J&B Software (India) Pvt. Ltd., CHENNAI V. ACIT, CHENNAI

ITA 1609/CHNY/2008

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 8125 (ITAT-CHENNAI)
• Duration Of Justice: 8 year(s) 2 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-10-2016
• Appeal Filed By: Assessee
• Bench Allotted: D
• Next Hearing Date: 03-08-2016
• Assessment Year: 2003-2004
• Appeal Filed On: 25-07-2008
• Court: TRIBUNAL
• Department Lawyers: DR ARUN C BHARATH
• Keywords: Related party transaction; Transfer pricing; International transaction; Wholly owned subsidiary; Prejudicial to interest
• Section: 92C; 143(3)

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH : CHENNAI , . ! ' , # '$ % [ BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI G. PAVAN KUMAR, JUDICIAL MEMBER ] ./ I.T.A.NO.1576/MDS/2008 / ASSESSMENT YEAR : 2003-04 THE ASSTT. COMMISSIONER OF INCOME-TAX COMPANY CIRCLE II(3) CHENNAI VS. M/S J&B SOFTWARE I NDIA P. LTD 6 TH FLOOR, TOWER I, RAYALA TOWERS 58, ANNA SALAI CHENNAI 600 002 [PAN AAACJ 9157 G ] ( &' / APPELLANT) ( ()&' /RESPONDENT) ./ I.T.A.NO.1609/MDS/2008 / ASSESSMENT YEAR : 2003-04 M/S J&B SOFTWARE INDIA P. LTD 6 TH FLOOR, TOWER I, RAYALA TOWERS 58, ANNA SALAI CHENNAI 600 002 VS. THE ASSTT. COMMISSIONER OF INCOME-TAX COMPANY CIRCLE II(3) CHENNAI ( &' / APPELLANT) ( ()&' /RESPONDENT) ASSESSEE BY : SHRI S. P. CHIDAMBARAM, ADVOCATE DEPARTMENT BY : DR. ARUN C. BHARATH, CIT / DATE OF HEARING : 5 - 08 - 2016 / DATE OF PRONOUNCEMENT : 24 - 10 - 2016 * / O R D E R PER G. PAVAN KUMAR, JUDICIAL MEMBER : THESE CROSS APPEALS BY THE ASSESSEE AND THE REVE NUE ARE DIRECTED AGAINST THE ORDER OF THE COMMISSIONER OF INCOME-TAX ITA NO. 1576 &1609/08 :- 2 -: (APPEALS)-XII, CHENNAI, DATED 31.3.2008 IN I.T.A.NO . 145/06-07 FOR ASSESSMENT YEAR 2003-04 PASSED U/S 143(3) AND 250 OF THE INCOME- TAX ACT, 1961. 2. FIRST WE TAKE UP ASSESSEES APPEAL I.T.A.NO.1609/M DS/2008. THE FIRST GROUND IS THAT THE CIT(A) ERRED IN CONFIR MING THE ADDITION OF ` 48,66,670/- AS ADJUSTMENT TOWARDS ARMS LENGTH PRI CE IN RESPECT OF INTERNATIONAL TRANSACTIONS INCLUDING THE COMPANIES M/S GEODESIC, IT MICROSYSTEMS, AND M/S FORTUNE INFOTECH LTD. THE CI T(A) HAS ALSO NOT CONSIDERED THE SUBMISSIONS OF THE ASSESSEE THAT TH E MARGINS OF COMPARABLE COMPANIES ARE TO BE ADJUSTED FOR THE MAR KET RISKS WHILE BENCH MARKING WITH THAT OF THE ASSESSEE. FURTHER THE CIT(A) HAS ALSO REJECTED THE COMPARABLES SELECTED BY THE ASSESSEE BEING M/S DYNACONS SYSTEMS, SHIPRA TECHNOLOGIES LTD AND SARK SYSTEMS LTD. THESE COMPARABLES WERE REJECTED DUE TO QUANTITATIVE FACTORS. FURTHER, THERE IS NO COMPARABILITY MADE IN RESPECT OF THE TU RNOVER OF THE ASSESSEE AND OTHER SELECTED COMPARABLE COMPANIES AN D THE CIT(A) HAS NOT CONSIDERED THE 5% VARIATION OF ARITHMETIC MEAN PROVIDED U/S 92C OF THE ACT. IN RESPECT OF OTHER GROUNDS, T HE CIT(A) HAS ERRED IN CONFIRMING THE REDUCTION OF FOREIGN TRAVEL EXPEN DITURE U/S 10A AND DEDUCTION OF ` 2,52,851/- REPRESENTING LOSS ON ACCOUNT OF EXCHANG E FLUCTUATION FROM EXPORT TURNOVER. ITA NO. 1576 &1609/08 :- 3 -: 3. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE-C OMPANY IS IN THE DEVELOPMENT OF COMPUTER SOFTWARE AND FILED R ETURN OF INCOME AS A WHOLLY OWNED SUBSIDIARY OF J&B SOFTWARE INC. USA WHICH IS REFERRED AS AE/J&B USA. THE ASSESSEE IS ENGAGED IN THE BUS INESS OF RENDERING SOFTWARE DEVELOPMENT SERVICES ALSO AVAILED BENEFIT U/S 10A IN INDIA UNDER THE INCOME-TAX ACT, 1961. THE ASSESSEE FILE D THE RETURN OF INCOME ON 27.11.2003 ADMITTING A TOTAL INCOME OF ` 17,65,600/- AND THE RETURN OF INCOME WAS PROCESSED U/S 143(1). SU BSEQUENTLY, THE CASE WAS SELECTED FOR SCRUTINY AND NOTICE U/S 143( 2) WAS ISSUED. IN COMPLIANCE, THE LD. AR OF THE ASSESSEE APPEARED AN D CASE WAS DISCUSSED FROM TIME TO TIME. THE ASSESSING OFFICER ON VERIFICATION OF THE FINANCIAL STATEMENTS MADE SOME ADDITIONS. SINC E THERE WAS INTERNATIONAL TRANSACTIONS BY THE ASSESSEE-COMPANY RENDERED WITH J&B FOR SOFTWARE DEVELOPMENT AND PAYMENT OF INTEREST ON LOAN, THE ASSESSEE HAS ADOPTED CUP METHOD FOR JUSTIFYING THE ALP OF THE INTERNATIONAL TRANSACTIONS. SINCE THERE WERE INTER NATIONAL TRANSACTIONS, THE ASSESSING OFFICER REFERRED THE ISSUE TO THE TPO AND THE TPO, AS PER THE PROVISIONS OF SEC. 92CA OF THE ACT HAS ADOP TED TNM METHOD AS ALP WITH ADJUSTMENT TO THE INTERNATIONAL TRANSACTIO N WITH AE OF ` 1,37,03,316/- AND THIS AMOUNT WAS ADDED TO THE RETU RNED INCOME. WHILE CLAIMING THE DEDUCTION U/S 10A THE ASSESSING OFFICER HAS MADE ADDITION OF FOREIGN TRAVEL EXPENSES AND ALSO IN RE SPECT OF FOREIGN ITA NO. 1576 &1609/08 :- 4 -: CURRENCY AND EXPORT TURNOVER. THE ASSESSING OFFICE R HAS DEALT WITH THIS ISSUE AT PAGES 3 & 4 OF HIS ORDER AND WORKED O UT TO ` 20,88,721/- AND PASSED ASSESSMENT ORDER U/S 143(3) OF THE ACT ON 22.2.2006. 4. AGGRIEVED BY THE ORDER OF THE ASSESSING OFFICER, TH E ASSESSEE FILED APPEAL BEFORE THE CIT(A). IN THE AP PELLATE PROCEEDINGS, THE LD. AR ARGUED THE GROUNDS AND ALSO REITERATED T HE SUBMISSIONS. THE CIT(A) HAS FOUND THAT THE ASSESSEE HAS MADE IN TERNATIONAL TRANSACTIONS AND ALSO AUDIT REPORT WAS FILED. THE CIT(A), HOWEVER, FOUND FROM THE ASSESSMENT ORDER AND TPOS ORDER THA T THE COMPARABLES SELECTED BY THE TPO ARE ACCEPTABLE CONS IDERING THE BUSINESS WORKING CONDITIONS. THE ASSESSEE-COMPANY HAS FILED AUDIT REPORT IN FORM 3CEB AND ALSO ADOPTED CUP METHOD TO JUSTIFY THE INTERNATIONAL TRANSACTION. WHEREAS THE TPO HAS MAD E CERTAIN CORRECTIONS TO THE CUP METHOD AND ADOPTED TNM METHO D AS THE MOST APPROPRIATE METHOD FOR ARRIVING AT THE ARMS LENGTH PRICE. THE TPO WORKED OUT THE NET MARGIN IN SIX DIFFERENT WAYS AND NET PROFIT MARGIN OF THE ASSESSEE-COMPANY AS PERCENTAGE OF TOTAL INCO ME WAS 25.44% WHEREAS THE TPO COMPARED THE ARITHMETIC MEAN OF 42. 