Mindteck (India) Limited, Bangalore V. ITO, Bangalore

ITA 1548/BANG/2010

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 86003 (ITAT-BANGALORE)
• Duration Of Justice: 4 year(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-01-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 01-01-2015
• Assessment Year: 2006-2007
• Appeal Filed On: 31-12-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: C H SUNDAR RAO CITIDR
• Assessee Lawyers: RAGHUNATHAN
• Keywords: Related party transaction; Business income; Depreciation; Transfer pricing; Opportunity of being heard; International transaction; Unabsorbed depreciation; Bonafide mistake
• Section: 92C; 143(3); 92D; 92E; 10AA; 133(6); 10B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, JUDICIAL MEMBER AND SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER IT (TP) A NO.1548/BANG/2010 ASSESSMENT YEAR : 2006-07 M/S. MINDTECK (INDIA) LIMITED, 16/3, CAMBRIDGE ROAD, ULSOOR, BANGALORE 560 009. PAN: AAACH 1072Q VS. THE INCOME TAX OFFICER, WARD 12(1), BANGALORE. APPELLANT RESPONDENT APPELLANT BY : SHRI RAGHUNATHAN, ADVOCATE RESPONDENT BY : SHRI C.H. SUNDAR RAO, CIT-I(DR) DATE OF HEARING : 01.01.2015 DATE OF PRONOUNCEMENT : 09.01.2015 O R D E R PER N.V. VASUDEVAN, JUDICIAL MEMBER THIS APPEAL BY THE ASSESSEE IS AGAINST THE ORDER DATED 21.10.2010 THE ITO, WARD 12(1), BANGALORE PASSED U/S. 143(3) R .W.S. 144C OF THE ACT, IN RELATION TO A.Y.2006-07. IT(TP)A NO.1548/BANG/2010 PAGE 2 OF 40 2. THE ASSESSEE HAS RAISED AS MUCH AS 14 GROUNDS OF APPEAL IN THE GROUNDS OF APPEAL. THE ASSESSEE HAS ALSO FILED APP LICATION SEEKING TO RAISE ADDITIONAL GROUNDS OF APPEAL. OUT OF THE 14 GROUNDS RAISED IN THE GROUNDS OF APPEAL, EXCEPT GROUNDS 3, 5, 7, 9 & 10, ALL OTHER GROUNDS WERE NOT PRESSED. WE THEREFORE NEED TO ADJUDICATE ONLY GROUNDS 3, 5, 7, 9 & 10 RAISED IN THE GROUNDS OF APPEAL AND THE ADDITIONAL GROUNDS SOUGHT TO BE RAISED BY THE ASSESSEE, SUBJECT TO ITS ADMISSIBILIT Y. 3. GROUNDS 3, 5, 7 AND THE ADDITIONAL GROUNDS SOUGH T TO BE RAISED BY THE ASSESSEE ARE WITH REGARD TO THE ADDITION TO THE TOTAL INCOME BY WAY OF ADJUSTMENT TO THE ARMS LENGTH PRICE ( ALP ) TO AN INTERNATIONAL TRANSACTION CARRIED OUT BY THE ASSESSEE U/S. 92CA O F THE ACT. AT THE TIME OF HEARING OF THE APPEAL, IT WAS SUBMITTED THAT THE CO MPARABLE COMPANIES CHOSEN BY THE TPO AND THE ADDITION MADE BY THE AO I N THE DRAFT ASSESSMENT ORDER WHICH WAS CONFIRMED BY THE DRP ARE IDENTICAL TO THE CASE DECIDED BY THE TRIBUNAL IN ITA NO.1054/BANG/20 11 FOR AY 07-08 IN M/S. TRILOGY E-BUSINESS SOFTWARE INDIA PVT. LTD. VS. DCIT, CIRCLE 12(4), BANGALORE, YODLEE INFOTECH VS. ITO ITA NO.1397/BANG/2010 FOR A.Y.2006- 07 AS CONSIDERED BY THIS TRIBUNAL IN THE CASE OF M/S. ACTIANCE INDIA PRIVATE LIMITED VS. THE ITO IN IT(TP)A.NO.1295/BANG/2010 ORDER DAT ED 17.10.2014. IT WAS ALSO SUBMITTED THAT THE BUSINE SS PROFILE OF THE ASSESSEE AND THAT OF THE ASSESSEE IN THE CASE OF M/ S. TRILOGY E-BUSINESS SOFTWARE INDIA PVT.LTD. (SUPRA), YODLEE INFOTECH (S UPRA) AND M/S. ACTIANCE INDIA PVT. LTD. (SUPRA) WERE ALSO IDENTICAL. THIS SUBMISSION WAS FOUND TO BE IT(TP)A NO.1548/BANG/2010 PAGE 3 OF 40 CORRECT AT THE TIME OF HEARING. WITH THIS BACKGROU ND WE WILL NOW CONSIDER THE FACTUAL BASIS OF THE PRESENT CASE AND THE DECIS ION RENDERED IN THE CASE OF TRILOGY E-BUSINESS SOFTWARE INDIA PVT.LTD. (SUPR A), YODLEE INFOTECH (SUPRA) AND M/S.ACTIANCE INDIA PVT.LTD. (SUPRA). 4. THE ASSESSEE IS A COMPANY. IT IS ENGAGED IN TH E BUSINESS OF RENDERING SOFTWARE DEVELOPMENT RESEARCH AND DEVELOP MENT SERVICES. THE ASSESSEE PROVIDES SUCH SERVICES TO ITS GROUP COMPAN IES APART FROM INDEPENDENT CUSTOMERS. THE TOTAL OPERATING REVENU E FROM RENDERING SOFTWARE DEVELOPMENT SERVICES WAS A SUM OF RS.19,47 ,91,538/-. OUT OF THE ABOVE, THE REVENUE FROM RENDERING SOFTWARE DEVELOP MENT SERVICES TO AN ASSOCIATED ENTERPRISE (AE) WAS A SUM OF RS.15,87,43,329/-. IT IS NOT IN DISPUTE BEFORE US THAT THE TRANSACTION OF PROVIDING SOFTWARE RESEARCH & DEVELOPMENT SUPPORT SERVICES BY THE ASSESSEE TO ITS RELATED PARTY VIZ., GROUP COMPANIES WAS AN INTERNATIONAL TRANSACTION WI TH THE AE AND THEREFORE THE PRICE AT WHICH THE ASSESSEE RENDERS S ERVICES TO ITS AE HAS TO PASS THE ARMS LENGTH PRICE (ALP) TEST AS LAID DOWN BY SECTION 92C OF THE ACT. 5. IN SUPPORT OF THE ASSESSEES CLAIM THAT THE PRIC E CHARGED BY IT FOR SERVICES RENDERED TO ITS AE WAS AT ARMS LENGTH, TH E ASSESSEE FILED A REPORT AS REQUIRED BY THE PROVISIONS OF SECTION 92E OF THE ACT IN FORM 3EB TOGETHER WITH DETAILED ANALYSIS. THE ASSESSEE ADOP TED TRANSACTION NET MARGIN METHOD (TNMM) AS THE MOST APPROPRIATE METHOD FOR DETERMINING IT(TP)A NO.1548/BANG/2010 PAGE 4 OF 40 THE ALP. OPERATING PROFITS TO COST WAS ADOPTED AS THE PROFIT LEVEL INDICATOR ( PLI ). THE PLI OF THE ASSESSEE WAS ARRIVED AT AS FO LLOWS: OPERATING REVENUE RS.19,47,91,538 OPERATING COST RS.18,00,23,193 OPERATING PROFIT RS.1,47,68,345 OP.PR/COST% 8.20% 6. THE TRANSFER PRICING OFFICER ( TPO ) ARRIVED AT A FINAL SET OF 20 COMPARABLES. THE SET OF 20 COMPARABLES IS GIVEN AS ANNEXURE-I TO THIS ORDER . 7. THE ASSESSEE RAISED VARIOUS OBJECTIONS TO THE M ETHODOLOGY ADOPTED AND THE REASONS ASSIGNED BY THE TPO FOR REJ ECTING THE COMPARABLES CHOSEN BY THE ASSESSEE IN ITS TP STUDY. IN THE COURSE OF PROCEEDINGS BEFORE THE TPO, NOTICE U/S. 133(6) HAS BEEN ISSUED TO THE COMPANIES THAT WERE CHOSEN AS COMPARABLE BY THE ASS ESSEE AS WELL AS THE TPO AND ON THE BASIS OF THE REPLIES RECEIVED IN RES PONSE TO SUCH NOTICES, CERTAIN INFERENCES WERE DRAWN BY THE TPO. THE ACTI ON OF THE TPO IN RELYING ON SOME OF THOSE INFORMATION WAS ALSO CHALL ENGED BY THE ASSESSEE. THE TPO FINALLY PASSED AN ORDER U/S. 92CA OF THE AC T AND ON THE BASIS OF THE COMPARABLES SET OUT IN ANNEXURE-I TO THIS ORDER , ARRIVED AT ARITHMETIC MEAN OF 20.48%. AFTER FACTORING THE WORKING CAPITA L ADJUSTMENT OF -1.65%, THE ADJUSTED ARITHMETIC MEAN WAS DETERMINED AT 22.1 3%. THE COMPUTATION OF THE ALP BY THE TPO IN THIS REGARD WAS AS FOLLOWS :- IT(TP)A NO.1548/BANG/2010 PAGE 5 OF 40 COMPUTATION OF ARMS LENGTH PRICE: THE ARITHMETIC MEAN OF THE PROFIT LEVEL INDICATORS IS TAKEN AS THE ARMS LENGTH MARGIN. (PLEASE SEE ANNEXURE B FOR DETA ILS OF COMPUTATION OF PLI OF THE COMPARABLES). BASED ON TH IS, THE ARMS LENGTH PRICE OF THE SOFTWARE DEVELOPMENT SERVICES R ENDERED BY THE TAXPAYER TO ITS AE(S) IS COMPUTED AS UNDER: ARITHMETIC MEAN PLI 20.48% LESS: WORKING CAPITAL ADJUSTMENT (ANNEXURE-C) -1.65% ADJ.ARITHMETIC MEAN PLU 22.13% ARMS LENGTH PRICE: OPERATING COST RS.18,00,23,193 ARMS LENGTH MARGIN 22.13% OF THE OPERATING COST ARMS LENGTH PRICE (ALP) AT 119.17% OF OPERATING COST RS.21,98,62,325/- PRICE RECEIVED VIS--VIS THE ARMS LENGTH PRICE: THE PRICE CHARGED BY THE TAX PAYER TO ITS ASSOCIATE D ENTERPRISES IS COMPARED TO THE ARMS LENGTH PRICE AS UNDER: ARMS LENGTH PRICE (ALP) AT 119.17% OF OPERATING COST RS.21,98,62,325/- PRICE CHARGED IN THE INTERNATIONAL TRANSACTIONS RS.19,47,91,538 SHORTFALL BEING ADJUSTMENT U/S.92CA RS.2,50,70,787 THE ABOVE SHORTFALL OF RS.2,50,70,787/- IS TREATED AS TRANSFER PRICING ADJUSTMENT U/S 92CA. 8. AGAINST THE SAID ADJUSTMENT PROPOSED BY THE TPO WHICH WAS INCORPORATED IN THE DRAFT ASSESSMENT ORDER BY THE A O, THE ASSESSEE FILED IT(TP)A NO.1548/BANG/2010 PAGE 6 OF 40 OBJECTIONS BEFORE THE DRP. THE DRP REJECTED THOSE O BJECTIONS AND CONFIRMED THE TRANSFER PRICING ADJUSTMENT SUGGESTED BY THE TPO. THE ADJUSTMENT CONFIRMED BY THE DRP WAS ADDED TO THE TO TAL INCOME OF THE ASSESSEE BY THE AO IN THE FAIR ORDER OF ASSESSMENT. AGAINST THE SAID ORDER OF THE ASSESSING OFFICER, THE ASSESSEE HAS PREFERRE D THE PRESENT APPEAL BEFORE THE TRIBUNAL. 9. THE LD. COUNSEL FOR THE ASSESSEE BROUGHT TO OUR NOTICE THAT OUT OF THE 20 COMPARABLE COMPANIES CHOSEN BY THE TPO, THE FOLLOWING COMPANIES WILL HAVE TO BE EXCLUDED AS THE TURNOVER OF THESE COMPANIES ARE MORE THAN RS.200 CRORES AND CANNOT BE COMPARED WITH THE ASSESSEE WHOSE TURNOVER IS LESS THAN RS.20 CRORES: (1) FLEXTRONICS SOFTWARE SYSTEMS LTD. 595.12 CR ORES (2) IGATE GLOBAL SOLUTIONS LTD. 527.91 CRORES (3) MINDTREE LTD. 448.79 CRORES (4) PERSISTENT SYSTEMS LTD. 209.18 CRORES (5) SASKEN COMMUNICATION TECHNOLOGIES LTD.