ACIT., Circle-16(2), Hyderabad, Hyderabad V. M/s Mindspeed Technologies Limited, Hyderabad

ITA 1600/HYD/2014

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 2369 (ITAT-HYDERABAD)
• Duration Of Justice: 3 year(s) 1 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-12-2017
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 13-06-2017
• Assessment Year: 2009-2010
• Appeal Filed On: 16-10-2014
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: DR SIBENDU MOHARANA
• Keywords: Transfer pricing; International transaction; Additional evidence; Competent authority; Revenue expenditure
• Section: 43B; 143(3); 139

Judgement Text

THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH A, HYDERABAD BEFORE SMT P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER ITA NO.1600/HYD/2014 ASSESSMENT YEAR: 2009-10 THE ASST COMMISSIONER OF INCOME TAX, CIRCLE-16(2), HYDERABAD. VS. M/S MINDSPEED TECHNOLOGIES LTD., HYDERABAD. PAN AAEXCM7105P (APPELLANT) (RESPONDENT) REVENUE BY : DR. SIBENDU MOHARANA ASSESSEE BY : SHRI CHAVALI NARAYAN DATE OF HEARING : 10-10-2017 DATE OF PRONOUNCEMENT : 08-12-2017 ORDER PER P. MADHAVI DEVI, J.M.: THIS APPEAL IS FILED BY THE REVENUE AGAINST THE ORDER PASSED BY CIT(A)-V, HYDERABAD, DATED 30-05-2014. 2. BRIEF FACTS OF THE CASE ARE THAT, THE ASSESSEE COMPANY, WHICH IS ENGAGED IN THE BUSINESS OF COMPUTER SOFTWARE DEVELOPMENT AND I.T ENABLED SERVICES, FILED ITS RETURN OF INCOME FOR THE A.Y 2010-11 ON 21-03-2011, ADMITTING THE TOTAL INCOME OF RS. 3,987/- AFTER CLAIMING DEDUCTION U/S 10A AMOUNTING TO RS. 71,57,277/-. 3. DURING THE ASSESSMENT PROCEEDINGS U/S 143(3) OF THE IT ACT, THE A.O DISALLOWED THE CLAIM OF EXPENDITURE OF RS. 2 ITA NO. 1600/HYD/2014 M/S MINDSPEED TECHNOLOGIES LTD., HYDERABAD. 12,80,470/- INCURRED ON ACCOUNT OF ESOP SCHEME, HOLDING IT TO BE CONTINGENT EXPENDITURE AND NOTIONAL IN NATURE. HE HELD THAT THE NOTIONAL LOSS, IF ANY, IS TO BE WRITTEN OFF ONLY AGAINST THE SHARE PREMIUM ACCOUNT, AND IS NOT ALLOWABLE AS REVENUE EXPENDITURE. FURTHER, THE A.O ALSO MADE A DISALLOWANCE OF EMPLOYEES CONTRIBUTION TO PF U/S 36(1)(VA) R.W.S 2(24)(X) OF THE IT ACT, ON THE GROUND THAT THE ASSESSEE HAS NOT REMITTED IT TO THE GOVERNMENT ACCOUNT WITHIN THE DUE DATE GIVEN IN THE RELEVANT ACT. AS REGARDS THE INTERNATIONAL TRANSACTION ENTERED INTO BY THE ASSESSEE WITH ITS AE, THE A.O REQUIRED THE ASSESSEE TO PRODUCE THE RELEVANT TRANSFER PRICING DOCUMENT. SINCE, THE ASSESSEE COMPANY FAILED TO SUBMIT THE DOCUMENTATION, THE A.O CONSIDERED THE DATA OF THE ASSESSEE PERTAINING TO F.Y 2009- 10 AND SELECTED SIX COMPANIES AS COMPARABLE TO THE ASSESSEE. HE ARRIVED THAT THE ARITHMETIC MEAN OF THE COMPARABLE COMPANIES AT 31.82% AS AGAINST 10.16% MARGIN OF THE ASSESSEE. HE THEREFORE, MADE THE ADDITION OF RS. 1,65,93,343/- AS AN ADJUSTMENT TOWARDS ALP. THEREAFTER, HE ALSO CONSIDERED THE ASSESSEES CLAIM OF DEDUCTION U/S 10A OF THE IT ACT. HE REQUESTED THE ASSESSEE TO PRODUCE THE FORM NO. 56F, DULY CERTIFIED BY THE 3 ITA NO. 1600/HYD/2014 M/S MINDSPEED TECHNOLOGIES LTD., HYDERABAD. STATUTORY AUDITORS CERTIFYING THE ASSESSEES CLAIM OF DEDUCTION U/S 10A OF THE IT ACT. SINCE, THE ASSESSEE FAILED TO SUBMIT THE SAME, HE DISALLOWED THE SAME U/S 10A OF THE IT ACT, AND BROUGHT IT TO TAX. ACCORDINGLY, HE RAISED A NET DEMAND OF RS. 1,05,39,250/-, AGAINST WHICH THE ASSESSEE PREFERRED AN APPEAL BEFORE THE CIT(A), WHO ALLOWED THE SAME. 4. AGAINST THE RELIEF GRANTED BY CIT(A), THE REVENUE IS IN APPEAL BEFORE US, BY RAISING THE FOLLOWING GROUNDS OF APPEAL: 1. THE ORDER OF THE CIT(A) IS ERRONEOUS IN LAW AND ON FACTS OF THE CASE. 2. THE CIT(A) OUGHT TO HAVE APPRECIATED THE ADDITIONAL OF EXPENDITURE ON ACCOUNT OF EMPLOYEE STOCK OPTION SCHEME BEING CAPITAL IN NATURE. 