32%. THE DIFFERENCE BETWEEN THE TWO MARGINS WAS WORKED OUT T O 17.88% AND ALSO THE DIFFERENCE HAS EXCEEDED THE MARGIN OF 5% A S PRESCRIBED AND THE DISALLOWANCE OF ` 1,37,03,316/- WAS MADE. WHILE DETERMINING ITA NO. 1576 &1609/08 :- 5 -: THIS, THE TPO HAS CHOSEN FOUR COMPANIES BEING M/S F OUR SOFT LTD., FORTUNE INFORMATICS LTD, GEODESIC INFORMATION SYSTE MS LTD AND IT MICROSYSTEMS (INDIA) LTD AND CALCULATED THE COMPAR ABLE COMPANIES MEAN OF 42.32%. THE ASSESSEE-COMPANY HAS FILED WRI TTEN SUBMISSIONS OBJECTING TO THE COMPARABLES AND ALSO F URNISHED A FRESH WORKING WITH NET MARGIN PERCENTAGE OF SEVEN COMPANI ES THAT WERE CHOSEN ORIGINALLY AND PROFIT MARGINS HAVE BEEN WORK ED OUT WITH A NET PROFIT BASIS AND AVERAGE NET PROFIT WAS SHOWN AT 26 .93% AS AGAINST THE NET MARGIN OF 27.94% WORKED OUT BY THE ASSESSEE -COMPANY. THE CIT(A) HAS MADE A FINDING ON THE BASIS OF THE FRESH SUBMISSIONS AT PARA 4.4.1.1 OF HIS ORDER ELABORATELY AND CONSIDERE D THE WRITTEN SUBMISSIONS AND ALSO THE SELECTION OF COMPARABLE MA DE BY THE ASSESSEE-COMPANY. FINALLY, HE ADOPTED THE MARGIN O F TPO AND WORKED OUT THE ADDITION OF ` 48,66,670/- BY TAKING ARITHMETIC MEAN OF THE MARGINS OF SEVEN COMPANIES. THIS ARITHMETIC MEAN W AS CALCULATED BASED ON THE TURNOVER OF THE COMPANIES AND ALSO THE PROFIT MARGIN AND ADJUSTMENT OF 5% WAS ALSO CONSIDERED. WITH THESE C ALCULATIONS, THE CIT(A) HAS REWORKED THE ADJUSTMENT TO THE EXTENT OF ` 48,66,670/- AGAINST ` 1,37,03,316/- ADOPTED BY THE TPO. IN RESPECT OF COMPUTATION OF DEDUCTION U/S 10A, THE CIT(A) FOUND THAT THE AMOUNT OF ` 20,88,721/- WAS REDUCED FROM THE EXPORT TURNO VER REPRESENTING EXPENDITURE INCURRED OUTSIDE INDIA FOR THE PURPOSE OF ITA NO. 1576 &1609/08 :- 6 -: RENDERING TECHNICAL SERVICES AND A SUM OF ` 2,52,819/- TOWARDS LOSS ON ACCOUNT OF FOREIGN EXCHANGE FLUCTUATION. THE ASSES SING OFFICER HAS ALSO MADE A SPECIFIC FINDING IN RESPECT OF FOREIGN TRAVELS UNDERTAKEN BY THE ASSESSEE-COMPANY AND THIS INFORMATION WAS NOT C ONTROVERTED BY THE ASSESSEE IN THE APPELLATE PROCEEDINGS. SO, TH E CIT(A) HAS UPHELD THE ADDITION OF ` 20,88,721/- AND PARTLY ALLOWED THE APPEAL. 5. AGGRIEVED BY THE ORDER, THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL. BEFORE US, THE LD. AR SUBMITTED THAT THE ASSESSEE-COMPANY IS A SUBSIDIARY OF M/S J&B SOFTWARE INC. USA AND TH E ASSESSEE IS ENGAGED IN THE BUSINESS OF RENDERING SOFTWARE DEVEL OPMENT SERVICES TO J&B USA. WHILE MAKING TRANSFER PRICING ADJUSTMENT, THE TPO HAS CONSIDERED THE FOLLOWING COMPARABLES : (I) M/S FOUR SOFT LTD (II) M/S FORTUNE INFORMATICS LTD (III) M/S GEODESIC INFORMATION SYSTEMS LTD (IV) IT MICROSYSTEMS (INDIA) LTD WHEREAS THE