(SEG.) 24 0.03 CRORES (6) INFOSYS TECHNOLOGIES LTD. 9028 CRORES. OUR ATTENTION WAS DRAWN TO THE OBSERVATIONS OF THE TRIBUNAL IN THE CASE OF TRILOGY E-BUSINESS SOFTWARE INDIA PVT.LTD. (SUPRA) ON THE APPLICATION OF TURNOVER FILTER AND IT WAS SUBMITTED THAT THE AFORESAID COMPARABLE COMPANIES HAVE TO BE EXCLUDED FROM THE F INAL LIST OF COMPARABLES SELECTED BY THE TPO. IT(TP)A NO.1548/BANG/2010 PAGE 7 OF 40 10. THE LEARNED DR POINTED OUT THAT AT PAGE-12 OF T HE TPOS ORDER AT PARA-5, THE TPO HAS LISTED OUT THE COMPARABLE CRITE RIA ADOPTED BY THE ASSESSEE IN ITS TRANSFER PRICING ANALYSIS TO SUPPOR T THE PRICE IT CHARGED ITS AE FOR RENDERING SOFTWARE DEVELOPMENT SERVICES. ON E OF THE CRITERIA OR FILTER SO APPLIED BY THE ASSESSEE WAS CHOOSING COMPANIES H AVING SALES OF RS.5 CRORES TO RS.250 CRORES. IT WAS THEREFORE HIS SUBM ISSION THAT HE CANNOT SEEK TO EXCLUDE THE COMPARABLE COMPANIES VIZ., SASK EN COMMUNICATION TECHNOLOGIES LTD. & PERSISTENT SYSTEMS LTD., ON TH E BASIS OF TURNOVER FILTER OF ABOVE RS.200 CRORES, AS THESE COMPANIES HAVE TUR NOVER BELOW RS.250 CRORES AND THEREFORE ARE TO BE CONSIDERED AS COMPAR ABLE ON THE BASIS OF ASSESSEES OWN ADMISSION. 11. AT THE TIME OF HEARING IT WAS ALSO NOTICED THAT THE ASSESSEE HAS NOT RAISED A SPECIFIC GROUND OF OBJECTION BEFORE DRP ON THE APPLICATION OF TURNOVER FILTER BY EXCLUDING COMPANIES WHICH HAVE T URNOVER ABOVE RS.200 CRORES FROM THE LIST OF COMPARABLE COMPANIES ON THE BASIS OF THE DECISION RENDERED IN THE CASE OF TRILOGY E-BUSINESS (SUPRA) RENDERED BY THE ITAT BANGALORE BENCHES. THE LEARNED COUNSEL FOR THE ASS ESSEE HAS FILED BEFORE US AN APPLICATION FOR ADMISSION OF ADDITIONA L GROUND OF APPEAL IN WHICH HE HAS RAISED A GROUND OBJECTING TO SELECTION OF COMPANIES WHOSE TURNOVER IS ABOVE RS.200 CRORES AS A COMPARABLE COM PANY WITH THAT OF THE ASSESSEE. IN THE SAID APPLICATION FOR ADMISSION OF ADDITIONAL GROUND OF IT(TP)A NO.1548/BANG/2010 PAGE 8 OF 40 APPEAL, THE ASSESSEE HAS POINTED OUT THAT THE TRANS FER PRICING LAW IN INDIA IS STILL AN EVOLVING LEGISLATION AND THE JUDICIAL T REND SET INTO MOTION BY THE DECISION BASED ON WHICH THE EXCLUSION OF COMPANIES WITH TURNOVER OF RS.200 CRORES FROM THE LIST OF COMPARABLE COMPANIES IS SOUGHT ON THE BASIS OF DECISION RENDERED SUBSEQUENT TO THE FILING OF TH IS APPEAL BY THE ASSESSEE. IT WAS POINTED OUT THAT THE APPEAL BY TH E ASSESSEE HAD BEEN FILED IN DEC.2010 WHEN THE DECISIONS REFERRED TO AB OVE, HAD NOT BEEN RENDERED. FURTHER RELIANCE WAS PLACED ON THE DECIS ION OF THE HONBLE SPECIAL BENCH OF ITAT CHANDIGARH IN THE CASE OF QUARK SYSTEMS PVT. LTD. (2010) 4 ITR 606 (SB)(CHANDIGARH) WHEREIN THE SPECIAL BENCH HELD THAT WHEN THE CAUSE OF SUBSTANTIAL JUSTICE AND TECHNICAL CONSIDERATIONS ARE PITTED AGAINST EACH OTHER, THE CAUSE OF SUBSTAN TIAL JUSTICE DESERVES TO BE PREFERRED. THE SPECIAL BENCH FURTHER OPINED THA T TRANSFER PRICING IS IN THE INITIAL STAGES AND THEREFORE A LIBERAL APPROACH BY GIVING ASSESSEE OPPORTUNITY TO MAKE OUT ITS CASE PROPERLY AND PLACE ALL RELEVANT FACTS BEFORE THE AUTHORITIES SO THAT ALP CAN BE DETERMINED IN AC CORDANCE WITH LAW SHOULD BE ADOPTED. THE SPECIAL BENCH FURTHER OPINE D THAT PROCEEDINGS BEFORE THE TAX AUTHORITIES ARE NOT STRICTLY ADVERSA RIAL PROCEEDINGS AND THE ASSESSEE SHOULD NOT THEREFORE BE PLACED AT DISADVAN TAGE BECAUSE OF INADVERTENT AND BONAFIDE MISTAKES. 12. WE HAVE CONSIDERED THE SUBMISSIONS OF THE LEARN ED COUNSEL FOR THE ASSESSEE AND THE LEARNED DR. WE ARE OF THE THAT TH E ADDITIONAL GROUNDS IT(TP)A NO.1548/BANG/2010 PAGE 9 OF 40 SOUGHT TO BE RAISED HAVE TO BE ADMITTED FOR ADJUDIC ATION AS HELD BY THE SPECIAL BENCH IN THE CASE OF QUARK SYSTEMS LTD. (SUPRA) . WE ARE ALSO OF THE VIEW THAT THE ENTIRE EXERCISE TO BE CARRIED OUT U/S.92 OF THE ACT IS DETERMINATION OF ALP AND IN DOING SO, THE REVENUE S HOULD NOT BE ALLOWED TO PLEAD ADMISSION BY THE ASSESSEE, THOUGH ERRONEOUS O R WAS MADE UNDER PARTICULAR CIRCUMSTANCES AND THEREFORE ARE NOT FINA L AND BINDING, AS CONCLUSIVE. WE THEREFORE ADMIT THE ADDITIONAL GROU NDS RAISED BY THE ASSESSEE FOR ADJUDICATION. 13. ON THE APPLICATION OF TURNOVER FILTER IN THE CA SE OF TRILOGY E-BUSINESS SOFTWARE INDIA (P) LTD. (SUPRA) , THIS TRIBUNAL HELD THAT WHILE SELECTING COMPARABLE COMPANIES FOR COMPARABILITY ANALYSIS HEL D AS FOLLOWS: (1) TURNOVER FILTER 11. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THA T THE TPO HAS APPLIED A LOWER TURNOVER FILTER OF RS. 1 CRORE, BUT HAS NOT CHOSEN TO APPLY ANY UPPER TURNOVER LIMIT. IN THIS REGARD, IT WAS SUBMITTED BY HIM THAT UNDER RULE 10B(3) TO THE INCO ME-TAX RULES, IT WAS NECESSARY FOR COMPARING AN UNCONTROLLED TRAN SACTION WITH AN INTERNATIONAL TRANSACTION THAT THERE SHOULD NOT BE ANY DIFFERENCE BETWEEN THE TRANSACTIONS COMPARED OR THE ENTERPRISES ENTERING INTO SUCH TRANSACTION, WHICH ARE LIKELY TO MATERIALLY AFFECT THE PRICE OR COST CHARGED OR PAID OR PROFIT ARISING FROM SUCH TRANSACTION IN THE OPEN MARKET. FURTHER IT IS ALSO NECESSARY TO SEE THAT WHEREVER THERE ARE SOME DIFFERENCES SUCH DIFFE RENCES SHOULD BE CAPABLE OF REASONABLE ACCURATE ADJUSTMENT IN MON ETARY TERMS TO ELIMINATE THE EFFECT OF SUCH DIFFERENCES. IT WA S HIS SUBMISSION THAT SIZE WAS AN IMPORTANT FACET OF THE COMPARABILI TY EXERCISE. IT WAS SUBMITTED THAT SIGNIFICANT DIFFERENCES IN SIZE OF THE COMPANIES WOULD IMPACT COMPARABILITY. IN THIS REGA RD OUR ATTENTION WAS DRAWN TO THE DECISION OF THE SPECIAL BENCH OF THE ITAT CHANDIGARH BENCH IN THE CASE OF DCIT V. QUARK SYSTEMS IT(TP)A NO.1548/BANG/2010 PAGE 10 OF 40 PVT. LTD. 38 SOT 207 , WHEREIN THE SPECIAL BENCH HAD LAID DOWN THAT IT IS IMPROPER TO PROCEED ON THE BASIS OF LOWE R LIMIT OF 1 CRORE TURNOVER WITH NO HIGHER LIMIT ON TURNOVER, AS THE SAME WAS NOT REASONABLE CLASSIFICATION. SEVERAL OTHER DECIS IONS WERE REFERRED TO IN THIS REGARD LAYING DOWN IDENTICAL PR OPOSITION. WE ARE NOT REFERRING TO THOSE DECISIONS AS THE DECISIO N OF THE SPECIAL BENCH ON THIS ASPECT WOULD HOLD THE FIELD. REFEREN CE WAS ALSO MADE TO THE OECD TP GUIDELINES, 2010 WHEREIN IT HAS BEEN OBSERVED AS FOLLOWS:- SIZE CRITERIA IN TERMS OF SALES, ASSETS OR NUMBER OF EMPLOYEES: THE SIZE OF THE TRANSACTION IN ABSOLUTE VALUE OR IN PROPORTION TO THE ACTIVITIES OF THE PAR TIES MIGHT AFFECT THE RELATIVE COMPETITIVE POSITIONS OF THE BUYER AND SELLER AND THEREFORE COMPARABILITY. 12. THE ICAI TP GUIDELINES NOTE ON THIS ASPECT LAY DOWN IN PARA 15.4 THAT A TRANSACTION ENTERED INTO BY A RS. 1,000 CRORE COMPANY CANNOT BE COMPARED WITH THE TRANSACTION ENT ERED INTO BY A RS. 10 CRORE COMPANY. THE TWO MOST OBVIOUS REASON S ARE THE SIZE OF THE TWO COMPANIES AND THE RELATIVE ECONOMIE S OF SCALE UNDER WHICH THEY OPERATE. THE FACT THAT THEY OPERA TE IN THE SAME MARKET MAY NOT MAKE THEM COMPARABLE ENTERPRISES. T HE RELEVANT EXTRACT IS AS FOLLOWS [ON RULE 10B(3)]: CLAUSE (I) LAYS DOWN THAT IF THE DIFFERENCES ARE NOT MATERIAL, THE TRANSACTIONS WOULD BE COMPARABLE. THESE DIFFERENCES COULD EITHER BE WITH REFERENCE TO THE TRANSACTION OR WITH REFERENCE TO THE ENTERPRISE. FOR INSTANCE, A TRANSACTION ENTERED INTO BY A RS 1,000 CRORE COMPANY CANNOT BE COMPARED WITH THE TRANSACTION ENTERED INTO BY A RS 10 CRORE COMPANY. THE TWO MOST OBVIOUS REASONS ARE THE SIZE OF THE TWO COMPANIES AND THE RELATIVE ECONOMIES OF SCALE UNDER WHICH THEY OPERATE. 13. IT WAS FURTHER SUBMITTED THAT THE TPOS RANGE ( RS. 1 CRORE TO INFINITY) HAS RESULTED IN SELECTION OF COMPANIES LIKE INFOSYS WHICH IS 277 TIMES BIGGER THAN THE ASSESSEE (TURNOV ER OF RS. 13,149 CRORES AS COMPARED TO RS. 47.47 CRORES OF AS SESSEE). IT WAS SUBMITTED THAT AN APPROPRIATE TURNOVER RANGE S HOULD BE APPLIED IN SELECTING COMPARABLE UNCONTROLLED COMPAN IES. IT(TP)A NO.1548/BANG/2010 PAGE 11 OF 40 14. REFERENCE WAS MADE TO THE DECISION OF THE ITAT BANGALORE BENCH IN THE CASE OF GENESIS INTEGRATING SYSTEMS (INDIA) PVT. LTD. V. DCIT, ITA NO.1231/BANG/2010 , WHEREIN RELYING ON DUN AND BRADSTREETS ANALYSIS, THE TURNO VER OF RS. 1 CRORE TO RS. 200 CRORES WAS HELD TO BE PROPER. THE FOLLOWING RELEVANT OBSERVATIONS WERE BROUGHT TO OUR NOTICE:- 9. HAVING HEARD BOTH THE PARTIES AND HAVING CONSIDERED THE RIVAL CONTENTIONS AND ALSO THE JUDIC IAL PRECEDENTS ON THE ISSUE, WE FIND THAT THE TPO HIMSELF HAS REJECTED THE COMPANIES WHICH .IRE (SIC) MAKING LOSSES AS COMPARABLES. THIS SHOWS THAT THERE IS A LIMIT FOR THE LOWER END FOR IDENTIFYING THE COMPARABLES. IN SUCH A SITUATION, WE ARE UNABLE TO UNDERSTAND AS TO WHY THERE SHOULD NOT BE AN UPPER LIMIT ALSO. WHAT SHOULD BE UPPER LIMIT IS ANOTHER FACTOR TO BE CONSIDERED. WE AGREE WITH THE CONTENTION OF THE LEARNED COUNSEL FOR THE ASSESSEE THAT THE SIZE MATTERS IN BUSINESS. A BIG COMPANY WOULD BE IN A POSITION TO BARGAIN THE PRICE AND ALS O ATTRACT MORE CUSTOMERS. IT WOULD ALSO HAVE A BROAD BASE OF SKILLED EMPLOYEES WHO ARE ABLE TO GIVE BETTER OUTPUT. A SMALL COMPANY MAY NOT HAVE THESE BENEFITS AND THEREFORE, THE TURNOVER ALSO WOULD COME DOWN REDUCING PROFIT MARGIN. THUS, AS HELD BY THE VARIOUS BENCHES OF THE TRIBUNAL, WHEN COMPANIES WHICH ARC LOSS MAKING ARE EXCLUDED FROM COMPARABLES, THEN THE SUPER PROFIT MAKING COMPANIES SHOULD ALSO BE EXCLUDED. FOR THE PURPOSE OF CLASSIFICATION OF COMPANIES ON THE BASIS OF NET SALES OR TURNOVER, WE FIND THAT A REASONABLE CLASSIFICATION HAS TO BE MADE. DUN & BRADSTREET & BRADSTREET AND NASSCOM HAVE GIVEN DIFFERENT RANGES. TAKING THE INDIAN SCENARIO INTO CONSIDERATION, WE FEEL THAT THE CLASSIFICATION MADE BY DUN & BRADSTREET IS MORE SUITABLE AND REASONABLE. IN VIEW OF THE SAME, WE HOLD THAT THE TURNOVER FILTER IS VERY IMPORTANT AND THE COMPANIES HAVING A TURNOVER OF RS.1.00 CRORE TO 200 CRORES HAVE TO BE TAKEN AS A PARTICULAR RANGE AND THE ASSESSEE BEING IN THAT RANGE HAVING TURNOVER OF 8.15 CRORES, THE COMPANIES WHICH ALSO HAVE TURNOVER OF 1.00 TO 200.00 CRORES ONLY SHOULD BE TAKEN INTO CONSIDERATION FOR THE PURPOSE OF MAKING TP STUDY. IT(TP)A NO.1548/BANG/2010 PAGE 12 OF 40 15. IT WAS BROUGHT TO OUR NOTICE THAT THE ABOVE PRO POSITION HAS ALSO BEEN FOLLOWED BY THE HONOURABLE BANGALORE ITAT IN THE FOLLOWING CASES: 1. M/S KODIAK NETWORKS (INDIA) PRIVATE LIMITED VS. ACIT (ITA NO.1413/BANG/2010) 2. M/S GENESIS MICROCHIP (I) PRIVATE LIMITED VS. D CIT (ITA NO.1254/BANG/20L0). 