3. THE CIT(A) OUGHT TO HAVE APPRECIATED THE ADDITION TOWARDS EMPLOYEES CONTRIBUTION TO PF IN VIEW OF THE CIT VS. UDAIPUR DISTILLERY CO. LTD TAXMAN 201(RAJ). 4. THE CIT(A) OUGHT TO HAVE ALLOWED ADDITION WITH RESPECT TO ARMS LENGTH PRICE IN INTERNATIONAL TRANSACTION AS THE ASSESSING OFFICER HAS SELECTED THE APPROPRIATE COMPARABLE COMPANIES AS TURNOVER FILTERS. 5. THE CIT(A) OUGHT TO HAVE ALLOWED DISALLOWANCE OF CLAIM OF DEDUCTION U/S 10A INSTEAD OF CONDONING THE DELAY IN FILING OF FORM NO. 56F. 6. ANY OTHER GROUND(S) THAT MAY BE URGED AT THE TIME OF HEARING. 4 ITA NO. 1600/HYD/2014 M/S MINDSPEED TECHNOLOGIES LTD., HYDERABAD. 5. FURTHER, VIDE LETTER DATED 20-02-2017, ASSESSEE FILED ADDITIONAL EVIDENCE IN SUPPORT OF RELIEF GRANTED BY THE CIT(A) FOR ALLOWING THE DEDUCTION U/S 10(A) OF THE IT ACT. WE SHALL CONSIDER THE ADMISSION OF THE EVIDENCE AT THE TIME OF DEALING WITH GROUND OF APPEAL NO. 5. 6. GROUNDS OF APPEAL NOS. 1 AND 6 ARE GENERAL IN NATURE AND NEED NO ADJUDICATION. 7. AS REGARDS GROUND NO. 2, WE FIND THAT THIS ISSUE IS NOW COVERED IN FAVOR OF THE ASSESSEE BY THE DECISION OF THE SPECIAL BENCH OF THE TRIBUBAL AT BANGALURU IN THE CASE OF BIOCON LTD., VS. DCIT REPORTED IN [2013] 35 TAXMAN.COM 335 WHEREIN THE EXPENDITURE INCURRED ON ESOP HAS BEEN HELD TO BE REVENUE IN NATURE, AND THE CIT(A) HAS FOLLOWED THE SAID DECISION TO GRANT RELIEF TO THE ASSESSEE. THEREFORE, WE SEE NO REASON TO INTERFERE WITH THE ORDER OF THE CIT(A) THE GROUND NO. 2 IS REJECTED. 8. AS REGARDS GROUND NO. 3, WITH REGARD TO THE DISALLOWANCE OF EMPLOYEES CONTRIBUTION TO PF U/S 36(1)(VA) R.W.S 2(24)(X) OF THE IT ACT, WE FIND THAT THE LD. DR HAD RELIED UPON THE DECISIONS OF THE HONBLE GUJARAT HIGH COURT IN THE CASE OF GUJARAT STATE ROAD TRANSPORT 5 ITA NO. 1600/HYD/2014 M/S MINDSPEED TECHNOLOGIES LTD., HYDERABAD. CORPORATION, REPORTED IN 41 TAXMANN.COM 100 AND ALSO THE DECISION OF THE HONBLE KERALA HIGH COURT IN THE CASE OF MERCHEM LTD., REPORTED IN 280 CTR 0381 KERALA. 8.1 ON THE OTHER HAND, THE LD. COUNSEL FOR THE ASSESSEE RELIED UPON THE VARIOUS DECISIONS OF THIS TRIBUNAL AND ALSO THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF CIV VS M/S ALOM EXTRUSIONS LTD, REPORTED IN 319 ITR 306, TO SUPPORT HIS CONTENTIONS THAT THE BOTH EMPLOYEE AND EMPLOYEES CONTRIBUTION IS ALLOWABLE U/S 43B AS WELL AS 36(1)(VA) OF THE IT ACT, IF IT IS PAID BEFORE THE DATE OF FILING OF THE APPEAL. HE ALSO RELIED UPON THE FOLLOWING OTHER DECISIONS: 1. TETRA SOFT (INDIA) (P) LTD VS. ACIT (2015) [61 TAXMANN.COM 299 (HYD-TRIB)] 2. VIVIMED LABS LTD. VS. DCIT (2002) [ITA NO. 211/HYD/2010]. 3. CIT VS SABARI ENTERPRISES (2008 298 ITR 141 KAR. 4. PRITHVI INFORMATION SOLUTIONS LTD. VS ACIT (2014) [34 ITR ( TRIB) 429] (HYD). 