Airvana Networks India Private Limited, Bangalore V. ITO, Bangalore

ITA 166/BANG/2016

• Counselvise Citation: [2017] 130 COUNSELVISE.COM (IT) 8549 (ITAT-BANGALORE)
• Duration Of Justice: 1 year(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-02-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Assessment Year: 2011-2012
• Appeal Filed On: 11-02-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: T SURYANARAY ANA SHRI SANJ
• Keywords: Transfer pricing; International transaction
• Section: 92C; 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH C, BANGALORE BEFORE SHRI SUNIL KUMAR YADAV JUDICIAL MEMBER AND SHRI A. K. GARODIA, ACCOUNTANT MEMBER IT (TP) A NO.166 (BANG) 2016 (ASSESSMENT YEAR : 2011 12) M/S COMMSCOPE NETWORKS (INDIA) PRIVATE LTD., EARLIER KNOWN AS AIRVANA NETWORKS (INDIA) PRIVATE L TD., SALARPURIA SOFTZONE, BLK A, WING B, 1 ST FLOOR, BELLANDUR, VILLAGE VARTHUR HOBLI, OUTER RING ROAD, BANGALORE -560 013 PAN: AAECA7568G APPELLANT VS THE ITO, WARD 1 (1) (1), BANGALORE RESPONDENT IT (TP) A NO.181 (BANG) 2016 (ASSESSMENT YEAR : 2011-12) (BY REVENUE) ASSESSEE BY : SHRI T. SURYANARAY ANA. ADVOCATE REVENUE BY : SHRI SANJAY KUMAR, CIT DR DATE OF HEARING : 14-12-2016 DATE OF PRONOUNCEMENT : 22-02-2017 O R D E R PER SHRI A.K.GARODIA, AM THESE ARE CROSS APPEALS FILED BY THE ASSESSEE AND T HE REVENUE AND THESE ARE DIRECTED AGAINST THE ASSESSMENT ORDER DAT ED 16.12.2015 PASSED BY THE A. O. U/S 143 (3) R.W.S. 144C (13) OF I T ACT, 1961 FOR A. Y. 2011 12 AS PER THE DIRECTIONS OF DRP. IT(TP)A NO.166 & 181(B)2016 2 2. THE GROUNDS RAISED BY THE ASSESSEE ARE AS UNDER: - TH E GR O U ND S STATED HEREUNDER ARE INDEPENDENT OF , AND WITHOUT PREJUD IC E TO ONE ANOTHER . THE APPELLANT SUBMITS AS UNDER: 1 A S S E SS MEN T A ND R EFE RENCE T O TRANSFER P R ICING O FF IC E R A R E B A D I N LAW (A) THE ORDER PASSED BY THE INCOME TA X O FF I C ER , W A RD 1 ( 1) ( 1 ) [ ' THE AO ' ] UNDER S ECTI O N 143(3) READ WITH SECTION 144C OF THE I NC OM E - TAX ACT, 196 1 (' TH E ACT') , PURSU A NT T O THE DIRECTIONS ISSUED BY THE HON ' BLE DISP UTE R ESO L UTION P A N E L [ ' DRP ' / LD . PANEL] , IS BAD IN LAW AND ON FACTS AND IS IN VIOLATION OF TH E PR I N CIPLES OF N ATURAL JUS TICE . ( B ) W I THOUT PREJUDICE TO T H E GENERALIT Y OF T HE ABOVE, THE ORDER ISSUED BY THE AO IS BAD IN LAW I N SO FAR A S THE FACT THAT THE AO DID N OT ISSUE TO AIRVA N A NETWORKS INDIA P RIVA T E L I MITED (' THE APPELLANT OR ' THE COMPAN Y') , A SHOW CAUSE NOTICE AS P ER PROVISO TO