M/s. Mercedes-Benz Research and Development India Pvt. Ltd., Bangalore V. ITO, Bangalore

ITA 1369/BANG/2010

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 60715 (ITAT-BANGALORE)
• Duration Of Justice: 1 year(s) 4 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-04-2012
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 08-03-2012
• Assessment Year: 2006-2007
• Appeal Filed On: 03-12-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: ETWA MUNDA CITIIIDR
• Assessee Lawyers: RAJAN S VORA
• Keywords: Related party transaction; Capital asset; Depreciation; Transfer pricing; Opportunity of being heard; Principle of natural justice; International transaction; Services rendered outside India; Initiation of penalty proceedings
• Section: 92C; 143(3); 234B; 133(6); 10B; 131

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH : BANGALORE BEFORE SHRI N.K. SAINI, ACCOUNTANT MEMBER AND SHRI GEORGE GEORGE K., JUDICIAL MEMBER ITA NO.1369/BANG/2010 ASSESSMENT YEAR : 2006-07 M/S. MERCEDES-BENZ RESEARCH & DEVELOPMENT INDIA PVT. LTD., PINE VALLEY, 3 RD FLOOR, EMBASSY GOLF LINKS BUSINESS PARKS, OFF INTERMEDIATE RING ROAD, BANGALORE 560 071. PAN : AAACD 6261B VS. THE INCOME TAX OFFICER, WARD 12(1), BANGALORE. APPELLANT RESPONDENT APPELLANT BY : SHRI RAJAN S. VORA, C.A. RESPONDENT BY : SHRI ETWA MUNDA, CIT-III(DR) DATE OF HEARING : 08.03.2012 DATE OF PRONOUNCEMENT : 30.04.2012 O R D E R PER N.K. SAINI, ACCOUNTANT MEMBER THIS IS AN APPEAL BY THE ASSESSEE AGAINST THE OR DER DATED 18.10.2010 PASSED BY THE ASSESSING OFFICER U/S. 143 (3) R.W.SEC. 144C(1) OF THE INCOME-TAX ACT, 1961 [HEREINAFTER REFERRED TO A S THE ACT IN SHORT]. 2. FOLLOWING GROUNDS HAVE BEEN RAISED IN THIS APPEA L:- ITA NO.1369/BANG/10 PAGE 2 OF 50 BASED ON THE FACTS AND CIRCUMSTANCES OF THE CASE A ND IN LAW, MERCEDES-BENZ RESEARCH AND DEVELOPMENT INDIA PRIVAT E LIMITED (HEREINAFTER REFERRED TO AS APPELLANT) RESPECTFUL LY CRAVES LEAVE TO PREFER AN APPEAL AGAINST THE ORDER PASSED BY INC OME TAX OFFICER WARD 12(1) (AO) IN PURSUANCE OF THE DIR ECTIONS ISSUED BY DISPUTE RESOLUTION PANEL (DRP), BANGALO RE DATED 08 SEPTEMBER 2010 UNDER SECTION 253 OF THE INCOME-TAX ACT, 1961 (ACT) ON THE FOLLOWING GROUNDS: THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, 1. THE ORDER OF THE LEARNED AO, BASED ON DIRECTIONS OF THE HONBLE DRP, ERRED IN ASSESSING THE TOTAL INCOME AT RS. 5,5 5,64,766 AS AGAINST RETURNED INCOME OF RS. 2,07,682/- COMPUTED BY THE APPELLANT; GROUNDS OF APPEAL RELATING TO CORPORATE TAX MATTERS 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, BASED ON DIRECTIONS OF DRP, THE LEARNED AO HAS ERRE D IN LAW AND IN FACT BY HOLDING THAT THE FOREIGN CURRENCY EXPENS ES ARE TOWARDS TECHNICAL SERVICES RENDERED OUTSIDE INDIA AND SHOUL D BE REDUCED FROM EXPORT TURNOVER WHILE COMPUTING THE PROFITS ELIGIBLE FOR DEDUCTION UNDER SECTION 10A OF THE ACT; 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, BASED ON DIRECTIONS OF DRP, THE LEARNED AO HAS ERRE D IN LAW BY NOT CONSIDERING THAT, IF FOREIGN CURRENCY TRAVEL EX PENSES ARE REDUCED FROM EXPORT TURNOVER, AN EQUAL AMOUNT SHOUL D ALSO BE REDUCED FROM TOTAL TURNOVER FOR COMPUTING THE DEDUC TION UNDER SECTION L0A OF THE ACT. GROUNDS OF APPEAL RELATING TO TRANSFER PRICING MATT ERS ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW: 4. THE LEARNED AO/TRANSFER PRICING OFFICER (TPO) ERRED IN MAKING AN ADDITION OF RS. 4,24,78,340 TO THE TOTAL INCOME OF THE APPELLANT ON ACCOUNT OF ADJUSTMENT IN THE ARMS LEN GTH PRICE OF THE CONTRACT SOFTWARE RESEARCH AND DEVELOPMENT SERV ICES TRANSACTION ENTERED BY THE APPELLANT WITH ITS ASSOC IATED ENTERPRISE; 5. THE LEARNED AO/TPO HAVE ERRED IN IGNORING THE FA CT THAT SINCE THAT APPELLANT IS AVAILING TAX HOLIDAY U/S 10A OF T HE ACT, THERE IS NO INTENTION TO SHIFT THE PROFIT BASE OUT OF INDIA, WHICH IS ONE OF THE BASIC INTENTION OF THE INTRODUCTION OF TRANSFER PRICING PROVISIONS; ITA NO.1369/BANG/10 PAGE 3 OF 50 GROUNDS OF OBJECTIONS RELATING TO COST PLUS METHOD (CPM)/COMPARABLE UNCONTROLLED PRICE METHOD (CUP ) . 6. THE LEARNED AO/TPO ERRED IN REJECTING THE METHOD OLOGY AS ADOPTED BY THE APPELLANT AND USING TRANSACTIONAL NE T MARGIN METHOD (TNMM) AS THE MOST APPROPRIATE METHOD FOR DETERMINING ARMS LENGTH PRICE. GROUNDS OF OBJECTIONS RELATING TO TNMM: 7. THE LEARNED AO/TPO ERRED IN DISREGARDING THE ECO NOMIC ANALYSIS UNDERTAKEN BY THE APPELLANT AND CONDUCTING A FRESH ECONOMIC ANALYSIS FOR THE DETERMINATION OF THE ARM S LENGTH PRICE IN CONNECTION WITH THE IMPUGNED INTERNATIONAL TRANS ACTION; 8. THE LEARNED AO/TPO ERRED IN DETERMINING THE ARM S LENGTH MARGIN PRICE USING ONLY FINANCIAL YEAR 2005-06 DATA , WHICH WAS NOT AVAILABLE TO THE APPELLANT AT THE TIME OF COMPL YING WITH THE TRANSFER PRICING DOCUMENTATION REQUIREMENTS; 9. THE LEARNED AO/TPO ERRED IN REJECTING CERTAIN CO MPARABLES CONSIDERED BY THE APPELLANT IN THE COMPARABILITY AN ALYSIS BY APPLYING DIFFERENT QUANTITATIVE AND QUALITATIVE FIL TERS; A) THE LEARNED AO/TPO HAS ERRED BY REJECTING CERTAI N COMPARABLE COMPANIES USING TURNOVER < RS. 1 CRORE AS A COMPARA BILITY CRITERION; B) THE LEARNED AO/TPO ERRED IN REJECTING CERTAIN CO MPARABLES ON THE GROUND THAT THE COMPARABLES WERE HAVING DIFFERE NT ACCOUNTING YEAR (OTHER THAN MARCH 31 OR COMPANIES WHOSE FINANC IAL STATEMENTS WERE FOR A PERIOD OTHER THAN 12 MONTHS); C) THE LEARNED AO/TPO ERRED IN REJECTING CERTAIN CO MPARABLES CONSIDERED BY THE APPELLANT IN THE COMPARABILITY AN ALYSIS USING ONSITE REVENUES GREATER THAN 75% OF THE EXPORT REV ENUES AS A COMPARABILITY CRITERION; AND D) THE LEARNED AO/TPO ERRED IN REJECTING CERTAIN CO MPARABLES IN THE COMPARABILITY ANALYSIS USING EMPLOYEE COST GRE ATER THAN 25% OF THE TOTAL REVENUES AS A COMPARABILITY CRITERION . 10. THE LEARNED AO/TPO ERRED IN ACCEPTING CERTAIN C OMPANIES AS COMPARABLES USING UNREASONABLE COMPARABILITY CRITER IA; 11. THE LEARNED TPO ERRED IN OBTAINING INFORMATION WHICH WAS NOT AVAILABLE IN PUBLIC DOMAIN BY EXERCISING POWERS U/S 133(6) OF THE ACT AND RELYING ON THE INFORMATION FOR COMPARABILIT Y ANALYSIS; ITA NO.1369/BANG/10 PAGE 4 OF 50 12. THE LEARNED AO/TPO ERRED IN NOT CONSIDERING THE FOREIGN EXCHANGE FLUCTUATION GAIN (LOSS) AS PART OF THE OPE RATING INCOME WHILE COMPUTING THE OPERATING MARGIN; 13. THE LEARNED AO/TPO ERRED IN NOT CONSIDERING THE PROVISIONS WRITTEN BACK AS PART OF THE OPERATING INCOME WHILE COMPUTING THE OPERATING MARGIN; 14. THE LEARNED AO/TPO ERRED IN WRONGLY COMPUTING T HE OPERATING MARGINS OF SOME OF THE COMPARABLE COMPANI ES IDENTIFIED IN THE TP ORDER; 15. THE LEARNED AO/TPO ERRED IN NOT MAKING SUITABLE ADJUSTMENTS ON ACCOUNT OF DIFFERENCES IN THE RISK PROFILE OF TH E APPELLANT VIS- -VIS THE COMPARABLES, WHILE CONDUCTING COMPARABILI TY ANALYSIS; 16. THE LEARNED AO/TPO ERRED IN COMPUTING THE ARMS LENGTH PRICE WITHOUT GIVING BENEFIT OF +/- 5 PERCENT UNDER THE P ROVISO TO SECTION 92C OF THE ACT; 17. THE LEARNED AO ERRED IN LEVYING INTEREST OF RS. 1,02,55,066 AND RS.626 U/S 234B AND 234C OF THE ACT RESPECTIVEL Y; 18. THE LEARNED AO ERRED, IN LAW, AND IN FACTS, IN INITIATING PENALTY PROCEEDINGS U/S 271(L)(C) OF THE ACT. THE APPELLANT SUBMITS THAT EACH OF THE ABOVE GROUND S IS INDEPENDENT AND WITHOUT PREJUDICE TO ONE ANOTHER. THE APPELLANT CRAVES LEAVE TO ADD, ALTER, AMEND, VA RY, OMIT OR SUBSTITUTE ANY OF THE AFORESAID GROUNDS OF APPEAL A T ANY TIME BEFORE OR AT THE TIME OF HEARING OF THE APPEAL, SO AS TO ENABLE THE HONBLE TRIBUNAL TO DECIDE ON THE APPEAL IN ACCORDA NCE WITH THE LAW. 3. GROUND NO.1 IS GENERAL IN NATURE AND GROUND NO.1 8 IS NOT ARISING OUT OF THE IMPUGNED ORDER, SO NO FINDING IS GIVEN FOR T HESE GROUNDS. 4. VIDE GROUND NOS. 2 & 3, THE GRIEVANCE OF THE ASS ESSEE RELATES TO THE ACTION OF THE ASSESSING OFFICER IN EXCLUDING FOREIG N CURRENCY EXPENSES FROM EXPORT TURNOVER AND NOT FROM THE TOTAL TURNOVER WHI LE COMPUTING DEDUCTION U/S. 10A OF THE ACT. ITA NO.1369/BANG/10 PAGE 5 OF 50 5. THE FACTS RELATED TO THIS ISSUE IN BRIEF ARE THA T THE ASSESSEE FILED ITS RETURN OF INCOME ON 27.11.2006 DECLARING AN INCOME OF Q 2,07,682, WHICH WAS PROCESSED U/S. 143(1) OF THE INCOME-TAX ACT, 19 61 [HEREINAFTER REFERRED TO AS THE ACT, IN SHORT]. LATER ON, THE CASE WA S SELECTED FOR SCRUTINY. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE AS SESSING OFFICER NOTICED THAT THE ASSESSEE HAD NOT COMPUTED THE EXPO RT TURNOVER AS STIPULATED IN SECTION 10A OF THE ACT. HE ALSO OBSE RVED THAT THE ASSESSEE HAD INCLUDED IN ITS EXPORT TURNOVER THE EXPENSES IN CURRED ON TELE/INTERNET CHARGES IN REGARD TO DELIVERY OF SOFTWARE ABROAD, T RAVELLING EXPENSES WHICH INCLUDES PAYMENT MADE IN FOREIGN CURRENCY ON VISIT OF ITS EMPLOYEES TO RENDER TECHNICAL ASSISTANCE TO ITS CLIENTS ABROAD A ND OTHER ONSITE EXPENSES. ACCORDING TO THE AO, THOSE EXPENSES ARE TO BE EXCLU DED FROM THE EXPORT TURNOVER AND HE ACCORDINGLY RECOMPUTED THE EXPORT T URNOVER AT Q 23,72,54,821 BY EXCLUDING THE AFORESAID EXPENSES AM OUNTING TO Q 11,45,37,299. THE AO RECOMPUTED ELIGIBLE EXEMPTION U/S. 10A OF THE ACT AT Q 2,66,29,480 INSTEAD OF Q 3,94,35,146 CLAIMED BY THE ASSESSEE. NOW THE ASSESSEE IS IN APPEAL. 6. THE LD. COUNSEL FOR THE ASSESSEE REITERATED THE SUBMISSIONS MADE BEFORE THE AUTHORITIES BELOW AND FURTHER SUBMITTED THAT DISALLOWANCE U/S. 40(A)(IA) WOULD IMPACT THE PROFITABILITY OF THE UND ERTAKING AND AS THE ASSESSEE COMPANY IS PROVIDING 100% EXPORT SERVICES TO ITS AE AND CLAIMING TAX HOLIDAY, HENCE THIS ADJUSTMENT WOULD B E INCONSEQUENTIAL AS FAR AS TAXABLE INCOME IS CONCERNED, BECAUSE THE EXEMPTI ON U/S. 10A WOULD GO UP IF THE FIGURE OF UNDERTAKING GOES UP. IT WAS FU RTHER STATED THAT IF THE FOREIGN CURRENCY, TRAVELLING EXPENSES WERE TO BE RE DUCED FROM THE EXPORT ITA NO.1369/BANG/10 PAGE 6 OF 50 TURNOVER, AN EQUAL AMOUNT SHOULD ALSO HAVE BEEN RED UCED FROM THE TOTAL TURNOVER FOR COMPUTING DEDUCTION U/S. 10A OF THE AC T. IT WAS FURTHER SUBMITTED THAT THE ADJUSTMENT MADE BY THE AO WITH R ESPECT TO SECTION 10A DEDUCTION WAS CONTRARY TO THE VARIOUS TRIBUNAL RULI NGS INCLUDING THE RULING OF THE CHENNAI SPECIAL BENCH IN THE CASE OF ITO VS. M/S.SAK SOFT LTD. (2009) 313 ITR (AT) 353 (CHN)(SB) . RELIANCE WAS ALSO PLACED ON THE FOLLOWING CASE LAWS: - CIT V. GEM PLUS JEWELLERY INDIA LTD. (2010) 330 I TR 175 (BOM) . - CIT V. TATA ELXI LTD. 2011-TIOL-684-KARN. 7. IN HIS RIVAL SUBMISSIONS, THE LD. CIT(DR) STRONG LY SUPPORTED THE ORDER OF THE AO THAT THE ISSUE OF QUALIFYING DEDUCTION OF SUB-SECTION (4) OF SECTION 10A DEVELOPED ITS MECHANISM OF COMPUTING THE SAME I .E., IN RESPECT OF THE PROFIT DERIVED FROM THE QUALIFYING EXPORT OF ARTICL ES, THINGS OR COMPUTER SOFTWARE, SALE PROCEEDS OF WHICH WERE RECEIVED OR W ERE BROUGHT AS REQUIRED BY THE ACT AND WHICH WAS TO BE DETERMINED BY APPLYING THE SAME RATIO AS THE EXPORT TURNOVER BEARS TO THE TOTAL TUR NOVER, IN SHORT BY APPORTIONMENT. RELIANCE WAS PLACED ON THE ITAT CHE NNAI BENCH DECISION IN THE CASE OF CALIFORNIA SOFTWARE CO. LTD. V. ACIT (2008) 118 TTJ (CHN) 842. 8. WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE P ARTIES AND CAREFULLY GONE THROUGH THE MATERIAL AVAILABLE ON RE CORD. IN THE PRESENT CASE, IT IS NOT IN DISPUTE THAT THE ASSESSEE CLAIME D DEDUCTION UNDER SECTION 10A OF THE ACT, HOWEVER, THE ASSESSING OFFICER WHIL E FRAMING THE ASSESSMENT UNDER SECTION 143(3) OF THE ACT COMPUTED THE DEDUCTION UNDER ITA NO.1369/BANG/10 PAGE 7 OF 50 SECTION 10A OF THE ACT BY REDUCING LEASE LINE CHARG ES FROM EXPORT TURNOVER, BUT NOT FROM THE TOTAL TURNOVER. 