8.2 HAVING REGARD TO THE RIVAL CONTENTIONS, WE FIND THAT UNDISPUTEDLY, THE EMPLOYEES CONTRIBUTION TO PF HAS BEEN PAID WITH THE DELAY OF TEN DAYS ONLY, BUT BEFORE THE DUE DATE OF FILING OF THE RETURN. IN A NUMBER OF CASES, THIS BENCH OF THE TRIBUNAL HAS CONSIDERED ALL THE DECISIONS 6 ITA NO. 1600/HYD/2014 M/S MINDSPEED TECHNOLOGIES LTD., HYDERABAD. RELEVANT TO THE ISSUE, BOTH U/S 43B AS WELL AS 36(1)(VA) R.W.S 2(24)(X) OF THE ACT, INCLUDING THE DECISIONS RELIED UPON BY THE LD. DR, AND HAS HELD THAT BOTH THE CONTRIBUTIONS ARE ALLOWABLE IF THEY ARE PAID BEFORE THE DUE DATE OF FILING OF THE RETURN OF INCOME U/S 139(1) OF THE ACT FOR THE SAKE OF READY REFERENCE, THE DECISION IN THE CASE OF M/S NAGARJUNA ENGINEERING CONSTRUCTIONS VS. ACIT IN ITA NO. 766/HYD/2017 HAS HELD AS UNDER: 2. BRIEF FACTS OF THE CASE ARE THAT DURING THE COURSE OF ASSESSMENT PROCEEDINGS U/S 143(3) OF THE ACT, THE AO NOTICED THAT THE EMPLOYEES CONTRIBUTION TO PF OF RS.43,01,134 AND ESI OF RS.45,000 WAS PAID BEYOND THE PRESCRIBED DUE DATE BUT THE ASSESSEE HAS NOT ADDED BACK THE SAME TO THE TOTAL INCOME IN ITS COMPUTATION OF INCOME. THE ASSESSEES EXPLANATION AS TO WHY DISALLOWANCE SHOULD NOT BE MADE WAS CALLED FOR. ASSESSEE RELIED UPON VARIOUS CASE LAW IN SUPPORT OF HIS CLAIM THAT IF IT IS PAID BEFORE THE DUE DATE OF FILING OF THE RETURN U/S 139(1) OF THE ACT, IT SHOULD BE ALLOWED. THE AO WAS NOT CONVINCED WITH THE CONTENTION OF THE ASSESSEE. HE OBSERVED THAT THERE ARE DIFFERENT DUE DATES FOR PAYING ESIC AND PF AND THEREFORE, AS PER THE AMENDED PROVISO TO SECTION 43B R.W.S. 36(1)(VA), THE SAME IS NOT ALLOWABLE AS EXPENSE. FURTHER, HE ALSO OBSERVED THAT U/S 2(24)(X) OF THE ACT, IF ANY SUM IS RECEIVED BY THE ASSESSEE FROM HIS EMPLOYEES AS CONTRIBUTION TO ANY PROVIDENT FUND OR SUPERANNUATION FUND OR ANY FUND SET UP UNDER THE PROVISIONS OF EMPLOYEES STATE INSURANCE ACT, OR ANY OTHER FUND FOR WELFARE OF SUCH EMPLOYEE IS TREATED AS INCOME IN HIS HANDS, IT IS ALLOWABLE AS AN EXPENDITURE ONLY IF IT IS PAID INTO THE GOVT. A/C ON OR BEFORE THE DUE DATE PRESCRIBED UNDER THE RELEVANT ACT. ACCORDINGLY, HE DISALLOWED THE EMPLOYEES CONTRIBUTION TO THE PF & ESIC AND BROUGHT IT TO TAX. 3. AGGRIEVED, THE ASSESSEE PREFERRED AN APPEAL BEFORE THE CIT (A) BY RELYING UPON THE DECISION OF THE HON'BLE ANDHRA PRADESH HIGH COURT IN THE CASE OF HITECH(INDIA) PVT. LTD AND OTHERS VS. UOI, REPORTED IN (1997) 227 ITR 446 AND ALSO THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF CIT VS.VINAY CEMENT LTD (2009) 313 ITR (ST.). THE CIT (A) HOWEVER, WAS NOT CONVINCED WITH THE ARGUMENTS OF THE ASSESSEE AND HELD THAT THE DECISIONS RELIED UPON BY THE ASSESSEE ARE NOT APPLICABLE TO 7 ITA NO. 1600/HYD/2014 M/S MINDSPEED TECHNOLOGIES LTD., HYDERABAD. THE ASSESSEES CASE. SHE RELIED UPON THE DECISION OF THE HON'BLE KERALA HIGH COURT IN THE CASE OF CIT VS. MERCHEM LTD REPORTED IN (2015) 378 ITR 0443 WHICH HAS DISTINGUISHED THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF ALOM EXTRUSIONS FOR ARRIVING AT A CONCLUSION THAT THE EMPLOYEES CONTRIBUTION IS NOT ALLOWABLE IF IT IS NOT PAID WITHIN THE PRESCRIBED DUE DATE. SHE ALSO RELIED UPON THE DECISION OF THE HON'BLE GUJARAT HIGH COURT IN THE CASE OF CIT VS. GUJARAT STATE ROAD TRANSPORT CORPORATION (2014) 57(I)ITCL 72 (GUJ. HIGH COURT). THEREFORE, SHE CONFIRMED THE DISALLOWANCE AND THE ASSESSEE IS IN SECOND APPEAL BEFORE US. 4. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT BOTH THE EMPLOYEES AND EMPLOYERS CONTRIBUTION IS TO BE REMITTED TO THE GOVT. A/C WITHIN THE PRESCRIBED DATE OR BEFORE THE DUE DATE FOR FILING OF THE RETURN U/S 139(1) OF THE ACT. HE SUBMITTED THAT THE HON'BLE SUPREME COURT IN THE CASE OF ALOM EXTRUSIONS HAS HELD THAT BOTH THE EMPLOYERS AS WELL AS EMPLOYEES CONTRIBUTION WHICH IS PAID BEFORE THE DUE DATE OF FILING OF RETURN U/S 139 (1) IS ALLOWABLE U/S 43B OF THE ACT. HE ALSO RELIED UPON THE JUDGMENT OF THE HON'BLE ANDHRA PRADESH HIGH COURT IN THE CASE OF HITECH(INDIA) (P) LTD (CITED SUPRA) WHEREIN THE CONSTITUTIONAL VALIDITY OF SECTION 43B AND EXPLANATION TO CLAUSE (VA) OF SUBSECTION (1) OF SECTION 36 WERE UNDER CONSIDERATION AND THE HON'BLE HIGH COURT HAS BROUGHT OUT THAT PARA MATERIA BOTH THE SECTIONS ARE HAVING THE SAME EFFECT AND ARE NOT UNCONSTITUTIONAL. FURTHER, HE ALSO PLACED RELIANCE UPON THE DECISION OF THE COORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF ACIT VS. TANLA SOLUTIONS LTD (ITA NO.879/HYD/2015) AND THE DECISION OF THE COORDINATE BENCH AT VISAKHAPATNAM IN THE CASE OF DCIT VS. EASTERN POWER DISTRIBUTION COMPANY OF A.P. LTD (ITA NO.609/VIZAG/2014). 5. THE LEARNED DR, ON THE OTHER HAND, SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW AND TRIED TO BRING OUT THE DISTINCTION BETWEEN THE PROVISO TO SECTION 43B AND SECTION 36(1)(VA) OF THE ACT. HE ALSO RELIED UPON THE JUDGMENT OF THE HON'BLE GUJARAT HIGH COURT REFERRED TO BY THE CIT (A) IN HER ORDER. 6. HAVING REGARD TO THE RIVAL CONTENTIONS AND THE MATERIAL ON RECORD, WE FIND THAT AS REGARDS THE ALLOWABILITY OF DEDUCTION U/S 43B OF THE ACT OF EMPLOYERS CONTRIBUTION TO PF AND ESIC, THE HON'BLE SUPREME COURT HAS HELD THAT IF IT IS PAID ON OR BEFORE THE DUE DATE OF THE FILING OF THE RETURN U/S 139(1) OF THE ACT, IT IS ALLOWABLE. AS REGARDS THE APPLICABILITY OF SUCH PROVISO TO THE DISALLOWANCE MADE U/S 36(1)(VA) OF THE ACT, WE FIND THAT DECISIONS ARE BOTH AGAINST AND IN FAVOUR OF THE ASSESSEE. WE FIND THAT THE COORDINATE BENCH OF THIS TRIBUNAL AT VISAKHAPATNAM IN THE CASE OF DCIT VS. EASTERN POWER DISTRIBUTION COMPANY OF A.P. LTD (CITED SUPRA) HAS CONSIDERED ALL THE ABOVE DECISIONS REFERRED TO BY THE ASSESSEE AS WELL AS THE DR AND HAS HELD THAT THERE IS NO DISTINCTION BETWEEN THE 8 ITA NO. 1600/HYD/2014 M/S MINDSPEED TECHNOLOGIES LTD., HYDERABAD. EMPLOYEES AND EMPLOYERS CONTRIBUTION OF PF AND IF THE TOTAL CONTRIBUTION IS DEPOSITED ON OR BEFORE THE DUE DATE OF FURNISHING THE RETURN U/S 139(1) OF THE ACT, THEN NO DISALLOWANCE CAN BE MADE OF EMPLOYEES CONTRIBUTION TO PF. RESPECTFULLY FOLLOWING THE DECISION OF THE COORDINATE BENCH ON SIMILAR SET OF FACTS, THIS APPEAL OF THE ASSESSEE IS ALLOWED. 8.3 RESPECTFULLY FOLLOWING THE SAME, WE DID NOT FIND ANY REASON TO INTERFERE WITH THE ORDERS OF THE CIT(A). THIS GROUND OF APPEAL NO. 3 IS ACCORDINGLY REJECTED. 