ASSESSEE IN THE APPELLATE PROCEEDINGS HAS GIVEN A FRESH LIST OF COMPANIES AND MADE A REWORKING OF SEVEN COM PANIES INCLUDING SOME OF THE COMPANIES SELECTED BY TPO THAT BEING M/ S GEODESIC INFORMATION SYSTEMS LTD., FORTUNE INFORMATICS LTD, IT MICROSYSTEMS LTD, ONLINE MEDIA SOLUTIONS LTD., BANGALORE SOFTSEL L LTD AND KCC SOFTWARE LTD AND WORKED OUT NET MARGIN AT 27.94%. BEFORE US, THE ITA NO. 1576 &1609/08 :- 7 -: ASSESSEE ARGUED THAT THE ASSESSEE-COMPANY HAS ADOPT ED CUP METHOD WHEREAS THE TPO HAS ADOPTED TNM METHOD AND PRAYED T O EXCLUDE THE FOLLOWING COMPARABLES IN THE TRANSFER PRICING STUDY . (I) M/S GEODESIC INFORMATION SYSTEMS LTD: THE LD. AR E XPLAINED THAT THIS COMPANY MANUFACTURE SOFTWARE PRODUCT MUN DU HAVING AN IPR BRAND AND THIS COMPANY POSSESSES THE PRICING PO LICY AND DIRECTLY IMPACT THE MARGINS EARNED BY YIELDING EXTRAORDINARY INCOME AND ALSO SUPPORTED WITH THE DECISION OF ITAT, DELHI BENCH, I N THE CASE OF EQUANT SOLUTIONS INDIA (P) LTD VS DCIT 66 TAXMANN. COM 192. 6. ON THE OTHER HAND, THE LD. DR OBJECTED TO THE EXCLU SION AS THE CIT(A) HAS ALREADY CONSIDERED THIS IN HIS ORDER . 7. WE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATE RIAL ON RECORD. WE FIND FROM PAGE 11 OF THE CIT(A)S ORDE R THAT M/S GEODESIC INFORMATION SYSTEMS LTD WAS NOT OPERATIONAL IN FINA NCIAL YEAR 2003-04. THE SUBSIDIARY AT SINGAPORE WAS SET UP ONLY IN APRI L, 2004 AND THERE IS NO RELATED PARTY TRANSACTION WITH THE DIRECTORS AND ALSO THERE IS A POTENTIAL CONFLICT OF INTEREST. THE COMPANY IS IN THE DEVELOPMENT OF PRODUCT CALLED MUNDU WHICH HAS APPLICATION IN INT ERNET, WIRELESS DEVICES AND SYSTEMS. THE DIFFERENCE BEING THE ASSE SSEE-COMPANY HAS NOT GIVEN ANY NAME TO ITS PRODUCT WHEREAS THIS COMP ANY HAS PROVIDED PRODUCT NAME AS MENTIONED EARLIER. WE FIND THAT TH E INCOME OF THE COMPANY BY THE ASSESSMENT YEAR 2003-04 HAS INCREASE D BY 89% AND ITA NO. 1576 &1609/08 :- 8 -: THE PROFITS IN THE SAME FINANCIAL YEAR GREW BY 249% BECAUSE OF ITS PRODUCT MUNDU WHICH IS ABNORMAL. THE FUNCTIONS OF THIS COMPANY DIFFER FROM THE ASSESSEE-COMPANY IN RESPECT OF SOFT WARE DEVELOPMENT. SO, THIS COMPANY CANNOT BE CONSIDERED AS A COMPARAB LE FOR THE TRANSFER PRICING TRANSACTION. WE DIRECT THE TPO TO EXCLUDE THIS COMPARABLE COMPANY. 8. M/S IT MICRO SYSTEMS (INDIA) LTD: THE LD. AR ARGUE D THAT THIS COMPANY HAVING A DIFFERENT FUNCTIONAL OBJECTS AND ALSO IN HOTEL INDUSTRY. WHEN THE FUNCTIONS ARE DIFFERENT IT HAS TO BE REJECTED AS A COMPARABLE COMPANY AS HELD BY THE DELHI ITAT IN THE CASE OF EQUANT SOLUTIONS (SUPRA). THIS COMPANY WAS INCORPORATED ITS WHOLLY OWNED SUBSIDIARY IN USA BEING SAI PROPERTIES INC. SAI PR OPERTIES INC ACQUIRED A HOTEL PROPERTY WITH 122 ROOMS AND ALSO ACQUIRED P ROPERTIES IN OTHER COUNTRIES AND HAVING SUBSIDIARIES AND THE SOFTWARE DEVELOPED BY THIS COMPANY WAS UTILIZED FOR SERVICE INDUSTRIES LIKE HO SPITAL AND AIRLINES AND THERE IS LESS USAGE FOR COMMERCIAL NEEDS. 