9. THIS ISSUE NOW HAS BEEN SETTLED BY THE SPECIAL B ENCH OF ITAT, CHENNAI IN THE CASE OF ITO VS. M/S.SAK SOFT LTD. (2009) 313 ITR (AT) 353 (CHENNAI (SB) BY HOLDING AS UNDER : TO SAY THAT IN THE ABSENCE OF ANY DEFINITION OF TOTAL TURNOVER FOR THE PURPOSE OF SECTION 10B, THERE IS NO AUTHORI TY TO EXCLUDE ANYTHING FROM THE EXPRESSION AS UNDERSTOOD IN GENER AL PARLANCE WOULD BE WRONG, AS THERE HAS TO BE AN ELEMENT OF TU RNOVER IN THE RECEIPT IF IT HAS TO BE INCLUDED IN THE TOTAL TURNO VER. THAT ELEMENT IS MISSING IN THE CASE OF FREIGHT, TELECOM CHARGES OR INSURANCE ATTRIBUTABLE TO THE DELIVERY OF THE GOODS OUTSIDE I NDIA AND EXPENSES INCURRED IN FOREIGN EXCHANGE IN CONNECTION WITH THE PROVISION OF TECHNICAL SERVICES OUTSIDE INDIA. THES E RECEIPTS CAN ONLY BE RECEIVED BY THE ASSESSEE AS REIMBURSEMENT O F SUCH EXPENSES INCURRED BY HIM. MERE REIMBURSEMENT OF EX PENSES CANNOT HAVE AN ELEMENT OF TURNOVER. IT IS ONLY IN RECOGNITION OF THIS POSITION THAT IN THE DEFINITION OF EXPORT TUR NOVER IN SECTION 10B THE AFORESAID TWO ITEMS HAVE BEEN DIRECTED TO B E EXCLUDED. SECONDLY, THE DEFINITION OF EXPORT TURNOVER CONTEMP LATES THAT THE AMOUNT RECEIVED BY THE ASSESSEE IN CONVERTIBLE FORE IGN EXCHANGE SHOULD REPRESENT CONSIDERATION IN RESPECT OF THE EXPORT. ANY REIMBURSEMENT OF THE TWO ITEMS OF EXPENSES MENTIONE D IN THE DEFINITION CAN UNDER NO CIRCUMSTANCES BE CONSIDERED TO REPRESENT CONSIDERATION FOR THE EXPORT OF THE COMPUTER SOFT WARE OR ARTICLES OR THINGS. THUS THE EXPRESSION TOTAL TUR NOVER WHICH IS NOT DEFINED IN SECTION 10B SHOULD ALSO BE INTERPRET ED IN THE SAME MANNER. THUS THE TWO ITEMS OF EXPENSES REFERRED TO IN THE DEFINITION OF EXPORT TURNOVER CANNOT FORM PART OF THE TOTAL TURNOVER SINCE THE RECEIPTS BY WAY OF RECOVERY OF S UCH EXPENSES CANNOT BE SAID TO REPRESENT CONSIDERATION FOR THE G OODS EXPORTED SINCE TOTAL TURNOVER IS NOTHING BUT THE AGGREGATE O F THE DOMESTIC TURNOVER AND THE EXPORT TURNOVER. IN THE FORMULA P RESCRIBED BY SECTION 10B(4) THE FIGURE OF EXPORT TURNOVER HAS TO BE THE SAME BOTH IN THE NUMERATOR AND IN THE DENOMINATOR OF THE FORMULA. IT FOLLOWS THAT THE TOTAL TURNOVER CANNOT INCLUDE THE TWO ITEMS OF EXPENSES RECOVERED BY THE ASSESSEE AND REFERRED TO IN THE DEFINITION OF EXPORT TURNOVER. IT HAS FURTHER BEEN HELD THAT ITA NO.1369/BANG/10 PAGE 8 OF 50 THE COMMON THREAD RUNNING THROUGH SECTIONS 80HHC, 80HHE AND 80HHF IS THAT THEY ARE ALL PROVISIONS GRANTING RELIEF TO THE ASSESSEES IN RESPECT OF PROFITS DERIVED FROM EXPORT . THE DIFFERENCE BETWEEN CHAPTER III IN WHICH SECTION 10B FALLS, AND CHAPTER VI-A IN WHICH THESE SECTIONS FALL, IS THAT WHILE THE FORMER EXCLUDES THE INCOME IN QUESTION TOTALLY FROM THE PURVIEW OF TOTAL INCOME AND GIVES TOTAL EXEMPTION FROM TAX, THE LATTER GIVES DEDUCTION OF A PART OF THE PROFITS AND GAINS OF THE CONCERNED BUSINESS FROM THE GROSS TOTAL INCOME. BOTH, HOWEVE R, ARE CHAPTERS WHICH GIVE RELIEF TO ASSESSEES FROM TAXATI ON SUBJECT TO THE CONDITIONS BRING FULFILLED AND IN THAT SENSE TH EY ARE OF THE SAME GENRE. THE OBJECT OF THESE SECTIONS IS TO ENC OURAGE THE EARNING OF FOREIGN EXCHANGE AND PROVIDE INCENTIVE T O PROMOTE EXPORTS. IF SOME OF THE SECTIONS SUCH AS SECTIONS 80HHE AND 80HHF PROVIDE FOR A FORMULA FOR CALCULATING THE DE DUCTION WHICH IS IDENTICAL WITH THE FORMULA PRESCRIBED BY S ECTION 10B, IT WOULD BE INCONGRUOUS TO INTERPRET SECTION 10B IN A MANNER DIFFERENT FROM THOSE TWO SECTIONS MERELY BECAUSE TH ERE IS NO DEFINITION OF TOTAL TURNOVER IN THAT SECTION. E XPORT TURNOVER AS DEFINED IN THESE SECTIONS EXCLUDES FREIGHT, TELE COM CHARGES OR INSURANCE ATTRIBUTABLE TO THE DELIVERY OF THE COMPU TER SOFTWARE OUTSIDE INDIA OR EXPENSES, IF ANY, INCURRED IN FORE IGN EXCHANGE IN PROVIDING TECHNICAL SERVICES OUTSIDE INDIA. THUS S TATUTORY PARITY IS MAINTAINED BETWEEN EXPORT TURNOVER AND TOTAL TUR NOVER IN THESE SECTIONS. THERE IS NO REASON WHY SUCH PARITY CANNO T BE MAINTAINED BETWEEN EXPORT TURNOVER AND TOTAL TURNOV ER IN SECTION 10B JUST BECAUSE TOTAL TURNOVER HAS NOT BEEN DEFI NED IN THAT SECTION. 10. SIMILAR VIEW HAS BEEN TAKEN BY THE HON'BLE HIGH COURT OF BOMBAY IN THE CASE OF CIT VS. GEM PLUS JEWELLERY INDIA LTD. (2010) 330 I TR 175 (SUPRA) WHEREIN IT HAS BEEN HELD AS UNDER : UNDER SUB-SECTION 10A OF THE INCOME TAX ACT, 196 1, A DEDUCTION IS ALLOWED FROM THE TOTAL INCOME OF THE A SSESSEE OF SUCH PROFITS AND GAINS AS ARE DERIVED BY AN UNDERTA KING FROM THE EXPORT OF ARTICLES OR THINGS OR COMPUTER SOFTWARE F OR A PERIOD OF TEN CONSECUTIVE ASSESSMENT YEARS COMMENCING FROM TH E ASSESSMENT YEAR RELEVANT TO THE PREVIOUS YEAR IN WH ICH THE UNDERTAKING BEGINS MANUFACTURE OR PRODUCTION. SUB- SECTION (4) OF SECTION 10A PROVIDES THE MANNER IN WHICH THE PRO FITS DERIVED FROM THE EXPORT OF ARTICLES OR THINGS OR COMPUTER S OFTWARE SHALL BE COMPUTED. UNDER SUB-SECTION (4) THE PROPORTION BET WEEN THE ITA NO.1369/BANG/10 PAGE 9 OF 50 EXPORT TURNOVER IN RESPECT OF THE ARTICLES OR THING S, OR, AS THE CASE MAY BE, COMPUTER SOFTWARE EXPORTED, TO THE TOTAL TU RNOVER OF THE BUSINESS CARRIED OVER BY THE UNDERTAKING IS APPLIED TO THE PROFITS OF THE BUSINESS OF THE UNDERTAKING IN COMPUTING THE PROFITS DERIVED FROM EXPORT. IN OTHER WORDS, THE PROFITS O F THE BUSINESS OF THE UNDERTAKING ARE MULTIPLIED BY THE EXPORT TUR NOVER IN RESPECT OF THE ARTICLES, THINGS OR, AS THE CASE MAY BE, COMPUTER SOFTWARE AND DERIVED BY THE TOTAL TURNOVER OF THE B USINESS CARRIED ON BY THE UNDERTAKING. THE EXPRESSION TOTAL TURNO VER HAS NOT BEEN DEFINED AT ALL BY PARLIAMENT FOR THE PURPOSES OF SECTION 10A. HOWEVER, THE EXPRESSION EXPORT TURNOVER HAS BEEN DEFINED. THE DEFINITION OF EXPORT TURNOVER EXCLUDES FREIGH T AND INSURANCE. SINCE EXPORT TURNOVER HAS BEEN DEFINED BY PARLIAMENT AND THERE IS A SPECIFIC EXCLUSION OF FREIGHT AND IN SURANCE, THE EXPRESSION EXPORT TURNOVER CANNOT HAVE A DIFFEREN T MEANING WHEN IT FORMS A CONSTITUENT PART OF THE TOTAL TURNO VER FOR THE PURPOSES OF THE APPLICATION OF THE FORMULA. A CON STRUCTION OF A STATUTORY PROVISION WHICH WOULD LEAD TO AN ABSURDIT Y MUST BE AVOIDED. MOREOVER, A RECEIPT SUCH AS FREIGHT AND I NSURANCE WHICH DOES NOT HAVE ANY ELEMENT OF PROFIT CANNOT BE INCLU DED IN THE TOTAL TURNOVER. FREIGHT AND INSURANCE CHARGES DO N OT HAVE ANY ELEMENT OF TURNOVER. FOR THIS REASON IN ADDITION, THESE TWO ITEMS WOULD HAVE TO BE EXCLUDED FROM THE TOTAL TURNOVER P ARTICULARLY IN THE ABSENCE OF A LEGISLATIVE PRESCRIPTION TO THE CO NTRARY. 11. A SIMILAR VIEW HAS BEEN TAKEN BY THE HON'BLE JU RISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. TATA ELEXI (2011) TIO L 684 (KARN.) AND THE RELEVANT FINDING GIVEN THEREIN READS AS UNDER : THE TOTAL TURNOVER OF THE BUSINESS CARRIED ON BY T HE UNDERTAKING WOULD CONSIST OF THE TURNOVER FROM EXPORT AND THE T URNOVER FROM LOCAL SALES. THE EXPORT TURNOVER CONSTITUTES THE N UMERATOR IN THE FORMULA PRESCRIBED BY SUB-SECTION (4). EXPORT TURN OVER ALSO FORMS A CONSTITUENT ELEMENT OF THE DENOMINATOR IN A S MUCH AS THE EXPORT TURNOVER IS A PART OF THE TOTAL TURNOVER. T HE EXPORT TURNOVER, IN THE NUMERATOR MUST HAVE THE SAME MEANI NG AS THE EXPORT TURNOVER WHICH IS CONSTITUENT ELEMENT OF THE TOTAL TURNOVER IN THE DENOMINATOR. THE LEGISLATURE HAS PROVIDED A DEFINITION OF THE EXPRESSION EXPORT TURNOVER IN EXPLN.2 TO S.10 A WHICH THE EXPRESSION IS DEFINED TO MEAN THE CONSIDERATION IN RESPECT OF EXPORT BY THE UNDERTAKING OF ARTICLES, THINGS OR CO MPUTER SOFTWARE RECEIVED IN OR BROUGHT INTO INDIA BY THE ASSESSEE I N CONVERTIBLE FOREIGN EXCHANGE BUT SO AS NOT TO INCLUDE INTER ALI A FREIGHT, ITA NO.1369/BANG/10 PAGE 10 OF 50 TELECOMMUNICATION CHARGES OR INSURANCE ATTRIBUTABLE TO THE DELIVERY OF THE ARTICLES, THINGS OR SOFTWARE OUTSID E INDIA. THEREFORE IN COMPUTING THE EXPORT TURNOVER THE LEGI SLATURE HAS MADE A SPECIFIC EXCLUSION OF FREIGHT AND INSURANCE CHARGES. THE SUBMISSION WHICH HAS BEEN URGED ON BEHALF OF THE RE VENUE IS THAT WHILE FREIGHT AND INSURANCE CHARGES ARE LIABLE TO B E EXCLUDED IN COMPUTING EXPORT TURNOVER, A SIMILAR EXCLUSION HAS NOT BEEN PROVIDED IN REGARD TO TOTAL TURNOVER. THE SUBMISSI ON OF THE REVENUE, HOWEVER, MISSES THE POINT THAT THE EXPRESS ION TOTAL TURNOVER HAS NOT BEEN DEFINED AT ALL BY PARLIAMENT FOR THE PURPOSES OF S.10A. HOWEVER, THE EXPRESSION EXPORT TURNOVER HAS BEEN DEFINED. THE DEFINITION OF EXPORT TURNOV ER EXCLUDES FREIGHT AND INSURANCE. SINCE EXPORT TURNOVER HAS B EEN DEFINED BY PARLIAMENT AND THERE IS A SPECIFIC EXCLUSION OF FRE IGHT AND INSURANCE, THE EXPRESSION EXPORT TURNOVER CANNOT HAVE A DIFFERENT MEANING WHEN IT FORMS A CONSTITUENT PART OF THE TOTAL TURNOVER FOR THE PURPOSES OF THE APPLICATION OF THE FORMULA. UNDOUBTEDLY, IT WAS OPEN TO PARLIAMENT TO MAKE A PR OVISION WHICH HAS BEEN ENUNCIATED EARLIER MUST PREVAIL AS A MATTER OF CORRECT STATUTORY INTERPRETATION. ANY OTHER INTERP RETATION WOULD LEAD TO AN ABSURDITY. IF THE CONTENTION OF THE REV ENUE WERE TO BE ACCEPTED, THE SAME EXPRESSION VIZ. EXPORT TURNOVER WOULD HAVE A DIFFERENT CONNOTATION IN THE APPLICATION OF THE S AME FORMULA. THE SUBMISSION OF THE REVENUE WOULD LEAD TO A SITUA TION WHERE FREIGHT AND INSURANCE, THOUGH THESE HAVE BEEN SPECI FICALLY EXCLUDED FROM EXPORT TURNOVER FOR THE PURPOSES OF THE NUMERATOR WOULD BE BROUGHT IN AS PART OF THE EXPOR T TURNOVER WHEN IT FORMS AN ELEMENT OF THE TOTAL TURNOVER AS A DENOMINATOR IN THE FORMULA. A CONSTRUCTION OF A STATUTORY PROV ISION WHICH WOULD LEAD TO AN ABSURDITY MUST BE AVOIDED. MOREOV ER, A RECEIPT SUCH AS FREIGHT AND INSURANCE WHICH DOES NOT HAVE A NY ELEMENT OF PROFIT CANNOT BE INCLUDED IN THE TOTAL TURNOVER. F REIGHT AND INSURANCE CHARGES DO NOT HAVE ANY ELEMENT OF TURNOV ER. FOR THIS REASON IN ADDITION, THESE TWO ITEMS WOULD HAVE TO B E EXCLUDED FROM THE TOTAL TURNOVER PARTICULARLY IN THE ABSENCE OF A LEGISLATIVE PRESCRIPTION TO THE CONTRARY CIT V SUDARSHAN CHEM ICALS INDUSTRIES LTD. (2000) 163 CTR (BOM) 596: (2000) 24 5 ITR 769 (BOM) APPLIED; CIT V LAKSHMI MACHINE WORKS (2007) 2 10 CTR (SC) 1: (2007) 290 ITR 667 (SC) AND CIT V CATAPHARM A (INDIA) (P) LTD. (2007) 211 CTR (SC) 83: (2007) 292 ITR 641 (SC) RELIED ON. 12. FROM THE RATIO LAID DOWN IN THE AFORESAID JUDIC IAL PRONOUNCEMENTS BY THE HON'BLE JURISDICTIONAL HIGH COURT AND HON'BLE H IGH COURT OF BOMBAY, IT ITA NO.1369/BANG/10 PAGE 11 OF 50 IS CRYSTAL CLEAR THAT IF AN ITEM IS EXCLUDED FROM T HE EXPORT TURNOVER, THE SAME SHOULD ALSO BE EXCLUDED FROM THE TOTAL TURNOVE R TO MAINTAIN PARITY BETWEEN THE NUMERATOR AND DENOMINATOR WHILE CALCULA TING THE DEDUCTION UNDER SECTION 10A OF THE ACT. IN VIEW OF THE ABOVE , WE SET ASIDE THE ORDER OF THE LOWER AUTHORITIES ON THIS ISSUE AND DIRECT T HE ASSESSING OFFICER TO REDUCE THE EXPENSES INCURRED ON TELE/INTERNET CHARG ES IN REGARD TO DELIVERY OF SOFTWARE ABROAD, TRAVELLING EXPENSES WHICH INCLU DES PAYMENT MADE IN FOREIGN CURRENCY ON VISIT OF ITS EMPLOYEES TO RENDE R TECHNICAL ASSISTANCE TO ITS CLIENTS ABROAD AND OTHER ONSITE EXPENSES AMOUN TING TO Q 11,45,37,299 BOTH FROM EXPORT TURNOVER AS WELL AS TOTAL TURNOVER . 13. VIDE GROUNDS 4 TO 15, THE GRIEVANCE OF THE ASSE SSEE RELATES TO DETERMINATION OF ARMS LENGTH MARGIN/PRICE ( ALP ). 14. THE FACTS RELATED TO THIS ISSUE IN BRIEF ARE TH AT SINCE THE ASSESSEE ENTERED INTO INTERNATIONAL TRANSACTION AS SPECIFIED IN SECTION 92(B) OF THE ACT, THEREFORE THE AO REFERRED THE CASE TO THE TRAN SFER PRICING OFFICER ( TPO ), WHO DETERMINED THE ALP IN RESPECT OF SOFTWARE SE RVICES AT Q 39,44,35,674 AS AGAINST Q 35,17,92,120 SHOWN BY THE ASSESSEE, THE DIFFERENCE OF Q 4,26,43,555 WAS DETERMINED AS AN ADJUSTMENT U/S. 9 2CA OF THE ACT. THE AO ASKED THE ASSESSEE TO FILE ITS OBJ ECTIONS, IF ANY, FOR THE PROPOSED ADJUSTMENT IN ALP. ACCORDING TO THE AO, T HE SUBMISSIONS OF THE ASSESSEE WERE ALREADY CONSIDERED BY THE TRANSFER PR ICING AUTHORITY WHILE PASSING THE ORDER U/S. 92CA OF THE ACT, THE AO THER EFORE PASSED AN ORDER DATED 21.12.09 U/S. 92CA OF THE ACT ADOPTING THE AL P IN RESPECT OF INTERNATIONAL TRANSACTIONS DEALT WITH BY THE ASSESS EE WITH ITS ASSOCIATED ENTERPRISES ( AE S) TO THE TUNE OF Q 4,26,43,555 AS SUGGESTED BY THE TPO. ITA NO.1369/BANG/10 PAGE 12 OF 50 THEREAFTER THE ASSESSEE FILED ITS OBJECTIONS BEFORE THE DISPUTE RESOLUTION PANEL ( DRP ), WHO GAVE DIRECTIONS UNDER SUB-SEC. (5) R.W. SUB- SEC.(8) OF SECTION 144C OF THE ACT AND WORKED OUT ADJUSTMENT O F Q 4,24,78,340 AS AGAINST Q 4,26,43,555 SUGGESTED BY THE TPO. NOW THE ASSESSE E IS IN APPEAL. 15. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ASSESSEE WAS ENGAGED IN PROVIDING SPECIALIZED CONTRACT SOFTWARE RESEARCH AND DEVELOPMENT SERVICE IN THE AUTOMOBILE FIELD (SOFTWA RE SERVICES) TO DAILMER A G THE PARENT COMPANY (ASSOCIATED ENTERPRISE OR AE ) ON COST PLUS 5% MARK UP BASIS. IT WAS FURTHER SUBMITTED THAT THE A SSESSEE SET UP A OFFSHORE SOFTWARE RESEARCH AND DEVELOPMENT SERVICE CENTRE FU LLY DEDICATED TO ITS PARENT COMPANY AND THAT THE SERVICES PROVIDED BY TH E ASSESSEE WERE FOR INTERNAL CAPTIVE CONSUMPTION. IT WAS CONTENDED THA T FOR THE PURPOSE OF ESTABLISHING THE ALP OF ITS INTERNATIONAL TRANSACTI ON WITH ITS AE, THE ASSESSEE HAD UNDERTAKEN A TRANSFER PRICING (TP) STU DY CARRIED OUT BY AN INDEPENDENT EXTERNAL CONSULTANT AND AN ANALYSIS WAS UNDERTAKEN TO DETERMINE THE FUNCTIONS PERFORMED, RISKS ASSUMED AN D ASSETS UTILIZED BY THE ASSESSEE AND ITS AE IN RESPECT OF INTERNATIONAL TRANSACTIONS BETWEEN THEM AND BASED ON THE TP STUDY, THE EXTERNAL CONSUL TANT CONCLUDED THAT THE PRICE ADOPTED BY THE ASSESSEE IN RESPECT OF ITS INTERNATIONAL TRANSACTIONS WITH ITS AE WAS AT ARMS LENGTH. IT W AS CONTENDED THAT THE COMPARABLE UNCONTROLLED PRICE ( CUP ) METHOD AND COST PLUS METHOD ( CPM ) WERE DETERMINED AS THE MOST APPROPRIATE METHOD TO DETERMINE THE ALP. WHILE DOING SO, THE MAN HOUR RATE CHARGED BY THE ASSESSEE WAS COMPARED WITH THE HOURLY RATES CHARGED BY LEADING S OFTWARE COMPANIES ITA NO.1369/BANG/10 PAGE 13 OF 50 WHOSE FINANCIAL INFORMATIONS WERE AVAILABLE IN THE PUBLIC DOMAIN. IT WAS EMPHASIZED THAT NO ADJUSTMENT WAS MADE TO TAKE INTO CONSIDERATION UNPRODUCTIVE AND IDLE HOURS AND THE DIFFERENCES IN RISKS ASSUMED SINCE THE UPPER RANGE OF TRANSFER PRICE AT USD 26.24 HAD BEEN ESTABLISHED BY THE ASSESSEE IN COMPARISON TO THE RATE OF COMPARABLE CO MPANIES IN THE RANGE OF USD 4.00 TO USD 31.16, THEREFORE, THE TOTAL PRIC E ARRIVED AT UNDER CUP/CPM WAS ESTABLISHED AT ARMS LENGTH. IT WAS AR GUED THAT THE TPO HAD NOT ACCEPTED THE ECONOMIC ANALYSIS UNDERTAKEN B Y THE ASSESSEE AND CONDUCTED A FRESH ECONOMIC ANALYSIS BY REJECTING TH E CUP/CPM ANALYSIS CARRIED OUT BY THE ASSESSEE AND APPLIED TRANSACTION AL NET MARGIN METHOD ( TNMM ) AS MOST APPROPRIATE METHOD. IT WAS FURTHER ARGUE D THAT THE TPO HAD OBTAINED INFORMATION U/S. 133(6) OF THE ACT, WH ICH WERE NOT AVAILABLE IN THE PUBLIC DOMAIN AND USED THE SAME FOR JUDGING COM PARABILITY WITH THE ASSESSEE. IT WAS STATED THAT THE TPO APPLIED CERTA IN FILTERS AND REJECTED CERTAIN COMPANIES SELECTED BY THE ASSESSEE BY USING THE FOLLOWING CRITERIA: - COMPANIES HAVING A TURNOVER LESS THAN 1 CRORE; - COMPANIES HAVING ECONOMIC PERFORMANCE CONTRARY TO THE INDUSTRY BEHAVIOUR (E.G. COMPANIES WHICH SHOWED A D IMINISHING REVENUE TREND); - COMPARABLES ON THE GROUND THAT THE COMPARABLES WE RE HAVING DIFFERENT ACCOUNTING YEAR (OTHER THAN MARCH 31 OR C OMPANIES WHOSE FINANCIAL STATEMENTS WERE FOR A PERIOD OTHER THAN 12 MONTHS); - COMPANIES ONSITE REVENUES GREATER THAN 75% OF TH E EXPORT REVENUES AS A COMPARABILITY CRITERION; AND - COMPANIES HAVING EMPLOYEE COST GREATER THAN 25% OF THE TOTAL REVENUES AS A COMPARABILITY CRITERION. ITA NO.1369/BANG/10 PAGE 14 OF 50 16. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE TPO PROVIDED AN ADJUSTMENT TOWARDS WORKING CAPITAL AT 1.31% AND ADJUSTED NET MARGIN OF COMPARABLE COMPANIES AFTER PROVIDING WORKING CAPITA L ADJUSTMENT WHICH WAS DETERMINED AT 19.37% ON OPERATING COST AND COMP UTED OPERATING MARGIN OF COMPARABLE COMPANIES BY CONSIDERING FOREI GN EXCHANGE GAIN/LOSSES AS NON-OPERATING IN NATURE. IT WAS SU BMITTED THAT THE TPO DID NOT MAKE SUITABLE ADJUSTMENT TO ACCOUNT FOR DIFFERE NCES IN THE RISK PROFILE OF THE ASSESSEE VIS--VIS THE COMPARABLE COMPANIES. I T WAS CONTENDED THAT THE ASSESSEE OPERATED IN A RISK MITIGATED ENVIRONME NT AND WAS REMUNERATED ON COST PLUS 5% MARK-UP BASIS, EVEN THO UGH THE PARENT COMPANY WAS IN THE AUTOMOBILE SECTOR (CAR MANUFACTU RER) AND EARNED ONLY A PROFIT MARGIN OF LESS THAN 3%. THEREFORE THE ASS ESSEE COMPANY HAD NO MOTIVE TO SHIFT THE PROFITS OUT OF INDIA BECAUSE TH E PARENT COMPANY HAD COMPENSATED THE ASSESSEE ADEQUATELY. 17. IT WAS CONTENDED THAT THE ASSESSEE JUSTIFIED IT S ALP FOR THE INTERNATIONAL TRANSACTIONS BY ADOPTING CPM/CUP METH OD FOR THE FINANCIAL YEAR 2001-02 AND THE SAME WAS ACCEPTED BY THE TPO F OR FINANCIAL YEAR 2002-03. IT WAS EXPLAINED THAT THE ASSESSEE WAS A CAPTIVE SERVICE PROVIDER RENDERING ITS ENTIRE SOFTWARE SERVICES TO ITS PARENT COMPANY FOR IMPROVING SOFTWARE BEING USED IN AUTOMOBILES/AIRCRA FT ENGINES MANUFACTURED BY THE HOLDING COMPANY AND THUS THE SE RVICES WERE BEING PROVIDED UNDER LONG TERM CONTRACT. IT WAS POINTED OUT THAT THE ASSESSEE WAS NOT ALLOWED TO CARRY OUT SIMILAR BUSINESS FOR A NY OTHER CUSTOMER DUE TO THE SPECIALIZED NATURE OF THE WORK AND THE FACT THA T THE SAME WAS FOR INTERNAL CONSUMPTION OF THE PARENT COMPANY, SO IT W AS DIFFICULT TO FIND EXACT ITA NO.1369/BANG/10 PAGE 15 OF 50 COMPARABLES WHICH PROVIDED SIMILAR SERVICES DUE TO LACK OF EXTERNAL INFORMATIONS. IT WAS ALSO POINTED OUT THAT OECD GU IDELINES CALLED FOR ADOPTION OF CPM METHOD IN CASES WHERE LONG TERM BUY AND SUPPLY ARRANGEMENTS IN THE CASE OF PROVISION OF SERVICES E SPECIALLY FOR CONTRACTED RESEARCH AND DEVELOPMENT WAS INVOLVED. IT WAS STAT ED THAT SINCE THE COMPANY WAS DEDICATED CAPTIVE SERVICE PROVIDER UNDE R LONG TERM SERVICE ARRANGEMENT AND THE FINAL OUTPUT BEING UNFINISHED I .E., NOT MARKETABLE, THE COST PLUS METHOD WAS THE MOST APPROPRIATE METHOD AN D EVEN THE TPO AGREED THE DIFFERENCE BETWEEN THE TWO METHODS I.E., CUP AND TNMM IN THE ASSESSEES CASE WAS ONLY OF ACADEMIC INTEREST. A R EFERENCE WAS MADE TO PAGE 9 OF TPOS ORDER. IT WAS ACCORDINGLY SUBMITTE D THAT THE CPM METHOD ADOPTED BY THE ASSESSEE WAS THE RIGHT METHOD AND SH OULD NOT HAVE BEEN REJECTED. 18. IT WAS SUBMITTED THAT ADDITIONAL SUPPLEMENTARY ANALYSIS WAS UNDERTAKEN USING THE HOURLY RATE FOR THE RATES CHAR GED BY THE ASSESSEE TO THE PARENT COMPANY AND THE COMPUTATION OF MAN HOUR RATES HAD BEEN ARRIVED AT AS PER THE INFORMATION AVAILABLE FROM TH E PUBLIC DOMAIN, SUCH AS ANNUAL REPORTS PUBLISHED, THOSE WERE SELECTED ON TH E BASIS OF THOSE COMPANIES WHICH WERE MAJOR INDUSTRY PLAYERS AND NO FILTERS HAD BEEN APPLIED WHILE SELECTING THOSE COMPANIES. IT WAS RE ITERATED THAT THE HOURLY RATE OF COMPARABLE COMPANIES WAS IN THE RANGE OF US D 4 TO USD 31.16 WHILE THE RATE CHARGED BY THE ASSESSEE I.E., USD 26 .24 WAS AT THE HIGHER END OF THIS RANGE, HENCE HOURLY RATE CHARGED WAS TO BE CONCLUDED AT ARMS LENGTH BECAUSE AVERAGE RATE PER HOUR OF THOSE COMPA RABLES WORKED OUT TO USD 14.46. IT WAS STATED THAT THERE WAS NO COMPARA BLE UNDERTAKING ITA NO.1369/BANG/10 PAGE 16 OF 50 SOFTWARE ACTIVITY IN THE AUTOMOTIVE SPACE, THEREFOR E THE COMPARISON WAS UNDERTAKEN WITH MAJOR INDIAN SOFTWARE COMPANIES TO ESTABLISH THE MAN HOUR RATES CHARGED BY THE ASSESSEE WHICH WAS CLOSER TO THE UPPER END OF THE RATES CHARGED BY INDUSTRY MAJORS WHO WERE IN A POSITION TO COMMAND PREMIUM PRICE. IT WAS STATED THAT THE ASSESSEE SAT ISFIED ALL THE CONDITIONS TO APPLY CPM METHOD AND ALSO PROVIDED AN ADDITIONAL ANALYSIS IN TERMS OF RETURN ON CAPITAL INVESTMENT TO INDICATE THE PROFIT ABILITY OF THE ASSESSEE AS IT WAS AN IMPORTANT CRITERION CONSIDERED BY THE BUSINE SSMEN TO DETERMINE THE VIABILITY OF THE BUSINESS. IT WAS STATED THAT THE TP REGULATIONS WERE INTRODUCED IN INDIA WITH THE INTENT TO CURB TAX AVO IDANCE BY ABUSE OF TP AND TO AVOID UNDUE HARDSHIP TO THE ASSESSEE AND THE CBD T HAD ISSUED CIRCULAR NO.14 OF 2001 WHICH WHEN READ WITH SECTION 92C(3) O F THE ACT CLEARLY PROVIDES THAT PRIMARY ONUS IS ON THE TAX PAYER TO D ETERMINE THE ARMS LENGTH PRICE IN ACCORDANCE WITH THE RULES AND TO SU BSTANTIATE THE SAME WITH THE PRESCRIBED DOCUMENTATION, WHERE SUCH ONUS IS DI SCHARGED BY THE ASSESSEE AND THE DATA USED FOR DETERMINING THE ALP IS RELIABLE AND CORRECT, THERE CAN BE NO INTERVENTION BY THE ASSESSING OFFIC ER. IT WAS STATED THAT A PLAIN READING OF SECTION 92C(3) OF THE ACT REVEALS THAT THE AO CAN DETERMINE THE PRICE ONLY UNDER THE CIRCUMSTANCES EN UMERATED IN CLAUSES (A) TO (D) OF SUB-SECTION (3) OF SECTION 92C OF THE ACT AND SINCE THE COMPARABILITY ANALYSIS UNDERTAKEN BY THE ASSESSEE W AS BASED ON WHOLLY ACCEPTED TRANSFER PRICING PRINCIPLES, THEREFORE IN THE ABSENCE OF ANY INFORMATION TO THE CONTRARY, IT WAS INAPPROPRIATE T O REJECT THE COMPARABILITY ANALYSIS OF THE ASSESSEE. RELIANCE WAS PLACED ON T HE FOLLOWING CASE LAWS:- - INDO AMERICAN JEWELLERY LTD. V. DCIT 41 SOT 1 (MU M) ITA NO.1369/BANG/10 PAGE 17 OF 50 - SONY INDIA (P) LTD. V. CIT [2007] 288 ITR 52 (DE L) - MENTOR GRAPHICS (NOIDA) (PVT) LTD. 112 TTJ (DEL) 408 IT WAS ACCORDINGLY SUBMITTED THAT THE TPO WAS BOUND TO ACCEPT ASSESSEES ANALYSIS ON ACCOUNT OF FOLLOWING REASONS:- - ANALYSIS UNDERTAKEN IN ACCORDANCE WITH THE LAW. - ANALYSIS UNDERTAKEN BY AN EXTERNAL AGENCY. - AO/TPO HAD NO REASONS TO BELIEVE THAT THE TRANSACTI ONS WERE NOT AT ARMS LENGTH. 19. LD. COUNSEL FOR THE ASSESSEE CONTENDED THAT THE TPO HAD REJECTED THE COMPANIES WITH LESS THAN Q 1 CRORE TURNOVER ON THE GROUND THAT THE MARGIN EARNED BY THOSE COMPANIES FLUCTUATE TO EXTRE MES BECAUSE OF NARROW BASE AND THAT THE RELIABILITY OF THE DATA IN RESPECT OF THE SMALL COMPANIES WAS NOT ALWAYS HIGH AND LACK OF COMPETITI VE STRENGTH, OPERATIONAL EFFICIENCIES AND RELIABILITY OF FINANCI AL DATA WAS SIGNIFICANTLY REDUCED BECAUSE THE SAME PERSONS WERE OFTEN MAJOR S HAREHOLDERS AS WELL AS KEY EMPLOYEES WITH DIMINISHING THE ECONOMIC DEST RUCTION BETWEEN PROFIT AND BALANCE. IT WAS FURTHER STATED THAT WHILE AP PLYING TNMM METHOD FOR DETERMINATION OF ALP, DIFFERENCES ON ACCOUNT OF TUR NOVER WERE NEUTRALIZED BY USE OF COMPARABLES HAVING BOTH HIGH AND LOW TURN OVER THAN THAT OF THE TESTED PARTY AND A TURNOVER FILTER HAD BEEN EMPLOYE D FOR THE TESTED PARTY WAS A RISK BEARING ENTREPRENEUR ASSUMING RISKS AND REWARDS OF SCALE. THEREFORE A TURNOVER CRITERIA SHOULD NOT HAVE BEEN APPLICABLE IN CASE OF A ENTITY WHICH CHARGED COST PLUS PRICING MODEL BECAUS E THE MARGINS OF A RISK MITIGATED CONTRACT SERVICE PROVIDER WERE NOT DEPEND ENT ON SCALE OR SIZE OF ITS OPERATIONS. IT WAS STATED THAT IN ASSESSEES C ASE THE TPO FAILED TO ITA NO.1369/BANG/10 PAGE 18 OF 50 ACKNOWLEDGE THE FACT THAT ACCOUNTS WERE PREPARED BY THE ASSESSEE IN ACCORDANCE WITH THE GENERALLY ACCEPTED ACCOUNTING S TANDARD, HENCE THE STAND OF TPO THAT THE FINANCIAL DATA OF COMPANIES W ITH LESS THAN Q 1 CRORE WERE NOT RELIABLE, WAS NOT TENABLE. THEREFORE THE TURNOVER FILTER OF LESS THAN Q 1 CRORE TURNOVER SHOULD NOT HAVE BEEN APPLIED FOR COMPARABILITY ANALYSIS. IT WAS POINTED OUT THAT THE TPO REJECTED THE COMPAN IES WHICH WERE HAVING DIFFERENT ACCOUNTING STANDARDS, BUT DID NOT CONSIDE R THIS FACT THAT THOSE COMPANIES EVEN THOUGH HAVING DIFFERENT FINANCIAL YE AR ENDING WERE OPERATING DURING THE SAME PERIOD OF TIME SIMILAR TO THE ASSESSEE AND WERE ALSO FACING SIMILAR BUSINESS CYCLES, MARKET AND ECO NOMIC CONDITIONS, THEREFORE IN THE ABSENCE OF ANY EVIDENCE AVAILABLE TO THE CONTRARY THAT THERE HAD BEEN SIGNIFICANT IMPACT ON THE MARGINS DU E TO CHANGE IN DIFFERENT REPORTING/ACCOUNTING PERIOD, IT WOULD HAVE BEEN INC ORRECT TO DISREGARD THOSE COMPANIES USING THIS FILTER, PARTICULARLY WHEN THE TPO COULD HAVE EXERCISED HIS POWER U/S. 133(6) OF THE ACT TO OBTAIN THE 12 M ONTH FINANCIAL STATEMENTS FOR ALL SUCH CASES. 