9. AS REGARDS GROUND OF APPEAL NO. 4, REGARDING THE ARMS LENGTH PRICE AND THE TRANSFER PRICING ADJUSTMENT, THEREAFTER, THOUGH THE ASSESSEE HAS NOT FILED TRANSFER PRICING DOCUMENTATION BEFORE THE A.O, WE FIND THAT THE SAME HAS FILED BEFORE THE CIT(A) AND THE CIT(A) HAS CALLED FOR A REMAND REPORT FROM THE A.O. THE A.O HAS SUBMITTED HIS REMAND REPORT ON 27-01-2014, WHICH HAS BEEN REPRODUCED AT PARA 7.2 OF CIT(A) ORDER AS UNDER: 7.2 FURTHER, THE A.O VIDE HIS REMAND REPORT DATED 27- 1-2014, HAS SUBMITTED AS UNDER: WITH REGARD TO THE COMPUTATION OF ARMS LENGTH PRICE AND UPWARD TP ADJUSTMENT AMOUNTING TO RS. 1,65,93,343, IT IS TO SUBMIT THAT THE ASSESSEE-COMPANY DURING THE COURSE OF ASST. PROCEEDINGS, HAS FAILED TO RELEVANT TRANSFER PRICING DOCUMENTATION. FURTHER, THE AO HAS COMPUTED THE NET OPERATING PROFIT MARGIN BASED ON COST (%) OF THE ASSESSEE-COMPANY AT 10.16% AND SELECTED THE COMPARABLE AFTER ADOPTION OF REQUISITE TURNOVER FILTERS AND DETERMINED THE ARITHMETIC MEAN AT 31.82%. THUS, THE ALP WAS ACCORDINGLY WORKED OUT AND UPWARD D TP ADJUSTMENT AMOUNTING TO RS. 1,65,93,343/- WAS MADE. DURING THE COURSE OF REMAND PROCEEDINGS, THE AR OF THE ASSESSEE COMPANY HAS SUBMITTED THE TRANSFER PRICING 9 ITA NO. 1600/HYD/2014 M/S MINDSPEED TECHNOLOGIES LTD., HYDERABAD. DOCUMENTATION AND SELECTED THE COMPARABLE AS SHOWN BELOW AND ARE ACCORDINGLY REASONED AND REJECTED. S.NO NAME OF THE COMPARABLE COMPANY REASON FOR REJECTION 1 M/S AOK IN-HOUSE BPO SERVICES LTD., THE COMPARABLE COMPANY TURNOVER FOR A.Y. 2009-10 & 2010-11 IS RS.28.05 & RS.37.23 CRORES WHEREAS THE ASSESSEE-COMPANY TURNOVER FOR THE A. Y.2009-10 & 2010-11 IS RS.5.63 CRORES AND RS.7.71 CRORES ONLY. THUS THERE IS HUGE DIFFERENCE IN TURNOVERS BETWEEN THE COMPARABLE SELECTED AND THE ASSESSEE COMPANY AND AS ECONOMIES OF SCALE INFLUENCES PROFITABILITY, HENCE SELECTION OF INAPPROPRIATE TURNOVER FILTER (1-50 CRORES) IS NOT ACCEPTABLE WHEREIN THE APPROPRIATE TURNOVER FILTER SHOULD BE ADOPTED AT RS.1-10 CRORES AND THUS THE SELECTED COMPARABLE FAILS TURNOVER FILTER AND ACCORDINGLY HAS TO BE REJECTED. 2 M/S ALTERNATE BRAND SOLUTIONS (INDIA) LIMITED THE BUSINESS OF THE COMPARABLE COMPANY IS PROMOTION AND OWNED-IPR EVENT MANAGEMENT WHICH IS COMPLETELY DIFFERENT FROM THE ASSESSEE COMPANY BUSINESS OF COMPUTER SOFTWARE DEVELOPMENT / IT ENABLED SERVICES. HENCE, THE COMPARABLE FAILS BASIC INDUSTRY SELECTION FILTER AND ACCORDINGLY HAS TO BE REJECTED. 3 M/S DIGICOMP COMPLETE SOLUTIONS LIMITED THE COMPARABLE COMPANY TURNOVER FOR A. Y.2009- 10 & 2010-11 IS RS.18.88 & RS.22.67 CRORES WHEREAS THE ASSESSEE-COMPANY TURNOVER FOR THE A. Y.2009-10 & 2010-11 IS RS.5.63 CRORES AND RS.7.71 CRORES ONLY. THUS THERE IS HUGE DIFFERENCE IN TURNOVERS BETWEEN THE COMPARABLE SELECTED AND THE ASSESSEE COMPANY AND AS ECONOMIES OF SCALE INFLUENCES PROFITABILITY, HENCE SELECTION OF 10 ITA NO. 1600/HYD/2014 M/S MINDSPEED TECHNOLOGIES LTD., HYDERABAD. INAPPROPRIATE TURNOVER FILTER (1-50 CRORES) IS NOT ACCEPTABLE WHEREIN THE APPROPRIATE TURNOVER FILTER SHOULD BE ADOPTED AT RS.1-10 CRORES AND THUS THE SELECTED COMPARABLE FAILS TURNOVER FILTER AND ACCORDINGLY HAS TO BE REJECTED. 4 M/S ETH LIMITED THE COMPARABLE COMPANY TURNOVER FOR A. Y.2009- 10 & 2010-11 IS RS.15.06 & RS.7.57 CRORES WHEREAS THE ASSESSEE-COMPANY TURNOVER FOR THE A. Y.2009-10 & 2010-11 IS RS.5.63 CRORES AND RS.7.71 CRORES ONLY. FURTHER, THE BUSINESS OF COMPARABLE COMPANY IS SOFTWARE CONSULTANCY, TRAINING AND DIGITAL CAMPUS IN EDUCATION DOMAIN WHICH IS DIFFERENT FROM THE ASSESSEE COMPANY BUSINESS OF COMPUTER SOFTWARE DEVELOPMENT / IT ENABLED SERVICES. THUS, THE COMPARABLE FAILS ON ACCOUNT OF INAPPROPRIATE SELECTION AND APPLICATION OF TURNOVER FILTER AND BASIC INDUSTRY SELECTION FILTER. 