9. THE LD. DR HAS OBJECTED TO THESE SUBMISSIONS. 10. WE HEARD THE RIVAL SUBMISSIONS AND FIND THAT THE AS SESSEE- COMPANY IS IN THE BUSINESS OF SOFTWARE DEVELOPMENT SERVICES WHEREAS THIS COMPARABLE SELECTED BY THE TPO IS IN THE BUSIN ESS OF SOFTWARE DEVELOPMENT FOR SERVICE INDUSTRY AS WELL AS IN HOT EL BUSINESS. THEREFORE, THE ASSESSEES COMPANY IS ONLY SOFTWARE DEVELOPMENT. WE ITA NO. 1576 &1609/08 :- 9 -: ARE OF THE OPINION THAT THIS COMPANY CANNOT BE COMP ARABLE TO THE ASSESSEE-COMPANY. WE DIRECT THE TPO TO EXCLUDE THI S COMPANY FROM THE LIST OF COMPARABLE COMPANIES. 11. M/S FORTUNE INFOTECH LTD: - THE LD. AR ARGUED THAT THIS COMPANY IS FUNCTIONALLY DIFFERENT AND IS IN THE MA NUFACTURING SOFTWARE PRODUCT WHEREAS THE ASSESSEE-COMPANY IS IN ITES SE RVICES. THIS COMPANY STARED A JOINT VENTURE WITH FORTUNE MICROTR ONICS PTE LTD., SINGAPORE AND THERE IS NO BUSINESS OPERATIONS IN FI NANCIAL YEAR 2003- 04 AD THE COMPANY IS ENGAGED IN DEVELOPMENT OF SOFT WARE PRODUCTS. THE LD. AR ALSO SUPPORTED HIS ARGUMENTS WITH THE DE CISION OF ITAT DELHI BENCH IN THE CASE OF EQUANT SOLUTIONS INDIA ( P) LTD. (SUPRA) AND THIS COMPANY IS NOT FUNCTIONALLY COMPARABLE. 12. CONTRA, THE LD. DR OPPOSED TO THE SUBMISSIONS. 13. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERUSE D THE MATERIAL ON RECORD. THE ASSESSEE IS OPERATING PUR ELY ON ITES SERVICES PROVIDING SERVICES TO ITS AE WHEREAS THE SELECTED C OMPARABLE BY TPO IS PROVIDING WEB CENTRIC APPLICATIONS BY WHICH IT PROV IDES SERVICES TO CUSTOMERS. THIS COMPARABLE CANNOT BE INCLUDED AS T HERE IS NO FUNCTIONAL SIMILARITY AND REQUIRES TO BE EXCLUDED F ROM THE LIST OF COMPARABLES. WE DIRECT THE TPO TO EXCLUDE THIS COM PANY FROM THE LIST OF COMPARABLES. ITA NO. 1576 &1609/08 :- 10 -: 14. THE ASSESSEE HAS SUBMITTED THAT THE FOLLOWING COMP ANIES HAVE TO BE CONSIDERED AS COMPARABLES: 15. M/S DYNACONS SYSTEMS & SOLUTIONS LTD: THE TPO HAS REJECTED THE COMPANY IRRESPECTIVE OF THE FACT THAT THE COMPANY DOES NOT HAVE RELATED PARTY TRANSACTION DURING THE YEAR AND ALSO NOT DERIVED ANY INCOME FROM TRADED GOODS. THE LD. AR SUPPORTED HIS ARGUMENTS WITH THE DECISION OF ITAT PUNE BENCH IN THE CASE OF TIBCO SOFTWARE (INDIA) P LTD VS DCIT, 58 TAXMANN.COM 215. 16. THE LD. DR HAS OBJECTED TO THE INCLUSION OF THE COM PARABLE AND THE TPO HAS RIGHTLY REJECTED THE COMPANY. 17. WE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATE RIAL ON RECORD. WE FIND THAT THE TPO HAS CHOSEN THE COMPAR ABLES WHERE THE TURNOVER RANGING FROM 1.5 TO 2.5 CRORES WHEREAS THE COMPARABLE SELECTED BY THE ASSESSEE IS HAVING A VERY LOW MARG IN. THE ARITHMETIC MEAN OF MARGIN VARIES WITHIN THE RANGE OF 5%. WHER EAS THE NET MARGIN OF THE COMPARABLE COMPANY BEING 3.75% AND CA NNOT BE COMPARED. THESE FACTS WERE DEMONSTRATED BY THE CIT (A) AND THE PROFIT MARGIN IS BELOW 5% I.E 3.75%. WE THEREFORE, REJECT THE ARGUMENT OF THE ASSESSEE. 