20. IT WAS FURTHER STATED THAT THE TPO ADOPTED ONSI TE REVENUE FILTER AND REJECTED CERTAIN COMPANIES WITH ONSITE REVENUES GRE ATER THAN 75% OF THE EXPORT REVENUES, BUT DID NOT CONSIDER THIS FACT THA T SOFTWARE DEVELOPMENT ACTIVITY COMPRISES OF BOTH ONSITE AND OFFSHORE DEVE LOPMENTAL ACTIVITIES AND THE NATURE OF ACTIVITY REMAINS THE SAME IRRESPECTIV E OF WHETHER THE COMPANY WAS ENGAGED IN PROVIDING ONSITE OR OFFSHORE SERVICES. SINCE THE ACTIVITY REMAINS SOFTWARE DEVELOPMENT, THEREFORE IT WAS NOT APPROPRIATE ON THE PART OF THE TPO TO REJECT THE COMPANIES PROVIDI NG ONSITE SERVICES ON THE GROUND OF FUNCTIONAL DISSIMILARITY. IT WAS EMPHASI ZED THAT AS PER ITA NO.1369/BANG/10 PAGE 19 OF 50 NASSCOM STRATEGIC REVIEW 2007 IT INDUSTRY IN IND IA, THE INDIAN IT INDUSTRY COMPRISES OF BOTH ONSITE AND OFFSHORE SERV ICES AND AS PER THE INDUSTRY REPORT, ONSITE REVENUES/SERVICES CONSTITUT ES APPROXIMATELY 30% OF THE TOTAL IT REVENUES IN THE FINANCIAL YEAR 2004-05 . IT WAS ALSO STATED THAT THE INFORMATIONS ON ONSITE REVENUE AND OFFSHORE REV ENUE WAS NOT AVAILABLE OR DISCLOSED IN THE FINANCIAL STATEMENTS OF MOST OF THE COMPANIES, BUT THOSE WERE GATHERED BY THE TPO BY EXERCISING POWER CONFER RED U/S. 133(6) OF THE ACT, THEREFORE IT WAS NOT APPROPRIATE TO REJECT THE COMPANIES PROVIDING ONSITE SERVICES ON THE GROUND OF FUNCTIONAL DISSIMI LARITY, WHEN THE NATURE OF ACTIVITY THEY PERFORMED STILL REMAINED SOFTWARE DE VELOPMENT. 21. IT WAS ALSO SUBMITTED THAT THE TPO ADOPTED EMPL OYEE COST FILTER WHERE COMPANIES WITH EMPLOYEE COST LESS THAN 25% OF THE TOTAL REVENUES WERE REJECTED AS A COMPARABLE BY STATING THAT ON AN AVERAGE SALARY COST COMPRISES OF 24% TO 42% OF THE REVENUE IN THE CASE OF A SOFTWARE SERVICE PROVIDER. IT WAS STATED THAT THE TPO DID NOT CONSI DER THAT THERE WAS NO MANDATORY NORM TO GOVERN THE DISCLOSURE RELATING TO EMPLOYEE COSTS, PARTICULARLY WHEN COMPANIES FOLLOWED DIFFERENT MODE L IN DISCLOSING THE EXPENSES AND MIGHT HAVE SHOWN EMPLOYEE COST AS A SE PARATE ITEM IN THEIR FINANCIAL STATEMENTS AND SOME OTHER COMPANIES MIGHT HAVE AGGREGATED IT UNDER OTHER EXPENSES HEADS SUCH AS ADMINISTRATIV E EXPENSES, SALES AND MARKETING EXPENSES, ETC., THEREFORE IT WAS NOT APPROPRIATE TO USE EMPLOYEE COST FILTER. IT WAS POINTED OUT THAT THE TPO ACCEPTED CERTAIN COMPANIES USING UNREASONABLE COMPARABLE CRITERIA, O NE INSTANCE WAS QUOTED OF M/S. MEGASOFT LTD., WHICH WAS STATED TO B E A SOFTWARE PRODUCT AND SERVICE COMPANY, RATHER THAN A PURE SOFTWARE SE RVICE PROVIDER LIKE THE ITA NO.1369/BANG/10 PAGE 20 OF 50 ASSESSEE AND MADE EXTRA-ORDINARY OR SUPER NORMAL PR OFITS AT 52.74% WHICH WAS HIGHER THAN EVEN INDIAN IT INDUSTRY LEADERS. 22. ANOTHER INSTANCE QUOTED WAS OF KALS INFORMATION SYSTEMS LTD. (KALS), AND IT WAS STATED THAT A REVIEW OF THE ANNU AL REPORT OF THE SAID COMPANY INDICATED THAT THE COMPANY WAS INTO PROVISI ON OF SOFTWARE DEVELOPMENT SERVICES AS WELL AS SALE OF SOFTWARE PR ODUCTS SINCE ITS INCEPTION AND CONSISTED OF STPI UNIT ENGAGED IN DEV ELOPMENT OF SOFTWARE & SOFTWARE PRODUCTS AND A TRAINING CENTRE ENGAGED IN TRAINING OF SOFTWARE PROFESSIONALS ON ONLINE PROJECTS. IT WAS POINTED O UT THAT THE TURNOVER OF KALS WAS Q 2.15 CRORES AND THE INVENTORIES WERE AT Q 1.27 CRORES, WHICH WAS APPROXIMATELY 60% OF THE TURNOVER. IT WAS STAT ED THAT NORMALLY THE SOFTWARE DEVELOPMENT SERVICES PROVIDER WOULD NOT CA RRY SUCH LARGE INVENTORIES, THEREFORE IT WAS CLEARLY EVIDENT THAT THE SAID COMPANY WAS MAJORLY INTO DEVELOPMENT OF SOFTWARE PRODUCTS. IT WAS ALSO STATED THAT THE PROFIT MARGIN OF KALS WAS AT 39.75% WHICH WAS ABNOR MALLY HIGH, SO THE SAID COMPANY COULD NOT HAVE BEEN CONSIDERED AS COMP ARABLE WITH THE ASSESSEE. 23. IT WAS POINTED OUT THAT THE TPO CONSIDERED M/S. ACCEL TRANSMATIC LTD. (ACCEL) AS COMPARABLE, THE SAID COMPANY WAS EN GAGED IN 2D/3D ANIMATION, SPECIAL EFFECTS CREATION AND GAME ASSET DEVELOPMENT, THEREFORE THE ACTIVITIES/SERVICES WERE IN THE NATURE OF IT EN ABLED SERVICES AND NOT SOFTWARE DEVELOPMENT. THE SAID COMPANY HAD RENDERE D THE SERVICES TO THE RELATED PARTIES TO THE EXTENT OF 31% OF THE TOTAL S ERVICES REVENUES, THEREFORE, THIS COMPANY SHOULD HAVE BEEN REJECTED A S IT DID NOT SATISFY RELATED PARTY TRANSACTION FILTER PROPOSED BY THE TP O AT THE SERVICES INCOME ITA NO.1369/BANG/10 PAGE 21 OF 50 LEVEL. IT WAS STATED THAT THE INFORMATION PROVIDED BY THE TPO PURSUANT TO NOTICE U/S. 133(6) OF THE ACT WAS CONTRADICTORY TO THE RELATED PARTY TRANSACTIONS DISCLOSURE PROVIDED IN THE AUDITED FIN ANCIAL STATEMENTS. IT WAS ALSO POINTED OUT THAT THE RELATED PROFIT MARGIN OF KALS WAS 44.07% WHICH WAS ON THE HIGHER SIDE, THEREFORE THE SAID COMPANY COULD NOT HAVE BEEN CONSIDERED AS COMPARABLE WITH THE ASSESSEE. 24. IT WAS FURTHER STATED THAT THE TPO CONSIDERED I NFOSYS TECHNOLOGIES LTD. (INFOSYS) AS COMPARABLE, BUT THE SAID COMPANY WAS HAVING SOFTWARE SERVICES REVENUE AT Q 9000 CRORES AS COMPARED TO THE ASSESSEES Q 35 CRORES AND THE PROFIT MARGIN OF THE SAID COMPANY WA S AT 40.38%, THEREFORE THE SAID COMPANY WAS ALSO NOT COMPARABLE WITH THE A SSESSEE. 25. ANOTHER RELATED INSTANCE QUOTED OF COMPARABLE W AS OF M/S. TATA ELXSI LTD. AND IT WAS STATED THAT THE SAID COMPANY WAS HAVING TWO SEGMENTS; ONE WAS SYSTEM INTEGRATION SERVICES AND A NOTHER SOFTWARE DEVELOPMENT AND SERVICES. IT WAS STATED THAT THE T PO CONSIDERED THE SOFTWARE DEVELOPMENT SERVICES SEGMENT AS COMPARABLE WHICH COMPRISES OF HARDWARE, SOFTWARE AND IT ENABLED SERVICES/ACTIV ITIES, BUT THE ASSESSEE HAD NOT RENDERED ANY HARDWARE RELATED OR IT ENABLED SERVICES, THEREFORE THE SAID COMPANY COULD NOT HAVE BEEN CONSIDERED AS COMPARABLE AS IT WAS FUNCTIONALLY DIFFERENT. 26. ONE ANOTHER INSTANCE QUOTED WAS OF FLEXTRONICS SOFTWARE SYSTEMS LTD. WHEREIN THE INFORMATIONS WERE OBTAINED U/S. 13 3(6) OF THE ACT, BUT THOSE WERE NOT AVAILABLE IN PUBLIC DOMAIN. ITA NO.1369/BANG/10 PAGE 22 OF 50 27. IT WAS CONTENDED THAT IF THE AFORESAID 6 COMPAN IES WERE NOT TO BE SELECTED AS COMPARABLES, THE ARITHMETIC MEAN OF 14 COMPANIES WAS AT 12.98% AND MARGIN OF POST WORKING CAPITAL ADJUSTMEN T WAS AT 11.79%. 28. THE LD. COUNSEL FOR THE ASSESSEE FURTHER SUBMIT TED THAT THE TPO OBTAINED INFORMATION BY EXERCISING POWERS U/S. 133( 6) OF THE ACT AND RELIED UPON THOSE INFORMATIONS FOR COMPARABILITY ANALYSIS INSPITE OF THE FACT THAT THOSE INFORMATIONS WERE NOT AVAILABLE IN PUBLIC DOM AIN. IT WAS STATED THAT THE TPO ISSUED NOTICES TO APPROXIMATELY 165 COMPANI ES AND SOUGHT CERTAIN INFORMATION, BUT THE BASIS OF SELECTION OF THOSE COMPANIES WAS NOT PROVIDED TO THE ASSESSEE, SO IT WAS UNFAIR IF NOTIC ES WERE NOT ISSUED TO ALL THE COMPANIES AND WERE ISSUED TO ONLY A FEW OF THE COMPANIES SELECTED BY THE TPO. IT WAS STATED THAT RULE 10D(3) OF THE I.T . RULES, 1962 PROVIDES THAT INFORMATION SPECIFIED IN SUB-RULE (1) SHALL BE SUPPORTED BY AUTHENTIC DOCUMENTS. RELIANCE WAS PLACED ON THE DECISION OF AZTEC SOFTWARE AND TECHNOLOGY LTD. V. ACIT (2007) 107 ITD 141 . 29. THE LD. COUNSEL FOR THE ASSESSEE FURTHER STATED THAT THE INFORMATIONS PROVIDED BY THE COMPANY SELECTED BY THE AO MIGHT NO T HAVE BEEN AS PER ACCOUNTING STANDARD 17 ISSUED BY THE INSTITUTE OF C HARTERED ACCOUNTANTS OF INDIA, HENCE THEY DID NOT REPRESENT THE TRUE AND FA IR POSITION AS THE BIFURCATION OF INCOME AND EXPENSES WAS BASED ON IND IVIDUAL JUDGMENT OF THE PERSONS HANDLING THE ACCOUNTS. IT WAS ALSO STA TED THAT THE INFORMATIONS OBTAINED BY THE TPO EXISTED BETWEEN THE TAX PAYERS AND THE TAX ADMINISTRATION, BUT WERE NOT AVAILABLE TO THE ASSES SEE, THEREFORE SUCH INFORMATIONS QUALIFIED AS SECRET COMPARABLES, AS SU CH THE INFORMATION WAS CONFIDENTIAL IN NATURE AND USAGE OF SUCH SECRET COM PARABLES/INFORMATION ITA NO.1369/BANG/10 PAGE 23 OF 50 RAISED A NUMBER OF CONCERNS ESPECIALLY WITH RESPECT TO FAIRNESS AND TRANSPARENCY OF THE PROCESS. IT WAS ACCORDINGLY SU BMITTED THAT THE TPO USED THE POWERS U/S. 133(6) OF THE ACT IN A DISCRET IONARY MANNER, SO IT WAS AGAINST THE PRINCIPLES OF NATURAL JUSTICE. RELIANC E WAS PLACED ON THE FOLLOWING CASE LAWS:- - PHILIPS SOFTWARE CENTRE PVT LTD. V. ACIT 119 TTJ (BANG) 721 - HONEYWELL AUTOMATION INDIA LTD. V. DCIT [2009-TI OL-104- ITAT-PUNE] - GLBAL VANTEDGE PVT. LTD. V. DCUT 37 SOT 1 (DEL) 30. IT WAS FURTHER SUBMITTED THAT THE TPO DID NOT C ONSIDER THE FOREIGN EXCHANGE FLUCTUATION GAIN (LOSS) AS WELL AS PROVISI ON WRITTEN BACK AS PART OF THE OPERATING INCOME WHILE COMPUTING OPERATING MARG IN. IT WAS POINTED OUT THAT THE TPO HAS CONSIDERED EXTRA-ORDINARY ITEMS FO R COMPUTING THE OPERATING MARGINS WHILE DEALING WITH THE COMPARABLE IGATE GLOBAL SOLUTIONS LTD., THAT COMPANY WAS INTRODUCED AS A CO MPARABLE AFTER CONDUCTING A FRESH ECONOMIC ANALYSIS AND OBTAINING RELEVANT SEGMENTAL INFORMATION U/S. 133(6) OF THE ACT. BY INCLUDING TH E SAID COMPANY AS COMPARABLE, THE TPO DETERMINED THE OPERATING MARGIN AS 15.61% ON COST INSTEAD OF CORRECT MARGIN OF 2.81%. THEREFORE THE TPO WAS NOT JUSTIFIED IN COMPUTING THE OPERATING MARGIN. 31. IT WAS FURTHER STATED THAT THE TPO HAD NOT MADE SUITABLE ADJUSTMENT ON ACCOUNT OF DIFFERENCE IN THE RISK PROFILE OF THE ASSESSEE VIS--VIS COMPARABLES LIKE CONDUCTING COMPARABILITY ANALYSIS. IT WAS FURTHER STATED THAT RULE 10B(1)(E)(III) OF THE I.T. RULES, 1962 PR OVIDES THAT ADJUSTMENT ITA NO.1369/BANG/10 PAGE 24 OF 50 SHOULD BE MADE TO THE PROFIT MARGIN OF INDEPENDENT COMPARABLE COMPANIES TO TAKE INTO ACCOUNT THE DIFFERENCE IN FUNCTIONS AN D RISKS AND THAT THE INTERNATIONAL COMMENTARY ON TP ALSO RECOGNIZES THAT THE ADJUSTMENT MUST BE MADE TO ACCOUNT FOR ITS DIFFERENCES BETWEEN CONT ROLLED AND UNCONTROLLED SITUATIONS THAT WOULD SIGNIFICANTLY AFFECT THE PRIC E CHARGED OR RETURN REQUIRED BY INDEPENDENT ENQUIRIES. IT WAS POINTED OUT THAT ONE OF THE PRINCIPAL ELEMENTS FOR TP PURPOSES IS THE ANALYSIS OF RISK AS SUMPTION BY THE RESPECTIVE PARTIES AND IN THE OPEN MARKET THEORY, T HE ASSUMPTION OF INCREASED RISK IS NORMALLY COMPENSATED BY AN INCREA SE IN THE ACCEPTED RETURN, THEREFORE THE CONTROLLED AND UNCONTROLLED T RANSACTIONS ARE COMPARABLE ONLY WHEN THE ADJUSTMENTS WITH RESPECT T O SIGNIFICANT DIFFERENCES BETWEEN THEM IN THE RISKS ASSUMED IS MA DE. HOWEVER, IN THE PRESENT CASE, THE TPO DID NOT MAKE ANY RISK ADJUSTM ENT OF THE MARGINS OF THE ASSESSEE ON THE GROUND THAT THE ASSESSEE DO NOT HAVE MATERIAL IMPACT ON THE PROFITABILITY AND ACCORDINGLY DENIED ANY RIS K ADJUSTMENTS. IT WAS EXPLAINED THAT HE ASSESSEE FUNCTIONS IN A LIMITED R ISK ENVIRONMENT WITH MOST OF THE RISK BEING ASSUMED BY ITS AES, WHILE TH E COMPARABLES SELECTED FOR THE ANALYSIS INCLUDES COMPANIES WHICH HAVE FAIR LY DIVERSIFIED AREAS OF SPECIALIZATION, PERFORM ADDITIONAL FUNCTIONS VIZ., MARKETING ETC. AND BEAR MORE RISKS AKIN TO ANY THIRD PARTY INDEPENDENT SERV ICE PROVIDER. IT WAS FURTHER STATED THAT IN VIEW OF THE LIMITED FUNCTION S PERFORMED AND LIMITED RISK BORNE BY THE ASSESSEE, IT COULD BE CHARACTERIZED AS A CONTRACT SERVICE PROVIDER OPERATING IN A RISK MITIGATED ENVIRONMENT VIS--VIS COMPARABLE COMPANIES WHO PERFORM ENTREPRENEURIAL RISK TAKING F UNCTIONS AND THEREFORE BEAR ENTREPRENEURIAL RISKS. IT WAS ALSO STATED THA T THE ASSESSEE BEARS ITA NO.1369/BANG/10 PAGE 25 OF 50 LESSER BUSINESS RISK THAN INDEPENDENT COMPARABLE CO MPANIES DUE TO THE NATURE OF ITS REVENUE MODEL BECAUSE IT GUARANTEED P ROFITS BY WAY OF MARK- UP ON COSTS INCURRED REGARDLESS OF ITS SUCCESS OR F AILURE AND IT HAS BEEN PROVIDING SERVICES TO ITS AES OVER THE YEAR WHICH I S GROWING YEAR ON YEAR AND MAKING PROFITS IRRESPECTIVE OF THE PERFORMANCE OF THE IT INDUSTRY IN INDIA AND THAT THE ASSESSEE DOES NOT BEAR ANY RISK OF INCURRING LOSS DUE TO UNDER-UTILISATION OF CAPACITY OR INSUFFICIENT BUSIN ESS FROM ITS AES AS IT IS COMPENSATORY ON COST PLUS BASIS, WHILE THE INDEPEND ENT COMPANIES HAVE TO BEAR THE VAGARIES OF ECONOMIC AND BUSINESS FACTO RS THAT ARE PREVAILING IN THE INDUSTRY AND THUS COULD EITHER INCUR LOSSES OR EARN PROFITS BASED ON MARKET CONDITIONS. THEREFORE THE BENEFIT OF RISK AD JUSTMENT SHOULD HAVE BEEN ACCORDED TO THE ASSESSEE. RELIANCE WAS PLACED ON THE FOLLOWING CASE LAWS:- - SONY INDIA (P) LTD. V. DCIT 114 ITD 448 (DEL) - PHILIPS SOFTWARE CENTRE PVT. LTD. V. ACIT 119 TT J (BANG) 721 32. IT WAS FURTHER STATED THAT THE ASSESSEE COMPUTE D RISK ADJUSTMENT IN ITS CASE VIS--VIS COMPARABLE COMPANIES AND PROVIDE D THE SAME TO THE TPO/AO, HOWEVER THE SAME HAD NOT BEEN ACCEPTED BY T HE TPO/AO. IT WAS ALSO STATED THAT THE ASSESSEE HAD FILED DETAILE D SUBMISSIONS WITH THE DRP ON CAPITAL ASSETS PRICING MODEL (CAPM) TO MAKE APPROPRIATE ADJUSTMENT TO MARGINS ON ACCOUNT OF RISK DIFFERENTI ALS IN THE CASE OF