5 M/S FORTUNE INFOTECH LIMITED ACCEPTED SINCE IT FITS BOTH TURNOVER FILTER AND D BASIC INDUSTRY SELECTION FILTE . 6 M/S INFO-DRIVE SOFTWARE LIMITED THE COMPARABLE COMPANY TURNOVER FOR A. Y.2009- 10 & 2010-11 IS RS.20.61 & RS.21.39 CRORES WHEREAS THE ASSESSEE-COMPANY TURNOVER FOR THE A. Y.2009-10 & 2010-11 IS RS.5.63 CRORES AND RS. 7. 71 CRORES ONLY. THUS, THERE IS HUGE DIFFERENCE IN TURNOVERS BETWEEN THE COMPARABLE SELECTED AND THE ASSESSEE COMPANY AND AS ECONOMIES OF SCALE INFLUENCES PROFITABILITY, HENCE SELECTION OF INAPPROPRIATE TURNOVER FILTER (1-50 CRORES) IS NOT ACCEPTABLE WHEREIN THE APPROPRIATE TURNOVER FILTER SHOULD BE ADOPTED AT RS.1-10 CRORES AND THUS THE SELECTED COMPARABLE FALLS TURNOVER FILTER AND ACCORDINGLY HAS TO BE REJECTED. 7 M/S INTERNATIONAL BIOTECH PARK LIMITED THE BUSINESS OF THE COMPARABLE COMPANY IS DEVELOPMENT OF 11 ITA NO. 1600/HYD/2014 M/S MINDSPEED TECHNOLOGIES LTD., HYDERABAD. BIOTECHNOLOGY PARK, WHICH IS COMPLETELY DIFFERENT FROM THE ASSESSEE COMPANY BUSINESS OF COMPUTER SOFTWARE DEVELOPMENT / IT ENABLED SERVICES. HENCE, THE COMPARABLE FALLS BASIC INDUSTRY SELECTION FILTER AND ACCORDINGLY HAS TO BE REJECTED. 8 M/S MOLD-TEK TECHNOLOGIES LIMITED THE COMPARABLE COMPANY TURNOVER FOR A. Y.2009- 10 & 2010-11 IS RS.19.13 & RS.15.85 CRORES WHEREAS THE ASSESSEE-COMPANY TURNOVER FOR THE A. Y.2009-10 & 2010-11 IS RS.5.63 CRORES AND RS.7.71 CRORES ONLY. THUS .THERE IS HUGE DIFFERENCE IN TURNOVERS BETWEEN THE COMPARABLE SELECTED AND THE ASSESSEE COMPANY AND AS ECONOMIES OF SCALE INFLUENCES PROFITABILITY, HENCE SELECTION OF INAPPROPRIATE TURNOVER FILTER (1-50 CRORES) IS NOT ACCEPTABLE WHEREIN THE APPROPRIATE TURNOVER FILTER SHOULD BE ADOPTED AT RS.1-10 CRORES AND THUS THE SELECTED COMPARABLE FALLS TURNOVER FILTER AND ACCORDINGLY HAS TO BE REJECTED. 9 M/S ZERO OCTA SELECTIVE SOURCING INIDA (P) LIMITED THE COMPARABLE COMPANY TURNOVER FOR A. Y.2009- 10 & 2010-11 IS RS.20.76 & RS.17.80 CRORES WHEREAS THE ASSESSEE-COMPANY TURNOVER FOR THE A. Y.2009-10 & 2010-11 IS RS.5.63 CRORES AND RS.7.71 CRORES ONLY. THUS THERE IS HUGE DIFFERENCE IN TURNOVERS BETWEEN THE COMPARABLE SELECTED AND THE ASSESSEE COMPANY AND AS ECONOMIES OF SCALE INFLUENCES PROFITABILITY, HENCE SELECTION OF INAPPROPRIATE TURNOVER FILTER (1-50 CRORES) IS NOT ACCEPTABLE WHEREIN THE APPROPRIATE TURNOVER FILTER SHOULD BE ADOPTED AT RS.1-10 CRORES AND THUS THE SELECTED COMPARABLE FALLS TURNOVER FILTER AND ACCORDINGLY HAS TO BE REJECTED. 12 ITA NO. 1600/HYD/2014 M/S MINDSPEED TECHNOLOGIES LTD., HYDERABAD. AS THE ABOVE COMPARABLE ARE HAVING TURNOVER OF RS.10 CRORES AND ABOVE, APPLICATION OF APPROPRIATE TURNOVER FILTERS (RS.1-10 CRORES) IS NECESSARY TO IDENTIFY SUITABLE COMPARABLE AS ECONOMIES OF SCALE INFLUENCE PROFITABILITY OF A COMPANY. FURTHER CLOSER THE TURNOVER FILTER RANGE BETTER WOULD BE THE COMPARABILITY. HENCE OUT OF THE 9 COMPARABLE COMPANIES SELECTED BY THE ASSESSEE-COMPANY 8 COMPARABLE COMPANIES ARE REJECTED DUE TO INAPPROPRIATE SELECTION AND APPLICATION OF TURNOVER FILTER (M/S AOK IN-HOUSE BPO SERVICES LTD, M/S DIGICOMP COMPLETE