3. ELECTRONIC FOR IMAGING INDIA PRIVATE LIMITED (I TA NO. 1171/BANG/2010). IT WAS FINALLY SUBMITTED THAT COMPANIES HAVING TURN OVER MORE THAN RS. 200 CRORES OUGHT TO BE REJECTED AS NOT COM PARABLE WITH THE ASSESSEE. 16. THE LD. DR, ON THE OTHER HAND POINTED OUT THAT EVEN THE ASSESSEE IN ITS OWN TP STUDY HAS TAKEN COMPANIES HA VING TURNOVER OF MORE THAN RS. 200 CRORES AS COMPARABLES . IN THESE CIRCUMSTANCES, IT WAS SUBMITTED BY HIM THAT THE ASS ESSEE CANNOT HAVE ANY GRIEVANCE IN THIS REGARD. 17. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. THE PROVISIONS OF THE ACT AND THE RULES THAT ARE RELEVANT FOR DECI DING THE ISSUE HAVE TO BE FIRST SEEN. SEC.92. OF THE ACT PROVIDES THAT ANY INCOME ARISING FROM AN INTERNATIONAL TRANSACTION SHALL BE COMPUTED HAVING REGARD TO THE ARMS LENGTH PRICE. SEC.92-B PROVIDES THAT INTERNATIONAL TRANSACTION MEANS A TRANSACTION BET WEEN TWO OR MORE ASSOCIATED ENTERPRISES, EITHER OR BOTH OF WHOM ARE NON- RESIDENTS, IN THE NATURE OF PURCHASE, SALE OR LEASE OF TANGIBLE OR INTANGIBLE PROPERTY, OR PROVISION OF SERVICES, OR L ENDING OR BORROWING MONEY, OR ANY OTHER TRANSACTION HAVING A BEARING ON THE PROFITS, INCOME, LOSSES OR ASSETS OF SUCH ENTER PRISES, AND SHALL INCLUDE A MUTUAL AGREEMENT OR ARRANGEMENT BETWEEN T WO OR MORE ASSOCIATED ENTERPRISES FOR THE ALLOCATION OR APPORT IONMENT OF, OR ANY CONTRIBUTION TO, ANY COST OR EXPENSE INCURRED O R TO BE INCURRED IN CONNECTION WITH A BENEFIT, SERVICE OR F ACILITY PROVIDED OR TO BE PROVIDED TO ANY ONE OR MORE OF SUCH ENTERP RISES. SEC.92- A DEFINES WHAT IS AN ASSOCIATED ENTERPRISE. IN THE PRESENT CASE THERE IS NO DISPUTE THAT THE TRANSACTION BETWEEN TH E ASSESSEE AND ITS AE WAS AN INTERNATIONAL TRANSACTION ATTRACTING THE PROVISIONS OF SEC.92 OF THE ACT. SEC.92C PROVIDES THE MANNER OF COMPUTATION OF ARMS LENGTH PRICE IN AN INTERNATION AL TRANSACTION AND IT PROVIDES:- IT(TP)A NO.1548/BANG/2010 PAGE 13 OF 40 (1) THAT THE ARMS LENGTH PRICE IN RELATION TO AN INTERNATIONAL TRANSACTION SHALL BE DETERMINED BY AN Y OF THE FOLLOWING METHODS, BEING THE MOST APPROPRIATE METHOD, HAVING REGARD TO THE NATURE OF TRANSACTION OR CLASS OF TRANSACTION OR CLASS OF ASSOCIATED PERSONS OR FUNCTIONS PERFORMED BY SUCH PERSONS OR SUCH OTHER RELEVANT FACTORS AS THE BOARD MAY PRESCRIBE, NAMELY : ( A ) COMPARABLE UNCONTROLLED PRICE METHOD; ( B ) RESALE PRICE METHOD; ( C ) COST PLUS METHOD; ( D ) PROFIT SPLIT METHOD; ( E ) TRANSACTIONAL NET MARGIN METHOD; ( F ) SUCH OTHER METHOD AS MAY BE PRESCRIBED BY THE BOARD. (2) THE MOST APPROPRIATE METHOD REFERRED TO IN SUB- SECTION (1) SHALL BE APPLIED, FOR DETERMINATION OF ARMS LENGTH PRICE, IN THE MANNER AS MAY BE PRESCRIBED: PROVIDED THAT WHERE MORE THAN ONE PRICE IS DETERMINED BY THE MOST APPROPRIATE METHOD, THE ARM S LENGTH PRICE 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 PRICE. (3) WHERE DURING THE COURSE OF ANY PROCEEDING FOR T HE ASSESSMENT OF INCOME, THE ASSESSING OFFICER IS, ON THE BASIS OF MATERIAL OR INFORMATION OR DOCUMENT IN HIS POSSESSION, OF THE OPINION THAT ( A ) THE PRICE CHARGED OR PAID IN AN INTERNATIONAL TRANSACTION HAS NOT BEEN DETERMINED IN ACCORDANCE WITH SUB-SECTIONS (1) AND (2); OR ( B ) ANY INFORMATION AND DOCUMENT RELATING TO AN INTERNATIONAL TRANSACTION HAVE NOT BEEN KEPT AND MAINTAINED BY THE ASSESSEE IN ACCORDANCE WITH IT(TP)A NO.1548/BANG/2010 PAGE 14 OF 40 THE PROVISIONS CONTAINED IN SUB-SECTION (1) OF SECTION 92D AND THE RULES MADE IN THIS BEHALF; OR ( C ) THE INFORMATION OR DATA USED IN COMPUTATION OF TH E ARMS LENGTH PRICE IS NOT RELIABLE OR CORRECT; OR ( D ) THE ASSESSEE HAS FAILED TO FURNISH, WITHIN THE SPECIFIED TIME, ANY INFORMATION OR DOCUMENT WHICH HE WAS REQUIRED TO FURNISH BY A NOTICE ISSUED UNDER SUB-SECTION (3) OF SECTION 92D, THE ASSESSING OFFICER MAY PROCEED TO DETERMINE THE ARMS LENGTH PRICE IN RELATION TO THE SAID INTERNAT IONAL TRANSACTION IN ACCORDANCE WITH SUB-SECTIONS (1) AND (2), ON THE BASIS OF SUCH MATERIAL OR INFORMATION OR DOCUMENT AVAILABLE WITH HIM: 18. RULE 10B OF THE IT RULES, 1962 PRESCRIBES RULES FOR DETERMINATION OF ARMS LENGTH PRICE UNDER SECTION 9 2C:- 10B. (1) FOR THE PURPOSES OF SUB-SECTION (2) OF SE CTION 92C, THE ARMS LENGTH PRICE IN RELATION TO AN INTER NATIONAL TRANSACTION SHALL BE DETERMINED BY ANY OF THE FOLLO WING METHODS, BEING THE MOST APPROPRIATE METHOD, IN THE FOLLOWING MANNER, NAMELY : (A). TO (D).. ( E ) TRANSACTIONAL NET MARGIN METHOD, BY WHICH, ( I ) THE NET PROFIT MARGIN REALISED BY THE ENTERPRISE FROM AN INTERNATIONAL TRANSACTION ENTERED INTO WITH AN ASSOCIATED ENTERPRISE IS COMPUTED IN RELATION TO COSTS INCURRED OR SALES EFFECTED OR ASSETS EMPLOYED OR TO BE EMPLOYED BY THE ENTERPRISE OR HAVING REGARD TO ANY OTHER RELEVANT BASE; ( II ) THE NET PROFIT MARGIN REALISED BY THE ENTERPRISE OR BY AN UNRELATED ENTERPRISE FROM A COMPARABLE UNCONTROLLED TRANSACTION OR A NUMBER OF SUCH TRANSACTIONS IS COMPUTED HAVING REGARD TO THE SAME BASE; ( III ) THE NET PROFIT MARGIN REFERRED TO IN SUB- CLAUSE ( II ) ARISING IN COMPARABLE UNCONTROLLED TRANSACTIONS IS ADJUSTED TO TAKE IT(TP)A NO.1548/BANG/2010 PAGE 15 OF 40 INTO ACCOUNT THE DIFFERENCES, IF ANY, BETWEEN THE INTERNATIONAL TRANSACTION AND THE COMPARABLE UNCONTROLLED TRANSACTIONS, OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS, WHICH COULD MATERIALLY AFFECT THE AMOUNT OF NET PROFIT MARGIN IN THE OPEN MARKET; ( IV ) THE NET PROFIT MARGIN REALISED BY THE ENTERPRISE AND REFERRED TO IN SUB-CLAUSE ( I ) IS ESTABLISHED TO BE THE SAME AS THE NET PROFIT MARGIN REFERRED TO IN SUB-CLAUSE ( III ); ( V ) THE NET PROFIT MARGIN THUS ESTABLISHED IS THEN TAKEN INTO ACCOUNT TO ARRIVE AT AN ARMS LENGTH PRICE IN RELATION TO THE INTERNATIONAL TRANSACTION. (2) FOR THE PURPOSES OF SUB-RULE (1), THE COMPARABI LITY OF AN INTERNATIONAL TRANSACTION WITH AN UNCONTROLLED TRAN SACTION SHALL BE JUDGED WITH REFERENCE TO THE FOLLOWING, NAMELY: ( A ) THE SPECIFIC CHARACTERISTICS OF THE PROPERTY TRANSFERRED OR SERVICES PROVIDED IN EITHER TRANSACTION; ( B ) THE FUNCTIONS PERFORMED, TAKING INTO ACCOUNT ASSETS EMPLOYED OR TO BE EMPLOYED AND THE RISKS ASSUMED, BY THE RESPECTIVE PARTIES TO THE TRANSACTIONS; ( C ) THE CONTRACTUAL TERMS (WHETHER OR NOT SUCH TERMS ARE FORMAL OR IN WRITING) OF THE TRANSACTIONS WHICH LAY DOWN EXPLICITLY OR IMPLICITLY HOW THE RESPONSIBILITIES, RISKS AND BENEFITS ARE TO BE DIVIDED BETWEEN THE RESPECTIVE PARTIES TO THE TRANSACTIONS; ( D ) CONDITIONS PREVAILING IN THE MARKETS IN WHICH THE RESPECTIVE PARTIES TO THE TRANSACTIONS OPERATE, INCLUDING THE GEOGRAPHICAL LOCATION AND SIZE OF THE MARKETS, THE LAWS AND GOVERNMENT ORDERS IN FORCE, COSTS OF LABOUR AND CAPITAL IN THE MARKETS, OVERALL ECONOMIC DEVELOPMENT AND LEVEL OF COMPETITION AND WHETHER THE MARKETS ARE WHOLESALE OR RETAIL. IT(TP)A NO.1548/BANG/2010 PAGE 16 OF 40 (3) AN UNCONTROLLED TRANSACTION SHALL BE COMPARABLE TO AN INTERNATIONAL TRANSACTION IF ( I ) NONE OF THE DIFFERENCES, IF ANY, BETWEEN THE TRANSACTIONS BEING COMPARED, OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS ARE LIKELY TO MATERIALLY AFFECT THE PRICE OR COST CHARGED OR PAID IN, OR THE PROFIT ARISING FROM, SUCH TRANSACTIONS IN THE OPEN MARKET; OR ( II ) REASONABLY ACCURATE ADJUSTMENTS CAN BE MADE TO ELIMINATE THE MATERIAL EFFECTS OF SUCH DIFFERENCES. (4) THE DATA TO BE USED IN ANALYSING THE COMPARABIL ITY OF AN UNCONTROLLED TRANSACTION WITH AN INTERNATIONAL TRAN SACTION SHALL BE THE DATA RELATING TO THE FINANCIAL YEAR IN WHICH TH E INTERNATIONAL TRANSACTION HAS BEEN ENTERED INTO : PROVIDED THAT DATA RELATING TO A PERIOD NOT BEING MORE THAN TWO YEARS PRIOR TO SUCH FINANCIAL YEAR MAY ALS O BE CONSIDERED IF SUCH DATA REVEALS FACTS WHICH COULD H AVE AN INFLUENCE ON THE DETERMINATION OF TRANSFER PRICE S IN RELATION TO THE TRANSACTIONS BEING COMPARED. 