COMPARABLE COMPANIES, HOWEVER THE DRP WITHOUT CONSI DERING THE SUBMISSIONS MADE BY THE ASSESSEE ON CAPM HAD PASSED THE DIRECTIONS. ACCORDINGLY IT WAS STATED THAT THE DIRECTIONS MAY B E GIVEN TO THE ASSESSING OFFICER TO ALLOW RISK ADJUSTMENT TO THE ASSESSEE. ITA NO.1369/BANG/10 PAGE 26 OF 50 33. IN HIS RIVAL SUBMISSIONS, THE LD. CIT(DR) STRON GLY SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW AND FURTHER SUBMITT ED THAT THE ASSESSEE IS A CAPTIVE SERVICE PROVIDER RENDERING ITS ENTIRE SOFTW ARE SERVICES TO ITS PARENT COMPANY FOR IMPROVING SOFTWARE FOR THE USE IN AUTOM OBILE/AIRCRAFT ENGINES MANUFACTURED BY THE HOLDING COMPANY, THESE SERVICES WERE BEING PROVIDED UNDER LONG TERM CONTRACT AND THE ASSESSEE WAS NOT A LLOWED TO CARRY OUT SIMILAR BUSINESS FOR ANY OTHER CUSTOMER, THEREFORE THE ASSESSEES PROFILE CLEARLY DISTINGUISHES IT FROM FULL FLEDGED ENTREPRE NEURIAL COMPANIES AND IT WAS DIFFICULT TO FIND EXACT COMPARABLES WHICH PROVI DE SIMILAR SERVICES, DUE TO LACK OF EXTERNAL INFORMATIONS. IT WAS STATED TH AT THE ADMITTED THAT IT WAS NOT POSSIBLE TO FIND OUT COMPANIES PROVIDING EXACTL Y SIMILAR SERVICES, THEREFORE THE ASSESSEE ADOPTED COST PLUS METHOD AS MOST APPROPRIATE METHOD AND PICKED UP 5 SOFTWARE COMPANIES FOR COMPA RING THE MAN HOUR RATE. HOWEVER, THE ASSESSEE DID NOT SELECT THE COMP ARABLE COMPANIES AND DID NOT COMPARE ITS GROSS OR NET MARGINS WITH THE M ARGINS OF OTHER COMPARABLE COMPANIES. IT WAS FURTHER STATED THAT S ECTION 92C(1) OF THE ACT PRESCRIBES CERTAIN METHOD FOR COMPUTATION OF ALP, O UT OF THOSE ONE OF WHICH IS MOST APPROPRIATE METHOD HAVING REGARD TO T HE NATURE OF TRANSACTION AND CLASS OF TRANSACTION OF ASSOCIATED PERSON OR FUNCTION PERFORMED BY SUCH PERSON SHALL BE ADOPTED. RELIANCE WAS PLACED ON THE DECISION OF THE ITAT MUMBAI L BENCH IN THE CASE O F SERDIA PHARMACEUTICALS (INDIA) (P) LTD. V. ACIT (2011) 37( II) ITCI 410. IT WAS STATED THAT THE PROVISIONS U/S. 92C(1) ARE SUBJECT TO THE CONDITION THAT THE AO HAS THE POWER TO DETERMINE THE ARMS LENGTH PRIC E (ALP) WHEN THE ALP COMPUTED BY THE TAX PAYER IS NOT ON THE BASIS OF CO RRECTLY APPLYING THE ITA NO.1369/BANG/10 PAGE 27 OF 50 METHOD OF COMPUTING THE ARMS LENGTH PRICE IN TERMS OF SECTION 92C(2) OF THE ACT, HOWEVER, SUBJECT TO THE CONDITION THAT THE AO HAS TO GIVE AN OPPORTUNITY OF HEARING TO THE ASSESSEE BY SERVING A SHOW CAUSE NOTICE AS TO WHY HE SHOULD NOT DO SO. THEREFORE THE SELECTIO N OF METHOD FOR DETERMINING THE ALP IS NOT UNFETTERED DISCRETION OF THE TAX PAYER, RATHER DUTY OF THE TAX PAYER IS TO SELECT SUCH METHOD FOR DETERMINING THE ALP AS IS MOST APPROPRIATE HAVING REGARD TO ALL THE RELEVANT FACTORS SUCH AS NATURE OF TRANSACTION, CLASS OF TRANSACTION, CLASS OF ASSO CIATED PERSONS, FUNCTIONS PERFORMED BY SUCH PERSONS OR SUCH OTHER RELEVANT FA CTORS AS THE BOARD MAY PRESCRIBE. 34. THE LD. CIT(DR) STATED THAT THE TPO REJECTED TH E TP DOCUMENT MAINTAINED BY THE ASSESSEE BECAUSE THE ASSESSEE HAD NOT GIVEN EITHER COMPUTATION OF GROSS MARK-UP OR USED MARK-UP IN COM PUTING ALP BY CONSIDERING ANY OTHER UNCONTROLLED TRANSACTION OR E NTERPRISES. IT WAS STATED THAT CUP METHOD IS ONE OF THE ADDITIONAL METHOD FOR DETERMINING THE ALP AND THIS METHOD IS TO BE APPLIED IN THE MANNER PROV IDED IN RULE 10B(1)(A) OF I.T. RULES, 1962. IT WAS FURTHER STATED THAT IN CUP METHOD, THE PRICE CHARGED OR PAID, PROPERTY TRANSFERRED OR SERVICES P ROVIDED IN A COMPARABLE UNCONTROLLED TRANSACTION OR NUMBER OF SUCH TRANSACT IONS ARE IDENTIFIED, THEREAFTER SOME ADJUSTMENTS ARE MADE IN THAT PRICE ON ACCOUNT OF FACTORS WHICH COULD MATERIALLY AFFECT THE PRICE IN THE OPEN PRICE AND THE SAID PRICE SO ADJUSTED WOULD BE THE ALP IN RESPECT OF THE PROP ERTY TRANSFERRED OR SERVICES PROVIDED IN THE INTERNATIONAL TRANSACTION. IT WAS FURTHER STATED THAT THE UNCONTROLLED TRANSACTION SHOULD REFLECT GOODS O F SIMILAR TYPE AND QUANTITY AS MOST BETWEEN THE AES AND RELATE TO TRAN SACTIONS TAKING PLACE AT ITA NO.1369/BANG/10 PAGE 28 OF 50 A SIMILAR TIME AND STAGE IN THE PRODUCTION/DISTRIBU TION GAIN WITH SIMILAR CONDITION APPLYING. IT WAS POINTED OUT THAT IN THE INSTANT CASE THE ASSESSEE ACCEPTED THAT THE MARGIN CHARGED BY OTHER COMPANIES RENDERING SOFTWARE SERVICES WAS NOT COMPARABLE TO ITS SITUATION IN THE ABSENCE OF MANY STATE FUNCTIONS AND RISK THAT THOSE COMPANIES CARRY OUT A ND ASSUME A COMPARISON OF THEIR MARGINS WERE NOT APPROPRIATE. IT WAS POINTED OUT THAT THE ASSESSEE WHILE RELYING HOURLY RATE CHARGED BY T HE COMPARABLE COMPANIES HAD NOT FURNISHED ANY INFORMATION RELATIN G TO PROPERTY PURCHASED OR SERVICES OBTAINED BY AN ENTERPRISE FRO M THEIR AE AND COUNTRIES WHEREIN AES SITUATED. IT WAS FURTHER PO INTED OUT THAT THE INFORMATION SUBMITTED BY THE ASSESSEE IN FORM 3CED REVEALED THAT THE ASSESSEE ENTERED INTO INTERNATIONAL TRANSACTION WIT H DIAMLER CHRYSLER AG, GERMANY AND DIAMLER CHRYSLER CORPORATE (DCC) USA AN D SUBSTANTIAL PART OF REVENUE DERIVED FROM DIAMLER CHRYSLER AG, GERMAN Y MIGHT HAVE BEEN AT VARIANCE WITH THAT CHARGED FROM USA, THEREFORE I N SUCH A SITUATION NO VALID COMPARISON COULD HAVE BEEN MADE BETWEEN THE P RICE CHARGED BY THE ASSESSEE FROM OTHER COUNTRIES WITH THAT OF GERMANY. RELIANCE WAS PLACED ON THE DECISION OF ITAT MUMBAI IN THE CASE OF GHARDIA CHEMICALS LTD. V. DCIT 35 SOT 406 MUM . IT WAS EMPHASIZED THAT SUB-RULE (4) OF RULE 10B OF THE I.T. RULES, 1962 CLEARLY STATES THAT DATA TO BE USED IN ANALYZING COMPARABILITY OF UNCONTROLLED TRANSACTION WITH INTE RNATIONAL TRANSACTION SHALL BE THE DATA RELATING TO THE FINANCIAL YEAR IN WHICH THE INTERNATIONAL TRANSACTION HAS BEEN ENTERED INTO, BUT THE PROVISO TO THE SAID RULE CARVES OUT AN EXCEPTION THAT DATA RELATING TO A PERIOD NOT BEING MORE THAN TWO YEARS PRIOR TO SUCH FINANCIAL YEAR MAY ALSO BE CONS IDERED IF SUCH DATA ITA NO.1369/BANG/10 PAGE 29 OF 50 REVEALS FACTS WHICH COULD HAVE AN INFLUENCE ON THE DETERMINATION OF TRANSFER PRICE RELATING TO RELEVANT TRANSACTIONS BEING COMPA RED. IT WAS FURTHER STATED THAT THE CONTEMPORANEOUS DATA AND PROVISO IS APPLIC ABLE ONLY IN SOME SPECIFIED CONDITIONS, BUT NO MATERIAL HAS BEEN BROU GHT ON RECORD BY THE ASSESSEE TO SUGGEST THAT THERE WERE CIRCUMSTANCES P REVAILING FOR APPLICATION OF THE PROVISO. THEREFORE THE TPO/DRP WAS JUSTIFIED IN CONSIDERING CURRENT FINANCIAL YEAR DATA. RELIANCE WAS PLACED ON THE FOLLOWING CASE LAWS:- - M/S. AZTECH SOFTWARE & TECHNOLOGY SERVICE LTD. V . ACIT 294 ITR (AT) 32 - MENTOR GRAPHICS PVT. LTD. V. DCIT 109 ITD 101 - CUSTOMER SERVICE INDIA PVT. LTD. V. ACIT 30 SOT 486 - M/S. SYMANTEC SOFTWARE SOLUTION V. ACIT, ITA NO. 7814/ MUM/2010 - AVAYA INDIA PVT. LTD. V. ACIT ITA 5150/DEL/20 10 - M/S. TNT INDIA PVT LTD. V. ACIT ITA NO.1442/BA NG/08 - HONEY WELL AUTOMATION INDIA LTD. V. DCIT ITA NO.4/PN/08 - HAWORTH (INDIA) PVT LTD. V. DCIT ITA NO.5341/D EL/2010 - DCIT V. M/S. BP INDIA SERVICE PVT LTD. ITA NO.4425/MUM/2010. 35. IT WAS STATED THAT THE LD. COUNSEL FOR THE ASSE SSEE RAISED SEVERAL OBJECTIONS ON SIX COMPARABLE COMPANIES VIZ., M/S. M EGASOFT LTD., M/S. KALS INFORMATION SYSTEM LTD., M/S. ACCEL TRANSMATIC LTD., M/S. TATA ELXI LTD., M/S. INFOSYS TECHNOLOGIES LTD. AND FLOCTRONIC S SOFTWARE SYSTEM LTD. AND ASKED FOR EXCLUSION OF THESE FROM COMPARABLES. IN THIS REGARD, IT WAS SUBMITTED THAT M/S. MEGASOFT LTD. HAS FURNISHED SEG MENTAL INFORMATION IN PURSUANCE TO NOTICE ISSUED U/S. 133(6) OF THE ACT A ND CLARIFIED THAT BLUE ALLY DIVISION IS AN OFFSHORE AND ON LIMIT CONSULTING DIV ISION AND DOES JOBS BASED ON CUSTOMERS REQUIREMENTS AND BILLING DONE ON HOURL Y BASIS, WHILE XIUS- ITA NO.1369/BANG/10 PAGE 30 OF 50 BCCIL WAS A PRODUCT WHICH CATERS THE NEED OF MOBILE SOFTWARE INDUSTRIES AND THE SAID PRODUCT WAS TO BE CUSTOMIZED TO THE RE QUIREMENT OF EACH CUSTOMER WHICH INDICATED THAT THE PRODUCTS OF THE S AID COMPANY I.E., M/S. MEGASOFT LTD. WERE IN THE FORM OF LICENCE FROM THIR D PARTIES AND CUSTOMIZED AS PER REQUIREMENT OF ITS CUSTOMERS, THEREFORE THE SAID COMPANY WAS A SERVICE PROVIDER AKIN TO SOFTWARE DEVELOPMENT SERVI CES. IT WAS FURTHER STATED THAT THE REVENUES OF SOFTWARE DEVELOPMENT SE RVICES OF M/S. MEGASOFT LTD. CONSTITUTED 76% OF OVERALL REVENUE FO R THE FINANCIAL YEAR 2005-06, THUS IT SATISFIED THE TPOS FILTER AND HEN CE COULD NOT BE REJECTED MERELY BECAUSE EXTRA-ORDINARY OR SUPER NORMAL PROFI TS, HENCE MAY BE RETAINED AS COMPARABLE. 36. REGARDING THE CASE OF KALS INFO SYSTEM LTD., TH E LD. CIT(DR) SUBMITTED THAT THE REVENUES FROM SOFTWARE DEVELOPME NT SERVICES IN THE SAID COMPANY CONSTITUTED ALMOST 99% OF THE TOTAL OP ERATING REVENUES AND IT QUALIFIES 75% REVENUES FILTER FROM SOFTWARE DEVELOP MENT, ACCORDINGLY CONSIDERED AS COMPARABLE. IT WAS FURTHER SUBMITTED THAT KALS ITSELF HAD CONFIRMED BEING A SOFTWARE DEVELOPMENT SERVICE PROV IDER, AS SUCH THERE WAS NO QUESTION OF MAJOR REVENUE FROM SOFTWARE PROD UCTS AND THE TPO RIGHTLY CONSIDERED THAT COMPANY AS A COMPARABLE. 37. AS REGARDS TO THE SUBMISSION OF THE LD. COUNSEL FOR THE ASSESSEE THAT M/S. ACCEL TRANSMATIC LTD. SHOULD HAVE BEEN REJECTE D ON ACCOUNT OF SIGNIFICANT RELATED PARTY TRANSACTIONS, THE LD. CIT (DR) SUBMITTED THAT THE SERVICES RENDERED BY THE SAID COMPANY TO THE RELATE D PARTIES WERE ALLEGED TO BE APPROXIMATELY 31% OF THE TOTAL SERVICES REVEN UE, HOWEVER NO INFORMATION APPEARS TOWARDS SOFTWARE DEVELOPMENT SE RVICES, EVEN THOUGH ITA NO.1369/BANG/10 PAGE 31 OF 50 THE SAID COMPANY HAS GIVEN SEGMENTAL INFORMATION, T HEREFORE M/S. ACCEL TRANSMATIC LTD. HAS RIGHTLY BEEN RETAINED AS A COMP ARABLE. 38. AS REGARDS TO M/S .TATA ELXSI LTD., IT WAS STAT ED THAT THE SAID COMPANY HAD FURNISHED SEGMENTAL REVENUES AND INSTAN CES AND MERELY BECAUSE EXPENSES FROM CASH OF THE SUB-ACTIVITIES WE RE NOT AVAILABLE, DID NOT TANTAMOUNT FOR REJECTION. IT WAS FURTHER STAT ED THAT FINANCIAL STATEMENTS FURNISHED BY THE SAID COMPANY WERE SEGMENTAL INFORM ATION AND TPO COMPUTED OPERATING PROFIT ON THE BASIS OF THE SAID DATA, THEREFORE M/S. TATA ELEXSI LTD. WAS RIGHTLY RETAINED AS COMPARABLE. 39. AS REGARDS TO M/S. INFOSYS TECHNOLOGIES LTD., T HE LD. CIT(DR) STATED THAT THE PRODUCTS REVENUE OF THE SAID COMPANY WAS O NLY 3.95% TO THE TOTAL OPERATING REVENUES, THUS MORE THAN 96% OF ITS REVEN UES WERE FROM SOFTWARE DEVELOPMENT SERVICES AND ACCORDINGLY IT QU ALIFIES FILTER OF 75% FROM SOFTWARE DEVELOPMENT SERVICES. THEREFORE GETT ING HIGHER TURNOVER DID NOT NECESSARILY MEAN THAT IT WOULD GENERATE HIGHER MARGIN. IT WAS FURTHER STATED THAT THE ASSESSEE HAD NOT DEMONSTRATED AS TO HOW THE DIFFERENCE IN TURNOVER HAS INFLUENCED THE RESULT OF THE COMPARABL ES. THE LD. CIT(DR) CONTENDED THAT IT IS ACCEPTED ECONOMIC PRINCIPLE AN D COMMERCIAL PRACTICE THAT IN HIGHLY COMPETITIVE MARKET CONDITIONS ONE CA N SURVIVE AND SUSTAIN ONLY BY KEEPING LOW MARGIN BUT HIGH TURNOVER. RELI ANCE WAS PLACED ON THE DECISION OF ITAT MUMBAI E BENCH IN THE CASE OF M/S. SYMANTEC SOFTWARE SOLUTION PVT. LTD. V. ACIT, ITA NO.7814/MUM/2010. IT WAS FURTHER SUBMITTED THAT A MERE HIGHER PROFIT MARGIN CANNOT B E A REASON FOR ELIMINATION AS A COMPARABLE. ITA NO.1369/BANG/10 PAGE 32 OF 50 40. SIMILARLY FOR M/S. FLEXTRONICS SOFTWARE SYSTEM LTD., THE LD. CIT(DR) STATED THAT ITS PRODUCTS REVENUE CONSTITUTES ONLY 1 6.6% OF THE SEGMENTAL REVENUE, THEREFORE THE SOFTWARE DEVELOPMENT SERVICE S REVENUE IN SEGMENT PRODUCTS AND SERVICES WAS 83.4% WHICH WAS MORE TH AN 75% AND THUS QUALIFIES THE TPOS FILTER FOR REVENUES FROM SOFTWA RE DEVELOPMENT SERVICES, ACCORDINGLY RIGHTLY CONSIDERED AS COMPARABLE. 41. THE LD. CIT(DR) VEHEMENTLY ARGUED AND STATED TH AT SUB-SECTION (7) OF SECTION 92CA OF THE ACT HAS EMPOWERED THE TPO TO EXERCISE ALL OR ANY OF THE POWERS MENTIONED IN SECTION 131 OR SUB-SECTI ON (6) OF SECTION 133 OF THE I.T. ACT FOR DETERMINATION OF THE ALP, THEREFOR E THE OBJECT WAS CLEARLY TO ENABLE THE TPO TO SEEK CLARIFICATION WHERE THERE WA S AMBIGUITY OR INSUFFICIENCY OR OBFUSCATION OF DATA OR INFORMATION IN PUBLIC DOMAIN SO THAT THE ALP CAN BE ARRIVED AT IN A LOGICAL MANNER, THER EFORE THE TPO ISSUED NOTICES U/S. 133(6) OF THE ACT TO ASCERTAIN FILTER CRITERIA, AS SUCH IT CANNOT BE A VALID GROUND FOR EXCLUSION OF THE COMPARABLES BEC AUSE THOSE WERE BASED ON THE REPLIES RECEIVED AGAINST THE NOTICE U/S. 133 (6) OF THE ACT. RELIANCE WAS PLACED ON THE DECISION OF THE HONBLE DELHI HIG H COURT IN THE CASE OF M/S. MESSE DUSSELDORF V. DCIT (2010) 320 ITR 565 (D EL) . 