18. SIMILARLY, IN THE CASE OF ONLINE MEDIA SOLUTIONS AN D KCC SOFTWARE LTD, THE LD. AR ARGUED THAT THESE COMPANIE S NET MARGIN WORKED OUT TO 1.17% AND 2.82% RESPECTIVELY AND IN T HE CASE OF ITA NO. 1576 &1609/08 :- 11 -: BANGALORE SOFTSELL LTD THE MARGIN IS (-) 0.64%. TH E CIT(A) HAS REJECTED THESE COMPANIES AS THEY ARE NOT FUNCTIONAL LY COMPARABLE AND THIS REJECTION CANNOT BE ON THE SOLE GROUND THAT TH EY ARE EARNING LOW MARGINS AND NEGATIVE MARGINS AND SUPPORTED HIS ARGU MENT WITH THE DECISION OF ITAT PUNE BENCH IN THE CASE OF TIBCO SO FTWARE (INDIA) P. LTD (SUPRA) AND PRAYED FOR INCLUSION IN THE LIST OF COMPARABLES. 19. THE LD. DR OBJECTED TO THE INCLUSION OF THESE COMPA NIES. 20. WE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATE RIAL ON RECORD. WE FIND THAT OUT OF THE SEVEN COMPANIES WH OSEN BY THE ASSESSEE-COMPANY THESE THREE COMPANIES WERE OMITTED BY THE TPO AS THE NET MARGINS DISCLOSED BY THESE COMPANIES ARE TO O LOW AND ALSO NEGATIVE IN RESPECT OF BANGALORE SOFTSELL. THIS CA NNOT BE COMPARED WITH THE NET MARGIN OF 27.94% DISCLOSED BY THE ASSE SSEE-COMPANY IN ITS REPORT. THESE COMPANIES DO NOT FALL INTO THE SA ME PROFIT MARGIN RANGE AND THEREFORE, WE FOUND THAT THE TPO IS JUSTI FIED IN REJECTING THE COMPARABLE COMPANIES. 21. FURTHER, THE LD. AR HAS NOT ARGUED ANY OTHER GROUND S RELATING TO TRANSFER PRICING ISSUES. ACCORDINGLY, ALL THE GROUNDS RAISED BY THE ASSESSEE RELATING TO TRANSFER PRICING ARE D ISMISSED AS NOT PRESSED. 22. THE LD. AR HAS ARGUED THAT THE CIT(A) HAS ERRED IN CONFIRMING THE DEDUCTION OF FOREIGN TRAVEL EXPENDIT URE FROM EXPORT ITA NO. 1576 &1609/08 :- 12 -: TURNOVER WHILE COMPUTING DEDUCTION U/S 10 A IRRESP ECTIVE OF THE FACT THAT THIS WAS NOT INCURRED FOR RENDERING TECHNICAL SERVICES OUTSIDE INDIA AND SIMILAR DEDUCTION SHOULD HAVE BEEN MADE FROM T OTAL TURNOVER ALSO. ALSO THE LOSS ON ACCOUNT OF FOREIGN EXCHANGE FLUCTUATION WAS DEDUCTED FROM EXPORT TURNOVER AND WAS NOT CONSIDERE D IN THE TOTAL TURNOVER AND ALSO SUPPORTED HIS SUBMISSIONS WITH JU DICIAL DECISIONS. 23. CONTRA, THE LD. DR OPPOSED TO THE GROUND AND RELIED ON THE ORDER OF THE CIT(A). 24. WE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATE RIAL AVAILABLE ON RECORD AND THE JUDICIAL DECISION CITED . WE FIND THAT THIS ISSUE IS SQUARELY COVERED BY THE DECISION OF SPECIA L BENCH OF THIS TRIBUNAL IN THE CASE OF ITO VS SAK SOFT LTD, 121 TT J 865 WHEREIN IT WAS HELD THAT FOR THE PURPOSE OF APPLYING THE FORMU LA UNDER SUB- SECTION (4) OF SEC. 10B, THE FREIGHT, TELECOM CHARG ES OR INSURANCE ATTRIBUTABLE TO THE DELIVERY OF ARTICLES OR THINGS OF