19. A READING OF THE PROVISIONS OF RULE 10B(2) OF T HE RULES SHOWS THAT UNCONTROLLED TRANSACTION HAS TO BE COMPA RED WITH INTERNATIONAL TRANSACTION HAVING REGARD TO THE FACT ORS SET OUT THEREIN. BEFORE US THERE IS NO DISPUTE THAT THE TN MM IS THE MOST APPROPRIATE METHOD FOR DETERMINING THE ALP OF THE I NTERNATIONAL TRANSACTION. THE DISPUTES ARE WITH REGARD TO THE C OMPARABILITY OF THE COMPARABLE RELIED UPON BY THE TPO. 20. IN THIS REGARD WE FIND THAT THE PROVISIONS OF LAW POINTED OUT BY THE LD. COUNSEL FOR THE ASSESSEE AS WELL AS THE DECISIONS REFERRED TO BY THE LD. COUNSEL FOR THE ASSESSEE CLE ARLY LAY DOWN THE PRINCIPLE THAT THE TURNOVER FILTER IS AN IMPORTANT CRITERIA IN CHOOSING THE COMPARABLES. THE ASSESSEES TURNOVER I S RS. 47,46,66,638. IT WOULD THEREFORE FALL WITHIN THE C ATEGORY OF COMPANIES IN THE RANGE OF TURNOVER BETWEEN 1 CRORE AND 200 IT(TP)A NO.1548/BANG/2010 PAGE 17 OF 40 CRORES (AS LAID DOWN IN THE CASE OF GENESIS INTEGRATING SYSTEMS (INDIA) PVT. LTD. V. DCIT, ITA NO.1231/BANG/2010) . THUS, COMPANIES HAVING TURNOVER OF MORE THAN 200 CRORES H AVE TO BE ELIMINATED FROM THE LIST OF COMPARABLES AS LAID DOW N IN SEVERAL DECISIONS REFERRED TO BY THE LD. COUNSEL FOR THE AS SESSEE. APPLYING THOSE TESTS, THE FOLLOWING COMPANIES WILL HAVE TO BE EXCLUDED FROM THE LIST OF 26 COMPARABLES DRAWN BY T HE TPO VIZ., TURNOVER RS. (1) FLEXTRONICS SOFTWARE SYSTEMS LTD. 848.66 CRO RES (2) IGATE GLOBAL SOLUTIONS LTD. 747.27 CRORES (3) MINDTREE LTD. 590.39 CRORES (4) PERSISTENT SYSTEMS LTD. 293.74 CRORES (5) SASKEN COMMUNICATION TECHNOLOGIES LTD. 343.57 C RORES (6) TATA ELXSI LTD. 262.58 CRORES (7) WIPRO LTD. 961.09 CRORES. (8) INFOSYS TECHNOLOGIES LTD. 13149 CRORES. . 14. RESPECTFULLY FOLLOWING THE AFORESAID DECISION O F THE TRIBUNAL IN THE CASE OF TRILOGY E-BUSINESS SOFTWARE INDIA PVT.LTD. (SUPRA), WE HOLD THAT THE FOLLOWING COMPANIES SHOULD BE EXCLUDED FROM THE LIS T OF COMPARABLE COMPANIES- (1) FLEXTRONICS SOFTWARE SYSTEMS LTD. 595.12 CR ORES (2) IGATE GLOBAL SOLUTIONS LTD. 527.91 CRORES (3) MINDTREE LTD. 448.79 CRORES (4) PERSISTENT SYSTEMS LTD. 209.18 CRORES (5) SASKEN COMMUNICATION TECHNOLOGIES LTD.(SEG.) 24 0.03 CRORES (6) INFOSYS TECHNOLOGIES LTD. 9028 CRORES. THE AO IS DIRECTED TO COMPUTE THE ARITHMETIC MEAN B Y EXCLUDING THE AFORESAID COMPANIES FROM THE LIST OF COMPARABLE. IT(TP)A NO.1548/BANG/2010 PAGE 18 OF 40 15. IMPROPER SELECTION OF COMPARABLES: IT WAS SUBMITTED BY THE LEARNED COUNSEL FOR THE ASSESSEE THAT THE FOLLOWING 4 COMPANIES ARE NOT FUNCTIONALLY COMPARABLE WITH THAT OF THE ASSESSEE. A) KALS INFORMATION SYSTEMS LIMITED B) ACCEL TRANSMISSION LIMITED. IN THIS REGARD OUR ATTENTION WAS DRAWN TO THE DECIS ION OF THE HONBLE ITAT BANGALORE BENCH IN THE CASE OF TRILOGY E-BUSINESS SOFTWARE INDIA PVT.LTD. (SUPRA) WHEREIN THESE COMPANIES WERE HELD TO BE NOT FUNCTI ONALLY COMPARABLE WITH THAT OF A PURE SOFTWARE DEVELOPER L IKE THE ASSESSEE. 16. THE FOLLOWING WERE THE RELEVANT OBSERVATIONS OF THE TRIBUNAL ON THE AFORESAID COMPARABLE COMPANIES IN THE CASE OF TRILOGY E-BUSINESS SOFTWARE INDIA PVT. LTD.(SUPRA) : (D) KALS INFORMATION SYSTEMS LTD. 46. AS FAR AS THIS COMPANY IS CONCERNED, THE CONTEN TION OF THE ASSESSEE IS THAT THE AFORESAID COMPANY HAS REVENUES FROM BOTH SOFTWARE DEVELOPMENT AND SOFTWARE PRODUCTS. BESIDE S THE ABOVE, IT WAS ALSO POINTED OUT THAT THIS COMPANY IS ENGAGED I N PROVIDING TRAINING. IT WAS ALSO SUBMITTED THAT AS PER THE AN NUAL REPOT, THE SALARY COST DEBITED UNDER THE SOFTWARE DEVELOPMENT EXPENDITURE WAS Q 45,93,351. THE SAME WAS LESS THAN 25% OF THE SOFTWARE SERVICES REVENUE AND THEREFORE THE SALARY COST FILT ER TEST FAILS IN THIS CASE. REFERENCE WAS MADE TO THE PUNE BENCH TRIBUNA LS DECISION OF THE ITAT IN THE CASE OF BINDVIEW INDIA PRIVATE LIMITED VS. DCI, ITA NO. ITA NO 1386/PN/1O WHEREIN KALS AS COMPARABLE WAS REJECTED FOR AY 2006-07 ON ACCOUNT OF IT BEING FUNC TIONALLY DIFFERENT FROM SOFTWARE COMPANIES. THE RELEVANT EXTRACT ARE A S FOLLOWS: IT(TP)A NO.1548/BANG/2010 PAGE 19 OF 40 16. ANOTHER ISSUE RELATING TO SELECTION OF COMPARA BLES BY THE TPO IS REGARDING INCLUSION OF KALS INFORMATION SYSTEM LTD. THE ASSESSEE HAS OBJECTED TO ITS INCLUS ION ON THE BASIS THAT FUNCTIONALLY THE COMPANY IS NOT COMPARABLE. WITH REFERENCE TO PAGES 185-186 OF THE PAPER BOOK, IT IS EXPLAINED THAT THE SAID COMPANY I S ENGAGED IN DEVELOPMENT OF SOFTWARE PRODUCTS AND SERVICES AND IS NOT COMPARABLE TO SOFTWARE DEVELOPM ENT SERVICES PROVIDED BY THE ASSESSEE. THE APPELLANT HA S SUBMITTED AN EXTRACT ON PAGES 185-186 OF THE PAPER BOOK FROM THE WEBSITE OF THE COMPANY TO ESTABLISH T HAT IT IS ENGAGED IN PROVIDING OF I T ENABLED SERVICES AND THAT THE SAID COMPANY IS INTO DEVELOPMENT OF SOFTWARE PRODUCTS, ETC. ALL THESE ASPECTS HAVE NOT BEEN FACT UALLY REBUTTED AND, IN OUR VIEW, THE SAID CONCERN IS LIAB LE TO BE EXCLUDED FROM THE FINAL SET OF COMPARABLES, AND THU S ON THIS ASPECT, ASSESSEE SUCCEEDS. BASED ON ALL THE ABOVE, IT WAS SUBMITTED ON BEHALF OF THE ASSESSEE THAT KALS INFORMATION SYSTEMS LIMITED SHOULD BE REJ ECTED AS A COMPARABLE. 47. WE HAVE GIVEN A CAREFUL CONSIDERATION TO THE S UBMISSION MADE ON BEHALF OF THE ASSESSEE. WE FIND THAT THE T PO HAS DRAWN CONCLUSIONS ON THE BASIS OF INFORMATION OBTAINED BY ISSUE OF NOTICE U/S.133(6) OF THE ACT. THIS INFORMATION WHICH WAS NOT AVAILABLE IN PUBLIC DOMAIN COULD NOT HAVE BEEN USED BY THE TPO, WHEN THE SAME IS CONTRARY TO THE ANNUAL REPORT OF THIS COMPA NY AS HIGHLIGHTED BY THE ASSESSEE IN ITS LETTER DATED 21.6.2010 TO TH E TPO. WE ALSO FIND THAT IN THE DECISION REFERRED TO BY THE LEARNE D COUNSEL FOR THE ASSESSEE, THE MUMBAI BENCH OF ITAT HAS HELD THAT TH IS COMPANY WAS DEVELOPING SOFTWARE PRODUCTS AND NOT PURELY OR MAINLY SOFTWARE DEVELOPMENT SERVICE PROVIDER. WE THEREFORE ACCEPT THE PLEA OF THE ASSESSEE THAT THIS COMPANY IS NOT COMPARABLE. (E) ACCEL TRANSMATIC LTD. 48. WITH REGARD TO THIS COMPANY, THE COMPLAINT OF THE ASSESSEE IS THAT THIS COMPANY IS NOT A PURE SOFTWARE DEVELOP MENT SERVICE COMPANY. IT IS FURTHER SUBMITTED THAT IN A MUMBAI TRIBUNAL DECISION OF CAPGEMINI INDIA (F) LTD V AD. CIT 12 TAXMAN.COM 51, THE DRP ACCEPTED THE CONTENTION OF THE ASSESSEE TH AT ACCEL TRANSMATIC SHOULD BE REJECTED AS COMPARABLE. THE RE LEVANT OBSERVATIONS OF DRP AS EXTRACTED BY THE ITAT IN ITS ORDER ARE AS FOLLOWS: IT(TP)A NO.1548/BANG/2010 PAGE 20 OF 40 IN REGARD TO ACCEL TRANSMATICS LTD. THE ASSESSEE SUBMITTED THE COMPANY PROFILE AND ITS ANNUAL REPORT FOR FINANCIAL YEAR 2005-06 FROM WHICH THE DRP NOTED THA T THE BUSINESS ACTIVITIES OF THE COMPANY WERE AS UNDER. (I) TRANSMATIC SYSTEM - DESIGN, DEVELOPMENT AND MANUFACTURE OF MULTI FUNCTION KIOSKS QUEUE MANAGEME NT SYSTEM, TICKET VENDING SYSTEM (II) USHUS TECHNOLOGIES - OFFSHORE DEVELOPMENT CENT RE FOR EMBEDDED SOFTWARE, NET WORK SYSTEM, IMAGING TECHNOLOGIES, OUTSOURCED PRODUCT DEVELOPMENT (III) ACCEL IT ACADEMY (THE NET STOP FOR ENGINEERS) - TRAINING SERVICES IN HARDWARE AND NETWORKING, ENTER PRISE SYSTEM MANAGEMENT, EMBEDDED SYSTEM, VLSI DESIGNS, CAD/CAM/BPO (IV) ACCEL ANIMATION STUDIES SOFTWARE SERVICES FOR 2D/3D ANIMATION, SPECIAL EFFECT, ERECTION, GAME ASSET DEVELOPMENT. 4.3 ON CAREFUL PERUSAL OF THE BUSINESS ACTIVITIES OF ACCEL TRANSMATIC LTD. DRP AGREED WITH THE ASSESSEE THAT THE COMPANY WAS FUNCTIONALLY DIFFERENT FROM THE ASS ESSEE COMPANY AS IT WAS ENGAGED IN THE SERVICES IN THE FO RM OF ACCEL IT AND ACCEL ANIMATION SERVICES FOR 2D AND 3D ANIMATION AND THEREFORE ASSESSEES CLAIM THAT THIS COMPANY WAS FUNCTIONALLY DIFFERENT WAS ACCEPTED. DR P THEREFORE DIRECTED THE ASSESSING OFFICER TO EXCLUDE ACCEL TRANSMATIC LTD. FROM THE FINAL LIST OF COMPAR ABLES FOR THE PURPOSE OF DETERMINING TNMM MARGIN. 