SECTION 92C ( 3) OF TH E ACT . ( C ) T HE LD . PANEL ERRED IN LAW AND O N FACTS IN NOT TAK IN G COGNIZANCE O F THE OBJECTIONS RAISED BY THE APPELLANT IN RELATION T O TH E TRANSFER P RICING MATTERS , W HILE I S SUIN G THE DIRE C TIONS U NDER SECTION 144C ( 5 ) . ( D ) THE LD . PANEL ERRED IN LA W AND ON FA C TS IN ARBITRARIL Y RE J ECTING E V OKE TECHNOLOGIES PRIVATE LIMITED (' EVOKE '), R S SOFTWARE ( INDIA ) LIMITED (' R S SOFTWARE ' ) AND MINDTREE LIMITED S U O M O T O, WITHOUT ISSUING A SHOW - CAUSE NOTICE FOR REJECTING THE AFORESAID COMPARABLE S. IT(TP)A NO.166 & 181(B)2016 3 (E) ON THE FAC T S AND I N TH E C I R C UMSTANCES O F THE CASE AND IN LAW , THE LD . PANEL AND AO / T PO ERRED I N NOT DEMONSTRATING THAT THE MOTIVE OF THE APPELLANT W AS TO S HI F T PROFITS OUTSIDE INDIA BY MANIPULATIN G THE PRICES CHARGED IN THE INTERNATIONAL TRAN S ACTION , WHICH I S A PRE - REQUISITE CONDIT I ON TO MAKE AN Y ADJUSTMENT U N DER THE PRO V ISION OF CH A PTER X OF THE ACT . 2 THE AO ERRED IN GI V ING EFFECT TO THE ORDER OF THE DISPUTE RESOLUTION PANEL (A) T H E A O / T P O ERRED IN G I VING EFFECT TO THE ORDER OF T H E LD . PANEL . IN DOING SO , THE AO INCORREC TL Y CO MP UTED T HE TRANSF E R P R I C I NG ADJUSTMENT IN CO NN ECTION WITH THE APPE LL ANT ' S INTER N A T IO N A L TRA N SACTIONS AT IN R 33 , 050 , 970 . TH E APPE LL A N T PRA Y S THAT THE AO OUGHT TO HAVE CO N S IDER E D T H E D IR ECT I O N S OF T H E LD . PANE L AND A C CO R D IN G L Y NO ADJUSTMENT O U GHT TO B E CO MPUT E D I N C ON NEC TI O N W I T H THE APPE LL ANT ' S INTERNATIONA L TRANSACT IO NS. ( B ) T HE AO / T P O ERRED ON FACTS A N D IN L AW IN NOT CONSIDERING FOREIGN EXCHANGE G A IN / LOSS AS O PERA TI NG IN COME / OPERATING EXPEN S E WHILE CAL C UL A TIN G THE NET COST-PLU S MARGIN S OF THE A PPELLA N T AND COMPARABLE COMP A NIE S, AS P E R DIRE C TI O N S I S SUED B Y THE LD. P A NEL . (C ) THE AO / TPO ERRED ON FACTS AND IN LAW IN NOT CONSIDERIN G THE RECTI F IED NET-COST PLUS MA R G IN OF COMPARABLE COMPANIES RETAINED IN THE DIRE C TIONS I SS UED B Y TH E LD . P A NEL . IT(TP)A NO.166 & 181(B)2016 4 3 D ETER MINATION OF ARM 'S LENGTH PRIC E O F SO F TWA R E DEVE L O PMENT SE R V IC ES TR A N SAC TI O N (A) THE LD. PA N E L AND THE AO / TPO ERRED IN REJECTIN G THE V ALUE OF INT E RN A TI O N A L T R A N S ACTIONS AS R ECORDED I N THE BOOK S O F ACCOU N T, A S T H E A RM 'S L E N G TH PRI C E . (B ) T H E L D . P ANE L A N D THE AO / TPO ERRED I N D E TERMININ G A NEW A RM ' S LEN G TH