COMPUTER SOFTWARE OUTSIDE INDIA OR THE EXPENSES, IF ANY, INCURRED IN FOREIGN EXCHANGE IN PROVIDING THE TECHNICAL SERVICES OUTSIDE INDIA ARE TO BE EXCLUDED BOTH FROM THE EXPORT TURNOVER AND FROM THE TOTAL TURNOVE R WHICH ARE THE NUMERATOR AND THE DENOMINATOR RESPECTIVELY IN THE F ORMULA. RESPECTFULLY FOLLOWING THE ABOVE DECISION, WE DIREC T THE ASSESSING OFFICER TO EXCLUDE THE FOREIGN TRAVEL EXPENDITURE A ND FOREIGN EXCHANGE LOSS FROM EXPORT TURNOVER AND ALSO FROM TOTAL TURNO VER FOR THE PURPOSE ITA NO. 1576 &1609/08 :- 13 -: OF ALLOWING DEDUCTION U/S 10A OF THE ACT. GROUND RAISED BY THE ASSESSEE IS ALLOWED. 25. NOW WE TAKE UP REVENUES APPEAL I.T.A.NO. 1576/MDS/ 2008. 26. THE REVENUE HAS RAISED THE GROUND THAT THE CIT(A) H AS ERRED IN RESTRICTING THE ADDITION TO ` 48,66,670/- AS AGAINST A SUM OF ` 1,37,03,316/- DETERMINED BY THE TPO FOR THE ALP. T HE CIT(A) HAS ALSO ERRED IN CONSIDERING THE COMPARABLES IN RESPEC T OF THREE COMPANIES BEING EXPENDITURE-STAR INFOTECH LTD, M/S SARK SYSTEMS INDIA LTD AND SHIPARA TECHNOLOGIES LTD. 27. THE LD. DR ARGUED THAT THE ASSESSEE-COMPANYS INTER NATIONAL TRANSACTION WITH ITS AE IS TO THE EXTENT OF ` 112.46 LAKHS AND THE ASSESSEE ADOPTED CUP METHOD AS THE MOST APPROPRIATE METHOD. THE TPO HAS REJECTED THE CUP METHOD AS THE DATA RELIED ON BY THE ASSESSEE-COMPANY IS BASED ON MARKET QUOTATIONS AND PUBLIC PRONOUNCEMENTS; THEREFORE, THE TNM METHOD ADOPTED B Y THE TPO WAS INCORPORATED BY THE ASSESSING OFFICER IN HIS ORDER. THE TPO HAS ADOPTED FOUR COMPARABLES AND ALSO REJECTED THE COMP ARABLES SUGGESTED BY THE ASSESSEE AND PRAYED FOR EXCLUSION OF COMPARABLES . 28. M/S E-STAR INFOTECH LTD. THE LD. DR EXPLAINED THAT TURNOVER OF THE SAID COMPANY IS 22.9 CRORES WHEREAS THE ASSE SSEE-COMPANYS TURNOVER IS ` 7.66 CRORES AND THE IMPORTANT CRITERIA OF SALES WA S ITA NO. 1576 &1609/08 :- 14 -: EXCLUDED BY THE CIT(A) WHILE INCLUDING THE COMPARAB LE AND PRAYED FOR EXCLUSION. 29. CONTRA, LD. AR ARGUED THAT THOUGH THE TURNOVER OF T HIS COMPANY IS 22.9 CRORES, THE METHOD ADOPTED BY THE C IT(A) IN HIS ORDER RANGE FROM ` 1 CRORES TO 25 CRORES, THEREFORE, THE ASSESSEES TURNOVER BEING ` 7.66 CRORES, THE CIT(A) IS JUSTIFIED IN CONSIDERIN G FOR ANALYSIS AND PRAYED FOR DISMISSING THE GROUND. 30. AFTER HEARING THE RIVAL SUBMISSIONS, WE FIND THAT T HE CIT(A) HAS CONSIDERED THESE FACTS WHILE CALCULATING MARGIN ANALYSIS AND ALSO AS SUBMITTED BY THE LD. AR THE CIT(A) HAS ADOPTED A VERY REASONABLE TURNOVER FILTER OF ` 1 CRORE TO ` 25 CRORES. CONSIDERING THIS ASPECT, WE REJECT THE GROUND OF THE REVENUE. 