49. BESIDES THE ABOVE, IT WAS POINTED OUT THAT THIS COMPANY HAS RELATED PARTY TRANSACTIONS WHICH IS MORE THAN T HE PERMITTED LEVEL AND THEREFORE SHOULD NOT BE TAKEN FOR COMPARA BILITY PURPOSES. THE SUBMISSION OF THE LD. COUNSEL FOR TH E ASSESSEE WAS THAT IF THE ABOVE COMPANY SHOULD NOT BE CONSIDERED AS COMPARABLE. THE LD. DR, ON THE OTHER HAND, RELIED ON THE ORDER OF THE TPO. 50. WE HAVE CONSIDERED THE SUBMISSIONS AND ARE OF THE VIEW THAT THE PLEA OF THE ASSESSEE THAT THE AFORESAID CO MPANY SHOULD NOT BE TREATED AS COMPARABLES WAS CONSIDERED BY THE TRIBUNAL IN CAPGEMINI INDIA LTD (SUPRA) WHERE THE ASSESSEE WAS SOFTWARE DEVELOPER. THE TRIBUNAL, IN THE SAID DECISION REFE RRED TO BY THE IT(TP)A NO.1548/BANG/2010 PAGE 21 OF 40 LD. COUNSEL FOR THE ASSESSEE, HAS ACCEPTED THAT THI S COMPANY WAS NOT COMPARABLE IN THE CASE OF THE ASSESSEES ENGAGED IN SOFTWARE DEVELOPMENT SERVICES BUSINESS. ACCEPTING THE ARGU MENT OF THE LD. COUNSEL FOR THE ASSESSEE, WE HOLD THAT THE AFOR ESAID COMPANY SHOULD BE EXCLUDED AS COMPARABLES. 17. THE FACTS AND CIRCUMSTANCES UNDER WHICH THE AFO RESAID COMPANIES WERE CONSIDERED AS COMPARABLE IS IDENTICAL IN THE C ASE OF THE ASSESSEE AS WELL AS IN THE CASE OF TRILOGY E-BUSINESS SOFTWARE INDIA PVT.LTD. (SUPRA) . RESPECTFULLY FOLLOWING THE DECISION OF THE TRIBUNAL REFERRED TO ABOVE IN THE CASE OF TRILOGY E-BUSINESS SOFTWARE INDIA PVT.LTD.(SUPRA) , WE DIRECT THAT THE FOLLOWING COMPANIES BE EXCLUDED FROM THE LIST O F 26 COMPARABLE ARRIVED AT BY THE TPO. A) KALS INFORMATION SYSTEMS LIMITED B) ACCEL TRANSMISSION LIMITED. 18. AS FAR AS THE COMPARABLE CHOSEN BY THE TPO VIZ. , TATA ELXSI IS CONCERNED, THIS TRIBUNAL IN THE CASE OF YODLEE INFOTECH PVT. LTD. VS. ITO IN ITA NO.1538/BANG/2010 BY ITS ORDER DATED 30. 8.2013 , HELD THAT THIS COMPANY IS NOT FUNCTIONALLY COMPARABLE WITH A SOFTW ARE DEVELOPMENT SERVICE PROVIDER. THE FOLLOWING WERE THE RELEVANT OBSERVATIONS OF THE TRIBUNAL IN THIS REGARD. 15. TATA ELXSI LIMITED. 15.1.1 THIS COMPANY WAS SELECTED BY THE TPO FOR INCLUSION IN THE SET OF COMPARABLES. BEFORE THE TP O, THE IT(TP)A NO.1548/BANG/2010 PAGE 22 OF 40 ASSESSEE HAD OBJECTED TO THE INCLUSION OF THIS COMP ANY IN THE SET OF COMPARABLES FOR VARIOUS REASONS SUCH AS FUNCTION AL DIS- SIMILARITY SIGNIFICANT R & D ACTIVITY, BRAND VALUE , SIZE, ETC. THE TPO, HOWEVER, REJECTED THE ASSESSEE'S OBJECTIONS AN D INCLUDED THE COMPANY IN THE SET OF COMPARABLES. BEFORE US, IN THIS APPEAL THE LEARNED AUTHORISED REPRESENTATIVE REITERATED TH AT THIS COMPANY IS NOT FUNCTIONALLY COMPARABLE TO THE ASSES SEE AS IT PERFORMS A VARIETY OF ACTIVITIES AND FUNCTIONS UNDE R THE SOFTWARE DEVELOPMENT AND SERVICES SEGMENT AND HAS DRAWN OUR ATTENTION TO AND QUOTED FROM THE ANNUAL REPORT OF THE COMPANY . 15.1.2 THE LEARNED AUTHORISED REPRESENTATIVE SUBMI TTED THAT AS PER THE ANNUAL REPORT, THIS COMPANY OPERATE S IN TWO SEGMENTS, NAMELY, 1. SYSTEMS AND INTEGRATION SUPPORT SERVICES - WHICH CATERS TO THE DOMESTIC MARKET AND OFFERS INTEGRATED HARDWARE AND PACKAGED SOFTWARE SOLUTIONS SOURCED FROM PRINCIPALS AND 2. SOFTWARE DEVELOPMENT SERVICES - WHILE THE TPO HAS CONSIDERED THE SOFTWARE DEVELOPMENT AND SERVICES SE GMENT AS COMPARABLE TO THE ASSESSEE, THE LEARNED AUTHORISED REPRESENTATIVE SUBMITS THAT ON PERUSAL OF THE ANNUA L REPORT OF THE COMPANY, IT CAN BE OBSERVED THAT THE SOFTWARE D EVELOPMENT SEGMENT CANNOT BE CONSIDERED FOR ANALYSIS FOR THE F OLLOWING REASONS : (I) AS PER THE DIRECTORS REPORT AND THE MANAGEMENT DISCUSSION AND ANALYSIS, THE SOFTWARE DEVELOPMENT A ND SERVICES SEGMENT COMPRISES OF THREE SUB-SERVICES NAMELY : A) PRODUCT DESIGN SERVICES I.E. DESIGN AND DEVELOPMENT OF HARDWARE AND SOFTWARE. B) INNOVATION DESIGN ENGINEERING I.E. MECHANICAL DESIGN WITH A FOCUS ON INDUSTRIAL DESIGN; AND C) VISUAL COMPUTING LABS I.E. ANIMATION AND SPECIAL EFFECTS FOR MOVIES AND TV. IT(TP)A NO.1548/BANG/2010 PAGE 23 OF 40 II) AS THE SOFTWARE DEVELOPMENT AND SERVICES SEGME NT COMPRISES OF HARDWARE, SOFTWARE AND ANIMATION SERVI CES, THERE IS NO SUB-SERVICES BREAK-UP / INFORMATION PRO VIDED IN THE ANNUAL REPORT OR THE DATABASES, THE LEARNED AUTHORISED REPRESENTATIVE CONTENDS THAT THIS COMPAN Y SHOULD BE REJECTED AS A COMPARABLE AS IT IS FUNCTIO NALLY DIFFERENT FROM THE ASSESSEE. 15.2 PER CONTRA, THE LEARNED DEPARTMENTAL REPRESENT ATIVE SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW ON TH IS ISSUE. 15.3.1 WE HAVE HEARD BOTH PARTIES AND PERUSED AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD INCLUDING THE JUD ICIAL DECISIONS RELIED UPON. FROM THE RECORD, WE FIND TH AT THIS COMPANY IS PREDOMINANTLY ENGAGED IN PRODUCT DESIGNI NG SERVICES AND NOT PURELY SOFTWARE DEVELOPMENT SERVIC ES. THE REFERENCES MADE TO THE ANNUAL REPORT BY THE LEARNED AUTHORISED REPRESENTATIVE SHOW THAT THE SEGMENT SOFTWARE DEVE LOPMENT AND SERVICES RELATES TO DESIGN SERVICES AND ARE NO T SIMILAR TO SOFTWARE SUPPORT SERVICES PERFORMED BY THE ASSESSEE IN THE CASE ON HAND. FURTHER, THE MUMBAI ITAT IN THE CASE OF T ELECORDIA TECHNOLOGIES INDIA PVT . LTD. (ITA NO.7821/MUM/2011 ) HAS HELD, THAT THIS COMPANY, M/S. TATA ELXSI LTD. IS NO T A SOFTWARE DEVELOPMENT SERVICE PROVIDER, AT PARA 7.7 ON PAGE 2 1 OF ITS ORDER WHICH IS EXTRACTED HEREUNDER : 7.7 . TATA ELXSI IS ENGAGED IN DEVELOPMENT OF NICHE PRODUCT AND DEVELOPMENT SERVICES, WHICH IS ENTIRELY DIFFERENT FROM THE ASSESSEE COMPANY. WE AGREE WITH THE CONTENTION OF THE LEARNED AUTHORISED REPRESENTATIVE THAT THE NATURE OF PRODUCT DEVELOPED AND SERVICES PROVIDED BY THIS COMPANY ARE DIFFERENT FROM THE ASSESSEE AS HAVE BEEN NARRATED IN PARA 6.6 ABOVE. EVEN THE SEGMENTAL DETAILS FOR REVENUE SALES HAVE NOT BEEN PROVIDED BY THE TPO SO AS TO CONSIDER IT AS A COMPARABLE PARTY FOR COMPARING THE PROFIT RATIO FROM PRODUCT AND SERVICES. THUS, ON THESE FA CTS, WE ARE UNABLE TO TREAT THIS COMPANY FIT FOR COMPARABILITY ANALYSIS FOR DETERMINING THE ARMS IT(TP)A NO.1548/BANG/2010 PAGE 24 OF 40 LENGTH PRICE FOR THE ASSESSEE, HENCE, SHOULD BE EXCLUDED FROM THE LIST OF COMPARABLE PARTIES. AS CAN BE SEEN FROM THE EXTRACTS OF THE ANNUAL REPO RT OF THIS COMPANY, PLACED BEFORE US, THIS FACTUAL POSITI ON PERTAINING TO TATA ELXSI LTD., HAS NOT CHANGED FROM ASSESSMENT YEARS 2007-08 TO 2008-09. IN THIS VIEW OF THE MATTER, WE ARE OF THE VIEW THAT THIS COMPANY IS NOT TO BE CONSIDERED FOR INCLUSION IN THE SET OF COMPARABLE I N THE CASE ON HAND FOR THE PERIOD UNDER CONSIDERATION AND THER EFORE DIRECT THE TPO TO EXCLUDE THIS COMPANY FROM THE FIN AL SET OF COMPARABLES FOR THE PERIOD UNDER CONSIDERATION . 19. IN VIEW OF THE ABOVE, THE AFORESAID COMPANY SHO ULD ALSO BE EXCLUDED FOR THE PURPOSE OF COMPARISON WHILE DETERM INING THE ALP OF THE INTERNATIONAL TRANSACTION IN QUESTION. 20. AS FAR AS THE COMPARABLE CHOSEN BY THE TPO VIZ. , MEGASOFT LTD. IN THE LIST OF FINAL COMPARABLES CHOSEN BY THE TPO IS CONCERNED, THIS TRIBUNAL IN THE CASE OF TRILOGY E-BUSINESS SOFTWARE INDIA PV T. LTD. (SUPRA) HAD HELD THAT ONLY SEGMENTAL DATA OF THE SAID COMPANY SHOULD BE TAKEN FOR THE PURPOSE OF COMPARISON. FOLLOWING ARE THE RELEVANT OBSERVATIONS OF THE TRIBUNAL:- 37. THE NEXT PLEA OF THE ASSESSEE IS THAT IF AT AL L THIS COMPANY IS CONSIDERED AS A COMPARABLE THEN THE SEGMENTAL MA RGIN OF 23.11% (WHICH IS THE MARGIN FOR SOFTWARE SERVICE SE GMENT) ALONE SHOULD BE CONSIDERED FOR COMPARABILITY. ON THE ABO VE SUBMISSION, WE FIND THAT THE TPO CONSIDERED THE SEG MENTAL MARGIN (SOFTWARE SERVICE SEGMENT) IN THE CASE OF GE OMETRIC, KALS INFO SYSTEMS, R SYSTEMS, SASKEN COMMUNICATION AND T ATA ELXSI. BEFORE DRP THE ASSESSEE POINTED OUT THAT THE SEGMEN TAL MARGIN OF 23.11% ALONE SHOULD BE TAKEN FOR COMPARABILITY. THE DRP HAS IT(TP)A NO.1548/BANG/2010 PAGE 25 OF 40 NOT GIVEN ANY SPECIFIC FINDING ON THE ABOVE PLEA OF THE ASSESSEE. PERUSAL OF THE ORDER OF THE TPO SHOWS THAT THE TPO RELIED ON INFORMATION WHICH WAS GIVEN BY THIS COMPANY IN WHIC H THIS COMPANY HAD EXPLAINED THAT IT HAS TWO DIVISIONS VIZ ., BLUEALLY DIVISION AND XIUS-BCGI DIVISION. XIUS- BCGI DIVISION DOES THE BUSINESS OF PRODUCT SOFTWARE (DEVELOPING SOFTWARE). THIS COMPANY DEVELOPS PACKAGED PRODUCTS FOR THE WIRELESS AND CONVERGENT TELECOM INDUSTRY. THESE PR ODUCTS ARE SOLD AS PACKAGED PRODUCTS TO CUSTOMERS. WHILE IMPL EMENTING THESE STANDARDIZED PRODUCTS, CUSTOMERS MAY REQUEST THE COMPANY TO CUSTOMIZE PRODUCTS OR RECONFIGURE PRODUCTS TO FI T INTO THEIR BUSINESS ENVIRONMENT. THEREUPON THE COMPANY TAKES UP THE JOB OF CUSTOMIZING THE PACKAGED SOFTWARE. THE COMPANY ALSO EXPLAINED THAT 30 TO 40% OF THE PRODUCT SOFTWARE (S OFTWARE DEVELOPED) WOULD CONSTITUTE PACKAGED PRODUCT AND AR OUND 50% TO 60% WOULD CONSTITUTE CUSTOMIZED CAPABILITIES AND EXPENSES RELATED TO TRAVELLING, BOARDING AND LODGING EXPENSE . BASED ON THE ABOVE REPLY, THE TPO PROCEEDED TO HOLD THAT THE COM PARABLE COMPANY WAS MAINLY INTO CUSTOMIZATION OF SOFTWARE P RODUCTS DEVELOPED (WHICH WAS AKIN TO SOFTWARE DEVELOPMENT) INTERNALLY AND THAT THE PORTION OF THE REVENUE FROM DEVELOPMEN T OF SOFTWARE SOLD AND USED FOR CUSTOMIZATION WAS LESS THAN 25% O F THE OVERALL REVENUES. THE TPO THEREFORE HELD THAT LESS THAN 25 % OF THE REVENUES