SOLUTIONS LIMITED, M/S ETH LTD, M/S INFO DRIVE SOFTWARE LIMITED, M/S MOLD-TEK TECHNOLOGIES LIMITED, M/S ZERO OCTA SELECTIVE SOURCING INDIA PVT LIMITED) & BASIC INDUSTRY SELECTION FILTER (M/S ALTERNATE BRAND SOLUTIONS (INDIA) LIMITED, M/S ETH LTD, M/S INTERNATIONAL BIOTECH PARK LIMITED). HENCE IN VIEW OF THE ABOVE DISCUSSION, A KIND REQUEST IS MADE BEFORE THE HON'BLE CLT(A)-V, HYDERABAD TO REFER THE CASE TO TRANSFER PRICING OFFICER (TPO) FOR THE A. Y 2010-11 SINCE TPO IS THE APPROPRIATE AUTHORITY TO DECIDE CORRECT METHOD FOR DETERMINATION OF ARM'S LENGTH PRICE (ALP). 9.1 THE A.O, IN THE REMAND REPORT HAS THUS REPORTED THAT, ALL THE COMPANIES SELECTED BY THE ASSESSEE ARE HAVING TURNOVER FILTER OF RS. 10 CRORES AND ABOVE, AND THAT APPLICATION OF APPROPRIATE TURNOVER I.E RS.1 TO 10 CRORES IS NECESSARY TO IDENTIFY SUITABLE COMPARABLES AS ECONOMIES OF SCALE INFLUENCE PROFITABILITY OF A COMPANY. HE OBSERVED THAT OUT OF THE 9 COMPARABLE COMPANY SELECTED BY THE ASSESSEE COMPANIES, 8 COMPANIES ARE TO BE REJECTED DUE TO INAPPROPRIATE SELECTION AND APPLICATION OF TURNOVER FILTER. HE THEREFORE REQUESTED THE CIT(A) TO REFER THE MATTER TO TPO FOR DETERMINATION. IN REPLY TO THE REMAND REPORT, THE ASSESSEE SUBMITTED THAT THE ASSESSEE HAS TAKEN TURNOVER 13 ITA NO. 1600/HYD/2014 M/S MINDSPEED TECHNOLOGIES LTD., HYDERABAD. FILTER OF RS. 1 TO 50 CRORES, AS THE ASSESSEE WAS HAVING A TURNOVER OF RS. 1.56 CRORES AND 7.71 CRORES FOR THE A.YS 2009-10 AND 2010-11 RESPECTIVELY AND JUSTIFIED THE COMPARABLES SELECTED BY IT. THE CIT(A) ACCEPTED THE ASSESSEES CONTENTIONS AND DELETED THE ADDITION MADE AN ACCOUNT OF TP ADJUSTMENT. 9.2 THE LD. DR SUBMITTED THAT, THE ASSESSEE HAS NOT SUBMITTED THE TP DOCUMENTATION BEFORE THE A.O BUT HAS SUBMITTED IT BEFORE THE CIT(A) AND IF THE ASSESSEE HAS NOT SELECTED APPROPRIATE COMPARABLES, THEN, THE CIT(A) OUGHT TO HAVE REMANDED THE MATTER TO THE TPO, SINCE THE TPO WAS THE COMPETENT AUTHORITY TO DETERMINE THE ALP, INSTEAD OF SETTING ASIDE THE TP ADJUSTMENT ITSELF. 9.3 THE LD. COUNSEL FOR THE ASSESSEE, ON THE OTHER HAND, SUBMITTED THAT THE A.O HAS GONE THROUGH THE TP DOCUMENTATION AND HAS SUBMITTED THE REMAND REPORT AND THEREFORE THERE WAS NO REASON FOR REFERENCE TO THE TPO AGAIN. HOWEVER, HE HAS SUBMITTED THAT IF THE MATTER WERE TO BE REMANDED, THEN, SINCE THERE ARE MISTAKES IN ADOPTING THE MARGINS OF THE COMPARABLE COMPANIES, A.O MAY BE DIRECTED TO VERIFY AND ADOPT THE CORRECT MARGINS OF THE COMPARABLES. 14 ITA NO. 1600/HYD/2014 M/S MINDSPEED TECHNOLOGIES LTD., HYDERABAD. 9.4 HAVING REGARD TO THE RESPECTIVE CONTENTIONS, WE FIND THAT THE CIT(A) HAS CALLED FOR A REMAND REPORT FROM THE A.O AND ON THE BASIS OF SAID REMAND REPORT AND SUBSEQUENT REPLY OF THE ASSESSEE TO THE REMAND REPORT, HE HAS CONFIRMED THE TP STUDY OF THE ASSESSEE. THIS APPROACH OF THE CIT(A), IN OUR OPINION, IS NOT CORRECT. SINCE THE ASSESSEE HAS FILED THE TP DOCUMENTATION BEFORE THE CIT(A), HE OUGHT TO HAVE REFERRED THE MATTER TO THE FILE OF THE TPO FOR DETERMINATION OF THE ALP. SINCE, IT IS ALSO POINTED OUT BY THE ASSESSEE THAT THERE ARE MISTAKES IN THE MARGINS OF THE COMPARABLES, WE DEEM IT FIT AND PROPER TO REMAND THE ISSUE TO THE FILE OF THE AO/TPO FOR FRESH DETERMINATION OF THE ALP IN ACCORDANCE WITH LAW. THEREFORE, THE GROUND OF APPEAL NO. 4 IS TREATED AS ALLOWED FOR STATISTICAL PURPOSES. 