PRICE IN SU BSTIT UT IO N OF THE A RM ' S L EN G TH PRICE DETERMIN E D BY THE APPE L LANT . ( C ) T HE LD . P A N E L AND T H E AO / TPO ERRED IN LAW IN HOLDIN G THE F R ESH COMPAR A BI L IT Y A N A L YSIS US ING NON CONTEMPORANE O U S D A T A CO NDU C TED B Y T H E TPO A ND FURTHER S UB S T I TUTIN G TH E AP PELLANT ' S A NAL YS IS W ITH F RE S H BE N CH M ARKING ANA L YSIS ON HI S OW N C ONJECTU R ES A ND S URMISES. THUS , T H E APPELLANT PRA YS TH A T TH E FRESH BENC HM A R KI N G ANA L YSIS COND U C T E D BY THE TPO I S LI A BL E TO BE QU AS H E D. ( D ) T H E L D. PANEL A ND THE AO / TPO G ROS S L Y E RR E D O N FAC T S IN CO N F I RMING T H E B E NC H M A RKING OF TR A NSACTION S OF S OFTW A R E D EV ELOPMENT S ER V I CES OF TH E A P PE LL A N T W ITH CO MP A NIES O P E RATI N G AS F ULL - FLEDGED E N T REPRENEUR S W I T H O UT C O N S IDERIN G T HE DI FF ERENCE S IN THE F UNCTIONS PERFORMED , AS S ETS EMPLO Y ED AND RI S K UNDERTAKEN B Y TH E APPELLANT VIS - A - VIS C OMPARAB L E COMPANIE S. ( E ) THE LD . P ANE L A ND THE AO / TPO ERRED ON F A CT S IN REJECTIN G T H E COMPARABLE COMPANIES ARRIVED AT IN THE TRANSFER PRICI N G STUD Y WITHOUT IT(TP)A NO.166 & 181(B)2016 5 CONSIDERING TH E FUNCTIONAL A ND RISK ANA L YSIS OF THE AP P E LL ANT . (F) THE LD . P A N EL A ND THE AO / TPO E R RED IN LAW AND ON F ACTS IN APPL Y ING ARBITRARY FILT E RS AS CRITER I ON FOR REJECTION OF COMPANIES IDENTIF I ED BY THE APPELLANT IN THE TRANSFER P RICING ST U DY, SUCH AS (I) COMPA N IES WHOSE DATA FO R F I NANCIA L Y EAR ( ' FY') 20 I 0-11 WAS NOT AVA IL A BL E, (I I ) C OMP A N IES W ITH SOF T W AR E D EVE L OP M E N T S E RV I CE REVENUE L ESS THAN 75% O F TOTAL O P ERATING REVENUE , ( II I) COMPAN I ES WIT H SOFTWA R E DEVELOPMENT SERVICE REVEN U E LESS THAN IN R 1 CRORE, (IV ) COM P ANIES WIT H RE L ATED PAR T Y TRANSACTIONS GREATER THAN 25% OF SALES (V) COM P ANI E S WITH EXPORT SALES LESS TH A T 7 5% OF TOTAL SA L ES , (V) COMPANIES WITH EM PL OYEE COST L ESS T H AN 25% OF TOTA L REVENUES, (VI) COMPANIES WITH DIFFERENT FINANCIAL YEAR EN D ING ( I . E. OTHER T H AN 31 MARC H 20 II) AND ( VII ) COMPANIES HAVING PE R SISTENT LOSSES UP TO AND INC L U DIN G F IN ANC I A L YEA R 2 0 I 0 - 1 1 . (G) T H E L D . P A N E L A ND T H E AO / T P O E RR E D O N FACTS AN D I N L AW IN CONS I DE R I N G P E R SIS T E N T SYSTEMS & SOLUTIONS L I MITED , PERSIS T ENT SYSTEMS LIMITED, SASKEN COMMUN I CATION TECHNOLOGIES LIMITED AND LA R SEN AND TOUBRO INFOTECH LIMITED AS COMPARABLE