OF THE COMPARABLE ARE FROM SOFTWARE PRODUC TS AND THEREFORE THE COMPARABLE SATISFIED TPOS FILTER OF MORE THAN 75% OF REVENUES FROM SOFTWARE DEVELOPMENT SERVICES. HA VING DRAWN THE ABOVE CONCLUSION, THE TPO DID NOT BOTHER TO QUA NTIFY THE REVENUES WHICH CAN BE ATTRIBUTED TO SOFTWARE PRODUC T DEVELOPMENT AND SOFTWARE DEVELOPMENT SERVICE BUT AD OPTED THE MARGIN OF THIS COMPANY AT THE ENTITY LEVEL. IN TER MS OF RULE 10B(3)(B) OF THE RULES, AN UNCONTROLLED TRANSACTION SHALL BE COMPARABLE TO AN INTERNATIONAL TRANSACTION IF (I) NONE OF THE DIFFERENCES, IF ANY, BETWEEN THE TR ANSACTIONS BEING COMPARED, OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS ARE LIKELY TO MATERIALLY AFFECT T HE PRICE OR COST CHARGED OR PAID IN, OR THE PROFIT ARISING FROM , SUCH TRANSACTIONS IN THE OPEN MARKET; OR (II) REASONABLY ACCURATE ADJUSTMENTS CAN BE MADE TO ELIMINATE THE MATERIAL EFFECTS OF SUCH DIFFERENCES. IT(TP)A NO.1548/BANG/2010 PAGE 26 OF 40 38. NEITHER THE TPO NOR THE DRP HAVE NOTICED THAT THERE IS BOUND TO BE A DIFFERENCE BETWEEN THE ASSESSEE AND M EGASOFT AND THE PROFIT ARISING TO THE MEGASOFT AS A RESULT OF T HE EXISTENCE OF THE SOFTWARE PRODUCT SEGMENT AND NO FINDING HAS BEE N GIVEN THAT REASONABLY ACCURATE ADJUSTMENTS CAN BE MADE TO ELIM INATE THE MATERIAL EFFECTS OF SUCH DIFFERENCES. FOR THIS RE ASON, WE ARE INCLINED TO HOLD THAT THE PROFIT MARGIN OF 23.11% W HICH IS THE MARGIN OF THE SOFTWARE SERVICE SEGMENT BE TAKEN FOR COMPARABILITY. IN VIEW OF THE ABOVE CONCLUSION, WE DO NOT WISH TO GO INTO THE QUESTION AS TO WHETHER LESS THAN 25% OF THE REVENUES OF THE COMPARABLE ARE FROM SOFTWARE PRODUC TS AND THEREFORE THE COMPARABLE SATISFIED TPOS FILTER OF MORE THAN 75% OF REVENUES FROM SOFTWARE DEVELOPMENT SERVICES. 21. IN VIEW OF THE AFORESAID DECISION OF THE TRIBUN AL, SEGMENTAL MARGINS IN SO FAR AS IT RELATES TO PROVIDING SOFTWARE SERVI CES BY MEGASOFT ALONE SHOULD BE TAKEN FOR THE PURPOSE OF COMPARISON. 22. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED BEFORE US THAT IF THE AFORESAID 9 COMPARABLE COMPANIES ARE EXCLUDED FROM THE LIST OF 20 COMPARABLE COMPANIES CHOSEN BY THE TPO AND SEGMENTA L RESULTS (SOFTWARE DEVELOPMENT SEGMENT) ALONE OF COMPARABLE COMPANY CHOSEN BY THE TPO M/S. MEGASOFT LTD., IS TAKEN FOR COMPARABIL ITY, THEN THE PROFIT MARGIN OF THE ASSESSEE WOULD BE WELL WITHIN THE (+) (-) 5% RANGE OF THE ARITHMETIC MEAN OF THE REMAINING COMPARABLE COMPANI ES AND THEREFORE THE PRICE RECEIVED BY THE ASSESSEE WOULD BE CONSIDERED AS AT ARMS LENGTH. HE PRAYED FOR A LIMITED DIRECTION TO THE TPO ON THE LINES SET OUT ABOVE AND DETERMINE THE ALP. IT ALSO SUBMITTED THAT THE OTHE R ISSUES RAISED BY THE ASSESSEE IN THE GROUNDS OF APPEAL NEED NOT BE GONE INTO. IT(TP)A NO.1548/BANG/2010 PAGE 27 OF 40 23. WE ARE OF THE VIEW THAT THE PRAYER SOUGHT FOR B Y THE LEARNED COUNSEL FOR THE ASSESSEE IS ACCEPTABLE AND ACCORDINGLY, THE TPO IS DIRECTED TO COMPUTE ALP AFTER EXCLUDING THE 8 COMPARABLE COMPAN IES DEALT WITH IN THIS ORDER. THE TPO IS ALSO DIRECTED TO TAKE ONLY THE SOFTWARE DEVELOPMENT SEGMENT MARGIN OF THE COMPARABLE COMPANY M/S.MEGASO FT LTD., AS WAS DIRECTED AND HELD IN THE CASE OF TRILOGY E-BUSINESS SOFTWARE INDIA PVT.LTD. (SUPRA) . 24. THE ASSESSEE HAS PROJECTED ITS GRIEVANCE IN GR OUND NO.5 THAT THE TPO APPLIED THE ARITHMETIC MEAN OF THE PROFIT MARGI NS OF THE 20 COMPARABLE CHOSEN BY HIM ON ALL THE TRANSACTIONS OF RENDERING SOFTWARE SERVICES CARRIED OUT BY THE ASSESSEE DURING THE PREVIOUS YEAR, WITHO UT RESTRICTING HIS ACTION IN RESPECT OF THE TRANSACTION OF THE ASSESSEE OF RE NDERING SOFTWARE SERVICES ONLY TO ITS AE. IN OTHER WORDS THE NON AE TRANSACT IONS HAVE ALSO BEEN CONSIDERED FOR ARRIVING AT THE TRANSFER PRICING ADJ USTMENT TO BE MADE BY THE TPO. IN THIS REGARD IT MAY BE RECALLED THAT TH E TOTAL OPERATING REVENUE FROM RENDERING SOFTWARE DEVELOPMENT SERVICES WAS A SUM OF RS.19,47,91,538/-. OUT OF THE ABOVE THE REVENUE FR OM RENDERING SOFTWARE DEVELOPMENT SERVICES TO AN ASSOCIATED ENTERPRISE (A E) WAS A SUM OF RS.15,87,43,329/-. THE PLEA OF THE ASSESSEE IS TH AT THE OPERATING MARGIN OF THE COMPARABLE SHOULD BE APPLIED BY THE TPO ON THE VALUE OF TRANSACTION WITH AE I.E., ON THE SUM OF RS.15,87,43 ,329 AND NOT ON RS.19,47,91,538/-. IN SUPPORT OF HIS PLEA THE LEAR NED COUNSEL FOR THE ASSESSEE HAS BROUGHT TO OUR NOTICE THE DECISION OF THE ITAT BANGALORE IT(TP)A NO.1548/BANG/2010 PAGE 28 OF 40 BENCH IN THE CASE OF M/S.KIRLOSKAR TOYOTA TEXTILE MACHINERY PRIVATE LTD. VS. ACIT IT (TP) A.NO1401/BANG/2010 ORDER DATED 14. 11.2014 WHEREIN THE HONBLE TRIBUNAL HELD AS FOLLOWS:- 7. WE HAVE DULY CONSIDERED THE RIVAL CONTENTIONS AND CAREFULLY GONE THROUGH THE RECORD. SECTION 92C OF THE INCOME TAX ACT PROVIDES COMPUTATION OF INCOME FROM INTERNATIONAL T RANSACTION HAVING REGARD TO ARMS LENGTH PRICE. IT CONTEMPLATE S THAT ANY INCOME ARISING FROM AN INTERNATIONAL TRANSACTION SH ALL BE COMPUTED HAVING REGARD TO THE ALP. BEFORE US THE ASSESSEE HA S NOT DISPUTED ABOUT THE NATURE OF THE INTERNATIONAL TRANSACTION W ITH ITS AE IN TEXTILE MACHINERY SEGMENT. IT HAS ALSO NOT DISPUTED SELECTI ON OF TNMM METHOD FOR DETERMINING ALP OF THE INTERNATIONAL TRA NSACTION. SIMILARLY THE LEARNED COUNSEL FOR THE ITA NO.1401 O F 2010 KIRLOSKAR TOYODA TEXTILE MACHINERY P LTD BANGALORE ASSESSEE D ID NOT DISPUTE ABOUT THE SELECTION OF COMPARABLE CASES FOR DETERMI NING THE PLI OF THE COMPARABLES. THE DISPUTE BEFORE IS, WHETHER THE ARITHMETIC MEAN OF THE PROFIT LEVEL INDICATOR ARRIVED AT FROM THE COMPARABLES COULD BE APPLIED TO THE TOTAL COST INCL UDING THE PURCHASES MADE FROM UNRELATED PARTIES OR IT IS TO B E RESTRICTED TO THE PURCHASE MADE FROM THE AE. THE SECOND FOLD OF SUBMISSION IS THAT THE BENEFIT OF THE PROVISO OF SECTION 92C(2 ) OUGHT TO HAVE BEEN GIVEN TO THE ASSESSEE, BECAUSE IN THE AUTOMOTI VE COMPONENT SEGMENT, THE TPO HAS HIMSELF GIVEN THE BENEFIT OF T HIS PROVISO. THE CONTENTION OF THE LEARNED DR WAS THAT THIS ARGUMENT WAS NOT TAKEN UP BY THE ASSESSEE BEFORE THE LEARNED TPO. THEREFOR E, IT BE REMITTED TO THE TPO FOR VERIFICATION AND RE-ADJUDIC ATION. HOWEVER, WE FIND THAT IN THE TP STUDY REPORT, THE ASSESSEE HAS DISCLOSED THE DETAILS OF PURCHASES IN TEXTILE MACHINERY SEGMENT F ROM THE AE. THESE ARE AVAILABLE ON PAGE 47 OF THE TP STUDY REPO RT AND THEY READ AS UNDER: WE FIND THAT THE ASSESSING OFFICER HAS WORKED OUT T HE ARMS LENGTH COST OF OPERATING REVENUE BY REDUCING THE TOTAL REV ENUE WITH ARMS LENGTH MEAN MARGIN WHICH WAS WORKED OUT AT 8.26%. I N OTHER WORDS, THE TOTAL SALES HAVE BEEN REDUCED BY THIS PE RCENTAGE IN ORDER TO ACHIEVE THE COST. THIS COST WAS FURTHER REDUCED BY THE PURCHASES WITH UNRELATED PARTIES AND THEREAFTER THE LEARNED T PO COMPUTED THE ALP OF THE PURCHASES MADE BY THE ASSESSEE FROM THE AE. IN OUR OPINION THIS TOTAL EXERCISE IS ERRONEOUS, BECAUSE T HERE IS NO ELEMENT OF UNDUE BENEFIT WHICH WOULD BE PRESUMED TO HAVE BE EN EXTENDED IT(TP)A NO.1548/BANG/2010 PAGE 29 OF 40 BY THE ASSESSEE ON THE PURCHASES FROM THE THIRD PAR TIES. THE BASIC ANOMALY IN THIS FORMULA WOULD BE THAT IT COULD MAKE MULTI-FOLD ADJUSTMENTS, FOR EXAMPLE IF THE ASSESSEE HAD MADE P URCHASE OF ONLY RS.2.00 CRORES FROM THE AE AND RS.91.00 CRORES FROM UNRELATED PARTIES, THE ADJUSTMENT WORKED OUT BY THE TPO IN TH E FIGURE WOULD BE MORE THAN THE TOTAL PURCHASES MADE FROM THE AE. THE LEARNED COUNSEL FOR THE ASSESSEE DREW OUR ATTENTION TOWARDS THE ORDER OF THE ITAT IN THE CASE OF POLARTECH INDIA (P) LTD V. ASST T. CIT (SUPRA). IN THIS CASE THE TRIBUNAL HAS FOLLOWED THE ORDER OF TH E ITAT DELHI BENCH AND MADE THE FOLLOWING OBSERVATIONS UNDER A S IMILAR SITUATION: 31. FOR APPLYING THE TNMM IN CASE OF INTERNATIONAL TRANSACTIONS CONSTITUTING A SMALL PORTION OF EXPENSES, THE ONLY PRACTICAL WAY OF APPLYING THE TNMM IS TO ADOPT THE PROFITABILITY OF THE ENTIRE ENTERPRISE AS THE PROFITABILITY FROM INTERNATIONAL TRANSACTION. IT HAS THEN TO BE COMPARED WITH THE PLI OF THE COMPARA BLE COMPANIES AND ADJUSTMENT MADE ONLY TO THE INTERNATI ONAL TRANSACTIONS. THIS WILL BE ACHIEVED BY TAKING THE T OTAL ADJUSTMENT APPLICABLE TO THE ENTERPRISE AS A WHOLE AND APPLYIN G PRO RATA, ON THE BASIS OF RATIO OF THE VALUE OF INTERNATIONAL TR ANSACTIONS FORMING PART OF OPERATIONAL COST TO THE TOTAL OPERA TIONAL EXPENSES OF THE ENTERPRISE ITA NO.1401 OF 2010 KIRLOSKAR TOY ODA TEXTILE MACHINERY P LTD BANGALORE AS A WHOLE. WE FIND THAT THE ADJUSTMENT MADE BY THE TPO FOR THIS PURPOSE IS NOT CORRECT. , 32. WE FIND SUPPORT OF THIS VIEW IN THE DELHI TRIBU NAL IN ELECTRONICS (I)(P) LTD. US. ASSTT. CIT (201 0) 36 S OT 227 (DEL) AS UNDER: 'THE ASSESSEE HAS