31. M/S SARK SYSTEMS INDIA LTD THE LD. DR ARGUED THAT THE COMPANY HAS NO FOREIGN EXCHANGE EARNINGS AND PROVID ING SOFTWARE SOLUTIONS TO THE EXPORT MARKET AND CANNOT BE COMPAR ED WITH A COMPANY PROVIDING DOMESTIC MARKET AND GEOGRAPHICAL LOCATION ALSO PAY A MAJOR ROLE CONSIDERING THE ECONOMIC CIRCUMSTA NCES AND MARKET COMPARABILITY. THE LD. AR ARGUED THAT THOUGH THE C OMPANY DOESNOT HAVE ANY FOREIGN EXCHANGE EARNINGS, THE FUNCTIONAL COMPARABILITY AND NO OBJECTIONS WERE RAISED ON FUNCTIONAL COMPARABILI TY AND THEREFORE, CANNOT BE REJECTED. ITA NO. 1576 &1609/08 :- 15 -: 32. AFTER HEARING THE RIVAL SUBMISSIONS, WE ARE OF THE OPINION THAT THE CIT(A) HAS CONSIDERED THIS AS A COMPARABLE WHILE APPLYING THE PROPER FILTERS AND THE FUNCTIONAL COMPARABILITY. T HOUGH THE COMPANIES HAVING A SOFTWARE SOLUTION MARKET IN ABROAD AND ALS O OPERATE IN THE DOMESTIC MARKET. SO, CONSIDERING THE FACTS, THE CI T(A) HAS RIGHTLY INCLUDED THE COMPARABLE FOR TRANSFER PRICING STUDY. 33. FINALLY, M/S SHIPARA TECHNOLOGIES LTD, THE LD. DR A RGUED THAT THE FINANCIAL DETAILS OF THE ASSESSEE ARE AVAILABL E ONLY UPTO FINANCIAL YEAR 2001-02 WHEREAS FOR THE FINANCIAL YEAR 2002-03 ARE NOT AVAILABLE IN PUBLIC DOMAIN AND THE DATA OF THE PREVIOUS YEAR HAS AN INFLUENCE ON THE DETERMINATION OF THE TRANSFER PRICING IN RELATI ON TO THE TRANSACTIONS COMPARABLE AND PRAYED FOR EXCLUSION OF THIS COMPANY FROM THE COMPARABLE COMPANIES. 34. CONTRA, THE LD. AR ARGUED THAT THE SUBMISSIONS OF T HE LD. DR IS WITHOUT ANY BASIS AND THE FINANCIAL REPORT OF TH E COMPARABLE IS AVAILABLE FOR FINANCIAL YEAR 2002-03 AND ALSO SUPPO RTED WITH THE COPY OF THE ANNUAL REPORT IN HEARING PROCEEDINGS WHERE T HE PARTICULARS OF DESCRIPTION AND AUDIT REPORT WERE FILED AND ALSO TH E OPERATIONS OF THE COMPANY HAS INCREASED FROM EARLIER YEAR AND OBTAINE D AS 9100 CERTIFICATION DURING THE YEAR AND THE COMPANY IS TH E FIRST COMPANY TO RECEIVE SUCH CERTIFICATION. FURTHER, HCL TECHNOLOG Y LTD BEING THE ITA NO. 1576 &1609/08 :- 16 -: HOLDING COMPANY INCREASED ITS STAKE FROM 75% TO 77. 1% BY SUBSCRIBING TO THE 40 LAKHS EQUITY SHARES. 35. WE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATE RIAL ON RECORD AND THE FINANCIALS AND ANNUAL ACCOUNTS OF TH IS COMPANY FILED FOR THE FINANCIAL YEAR 2002-03 ADOPTED BY THE BOARD AND ALSO THE DIRECTORS REPORT WHERE THE ASSESSEE HAS SUPPORTED WITH THE AUDIT REPORT EXPLAINING THE DIRECTORS RESPONSIBILITY AND THE FACTS OF FINANCIAL TRANSACTIONS. SO, WE ARE CONVINCED THAT THE CIT(A) HAS RIGHTLY SELECTED THE COMPARABLE AND WE DISMISS THE GROUND OF THE REV ENUE. 36. IN THE RESULT, THE REVENUES APPEAL IS DISMISSED. 37. TO SUMMARIZE, THE ASSESSEES APPEAL IS PARTLY ALLO WED WHEREAS THE REVENUES APPEAL IS DISMISSED. ORDER PRONOUNCED ON 24 TH OCTOBER, 2016, AT CHENNAI. SD/- SD/- ( ) (CHANDRA POOJARI) / ACCOUNTANT MEMBER ( . ! ' ) (G. PAVAN KUMAR) # / JUDICIAL MEMBER / CHENNAI / DATED: 24 TH OCTOBER, 2016 RD ! ' #$ %$ / COPY TO: 1 . &' / APPELLANT 4. ( / CIT 2. ')&' / RESPONDENT 5. $*+ ' , / DR 3. ( () / CIT(A) 6. +/ 0 / GF