42. AS REGARDS TO THE EXCLUSION OF FOREIGN EXCHANGE LOSS AND LOSS ON SALE OF ASSETS, THE LD. CIT(DR) SUBMITTED THAT THE TPO HAS RIGHTLY EXCLUDED THE SAME FROM OPERATING COSTS BECAUSE THOSE EXPENSE S HAD NOTHING TO DO WITH THE MAIN OPERATIVES OF THE ASSESSEE. RELIANCE WAS PLACED ON THE DECISION OF THE ITAT MUMBAI BENCH IN THE CASE OF M/S. DHL EXPRESS (INDIA) PVT. LTD. V. ACIT, ITA NO.7360/MUM/2010. AS REGARDS TO THE OBJECTION OF THE ASSESSEE RELATING TO THE EXCLUSION OF PROVISIONS WR ITTEN ITA NO.1369/BANG/10 PAGE 33 OF 50 BACK, IT WAS STATED THAT NO SUCH INCOME HAD BEEN CR EDITED IN THE P&L ACCOUNT, HENCE THERE WAS NO QUESTION OF ADJUSTMENT OF OPERATING INCOME. 43. AS REGARDS TO THE OBJECTION OF THE LD. COUNSEL FOR THE ASSESSEE THAT THE TPO HAS INTRODUCED IGATE GLOBAL SOLUTIONS LTD. AS A COMPARABLE COMPANY AFTER CONDUCTING A FRESH ECONOMIC ANALYSIS AND OBTAINING RELEVANT SEGMENTAL INFORMATION U/S. 133(6) OF THE ACT, THE L D. CIT(DR) SUBMITTED THAT SEGMENTAL INFORMATION/DATA FURNISHED BY M/S. IGATE GLOBAL SOLUTIONS LTD. REVEALED THAT THE OPERATING COSTS CONSISTED OF SALA RIES & WAGES, SELLING, MARKETING, DEPRECIATION ETC., BUT THE TPO WORKED OU T EXTRAORDINARY ITEMS AFTER EXAMINING THE FINANCIAL STATEMENT FOR THE F.Y . 2005-06 AND RIGHTLY DETERMINED MARGIN AT 15.61% INSTEAD OF 2.81% WRONGL Y WORKED OUT BY THE ASSESSEE. IT WAS ALSO STATED THAT SIMILAR OBJECTI ONS HAD BEEN RAISED BEFORE THE DRP WHO HELD THAT MARGIN IN RESPECT OF I GATE HAD BEEN CORRECTLY WORKED OUT BY THE TPO, THEREFORE THERE WAS NO MERIT IN THE OBJECTION RAISED BY THE ASSESSEE. 44. AS REGARDS TO THE CLAIM OF THE ASSESSEE FOR RIS K ADJUSTMENT, THE LD. CIT(DR) SUBMITTED THAT THE TPO AND DRP HAD REJECTED THE ASSESSEES CLAIM ON THE GROUND THAT THE ASSESSEE FAILED TO BRI NG ANY EVIDENCE ON RECORD TO SHOW THAT THERE EXISTED ANY DIFFERENCE IN THE RISK PROFILE OF COMPARABLE COMPANIES VIS--VIS OF THE ASSESSEE. IT WAS POINTED OUT THAT IN ORDER TO TAKE BENEFIT OF THIS ADJUSTMENT, INFORMATI ON SHOULD HAVE BEEN SUBMITTED ALONG WITH THE DETAILS UNDER RULE 10D OF THE INCOME-TAX RULES, 1962 BY THE ASSESSEE. IT WAS ALSO POINTED OUT THAT AS PER THE PROVISIONS U/S. 92D(I) OF THE ACT, EVERY PERSON ENTERING INTO AN INTERNATIONAL TRANSACTION IS REQUIRED TO KEEP AND MAINTAIN SUCH I NFORMATION AND ITA NO.1369/BANG/10 PAGE 34 OF 50 DOCUMENTS IN RESPECT THEREOF, AS IS BEING PRESCRIBE D UNDER RULE 10D(1) OF THE INCOME-TAX RULES, 1962. THE SAID RULE REQUIRES MAINTENANCE OF A RECORD OF THE ANALYSIS PERFORMED TO EVALUATE COMPAR ABLE AS WELL AS A RECORD OF THE ACTUAL WORKING CARRIED OUT FOR DETERM INING THE ALP. IT WAS FURTHER STATED THAT THE ASSESSEE ADMITTED THAT THEY DID NOT UNDERTAKE ANY RISK ADJUSTMENT IN TP DOCUMENT REPORT, THEREFORE IN THE ABSENCE OF THAT COMPARABILITY, IT WAS DIFFICULT TO MAKE ADJUSTMENT. RELIANCE WAS PLACED ON THE FOLLOWING CASE LAWS:- I) M/S. MARUBENI INDIA PRIVATE LTD. V. ADDL. CIT ITA NO.945/DEL/2009. II) SYMANTEC SOFTWARE SOLUTION PRIVATE LTD. V. ACIT I TA NO.7894/MUM/2010 III) EXXON MOBIL COMPANY INDIA PVT. LTD. V. DCIT ITA NO.8311/MUM/2010 IV) ADP(P) LTD. V. DCIT, ITAT NO.106/HYD/2009 V) VEDARIS TECHNOLOGY (P) LTD. V. ACIT (2010) 131 TTJ (DEL) 309 VI) M/S. DELOITTE CONSULTING INDIA PVT. LTD. V. DCIT VII) ST MICRO ELECTRONICS PVT. LTD. V. CIT(A), ITA NO.18 06, 1807/DEL/2008. 45. IN HIS REJOINDER, THE LD. COUNSEL FOR THE ASSES SEE SUBMITTED THAT IN ORDER TO DETERMINE THE ARMS LENGTH PRICE (ALP) NAT URE OF THE INTERNATIONAL TRANSACTIONS, THE MAN HOUR RATE CHARGED BY THE ASSE SSEE WAS COMPARED WITH HOURLY RATES CHARGED BY LEADING SOFTWARE COMPA NIES WHOSE FINANCIAL INFORMATIONS WERE AVAILABLE IN PUBLIC DOMAIN AND TH E HOURLY RATE OF THE COMPARABLE COMPANIES WAS IN THE RANGE OF USD 4 TO U SD 31.16 I.E, THE AVERAGE RATE PER HOUR WORKS OUT TO USD 14.46, WHILE THE RATE CHARGED BY THE ASSESSEE I.E. USD 26.24 WAS AT THE HIGHER END O F THIS RANGE AND HIGHER AVERAGE OF THE ABOVE SAID RATES, HENCE HOURLY RATE CHARGED WAS TO BE ITA NO.1369/BANG/10 PAGE 35 OF 50 CONCLUDED AT ARMS LENGTH. THEREFORE THE APPROACH ADOPTED BY THE TPO IN REJECTING THE ECONOMIC ANALYSIS CARRIED OUT BY THE ASSESSEE AND UNDERTAKING FRESH ECONOMIC ANALYSIS USING TNMM TO D ETERMINE THE ALP OF THE INTERNATIONAL TRANSACTION WAS NOT APPROPRIATE. RELIANCE WAS PLACED ON THE DECISION OF THE ITAT DELHI BENCH IN THE CASE OF MENTOR GRAPHICS (NOIDA) (P.) LTD. V. DCIT 112 TTJ (DEL) 408. 46. IT WAS FURTHER SUBMITTED THAT THE COMPANY WHICH OWNS INTELLECTUAL PROPERTY RIGHTS GENERALLY HAS PREMIUM PRICING POWER WHICH IS ULTIMATELY REFLECTED IN HIGHER NET PROFITABILITY LIKE IN THE C ASE OF M/S. MEGASOFT LTD., THEREFORE THE ARGUMENT OF THE LD. DR THAT REVENUES IN THE FORM OF LICENCE FROM THIRD PARTIES ARE AKIN TO SOFTWARE DEVELOPMENT SERVICES WAS MERELY GENERIC WITHOUT ANY SOUND BASIS BECAUSE THE COMPANY M/S. MEGASOFT LTD. WAS ENGAGED IN BUSINESS OF SOFTWARE DEVELOPMENT SER VICES ON A COMPANY WISE BASIS AND HAD THE SAID COMPANY PROVIDED SEGMEN TAL ACCOUNTS FOR XIUS-BCIG AND BLUE ALLY DIVISION, IT SHOULD NOT HAV E BEEN CONSIDERED AS A COMPARABLE AND ONLY THE BLUE ALLY DIVISION OF THE S AID COMPANY SHOULD HAVE BEEN CONSIDERED AS COMPARABLE. SIMILARLY THE COMPANY KALS HAS PRODUCTS OF ITS OWN AND HENCE SHOULD HAVE BEEN REJE CTED AS COMPARABLE BECAUSE A BREAK-UP OF PRODUCT AND SERVICES REVENUE WAS NOT AVAILABLE. IT WAS FURTHER STATED THAT THE TPO HAD SELECTED COMPAN IES FOR ISSUING NOTICES U/.S 133(6) OF THE ACT ON AN ARBITRARY BASIS, PARTI CULARLY THE RESPONSES OF M/S. SANKHYA INFOTECH AND M/S. MEGASOFT LTD. OBTAIN ED U/S. 133(6) OF THE ACT COULD NOT HAVE BEEN RELIED UPON AS THOSE COMPAN IES HAD PROVIDED CONTRADICTORY INFORMATION IN THEIR RESPONSES TO THE NOTICES ISSUED U/S. 133(6) OF THE ACT. IT WAS FURTHER STATED THAT THE TPO HAD WRONGLY ITA NO.1369/BANG/10 PAGE 36 OF 50 CONSIDERED FOREIGN EXCHANGE FLUCTUATION AND PROVISI ONS WRITTEN BACK AS NON-OPERATING IN NATURE, WHICH ARE TO BE CONSIDERED AS OPERATING IN NATURE. RELIANCE WAS PLACED ON THE FOLLOWING CASE LAWS: (I) M/S. SAP LABS INDIA PVT. LTD. V. ACIT 44 SOT 156 (B ANG) (II) GEM PLUS JEWELLERY INDIA LTD. V. CIT 330 ITR 175 (B OM) (III) SONY INDIA (P) LTD. V. DCIT 114 ITD 448 (DEL) 47. THE LD. COUNSEL FOR THE ASSESSEE FURTHER SUBMIT TED THAT THE ASSESSEE PROVIDED THE WORKING FOR THE ADJUSTMENT ONLY ON THE BASIS OF THE DECISION OF THE ITAT DELHI BENCH IN THE CASE OF SONY INDIA (P.) LTD. V. DCIT 114 ITD 448 AND ALSO PROVIDED CAPITAL ASSETS PRICING MODEL (CAPM) BASED ON THE ANALYSIS BEFORE THE DRP FOR THE RISK ADJUSTMENT, BU T THE SAME HAD NOT BEEN CONSIDERED BY THE DRP. THEREFORE IN THE ABSENCE OF ANY OTHER QUANTIFICATION MECHANISM, CAPM BASED ANALYSIS SHOUL D HAVE BEEN CONSIDERED AND DEDUCTION IS TO BE ALLOWED TO THE AS SESSEE ON ACCOUNT OF DIFFERENCE IN THE RISK PROFILE OF THE ASSESSEE VIS- -VIS COMPARABLE COMPANIES. 48. WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE PARTIES AND CAREFULLY GONE THROUGH THE MATERIAL AVAILABLE ON RE CORD. IT IS NOTICED THAT A SIMILAR ISSUE HAVING IDENTICAL FACTS HAS BEEN ADJUD ICATED BY THIS BENCH OF THE TRIBUNAL IN THE CASE OF M/S. INSILICA SEMICONDUCTORS INDIA PVT. LTD. V. ITO, WARD 11(2) IN ITA NO.1399/BANG/2010 FOR THE A. Y. 2006-07 ORDER DATED 29.02.2012, WHEREIN THE RELEVANT FINDINGS HAS BEEN GIVEN IN PARAS 18 & 19 OF THE SAID ORDER, WHICH READ AS UNDER:- ITA NO.1369/BANG/10 PAGE 37 OF 50 18. WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH TH E PARTIES AND CAREFULLY GONE THROUGH THE MATERIAL AVAILABLE O N RECORD. IN THE PRESENT CASE, IT IS NOTICED THAT THE ASSESSEE S ELECTED 10 COMPARABLES OUT OF WHICH 2 VIZ., VISUAL SOFT TECHNO LOGIES LTD. AND VJIL CONSULTANCY LTD. WERE REJECTED BY THE TPO. HOWEVER, THE TPO INCLUDED ANOTHER COMPANY M/S. INFOSYS TECHN OLOGIES LTD. WHICH WAS CLAIMED TO BE 906 TIMES BIGGER THAN THE ASSESSEE. IN OUR OPINION THE SAID COMPANY BEING SIGNIFICANTLY DISSIMILAR IN SIZE SHOULD NOT HAVE BEEN CONSIDERED AS COMPARABLE. IN THE PRESENT CASE, THE TPO INCLUDED CERTAIN COMPANIES AS COMPARABLE ON THE BASIS OF INFORMATION OBTAINED BY WAY OF NOTI CE U/S. 133(6) OF THE ACT, BUT WITHOUT PROVIDING AN OPPORTUNITY OF BEING HEARD TO THE ASSESSEE, THE TPO ISSUED A SHOW CAUSE NOTICE DA TED 30.04.09 COPY OF WHICH IS PLACED ON PAGES 95 TO 125 OF THE A SSESSEES PB AND PROPOSED TO REDETERMINE THE ALP ON THE BASIS OF 20 COMPARABLES AND SUBSEQUENTLY ISSUED ANOTHER NOTICE ON 20.07.09 AND PROPOSED TO ADOPT 14 COMPANIES AS COMPARABLES, BUT IN THE FINAL ORDER THE TPO SELECTED 22 COMPANIES AS COMPAR ABLES. IN OTHER WORDS, 8 ADDITIONAL COMPANIES WERE CONSIDERED AS COMPARABLES APART FROM THOSE WHICH WERE PROPOSED IN THE NOTICE DATED 20.07.09, COPY OF WHICH IS PLACED AT PAGES 30 5 TO 355 OF THE ASSESSEES COMPILATION. IT THEREFORE APPEARS T HAT NEW COMPANIES WERE ADOPTED BY THE TPO AS COMPARABLES WI THOUT AFFORDING OPPORTUNITY TO THE ASSESSEE TO PRESENT IT S OBJECTIONS TO THEIR ADOPTION. IT IS WELL SETTLED THAT NOBODY SHO ULD BE CONDEMNED UNHEARD AS PER THE MAXIM AUDI ALTERAM PARTEM , BUT IN THE PRESENT CASE NOTHING IS BROUGHT ON RECORD TO SUBSTANTIATE THAT THE TPO/AO WHILE ADOPTING ADDITIONAL COMPARABL ES HAD PROVIDED OPPORTUNITY OF BEING HEARD TO THE ASSESSEE . THEREFORE THIS ISSUE DESERVES TO BE SET ASIDE TO BE DECIDED A FRESH AT THE LEVEL OF THE ASSESSING OFFICER. FOR THE AFORESAID VIEW, WE ARE FORTIFIED BY THE ORDER DATED 31.01.2012 OF THE ITAT A BENCH BANGALORE IN THE CASE OF GENESIS MICROCHIP (I) PVT. LTD., BANGALORE V. DCIT, CIRCLE 11(3), BANGALORE IN ITA NO.1254/BANG/2 010 FOR THE A.Y. 2006-07 . 19. IN THE PRESENT CASE, THE AO ADOPTED M/S. INFOSY S TECHNOLOGIES LTD., KALS INFORMATION SYSTEM LTD., AC CEL TRANSMATIC LTD. AND TATA ELXSI LTD. AS COMPARABLES ON THE BASIS OF DATA WHICH WAS OBTAINED BY HIM IN RESPONSE OF TH E NOTICES ISSUED U/S. 133(6) OF THE ACT, HOWEVER NO OPPORTUNI TY OF BEING HEARD WAS PROVIDED TO THE ASSESSEE FOR REBUTTAL, TH EREFORE THE ASSESSING OFFICER WAS NOT JUSTIFIED IN CONSIDERING THOSE COMPARABLES WHILE WORKING OUT THE ALP IN ASSESSEES CASE. IN THAT VIEW OF THE MATTER, WE DEEM IT APPROPRIATE TO SET ASIDE THIS ISSUE BACK TO THE FILE OF THE ASSESSING OFFICER, TO BE ADJUDICATED ITA NO.1369/BANG/10 PAGE 38 OF 50 AFRESH IN ACCORDANCE WITH LAW, AFTER PROVIDING DUE AND REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. THE A O/TPO IS ALSO DIRECTED TO ALLOW THE OPPORTUNITY TO CROSS-EXAMINE THE COMPARABLES WHOSE REPLIES WERE OBTAINED U/S. 133(6) OF THE ACT AND WERE SOUGHT TO BE USED AGAINST THE ASSESSEE, IF THE ASSESSEE SO DESIRES. 49. SINCE THE FACTS OF THE PRESENT CASE ARE SIMILAR TO THE FACTS INVOLVED IN THE AFORESAID REFERRED TO ORDER DATED 29.02.2012 OF THE TRIBUNAL IN THE CASE OF M/S. INSILICA SEMICONDUCTORS INDIA PVT. LTD. V. ITO , SO RESPECTFULLY FOLLOWING THE SAID ORDER, WE REMAND THIS ISSUE BACK TO THE FILE OF THE AO/TPO TO BE DECIDED AFRESH IN ACCORDANCE WITH LAW, AFTER PROVIDING DUE AND REASONABLE OPPORTUNITY OF BEING HEARD TO THE AS SESSEE. 50. IT IS ALSO RELEVANT TO POINT OUT THAT IN THE AF ORESAID REFERRED TO CASE, THE ISSUE RELATING TO ADJUSTMENT ON ACCOUNT OF RISK PROFILE WAS NOT THERE, THEREFORE WE DIRECT THE TPO TO CONSIDER THE ARGUMEN TS AND SUBMISSIONS OF THE ASSESSEE WHICH HAS BEEN MENTIONED IN THE FORMER PART OF THIS ORDER, WHILE ADJUDICATING THE ISSUE AFRESH. 