ALSO TAKEN ONE ALTERNATIVE GROUND OUT OF THE TOTAL RAW MATERIALS CONSUMED BY THE ASSESSEE FO R MANUFACTURING PRINTED CIRCUIT BOARDS, ONLY 45.51 PE R CENT OF THE TOTAL RAW MATERIALS WERE IMPORTED THROUGH ASSESSEE'S ASSOCIATE CONCERNS, AND, THEREFORE, ANY ADJUSTMENT, IF ANY CALLED FOR, CAN ONLY BE MADE TO THE 45.51 PER CENT OF THE TOTAL TURNOVER, AND NOT TO TH E TOTAL TURNOVER OF THE ASSESSEE. AFTER CONSIDERING THE FAC TS OF THE CASE, WE DO NOT FIND ANY DIFFICULTY IN ACCEPTING TH IS CONTENTION OF THE ASSESSEE THAT AT BEST ONLY 45.51 PER CENT OF THE OPERATING PROFIT CAN BE ATTRIBUTED TO IMPORT ED RAW MATERIAL ACQUIRED FROM ASSESSEE'S ASSOCIATE CONCERN S. IN THE PRESENT CASE, THE AO HAS CALCULATED THE OPERATI NG PROFIT ON THE ENTIRE SALES OF THE ASSESSEE, WHICH I N OUR CONSIDERED OPINION, IS NOT JUSTIFIED, WHEN IT IS AD MITTED POSITION THAT ONLY 45.51 PER CENT OF RAW MATERIAL H AS BEEN ACQUIRED BY THE ASSESSEE FROM ITS ASSOCIATE CONCERN S FOR IT(TP)A NO.1548/BANG/2010 PAGE 30 OF 40 THE PURPOSE OF MANUFACTURING ITEMS. THE ASSESSEE HA S STATED THAT THE OPERATING PROFIT IF APPLIED TO 45.5 1 PER CENT OF THE TURNOVER WOULD COME TO RS. 35,52,573 AS AGAI NST OPERATING PROFIT OF RS. 24,35,175 BOOKED BY THE ASS ESSEE, AND THE DIFFERENCE THEREOF WOULD ONLY BE CALLED FOR TO BE MADE AS ADDITION TO THE PROFIT SHOWN BY THE ASSESSE E. WE, THEREFORE, DIRECT THE AO TO MODIFY THE ASSESSMENT A ND MAKE THE ADJUSTMENT ONLY TO THE EXTENT OF DIFFERENC E IN THE ARM'S LENGTH OPERATING PROFIT WITH ADJUSTED PRO FIT WITH REFERENCE TO THE 45.51 PER CENT OF THE TURNOVER, AN D NOT TO THE TOTAL TURNOVER OF THE ASSESSEE. THEREFORE, TO T HIS EXTENT, THE ADDITION MADE BY THE AO AND FURTHER CONFIRMED BY THE CIT(A) IS REDUCED. WE ORDER ACCORD INGLY.' 33. THEREFORE, THE TRANSFER PRICING ADJUSTMENT IS T O BE WORKED OUT WITH THE ALP DETERMINED FOR THE ENTERPRISE, AS A WH OLE. THEREAFTER THE TRANSFER PRICING ADJUSTMENT FOR THE ENTERPRISE AS A WHOLE SHOULD BE ALLOCATED TO THE ITA NO.1401 OF 201 0 KIRLOSKAR TOYODA TEXTILE MACHINERY P LTD BANGALORE INTERNATIO NAL TRANSACTION ON A PRO RATA BASIS IN THE RATIO OF OPE RATING EXPENSES INCURRED THROUGH INTERNATIONAL TRANSACTIONS TO THE TOTAL OPERATIONAL EXPENSES OF THE COMPANY. ONLY THIS PROP ORTION OF THE OVERALL ADJUSTMENT CAN BE ADDED AS TRANSFER PRICING ADJUSTMENT. WE DIRECT THE TPO TO COMPUTE THE TRANSFER PRICING A DJUSTMENT ALONG THESE DIRECTIONS. 8. TAKING INTO THE CONSIDERATION OF THESE FACTORS, WE ACCEPT THE FIRST FOLD OF SUBMISSION MADE BY THE LEARNED COUNSE L FOR THE ASSESSEE AND DIRECT THE ASSESSING OFFICER TO CONFIN E THE ADJUSTMENT, QUA THE PURCHASES MADE BY THE ASSESSEE FROM THE AE. TO BE MORE SPECIFIC, THE ADJUSTMENT IS TO BE MADE ONLY TO THE PURCHASES MADE FROM THE AE. HOWEVER, THIS EXERCISE BE CARRIED OUT AFTER VERIFYING THE DETAILS OF PURCHASES AVAILABLE ON PAGE NO.47 OF THE TP STUDY REPORT (EXTRACTED SUPRA). THE ASSESSING OFFICER FIRST DETE RMINE THE PURCHASE OF RAW MATERIAL AND COMPONENTS FROM THE AE AND THEN DETERMINE THE ALP HAVING REGARD TO THE MEAN PROFIT MARGIN OF COMPARABLE CASES AT 8.26%. 25. THE LEARNED DR RELIED ON THE ORDER OF THE TPO. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND ARE OF THE VIE W THAT IN THE LIGHT OF THE IT(TP)A NO.1548/BANG/2010 PAGE 31 OF 40 DECISION RENDERED IN THE CASE OF KIRLOSKAR TOYODA TEXTILE MACHINERY PVT. LTD. (SUPRA) , THE ASSESSING OFFICER SHOULD CONFINE THE ADJUSTME NT, QUA THE TRANSACTIONS BY THE ASSESSEE WITH ITS AE ALONE. TO BE MORE SPECIFIC, THE ADJUSTMENT IS TO BE MADE ONLY TO THE TRANSACTIONS W ITH THE AE. 26. GROUND NO.9(A) TO (D) RAISED BY THE ASSESSEE PR OJECT THE GRIEVANCE OF THE ASSESSEE REGARDING THE ACTION OF THE LEARNED ASSESSING OFFICER AND HONORABLE DISPUTE RESOLUTION PANEL EXCLUDING EXPENS ES INCURRED ON TRAVEL EXPENSES IN FOREIGN CURRENCY AND EXPENSES INCURRED TOWARDS COMMUNICATION EXPENSES FROM EXPORT TURNOVER ON THE GROUND THAT THESE EXPENSES ARE INCURRED IN RENDERING TECHNICAL SERVIC ES RENDERED TO CLIENTS OUTSIDE INDIA, WHILE COMPUTING DEDUCTION UNDER SECT ION 10A. IT IS THE PLEA OF THE ASSESSEE THAT AT ALL TIMES DURING THE RELEVA NT PREVIOUS YEAR, IT WAS ENGAGED IN DEVELOPMENT OF COMPUTER SOFTWARE AND NOT IN RENDERING ANY TECHNICAL SERVICES. WITHOUT PREJUDICE TO ITS CONTE NTION THAT THE AFORESAID SUMS SHOULD NOT BE EXCLUDED FROM THE EXPORT TURNOVE R WHILE COMPUTING DEDUCTION U/S.10A OF THE ACT, THE ASSESSEE HAS ALSO MADE AN ALTERNATE PRAYER THAT EXPENSES THAT ARE REDUCED FROM THE EXPO RT TURNOVER SHOULD ALSO BE REDUCED FROM THE TOTAL TURNOVER AND IN THIS REGA RD HAS PLACED RELIANCE ON THE DECISION OF THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF CIT V. TATA ELXSI LTD [2012] 349 ITR 98 (KARN) . 27. WE HAVE HEARD THE LD. COUNSEL FOR THE ASSESSEE AND THE LD. DR ON THE ISSUES RAISED IN GROUND NO.9(A) TO (D). TAKING INTO CONSIDERATION THE IT(TP)A NO.1548/BANG/2010 PAGE 32 OF 40 DECISION RENDERED BY THE HONBLE HIGH COURT OF KARN ATAKA IN THE CASE OF CIT V. TATA ELXSI LTD [2012] 349 ITR 98 (KARN) , WE ARE OF THE VIEW THAT IT WOULD BE JUST AND APPROPRIATE TO DIRECT THE ASSESSING OFFICER TO EXCLUDE EXPENSES INCURRED IN FOREIGN CURRENCY TOWAR DS TRAVELLING AND EXPENSES INCURRED TOWARDS COMMUNICATION BOTH FROM E XPORT TURNOVER AND TOTAL TURNOVER, AS HAS BEEN PRAYED FOR BY THE ASSES SEE IN GROUND NO.9(D ). IN VIEW OF THE ACCEPTANCE OF THE ALTERNATIVE PRAYER IN GROUND NO.9, WE ARE OF THE VIEW THAT NO ADJUDICATION IS REQUIRED ON GRO UND NO.9 (A) TO (C). 28. GROUND NO.10 RAISED BY THE ASSESSEE READS AS FO LLOWS: 10. NON-GRANT OF SET-OFF OF BROUGHT FORWARD BUSIN ESS LOSS AND UNABSORBED DEPRECIATION: A) THE DRP AND AO ERRED IN NOT ALLOWING A SET-OFF O F BROUGHT FORWARD BUSINESS LOSS AND UNABSORBED DEPRECIATION A GAINST THE ALLEGED INCOME. B) THE DRP ERRED IN DIRECTING THE AO TO SET-OFF OF BROUGHT FORWARD BUSINESS LOSS AND UNABSORBED DEPRECIATION B EFORE COMPUTING THE DEDUCTION UNDER SECTION 10A. 29. THE ASSESSEE FILED RETURN OF INCOME FOR AY 06-0 7 DECLARING LOSS OF RS.8,43,640/-. THE ASSESSEE HAD CLAIMED DEDUCTION U/S.10A OF THE ACT AT RS.1,51,13,126/-. THE TOTAL TURNOVER, EXPORT TURNO VER AND PROFITS OF THE BUSINESS ON THE BASIS OF WHICH THE ASSESSEE COMPUTE D DEDUCTION U/S.10A WAS TOTAL TURNOVER OF RS.3,43,60,420, EXPORT TURNOV ER OF RS.3,43,60,420 AND PROFITS OF THE BUSINESS OF RS.3,01,66,703/-. T HE AO EXCLUDED TRAVELLING EXPENSES AND COMMUNICATION EXPENSES FROM THE EXPORT TURNOVER AND IT(TP)A NO.1548/BANG/2010 PAGE 33 OF 40 ADOPTED EXPORT TURNOVER AT RS.3,01,66,703/-. BY DO ING SO, THE AO ALLOWED DEDUCTION U/S.10A OF THE ACT ONLY AT RS.1,32,68,557 /-. WHILE DECIDING GR.NO.9 WE HAVE ALREADY HELD THAT WHATEVER IS EXCLU DED FROM THE EXPORT TURNOVER SHOULD ALSO BE EXCLUDED FROM THE TOTAL TUR NOVER WHILE COMPUTING DEDUCTION U/S.10A OF THE ACT. WE HAVE ALSO SEEN TH AT THE TPO SUGGESTED AN UPWARD REVISION OF THE ALP OF THE INTERNATIONAL TRANSACTION AS A RESULT OF WHICH A SUM OF RS.2,49,98,778 HAD TO BE ADDED TO TH E TOTAL INCOME OF THE ASSESSEE. WE HAVE ALSO ADJUDICATED ON THE SAID ADJ USTMENT IN THE OTHER GROUNDS OF APPEAL DEALT WITH IN THE EARLIER PART OF THIS ORDER. THE RESULTANT COMPUTATION OF TOTAL INCOME BY THE AO IN THE ORDER OF ASSESSMENT WAS AS FOLLOWS: TOTAL LOSS AS PER RETURN OF INCOME RS. 8,43,6 40 ADD: ON ACCOUNT OF RECOMPUTED 10A RESULTANT DISALLOWANCE OF INELIGIBLE 10A CLAIM AS DISCUSSED ABOVE RS. 18,44,569 ADD: DIFFERENCE ON ACCOUNT OF ALP SUGGESTED BY THE TPO AND SUBSEQUENTLY REWORKED IN ACCORDANCE WITH THE DIRECTIONS OF DRP RS.2,49,98 ,778 TAXABLE INCOME FROM BUSINESS RS.2,59,99,707 ADD: INCOME FROM HOUSE PROPERTY RS. 51,9 66 ADD: INCOME FROM OTHER SOURCES (DIVIDEND RECEIVED FROM FOREIGN COMPANY) RS. 96,60,230 TOTAL ASSESSED INCOME RS. 3,57,11,933 28. AS ON THE FIRST DAY OF THE PREVIOUS YEAR RELEV ANT TO AY 06-07, THE ASSESSEE HAD THE FOLLOWING UNABSORBED DEPRECIATION AND BROUGHT FORWARD LOSS:- IT(TP)A NO.1548/BANG/2010 PAGE 34 OF 40 BUSINESS LOSS RS.8,39,67,017 UNABSORBED DEPRECIATION RS.3,22,16,422 CAPITAL LOSS RS.40,87,032 THE AO DID NOT ALLOW SET OFF OF ANY OF THE ABOVE LO SS EITHER AGAINST INCOME FROM BUSINESS OF SEC.10A UNIT OR OTHER BUSINESS INC OME NOR AGAINST INCOME FROM HOUSE PROPERTY OR INCOME FROM OTHER SOURCES. 30. BEFORE DRP THE ASSESSEE RAISED OBJECTION (OBJEC TION NO.28) WHEREIN THE ASSESSEE PLEADED (I) ALLOWING SETTING O FF THE BROUGHT FORWARD LOSS/UNABSORBED DEPRECIATION AGAINST ADDITION MADE CONSEQUENT TO TRANSFER PRICING ADJUSTMENT OF RS.2,49,98,778 AND BRINGING TO TAX INCOME FROM SEC.10A UNIT WHICH WAS HELD TO BE TAXA BLE CONSEQUENT TO REWORKING OF DEDUCTION U/S.10A OF THE ACT AT RS.10, 00,929/-. (II) ALLOWING SETTING OFF OF UNABSORBED DEPRECIATION AGAINST DIVI DEND INCOME FROM RECEIVED FROM FOREIGN SUBSIDIARY OF RS.96,60,230 AN D INCOME FROM HOUSE PROPERTY AMOUNTING TO RS.51,996/-. 