10. AS REGARDS GROUND NO. 5, WE FIND THAT THE CIT(A) HAS GRANTED RELIEF TO THE ASSESSEE AFTER TAKING INTO CONSIDERATION THE ASSESSEES CONTENTIONS THAT HE HAD FILED FORM NO. 56F BEFORE THE A.O ON 03-04-2013 BELATEDLY AND REQUESTED FOR CONDONATION OF DELAY. 10.1 THE LD. DR SUBMITTED THAT, FORM NO. 56F HAS TO BE FILED ALONG WITH THE RETURN OF INCOME AND SINCE IT HAS NOT 15 ITA NO. 1600/HYD/2014 M/S MINDSPEED TECHNOLOGIES LTD., HYDERABAD. ACCOMPANIED THE RETURN OF INCOME, THE A.O HAS RIGHTLY DISALLOWED THE CLAIM OF DEDUCTION U/S 10A OF THE ACT. 10.2 THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE FILING OF FORM 56F IS ONLY DIRECTORY AND NOT MANDATORY AND SINCE THE ASSESSEE HAS FULFILLED ALL THE CONDITIONS OF SEC. 10A OF THE IT ACT, AND SINCE THE ASSESSEE HAS FILED THE E- RETURN, IT COULD NOT BE FILED ALONG WITH THE RETURN OF INCOME AND WAS FILED SUBSEQUENTLY BEFORE THE A.O. HE RELIED UPON THE DECISION OF THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF CIT VS AMERICAN DATA SOLUTIONS INDIA PVT LTD., REPORTED IN 45 TAXMANN.COM 379, IN SUPPORT OF HIS CONTENTIONS. 10.3 HAVING REGARD TO THE RIVAL CONTENTIONS AND THE MATERIAL ON RECORD, WE FIND THAT THE HONBLE KARNATAKA HIGH COURT, IN THE CASE OF AMERICAN DATA SOLUTIONS INDIA PVT LTD., WAS CONSIDERING THE CASE OF AN ASSESSEE, WHICH HAD FILED FORM NO. 56F BEFORE THE CIT(A), WHO GRANTED RELIEF TO THE ASSESSEE AFTER GIVING OPPORTUNITY TO THE ASSESSEE. ON AN APPEAL BY THE REVENUE, THE HONBLE HIGH COURT HELD THAT THE PROCEEDINGS BEFORE THE FIRST APPELLATE AUTHORITY IS CONTINUATION OF ASSESSMENT PROCESS AND THE AUDIT REPORT THOUGH WAS NOT PRODUCED BEFORE THE ASSESSING 16 ITA NO. 1600/HYD/2014 M/S MINDSPEED TECHNOLOGIES LTD., HYDERABAD. AUTHORITY, THE LOWER APPELLATE AUTHORITY WAS DUTY BOUND TO TAKE NOTE OF THE SAID AUDIT REPORT AND GRANT BENEFIT, IF THE ASSESSEE IS ENTITLED TO. WE FIND THAT IN THE CASE BEFORE US, THE A.O HAS NOT HELD THAT THE ASSESSEE HAS NOT FULFILLED THE OTHER CONDITIONS PRESCRIBED U/S 10A OF THE IT ACT. IT IS ALSO NOT IN DISPUTE THAT THE FORM NO. 56F HAS BEEN FILED BEFORE THE A.O WITH A DELAY. THE ASSESSEE HAS FILED THE ADDITIONAL EVIDENCE IN SUPPORT OF THE DEDUCTION U/S 10A OF THE ACT. WE ARE INCLINED TO ADMIT THE SAME AND REMAND TO THE FILE OF THE A.O WITH A DIRECTION TO ALLOW THE DEDUCTION U/S 10A OF THE ACT IN ACCORDANCE WITH LAW AFTER VERIFYING IF THE ASSESSEE SATISFIES ALL OTHER CONDITIONS U/S 10A OF THE ACT, NEEDLESS TO MENTION THAT THE ASSESSEE SHALL BE GIVEN A FAIR OPPORTUNITY OF HEARING. IN THE RESULT, THE GROUND OF APPEAL NO. 5 IS TREATED ALLOWED FOR STATISTICAL PURPOSES. 11. IN THE RESULT, THE REVENUE APPEAL IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. PRONOUNCED IN THE OPEN COURT ON 08 TH DECEMBER, 2017. SD/- SD/- (B. RAMAKOTAIAH) (P. MADHAVI DEVI) ACCOUNTANT MEMBER JUDICIAL MEMBER HYDERABAD, DATED: 08 TH DECEMBER, 2017 17 ITA NO. 1600/HYD/2014 M/S MINDSPEED TECHNOLOGIES LTD., HYDERABAD. KRK 1 M/S MINDSPEED TECHNOLOGIES LTD., D-3, MIRINER BLOCK, THE VENENBURG IT PARK, MADHAPUR, HYDERABAD-81 2 ASST CIT, CIRCLE-16(2), HYDERABAD. 3 CIT(A)-5, HYDERABAD 4 CIT-IV, HYDERABAD. 5 THE DR, ITAT HYDERABAD 6 GUARD FILE