51. THE NEXT ISSUE VIDE GROUND NO.16 RELATES TO THE BENEFIT OF +/- 5% ADJUSTMENT AS MENTIONED IN THE PROVISO TO SECTION 9 2C(2) OF THE ACT. 52. THE FACTS RELATED TO THIS ISSUE IN BRIEF ARE TH AT THE ASSESSEE HAD INTERNATIONAL TRANSACTIONS DURING THE FINANCIAL YEA R 2005-06 AND THE CASE WAS REFERRED TO THE TPO TO DETERMINE THE ALP. THE TPO VIDE ORDER DATED 29.10.2009 STATED THAT AN ADJUSTMENT OF RS.4,26,43, 555 WAS REQUIRED TO BE MADE TO THE INCOME OF THE ASSESSEE COMPANY, CONSEQU ENT TO DETERMINATION OF THE ALP. THE AO FORWARDED THE DRA FT ASSESSMENT ORDER DATED 21.12.09 TO THE ASSESSEE TO FILE ITS OBJECTIO NS BEFORE THE DRP. THE ITA NO.1369/BANG/10 PAGE 39 OF 50 DRP DIRECTED THE AO TO COMPLETE THE ASSESSMENT AFT ER TAKING INTO CONSIDERATION THE DETAILED DISCUSSION ON VARIOUS IS SUES VIDE DIRECTIONS UNDER SUB-SECTIONS (5) & (8) OF SECTION 144C OF THE ACT DATED 08.09.10. THE DRP DIRECTED TO MODIFY THE ASSESSMENT ORDER AFT ER REWORKING THE CORRECT MARGIN IN THE DRAFT ASSESSMENT ORDER. IN C OMPLIANCE TO THE ABOVE DIRECTION, THE AO ADOPTED THE ADJUSTMENT AT RS.4,24 ,78,340 AS AGAINST EARLIER ADJUSTMENT OF RS.4,26,43,555. NOW THE ASSE SSEE IS IN APPEAL. 53. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ASSESSEE SHOULD HAVE BEEN GIVEN A STANDARD DEDUCTION OF 5% AS PROVI DED UNDER PROVISO TO SECTION 92C(2) OF THE ACT BEFORE MAKING ADJUSTMENT FOR THE TRANSFER PRICE. RELIANCE WAS PLACED ON THE FOLLOWING CASE LAWS: 1. M/S. GENISYS INTEGRATING SYSTEMS (INDIA) PVT. LTD. V. DCIT ITA NO.1231/BANG/2010 2. M/S. TATRA VECTRA MOTORS LTD. V. DCIT ITA NO.1284/BANG/2010 DTD. 31.01.2012. 54. THE LD. COUNSEL FOR THE ASSESSEE FURTHER SUBMIT TED THAT THE CONTENTION OF THE ASSESSEE WAS REJECTED BY THE DRP ON THE GROUND THAT AMENDMENT TO PROVISO TO SECTION 92C WAS CLARIFICATO RY IN NATURE AND THEREFORE RETROSPECTIVE IN EFFECT. IT WAS CONTENDE D THAT THE AMENDMENT TO PROVISO TO SECTION 92C WAS NOT RETROSPECTIVE AS CLA RIFIED BY THE CBDT BY WAY OF LETTER NO.F.142/13/2010-SO(TPL) DATED 30.09. 2010. THE LD. COUNSEL FOR THE ASSESSEE CONTENDED THAT A DEEMING P ROVISION HAS BEEN CREATED TO ADOPT AN ARMS LENGTH PRICE IF THE PRICE ACTUALLY UNDERTAKEN BY THE ASSESSEE DOES NOT EXCEED 5% OF THE AMOUNT AT WH ICH INTERNATIONAL TRANSACTION HAS ACTUALLY BEEN UNDERTAKEN INSTEAD OF RECKONING THE PRICE WHICH IS DETERMINED BY THE TPO WHICH WAS THE POSITI ON UNDER UNAMENDED ITA NO.1369/BANG/10 PAGE 40 OF 50 PROVISO TO SECTION 92C(2) OF THE ACT. RELIANCE WA S PLACED ON THE FOLLOWING CASE LAWS: - M/S IPOLICY NETWORK PRIVATE LIMITED VS. ITO, NEW DELHI [ITA NO.5504/DEL/2010] - M/S. SYMANTEC SOFTWARE SOLUTIONS PRIVATE LIMITED VS. ACIT [ITA NO.7894/MUM/2010] - M/S. SAP LABS INDIA PRIVATE LIMITED VS. ACIT, [4 4 SOT 156 (BANG)] - TNT INDIA PRIVATE LIMITED VS. ACIT [ITA NO. 1442 (BNG)/08] - HAWORTH (INDIA) PRIVATE LIMITED VS. DCIT, [ITA NO.5341/DEI/2010] - UE TRADE CORPORATION (INDIA) (P) LIMITED VS. ACI T [44 SOT 457 (DEL)] - CUMMINS INDIA LIMITED VS. DCIT, [ITA NO. 277 & 1 412 /PN/071 - STARNET NETWORKS (INDIA) P. LTD. VS. DCIT(ITA NO. 1350/PN/2010) ITAT, PUNE. - GENISYS INTEGRATING SYSTEMS (INDIA) PRIVATE LIMIT ED VS DCIT (ITA. NO. 1231 (BANG.)/2010) - CISCO SYSTEMS (INDIA) PVT. LTD. VS. DCIT (ITA NO. 1410 (BANG.)/2010) - EMERSON PROCESS MANAGEMENT INDIA PVT LTD VS ACIT (ITA NO. 8118/MUM/2010) - DIAGEO INDIA PRIVATE LIMITED VS DCIT ([TA. NO. 8 602 (MUM.)/2010) 55. IN VIEW OF THE ABOVE, THE LD. COUNSEL FOR THE A SSESSEE CONTENDED THAT THE PROVISO TO SECTION 92C(2) OF THE ACT AS AMENDED BY FINANCE (NO: 2) ACT OF 2009 IS PROSPECTIVE IN OPERATION AND WILL BE APPLICABLE ONLY AFTER 01 OCTOBER 2009 (I.E., FROM AY 2009-10 AND ONWARDS). T HEREFORE HE SUBMITTED ITA NO.1369/BANG/10 PAGE 41 OF 50 THAT THE BENEFIT OF 5% IS TO BE PROVIDED FROM THE A LP AS PER THE ERSTWHILE PROVISO OF SECTION 92C(2) OF THE ACT. 56. IN HIS RIVAL SUBMISSIONS, THE LD. CIT(DR) SUBMI TTED THAT NO BENEFIT OF ADJUSTMENT OF +/- 5% BE GIVEN TO THE ASSESSEE PARTI CULARLY WHEN THE PROVISO TO SECTION 92C(2) OF THE ACT HAS BEEN AMEND ED W.E.F. 1.10.2009 BY INTRODUCING A CLARIFICATORY AMENDMENT. IT WAS FURT HER STATED THAT THE TRANSFER PRICING ADJUSTMENT WOULD BE MADE ONLY FROM ARITHMETICAL MEAN PRICE, THEREFORE BY VIRTUE OF AMENDMENT THE ADJUSTM ENT OF +/- 5% VARIANCE IS ALLOWABLE ONLY IN THE CASE OF PRICE CHARGED IN T HE INTERNATIONAL TRANSACTION AND NOT FOR THE ADJUSTMENT. RELIANCE W AS PLACED ON THE FOLLOWING CASE LAWS:- - MARUBANI INDIA PVT. LTD. V. ADDL. CIT (ITA NO.935/DEL/2009) - DCIT V. GLOBAL VANTADGE PVT. LTD. (2010-TIOL-24-I TAT- DEL) - DCIT V. BAST INDIA LTD. (41 SOT 10) - M/S. DELOITTE CONSULTANCY INDIA PVT. LTD. V. DCI T (ITA NO.1084/HYD/2010) - EXXON MOBIL COMPANY INDIA PVT. LTD. V. DCIT (ITA NO.8311/MUM/2010) - ST MICRO ELECTRONICS PVT. LTD. V. CIT(A) (ITA NO. 1806, 1807/DEL/2008) - ADP (P) LTD. V. DCIT (ITA NO.106/HYD/2009) 57. AFTER CONSIDERING THE SUBMISSIONS OF BOTH THE P ARTIES AND MATERIAL ON RECORD, IT IS NOTICED THAT A SIMILAR ISSUE HAS BEEN ADJUDICATED BY THE ITAT A BENCH BANGALORE HAVING THE SAME CONSTITUTION IN THE CASE OF M/S. TATRA ITA NO.1369/BANG/10 PAGE 42 OF 50 VECTRA MOTORS LTD. V. DCIT, ITA NO.1284/BANG/2010 F OR THE A.Y. 2006-07 WHEREIN THE RELEVANT FINDING HAS BEEN GIVEN IN PARA S 12 TO 17 OF THE ORDER DATED 31.01.2012, WHICH READ AS UNDER: 12. WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE PARTIES AND CAREFULLY GONE THROUGH THE MATERIAL AVAILABLE O N RECORD. IN THE PRESENT CASE, THE ASSESSEE HAS NOT DISPUTED THE ADJUSTMENTS U/S. 92CA OF THE ACT, BUT CHALLENGING THE WORKING O F ALP WITHOUT GIVING BENEFIT OF THE OPTION AVAILABLE UNDE R THE ERSTWHILE PROVISO TO SECTION 92C(2) OF THE ACT, SO IT BECOMES RELEVANT TO DISCUSS THE PROVISIONS CONTAINED IN THE ERSTWHILE P ROVISO TO SECTION 92C(2) OF THE ACT, WHICH WAS INSERTED BY FI NANCE ACT, 2002 W.E.F. 1-4-2002 AND READS AS UNDER: PROVIDED , THAT WHERE MORE THAN ONE PRICE IS DETERMINED BY THE MOST APPROPRIATE METHOD, THE ARMS LENGTH PR ICE SHALL BE TAKEN TO BE THE ARITHMETICAL MEAN OF SUCH PRICES, OR, AT THE OPTION OF THE ASSESSEE, A PRICE WHICH MA Y VARY FROM THE ARITHMETICAL MEAN BY AN AMOUNT NOT EXCEEDI NG FIVE PER CENT OF SUCH ARITHMETICAL MEAN. 13. FROM THE PLAIN READING OF THE ABOVE PROVISO, I T IS CLEAR THAT THE OPTION IS AVAILABLE TO THE ASSESSEE FOR ADJUSTM ENT OF +/- 5% VARIATION FOR THE PURPOSES OF COMPUTING ALP. AS PE R THE SAID PROVISO, WHERE MORE THAN ONE PRICE IS DETERMINED BY THE MOST APPROPRIATE METHOD, THE ALP SHALL BE TAKEN TO BE TH E ARITHMETICAL MEAN OF SUCH PRICES, OR, AT THE OPTION OF THE ASSES SEE, A PRICE WHICH MAY VARY FROM THE ARITHMETICAL MEAN BY AN AMO UNT NOT EXCEEDING FIVE PER CENT OF SUCH ARITHMETICAL MEAN. IN OUR OPINION, THE BENEFIT OF OPTION I.E., ADJUSTMENT OF +/- 5% VARIATION, AS PROVIDED IN PROVISO TO SECTION 92C(2) OF THE ACT IS AVAILABLE TO THE ASSESSEE. 14. ON A SIMILAR ISSUE, THE ITAT DELHI BENCH IN T HE CASE OF SONY INDIA PVT. LTD. V. DCIT (2009) 315 ITR (AT) 15 0 HAS HELD AS UNDER: THE PROVISO TO SECTION 92C(2) OF THE ACT CONSISTS MAINLY OF TWO PARTS: (A) WHERE MORE THAN ONE PRICE IS DETERMINED BY THE MOST APPROPRIATE METHOD, THEN THE ARMS LENGTH PRICE SHA LL BE TAKEN TO BE THE ARITHMETICAL MEAN OF SUCH PRICE; OR (B) AT THE OPTION OF THE ASSESSEE, A PRICE WHICH MAY VARY FROM THE ARITHMETICAL MEAN BY AN AMOUNT NOT EXCEEDING 5 PER ITA NO.1369/BANG/10 PAGE 43 OF 50 CENT OF SUCH ARITHMETICAL MEAN. THE FIRST LIMB OF THE PROVISO HAS GENERAL APPLICATION. THERE IS NO OPTIO N WITH NOR ANY SORT OF CONCESSION ALLOWED TO THE ASSESSEE. THE ARMS LENGTH PRICE SO DETERMINED MAY BE ACCEPTED OR CONTESTED BY THE ASSESSEE OR BY ANY AGGRIEVED PERSO N IN ACCORDANCE WITH THE STATUTORY PROVISIONS. IT IS A STATUTORY LEVY WITHOUT ANY OPTION. THE SECOND LIMB OF THE PR OVISO GIVES AN OPTION TO THE ASSESSEE TO TAKE THE ARMS LENGTH PRICE WHICH MAY VARY FROM THE ARITHMETIC MEAN BY AN AMOUNT NOT EXCEEDING 5 PER CENT OF SUCH ARITHMETIC MEAN. THE WORD OPTION IS SYNONYMOUS WITH CHOICE OR PREFERENCE. THEREFORE, IT IS THE CHOICE OF THE A SSESSEE TO TAKE THE ARMS LENGTH PRICE WITH A MARGINAL BENE FIT AND NOT THE ARITHMETICAL MEAN DETERMINED AS THE MOST APPROPRIATE METHOD. THERE IS NOTHING IN THE LANGUA GE TO RESTRICT THE APPLICATION OF THE PROVISION ONLY TO M ARGINAL CASES WHERE THE PRICE DISCLOSED BY THE ASSESSEE DOE S NOT EXCEED 5 PER CENT OF THE ARITHMETIC MEAN. THE ARM S LENGTH PRICE DETERMINED ON APPLICATION OF THE MOST APPROPRIATE METHOD IS ONLY AN APPROXIMATION AND IS NOT A SCIENTIFIC EVALUATION. THEREFORE, THE LEGISLATURE THOUGHT IT PROPER TO ALLOW MARGINAL BENEFIT TO ASSESSEES WHO O PT FOR SUCH BENEFIT. IN THE CASE OF AN ASSESSEE WHO EXERC ISES THE OPTION AND ACCEPTS THE ARMS LENGTH PRICE EVEN EXCE EDING 5 PER CENT OF THE ARITHMETIC MEAN DETERMINED BY THE TAX AUTHORITY AS CORRECT AND IS READY TO PAY TAX ON THE DIFFERENCE BETWEEN THE PRICE DISCLOSED BY HIM AND T HE ARMS LENGTH PRICE THE APPLICATION OF THE PROVISO I S NOT EXCLUDED. THE LEGAL POSITION CANNOT BE DIFFERENT I N A CASE WHERE MINOR VARIATION OF 5 PER CENT IS NOT ACCEPTED AND THE ARMS LENGTH PRICE IS FURTHER CHALLENGED IN APP EAL. THE MERE FACT OF ACCEPTANCE OR NON-ACCEPTANCE OF TH E ARITHMETIC MEAN CANNOT BE TAKEN TO BE THE DETERMINI NG FACTOR RELATING TO THE RIGHT TO CONTEST THE ARMS L ENGTH PRICE IN APPEAL. SUCH INFERENCE IS NOT SUPPORTED B Y THE LANGUAGE OF THE PROVISION. BOTH IN THE FIRST AS ALS O IN THE SECOND LIMB, THE IMPLICATIONS OF THE DETERMINED THE ARMS LENGTH PRICE ARE THE SAME EXCEPT FOR THE MARGINAL B ENEFIT ALLOWED TO THE ASSESSEE UNDER THE SECOND LIMB. HEN CE, THE SECOND LIMB OF THE PROVISO IS APPLICABLE EVEN TO CA SES WHERE THE ASSESSEE INTENDS TO CHALLENGE THE ARMS L ENGTH PRICE TAKEN AS ARITHMETIC MEAN AND DETERMINED THROU GH THE MOST APPROPRIATE METHOD. THEREFORE, THE BENEFI T OF SECOND LIMB IS AVAILABLE TO ALL ASSESSEES IRRESPECT IVE OF THE FACT THAT THE PRICE OF INTERNATIONAL TRANSACTION DI SCLOSED BY THEM EXCEEDS THE MARGIN PROVIDED IN THE PROVISIO N. ITA NO.1369/BANG/10 PAGE 44 OF 50 15. IN THE PRESENT CASE, IT APPEARS THAT THE BENEF IT OF +/- 5% ADJUSTMENT HAS NOT BEEN GIVEN TO THE ASSESSEE FOR T HE REASON (AS MENTIONED BY THE TPO) THAT SALES MADE BY THE ASSESS EE TO THIRD PARTIES WERE HIGHER IN COMPARISON TO THE RATES OF S ALE BY AES TO THE ASSESSEE. BUT NOTHING IS BROUGHT ON RECORD TO SUBSTANTIATE THE AFORESAID OBSERVATIONS OF THE TPO. THE AO HAD ACCE PTED THE RECOMMENDATION OF THE TPO IN HIS REPORT DATED 30.8. 2000 AND MADE THE ADDITION OF RS.1,76,56,164, HOWEVER, WHILE DOING SO, HE DID NOT ALLOW THE BENEFIT OF THE ADJUSTMENT AS PROV IDED IN THE PROVISO TO SECTION 92C(2) OF THE ACT AND THE CONTEN TION OF THE LD. CIT(DR) WAS THAT SINCE THE IMPUGNED ASSESSMENT WAS MADE AFTER 1.10.2009, THE AMENDED PROVISO TO SECTION 92C(2) OF THE ACT SHALL APPLY IN THIS CASE, WHICH ARE APPLICABLE FROM W.E.F . 1.10.2009. AND SHALL ACCORDINGLY APPLY TO THE CASES IN WHICH T HE PROCEEDINGS WERE PENDING BEFORE THE TPO ON OR AFTER SUCH DATE. THEREFORE, THE BENEFIT OF +/- 5% INTENDED BY THE ERSTWHILE PRO VISO TO SECTION 92C(2) OF THE ACT WAS NOT AVAILABLE TO THE ASSESSEE . ACCORDINGLY THE LD. CIT(DR) HAD STRONGLY DEFENDED THE ASSESSMEN T FRAMED BY THE AO AND HIS METHOD OF DETERMINING THE ALP. 16. AS REGARDS TO THE APPLICABILITY OF THE AMENDED PROVISIONS IN PROVISO TO SECTION 92C(2) OF THE ACT WHICH IS AP PLICABLE W.E.F. 1.10.2009 IS CONCERNED, IT IS NOTICED THAT THIS ISS UE HAS BEEN ADJUDICATED BY THE ITAT PUNE BENCH A, PUNE IN ITA NO.1350/PN/2010 IN THE CASE OF STARNET NETWORKS (INDIA) P. LTD. V. DCIT (SUPRA), WHEREIN THE RELEVANT FINDINGS HAS BEEN GIVEN IN PARAS 20 TO 23 OF THE ORDER DATED 03.10.2011 AND RE AD AS UNDER: 20. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIONS. IN THIS CASE, A PERTINENT ISSUE WHICH HAS BEEN VEHEMENTLY AGITATED BY THE APPELLANT IS WITH REGARD TO ITS CLAIM OF SEEKING BENEFIT OF THE OPTION AVAILABLE UN DER THE ERSTWHILE PROVISO TO SECTION 92C(2) OF THE ACT. THE ERSTWHILE PROVISO WHICH WAS INSERTED BY FINANCE ACT , 2002 WITH EFFECT FROM 1.4.2002 READ AS UNDER: PROVIDED THAT WHERE MORE THAN ONE PRICE IS DETERMI NED BY THE MOST APPROPRIATE METHOD, THE ARMS LENGTH PR ICE SHALL BE TAKEN TO BE THE ARITHMETICAL MEAN OF SUCH PRICES, OR, AT THE OPTION OF THE ASSESSEE, A PRICE WHICH MA Y VARY FROM THE ARITHMETICAL MEAN BY AN AMOUNT NOT EXCEEDI NG FIVE PERCENT OF SUCH ARITHMETICAL MEAN. AS PER THE SAID PROVISO, AN OPTION IS AVAILABLE TO THE ASSESSEE FOR ADJUSTMENT OF +/-5% VARIATION FOR THE PURPOSES OF COMPUTING ALP. AS PER THE PROVISO, WHER E ITA NO.1369/BANG/10 PAGE 45 OF 50 MORE THAN ONE PRICE IS DETERMINED BY THE MOST APPRO PRIATE METHOD, THE ARMS LENGTH PRICE SHALL BE TAKEN TO BE THE ARITHMETICAL MEAN OF SUCH PRICES OR AT THE OPTION O F THE ASSESSEE, A PRICE WHICH MAY VARY FROM THE ARITHMETI CAL MEAN BY AN AMOUNT NOT EXCEEDING 5% OF SUCH ARITHMET ICAL MEAN. THE POINT MADE OUT BY THE ASSESSEE IS BASED O N THE LATTER PART OF THE PROVISO WHEREBY AN OPTION IS GIV EN TO THE ASSESSEE TO TAKE AN ALP WHICH MAY VARY FROM THE ARITHMETICAL MEAN BY AN AMOUNT NOT EXCEEDING 5% OF SUCH ARITHMETICAL MEAN. FIRSTLY, THE CLAIM OF THE REVENU E IS THAT SUCH BENEFIT IS NOT AVAILABLE TO THE PRESENT ASSESS EE, BECAUSE THE PRICE OF INTERNATIONAL TRANSACTION DIS CLOSED BY THE ASSESSEE EXCEEDS THE MARGIN PROVIDED IN THE PRO VISO. THIS ASPECT OF THE CONTROVERSY, IN OUR VIEW, IS NO LONGER GERMANE IN VIEW OF THE PLETHORA OF DECISIONS OF OUR CO- ORDINATE BENCHES, NAMELY, SONY INDIA (P) LTD. (SUPR A); ELECTROBUG TECHNOLOGIES LTD. (SUPRA), AND DEVELOPME NT CONSULTANT P LTD V DCIT 115 TTJ 577 (KOL.) WHEREIN IT HAS BEEN OBSERVED THAT THE BENEFIT OF THE OPTION CO NTAINED IN THE LATTER PART OF THE PROVISO TO SECTION 92C(2) IS AVAILABLE TO ALL ASSESSEES, IRRESPECTIVE OF THE FAC T THAT PRICE OF THE INTERNATIONAL TRANSACTION DISCLOSED BY THEM EXCEEDS THE MARGIN PRESCRIBED IN THE PROVISO. 21. SO, HOWEVER, THE OTHER ARGUMENT SET UP BY THE REVENUE AND WHICH HAS BEEN MORE POTENTLY ARGUED IS TO THE EFFECT THAT THE BENEFIT OF SUCH PROVISO IS NOT AVAILABLE TO THE ASSESSEE IN THE INSTANT CASE, BECAUSE THE SA ID PROVISO HAS BEEN AMENDED BY THE FINANCE (NO 2) ACT, 2009 WI TH EFFECT FROM 1.10.2009 WHICH READS AS UNDER: PROVIDED THAT WHERE MORE THAN ONE PRICE IS DETERMI NED BY THE MOST APPROPRIATE METHOD, THE ARMS LENGTH PR ICE SHALL BE TAKEN TO BE THE ARITHMETICAL MEAN OF SUCH PRICES: PROVIDED FURTHER THAT IF THE VARIATION BETWEEN THE ARMS LENGTH PRICE SO DETERMINED AND PRICE AT WHICH THE INTERNATIONAL TRANSACTION HAS ACTUALLY BEEN UNDERTA KEN DOES NOT EXCEED FIVE PER CENT OF THE LATTER, THE PR ICE AT WHICH THE INTERNATIONAL TRANSACTION HAS ACTUALLY BE EN UNDERTAKEN SHALL BE DEEMED TO BE THE ARMS LENGTH P RICE. THE CASE SET UP BY THE REVENUE IS THAT THE AMENDED PROVISO SHALL GOVERN THE DETERMINATION OF ALP IN TH E PRESENT CASE, INASMUCH AS THE AMENDED PROVISIONS WE RE ON STATUTE WHEN THE PROCEEDINGS WERE CARRIED ON BY THE TRANSFER PRICING OFFICER (TPO). AS PER THE REVENUE, THE ITA NO.1369/BANG/10 PAGE 46 OF 50 AMENDED PROVISO WOULD HAVE A RETROSPECTIVE OPERATIO N AND IN ANY CASE, WOULD BE APPLICABLE TO THE PROCEED INGS WHICH ARE PENDING BEFORE THE TPO ON INSERTION OF TH E AMENDED PROVISO, WHICH HAS BEEN INSERTED BY THE FIN ANCE (NO. 2) ACT, 2009 WITH EFFECT FROM 1.10.2009 AND, I N THIS CASE, THE TPO HAS PASSED HIS ORDER ON 30.10.2009. T HE LEARNED DEPARTMENTAL REPRESENTATIVE HAS ALSO REFERR ED TO THE CBDT CIRCULAR NO 5/2010 (SUPRA) READ WITH CORRIGENDUM DATED 30.9.2010 ISSUED BY THE CBDT IN T HIS REGARD. PER CONTRA, THE STAND OF THE ASSESSEE IS TH AT THE AMENDED PROVISO WOULD BE APPLICABLE PROSPECTIVELY A ND WOULD NOT APPLY IN RESPECT OF THE STATED ASSESSMENT YEAR, WHICH IS PRIOR TO THE INSERTION OF THE AMENDED PROV ISO WITH EFFECT FROM 1.10.2009. 22. WE HAVE CAREFULLY EXAMINED THE RIVAL STANDS ON THIS ASPECT. THE AMENDED PROVISO HAS BEEN BROUGHT O N THE STATUTE BY THE FINANCE (NO. 2) ACT, 2009 WITH EFFEC T FROM 1.10.2009. THE EXPLANATORY NOTES TO THE PROVISIONS OF FINANCE (NO 2) ACT, 2009 CONTAINED IN CIRCULAR NO 5 OF 2010 (SUPRA) PROVIDES THE OBJECTIVE BEHIND THE AMEN DMENT OF THE PROVISO. THE LEGISLATURE NOTICED THE CONFLIC TING INTERPRETATION OF THE ERSTWHILE PROVISO BY THE ASSE SSEE AND THE INCOME-TAX DEPARTMENT. THE ASSESSEES VIEW WAS THAT THE ARITHMETICAL MEAN SHOULD BE ADJUSTED BY 5% TO A RRIVE AT ALP, WHEREAS THE DEPARTMENTAL VIEW WAS THAT NO S UCH ADJUSTMENT IS REQUIRED TO BE MADE IF THE VARIATION BETWEEN THE TRANSFER PRICE AND THE ARITHMETICAL MEAN IS MOR E THAN 5% OF THE ARITHMETICAL MEAN. WITH A VIEW TO RESOLVI NG THIS CONTROVERSY, THE LEGISLATURE SOUGHT TO AMEND THE PR OVISO TO SECTION 92C(2), WHICH HAS BEEN REPRODUCED BY US IN THE EARLIER PART OF THIS ORDER. IN THE SAID CIRCULAR, I T HAS ALSO BEEN ELABORATED THAT THE ABOVE AMENDMENT HAS BEEN M ADE APPLICABLE WITH EFFECT FROM 1.4.2009 AND WILL ACCOR DINGLY APPLY IN RESPECT OF ASSESSMENT YEAR 2009-10 AND SUBSEQUENT YEARS. IN ANY CASE, THE PROVISO CONTAIN S A PRESCRIPTION TO DETERMINE THE ALP AND QUITE CLEARLY IT IS A SUBSTANTIVE PROVISION ENCOMPASSING THE EVENTUAL DETERMINATION OF AN ASSESSEES TAX LIABILITY. THUS, IT CAN BE SAID THAT THE PROVISO IS NOT A PROCEDURAL PIECE OF LEGISLATION AND THEREFORE, UNLESS IT IS SO CLEARLY INTENDED, THE NEWLY AMENDED PROVISO CANNOT BE UNDERSTOOD TO B E RETROSPECTIVE IN NATURE. IN FACT, IT IS A WELL-SETT LED PROPOSITION THAT THE STATUTORY PROVISIONS AS THEY S TAND ON THE FIRST DAY OF APRIL OF THE ASSESSMENT YEAR MUST APPLY TO THE ASSESSMENT OF THE YEAR AND THE MODIFICATION OF THE ITA NO.1369/BANG/10 PAGE 47 OF 50 PROVISIONS DURING THE PENDENCY OF ASSESSMENT WOULD NOT GENERALLY PREJUDICE THE RIGHTS OF THE ASSESSEE. FURTHERMORE, WE ARE FORTIFIED BY THE INTENTION OF T HE LEGISLATURE AS FOUND FROM CIRCULAR NO 5 OF 2010 (SU PRA) WHEREBY IN PARA 37.5, THE APPLICABILITY OF THE ABOV E AMENDMENT HAS BEEN STATED TO BE WITH EFFECT FROM 1.4.2009 SO AS TO APPLY IN RESPECT OF ASSESSMENT YE AR 2009-10 AND SUBSEQUENT YEARS. IN THIS REGARD, WE AL SO FIND THAT THE DELHI BENCH OF THE TRIBUNAL IN THE CASE OF ACIT V UE TRADE CORPORATION INDIA (P) LTD. VIDE ITA NO 4405(DEL)/2009 DT 24.12.2010 HAS OBSERVED THAT THE PROVISO INSERTED BY THE FINANCE (NO 2) ACT, 2009 WO ULD NOT APPLY TO AN ASSESSMENT YEAR PRIOR TO ITS INSERT ION. IN THIS VIEW OF THE MATTER, WE THEREFORE FIND NO JUSTI FICATION TO DENY THE BENEFIT OF +/-5% TO THE ASSESSEE IN TER MS OF THE ERSTWHILE PROVISO FOR THE PURPOSES OF COMPUTING THE ALP. 23. HOWEVER, BEFORE PARTING WE MAY ALSO REFER TO A CORRIGENDUM DATED 30.9.2010 BY THE CBDT BY WAY OF WHICH PARA 37.5 OF THE CIRCULAR NO 5/2010 (SUPRA) H AS BEEN SOUGHT TO BE MODIFIED. THE CORRIGENDUM READS A S UNDER: CORRIGENDUM IN PARTIAL MODIFICATION OF CIRCULAR NO. 5/2010 DATE D 03.6.2010, (I) IN PARA 37.5 OF THE SAID CIRCULAR, FOR THE LINE S THE ABOVE AMENDMENT HAS BEEN MADE APPLICABLE WITH EFFECT FROM 1 ST APRIL, 2009 AND WILL ACCORDINGLY APPLY IN RESPECT OF ASSESSMENT YEAR 2009-10 AND SUBSEQUENT YEARS. THE FOLLOWING LINES SHALL BE READ; THE ABOVE AMENDMENT HAS BEEN MADE APPLICABLE WITH EFFECT FROM 1 ST OCTOBER, 2009 AND SHALL ACCORDINGLY APPLY IN RELATION TO ALL CASES IN WHICH PROCEEDINGS ARE P ENDING BEFORE THE TRANSFER PRICING OFFICER (TPO)ON OR AFTE R SUCH DATE. (II) IN PARA 38.3, FOR THE DATE 1ST OCTOBER, 2009 , THE FOLLOWING DATE SHALL BE READ: 1ST APRIL, 2009. IN TERMS THEREOF, IT IS CANVASSED THAT THE AMENDED PROVISO HAS BEEN MADE APPLICABLE WITH EFFECT FROM 1.10.2009 AND SHALL APPLY EVEN TO CASES WHERE PROCEEDINGS WERE PE NDING BEFORE THE TPO ON OR AFTER SUCH DATE, IRRESPECTIVE OF THE ITA NO.1369/BANG/10 PAGE 48 OF 50 ASSESSMENT YEAR INVOLVED AND, THEREFORE, IN THE INS TANT CASE THE BENEFIT OF THE ERSTWHILE PROVISO CANNOT BE EXTENDED TO THE ASSESSEE. WE HAVE CAREFULLY PONDERE D OVER THE ASSERTION MADE BY THE APPELLANT THAT THE CORRIG ENDUM IS UNTENABLE IN THE EYES OF LAW. FIRSTLY, THE SAID CORRIGENDUM DOES NOT BRING OUT ANY PREAMBLE SO AS T O THROW LIGHT ON THE CIRCUMSTANCES AND THE BACKGROUND IN WHICH THE SAME HAS BEEN ISSUED. SECONDLY, IT IS WEL L UNDERSTOOD THAT THE EXPLANATORY NOTES TO THE PROVIS IONS OF A FINANCE ACT PASSED BY THE PARLIAMENT SEEKS TO EXP LAIN THE SUBSTANCE OF THE PROVISIONS OF THE ACT AS INTEN DED BY THE LEGISLATURE. IN FACT, THE HONBLE SUPREME COURT IN THE CASE OF K.P VARGHESE V ITO 131 ITR 597 (KER) EMPHASIZED THE SANCTITY OF THE STATEMENTS CONTAINED IN THE EXPLANATORY NOTES OF THE PROVISIONS AND STATED THAT THE INTERPRETATION PLACED IN SUCH DOCUMENTS IS BINDING INTERPRETATION OF LAW. THE CONTENTS OF THE CORRIGEN DUM ARE QUITE INEXPLICABLE. NOTWITHSTANDING THE AFORESAID A ND WITHOUT GOING INTO THE VALIDITY OF THE CORRIGENDUM DATED 30.9.2010 (SUPRA), WE ARE OF THE VIEW THAT THE SAME WOULD NOT OPERATE TO THE DETRIMENT OF THE ASSESSEE SINCE AT THE RELEVANT POINT OF TIME THE CONTENTS OF THE CIRCULAR NO 5/2010 (SUPRA) WERE IN OPERATION. IN OTHER WORDS, T HE WITHDRAWAL OF THE INTERPRETATION PLACED IN CIRCULAR NO 5 /2010 (SUPRA) ON THE APPLICABILITY OF THE AMENDED P ROVISO IS SOUGHT TO BE DONE AWAY BY THE CORRIGENDUM DATED 30.9.2010 AND, THEREFORE, SUCH WITHDRAWAL SHALL BE EFFECTIVE ONLY AFTER 30.9.2010, EVEN IF SUCH CORRIG ENDUM IS ACCEPTED AS VALID. WE MAY NOTE HERE THAT THE APP ELLANT HAS ASSAILED THE VALIDITY OF THE CORRIGENDUM ITSELF ON WHICH WE HAVE NOT MADE ANY DETERMINATION. THEREFORE , THE CORRIGENDUM DATED 30.9.2010, IN OUR CONSIDERED OPINION, HAS NO BEARING SO AS TO DIS-ENTITLE THE AS SESSEE FROM ITS CLAIM OF THE BENEFIT OF +/-5% IN TERMS OF THE ERSTWHILE PROVISO TO SECTION 92C(2) OF THE ACT. IN COMING TO THE AFORESAID, WE HAVE BEEN GUIDED BY THE PARITY OF REASONING LAID DOWN IN THE JUDGMENTS OF THE HONBLE BOMBAY HIGH COURT IN THE CASES OF BASF (INDIA) LTD. V CIT 280 ITR 136 (BOM); SHAKTI RAJ FILMS DISTRIBUTOR S V CIT 213 ITR 20 (BOM); AND, UNIT TRUST OF INDIA & AN RS. V ITO 249 ITR 612 (BOM). THE HONBLE HIGH COURT HAS OPINED IN THE CASE OF BASF (INDIA) LTD. (SUPRA) THA T THE CIRCULARS WHICH ARE IN FORCE DURING THE RELEVANT PE RIOD ARE TO BE APPLIED AND THE SUBSEQUENT CIRCULARS EITHER WITHDRAWING OR MODIFYING THE EARLIER CIRCULARS HAVE NO APPLICATION. MOREOVER, THE CIRCULARS IN THE NATURE OF ITA NO.1369/BANG/10 PAGE 49 OF 50 CONCESSION CAN BE WITHDRAWN PROSPECTIVELY ONLY AS H ELD BY THE HONBLE SUPREME COURT IN THE CASE OF STATE B ANK OF TRAVANCORE V CIT 50 CTR 102 (SC). CONSIDERING AL L THESE ASPECTS, WE THEREFORE FIND NO JUSTIFICATION I N THE ACTION OF THE LOWER AUTHORITIES IN DISENTITLING THE ASSESSEE FROM ITS CLAIM FOR THE BENEFIT OF +/-5% TO COMPUTE ALP IN TERMS OF THE ERSTWHILE PROVISO TO SECTION 92C(2) OF THE ACT. WE ORDER ACCORDINGLY. 17. WE THEREFORE CONSIDERING THE TOTALITY OF THE FA CTS AND RESPECTFULLY FOLLOWING THE AFORESAID REFERRED TO OR DERS OF THE CO- ORDINATE BENCHES OF THE ITAT AT DELHI & PUNE, DIREC T THE ASSESSING OFFICER TO ALLOW THE BENEFIT OF +/-5% TO THE ASSESSEE WHILE COMPUTING THE ALP IN TERMS OF THE ERSTWHILE P ROVISO TO SECTION 92C(2) OF THE ACT. 58. SINCE THE FACTS OF THE PRESENT CASE ARE SIMILAR TO THE FACTS INVOLVED IN THE AFORESAID REFERRED TO CASE OF M/S. TATRA VECTRA MOTORS LTD. V. DCIT IN ITA NO.1284/BANG/2010 ORDER DATED 31.01.2012, SO RE SPECTFULLY FOLLOWING THE SAID ORDER, WE DIRECT THE AO TO ALLOW THE BENEF IT OF +/- 5% TO THE ASSESSEE WHILE COMPUTING THE ALP. 59. VIDE GROUND NO.17, THE GRIEVANCE OF THE ASSESSE E RELATES TO CHARGING OF INTEREST U/S. 234B AND 234C OF THE ACT. REGARDING THIS ISSUE, IT WAS THE COMMON CONTENTION OF BOTH THE PARTIES THAT IT IS CONSEQUENTIAL IN NATURE, WE ORDER ACCORDINGLY. 60. THE LAST ISSUE AGITATED BY THE ASSESSEE VIDE GR OUND NO.18 REGARDING THE INITIATION OF PENALTY PROCEEDINGS U/S . 271(1)(C) OF THE ACT HAS BEEN RAISED PREMATURELY, HENCE THE SAME IS DISMISSE D. ITA NO.1369/BANG/10 PAGE 50 OF 50 61. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PA RTLY ALLOWED FOR STATISTICAL PURPOSES. PRONOUNCED IN THE OPEN COURT ON THIS 30 TH DAY OF APRIL, 2012. SD/- SD/- ( GEORGE GEORGE K. ) ( N.K. SAINI ) JUDICIAL MEMBER ACCOUNTANT MEMBER BANGALORE, DATED, THE 30 TH APRIL , 2012. DS/- COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR ITAT, BANGALORE.