31. THE DRP DID NOT ACCEPT THE AFORESAID CLAIM OF T HE ASSESSEE BY HOLDING THAT SEC.10A IS A DEDUCTION PROVISION AND T HEREFORE DEDUCTION U/S.10A HAD TO BE COMPUTED AFTER SETTING OFF OF BRO UGHT FORWARD LOSSES/UNABSORBED DEPRECIATION RELATING TO EARLIER ASSESSMENT YEARS AGAINST PROFITS OF THE ELIGIBLE UNIT. IN HOLDING A S ABOVE, THE DRP FOLLOWED THE DECISION OF THE HONBLE ITAT BANGALORE BENCH IN THE CASE OF INTELLINET TECHNOLOGIES PVT. LTD. ITA NO.1021/BANG/2009 DATED IT(TP)A NO.1548/BANG/2010 PAGE 35 OF 40 12.3.2010 . AS A RESULT, THE DEDUCTION U/S.10A OF THE ACT WO ULD STAND FULLY WITHDRAWN. ADDED TO THAT THE INCOME DECLARED BY TH E ASSESSEE UNDER THE HEAD INCOME FROM OTHER SOURCES (DIVIDEND FROM FOREI GN COMPANY) AND INCOME FROM HOUSE PROPERTY WOULD ALSO GET TAXED. 32. AGGRIEVED BY THE AFORESAID DIRECTIONS OF THE DR P, THE ASSESSEE HAS RAISED GROUND NO.10 BEFORE THE TRIBUNAL, WHICH WE H AVE SET OUT EARLIER. WE HAVE HEARD THE SUBMISSIONS OF THE LEARNED AR WHO PLACED RELIANCE ON THE DECISION RENDERED BY THE BANGALORE BENCH OF ITA T IN THE CASE OF KARLE INTERNATIONAL (P) LTD. VS. ACIT ITA NO.381/BANG/2012 ORDER DATED 12.10.2012 WHEREIN THIS TRIBUNAL HELD THAT PROVISIONS OF SEC.1 0A ARE NOT DEDUCTION PROVISIONS AND THEY ARE EXEMPTION PROVISI ONS. IN DOING SO THE TRIBUNAL FOLLOWED THE DECISION OF THE HONBLE KARNA TAKA HIGH COURT IN THE CASE OF CIT VS. YOKOGAWA INDIA LTD. ITA NO.78/2011 . IN THE CASE OF YOKOGAWA INDIA LTD. (SUPRA) , THE HIGH COURT HAD TO CONSIDER TWO ISSUES FOR AY 2001-02 & ONWARDS AS TO WHETHER, (I) THE LOSS INCURRED BY A NON-ELIGIBLE UNIT & (II) THE BROUGHT FORWARD UNABSORBED LOSS & UNABSOR BED DEPRECIATION OF THE ELIGIBLE UNIT HAS TO BE SET-OFF AGAINST THE PRO FITS OF THE ELIGIBLE UNIT BEFORE ALLOWING DEDUCTION U/S 10A/ 10B. HELD, ANSWERING BOTH QUESTIONS IN FAVOUR OF THE ASS ESSEE:- IT(TP)A NO.1548/BANG/2010 PAGE 36 OF 40 (A) ON ISSUE (I), S. 10A WAS AMENDED BY THE FA 200 0 W.E.F. 1.4.2001 TO CONVERT IT FROM AN EXEMPTION PROVISION TO A DEDU CTION PROVISION. S. 10A ALLOWS DEDUCTION FROM THE TOTAL INCOME. THE P HRASE TOTAL INCOME IN S. 10A MEANS THE TOTAL INCOME OF THE ST P UNIT AND NOT TOTAL INCOME OF THE ASSESSEE. CONSEQUENTLY, S. 10 A DEDUCTION HAS TO BE GIVEN BEFORE COMPUTING THE PROFITS & GAINS O F BUSINESS UNDER CHAPTER IV. THIS PROPOSITION IS IN LINE WITH THE FO RM OF RETURN. ALLOWING DEDUCTION AT THE EARLIEST STAGE OF BUSINESS INCOME COMPUTATION WILL BLUR THE DIFFERENCE BETWEEN COMMERCIAL PROFITS AN D TAX PROFITS. FURTHER, THOUGH S. 10A WAS AMENDED TO MAKE IT A DE DUCTION PROVISION, IT CONTINUES TO REMAIN IN CHAPTER III AN D WAS NOT MOVED TO CHAPTER VI-A. THE RESULT IS THAT EVEN NOW S. 10A IS IN THE NATURE OF AN EXEMPTION PROVISION AND THE PROFITS OF THE ELI GIBLE UNIT HAVE TO BE DEDUCTED AT SOURCE LEVEL AND DO NOT ENTER INTO THE COMPUTATION OF INCOME. CONSEQUENTLY, THE LOSSES SUFFERED BY NON-EL IGIBLE UNITS CANNOT BE SET-OFF AGAINST THE ELIGIBLE PROFITS; (B) ON ISSUE (II), S. 10A(6) AS AMENDED BY THE FA 2003 W.R.E.F. 1.4.2001 PROVIDES THAT DEPRECIATION AND BUSINESS LOSS OF THE ELIGIBLE UNIT RELATING TO THE AY 2001-02 & ONWARDS IS ELIGIBLE FO R SET-OFF & CARRY FORWARD FOR SET-OFF AGAINST INCOME POST TAX HOLIDAY . THIS AMENDMENT DOES NOT MILITATE AGAINST THE PROPOSITION THAT THE BENEFIT OF RELIEF U/S 10A IS IN THE NATURE OF EXEMPTION WITH REFERENCE TO COMMERCIAL PROFITS. HOWEVER, TO GIVE EFFECT TO THE LEGISLATIVE INTENTION OF ALLOWING IT(TP)A NO.1548/BANG/2010 PAGE 37 OF 40 THE CARRY FORWARD OF DEPRECIATION AND LOSS SUFFERED IN RESPECT OF ANY YEAR DURING THE TAX HOLIDAY FOR BEING SET OFF AGAIN ST INCOME POST TAX HOLIDAY, IT IS NECESSARY THAT A NOTIONAL COMPUTATIO N OF BUSINESS INCOME AND THE DEPRECIATION SHOULD BE MADE FOR EACH YEAR OF THE TAX HOLIDAY PERIOD. SUCH LOSS IS ELIGIBLE TO BE CARRIED FORWARD. BUT, AS THE INCOME OF THE 10A UNIT HAS TO BE EXCLUDED AT SOURCE ITSELF BEFORE ARRIVING AT THE GROSS TOTAL INCOME, THE QUESTION OF SETTING OFF THE LOSS OF THE CURRENT YEARS OR THE BROUGHT FORWARD BUSINE SS LOSS (AND UNABSORBED DEPRECIATION) AGAINST THE S. 10A PROFITS DOES NOT ARISE. 33. THE SUBMISSION OF THE LEARNED COUNSEL FOR THE A SSESSEE WAS THAT IN VIEW OF THE DECISION OF THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF YOKOGAWA (SUPRA) , THE DIRECTIONS OF THE DRP WHICH ARE BASED ON A DECISION RENDERED BY ITAT PRIOR TO THE DECISION OF THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF YOKOGAWA (SUPRA) , IS NOT VALID. THE LEARNED DR RELIED ON THE ORDER OF THE DRP. 34. IT WAS POINTED OUT BY THE BENCH THAT IN VIEW OF THE PROVISIONS OF SEC.92C(4) PROVISO, THE ASSESSEE WOULD NOT BE ENTIT LED TO DEDUCTION U/S.10A OF THE ACT ON THE AMOUNT ADDED TO TOTAL INC OME. THE SAME READS THUS: (4) WHERE AN ARMS LENGTH PRICE IS DETERMINED BY T HE ASSESSING OFFICER UNDER SUB-SECTION (3), THE ASSESSING OFFICE R MAY COMPUTE IT(TP)A NO.1548/BANG/2010 PAGE 38 OF 40 THE TOTAL INCOME OF THE ASSESSEE HAVING REGARD TO T HE ARMS LENGTH PRICE SO DETERMINED : PROVIDED THAT NO DEDUCTION UNDER SECTION 10A OR SECTION 10AA OR SECTION 10B OR UNDER CHAPTER VI-A SHALL BE ALLOWED IN RESPECT OF THE AMOUNT OF INCOME BY WHICH THE TOTAL INCOME OF THE ASSESSEE IS ENHANCED AFTER COMPUTATION OF INCOME UN DER THIS SUB- SECTION : 35. THE LEARNED COUNSEL FOR THE ASSESSEE FAIRLY CON CEDED THAT THE ADDITION TO TOTAL INCOME BY WAY OF ADJUSTMENT TO TH E ALP OF INTERNATIONAL TRANSACTION WILL NOT BE ENTITLED TO DEDUCTION U/S.1 0A OF THE ACT. HE HOWEVER SUBMITTED THAT IF THE BROUGHT FORWARD BUSINESS LOSS RELATES TO NON-10A UNITS THE LOSS SHOULD BE SET OFF IN ACCORDANCE WITH THE P ROVISIONS OF SEC.72 OF THE ACT. HE ALSO SUBMITTED THAT IF THE CARRIED FORWARD LOSS CONTAINS ANY LOSS OF 10A UNIT, TO THAT EXTENT THE ASSESSEE WOULD NOT BE ENTITLED TO SET OFF AGAINST ANY OTHER INCOME SINCE THE PROFIT OR LOSS OF SEC.10 A UNIT DURING THE TAX HOLIDAY PERIOD IS QUARANTINED AND CARRIED FORWARD T O THE ASSESSMENT YEARS IMMEDIATELY FOLLOWING THE LAST OF THE ASSESSMENT YE ARS FOR WHICH THE ASSESSEE IS ENTITLED TO CLAIM EXEMPTION U/S.10A, FO R BEING SET OFF IN ACCORDANCE WITH LAW AS IF IT WERE ANY OTHER LOSS TO BE DEALT WITH IN ACCORDANCE WITH SEC.70 TO 72 AND 32(2) OF THE ACT. 36. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. THE LEGAL POSITION THAT EMANATES FROM THE DECISIONS REFERRED TO ABOVE CAN B E SUMMED UP THUS:- (I) THE CARRIED FORWARD BUSINESS LOSS OF SEC.10A UNIT CANNOT BE SET OFF OR CARRIED FORWARD DURING THE TAX HOLIDAY PERIOD AG AINST ANY INCOME. IT(TP)A NO.1548/BANG/2010 PAGE 39 OF 40 (II) THE CARRIED FORWARD BUSINESS LOSS TO THE EXT ENT IT PERTAINS TO NON- 10A UNIT CAN BE SET OFF AGAINST INCOME OF NON-10A U NIT. (III) SEC.10A IS AN EXEMPTION PROVISION AND THEREF ORE WILL NOT ENTER THE COMPUTATION OF TOTAL INCOME AND THEREFORE THERE IS NO QUESTION OF ANY CARRIED FORWARD LOSS BEING SET OFF AGAINST THE PROFITS ELIGIBLE FOR DEDUCTION U/S.10A OF THE ACT; AND (IV) THE PROFIT OR LOSS OF SEC.10A UNIT DURING THE TAX HOLIDAY PERIOD IS QUARANTINED AND LOSS IF ANY IS CARRIED FORWARD TO T HE ASSESSMENT YEARS IMMEDIATELY FOLLOWING THE LAST OF THE ASSESSM ENT YEARS FOR WHICH THE ASSESSEE IS ENTITLED TO CLAIM EXEMPTION U /S.10A, FOR BEING SET OFF IN ACCORDANCE WITH LAW AS IF IT WERE ANY OT HER LOSS TO BE DEALT WITH IN ACCORDANCE WITH SEC.70 TO 72 AND 32(2) OF T HE ACT. 37. WE ARE ALSO OF THE VIEW THAT THE DRPS ORDER/DI RECTIONS ON THIS ISSUE BASED ON A TRIBUNAL DECISION RENDERED PRIOR TO THE DECISION OF THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF YOKOGAWA (SUPRA) CANNOT BE SUSTAINED. WE DIRECT THE AO TO DECIDE THE CLAIM OF THE ASSESSEE IN THE LIGHT OF THE LEGAL POSITION SET OUT IN THE EARLIER PARA OF THIS ORDER AFTER ANALYZING THE FACTUAL POSITION PREVAILING IN THE PR ESENT CASE. THE AO WILL AFFORD OPPORTUNITY OF BEING HEARD TO THE ASSESSEE B EFORE DECIDING THE ISSUE. THUS GROUND NO.10 IS TREATED AS ALLOWED TO T HE EXTENT INDICATED ABOVE. IT(TP)A NO.1548/BANG/2010 PAGE 40 OF 40 38. IN THE RESULT, APPEAL BY THE ASSESSEE IS PARTLY ALLOWED. PRONOUNCED IN THE OPEN COURT ON THIS 9 TH DAY OF JANUARY, 2015. SD/- SD/- ( JASON P. BOAZ ) ( N.V. VASUDEVA N ) ACCOUNTANT MEMBER JUDICIAL MEM BER ENCL: ANNEXURE-I BANGALORE, DATED, THE 9 TH JANUARY, 2015. /D S/ COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR / SENIOR PRIVATE SECRETARY ITAT, BANGALORE.