TO THE CAPTIVE SOFTWARE DEVELOPMENT SERVICES FUNCTION RENDERED B Y THE APPELLANT . (H ) THE LD. PANEL AN D THE A O / T P O ERRED ON FACTS IN ARBITRARILY ACCEPTIN G COMPARABLE IT(TP)A NO.166 & 181(B)2016 6 COMPAN I ES WIT H OUT CO N S ID E R I N G THE TU R NOVER AND S I ZE OF THE APPELL A NT . (I) THE L D . P A N E L ERRE D IN L AW AND O N FACTS I N REJECT IN G A K S H AY SOFTWARE TEC H NO L OG I ES LIMITED AND R S SOFTWARE ON THE R EASONING OF SIGNIFICANT ONSITE RE V ENUES, WITHOUT TAKING COGN I ZA N CE OF THE FACT THAT THE ONSITE REVE N UE FILTER HAD NOT BEEN A PPL I ED B Y THE TPO I N THE ORDER ISSUED U N DER SECTION 92CA OF THE ACT . THE LD. PANEL F URTHER E R RED IN A DOPTIN G A N INCONSISTENT POSITIO N IN RETAINING LARSEN & TOUBR O INFOTECH L I MITED AS A COMPARABLE , EVEN T H O U G H THE SAID CO MP ANY H AD SIGNIF I CA N T REVENUES FROM ONSITE ACTIVITY. 4 E RRONEOUS DATA USED B Y THE AO / TPO (A ) THE LD . PANEL AND THE AO / TPO E RR ED IN LA W IN USIN G DATA , W H ICH WA S NOT C ONTEMPORANEOUS AND WHICH W AS NOT AVA IL A BL E I N THE PUBLI C D OMAIN A T TH E TIME OF C ONDUCTIN G THE TRANSFER PRICIN G STU D Y B Y THE APPELL A NT . ( B ) T H E LD. PANEL AND THE AO / TPO ERRED IN LAW AND ON FACTS IN D I SREGARDIN G THE APPLICATION O F MULTIPLE - YEAR DATA WHILE COMPUTING THE MARGINS OF CO MP ARABLE COMPANIE S. 5 NO N- A LLOWANCE OF APPROPRIATE ADJUSTMENT S TO THE COMPARABL E C O MP A N IES, B Y THE AO / TPO (A ) THE AO / TPO ERRED IN L AW AND ON FACTS IN NOT ALLOWING APPROP R IATE ADJUSTMENTS UN DER RULE 108 TO ACCOUNT FOR , INT E R A LI A, DI F FERENCE S IN ( A ) ACCOUNTING PRACTICES , ( B ) MARKETI N G EX P E NDITUR E ADJUSTMENT , ( C) RE SE ARCH AND D EVE LOPM E NT EXPENDI T UR E A DJU ST M E NT , AND ( D ) IT(TP)A NO.166 & 181(B)2016 7 RI S K A D J U ST MENT T O ACCOUNT FOR THE DI F FER E N C E IN PR O FILE BETWEEN THE A PPELL A NT A N D T H E CO MPAR A BLE COMPANIES. ( B ) T H E LD. P A NEL A ND T H E A O / T PO ERRED I N L AW IN NOT PROVI D I N G A N O PP ORT U NI T Y T O T H E COM P A N Y B E F ORE M A K ING AN A D JUSTMENT O N ACCOUNT OF NEGATIVE WO R KING CAPITAL . 6 VARIATIO N OF 5 % FROM TH E A RITHMETIC MEAN T H E A O / T PO E RR E D I N L AW IN NOT GRAN T ING THE VARIATIO N AS PER THE PROVISO TO SECTION 92C(2) OF THE AC T . 7 GR A NT OF L OWER DED U CT I ON UNDER S ECT I ON 10A OF T H E INCOME - TAX ACT, 1961 (A) O N TH E F AC T S AND C IR C U M ST A N CES OF THE CASE, THE LEARNED ASSESSING O FF IC E R ('LD. A O ') H A S ERRED I N RE DU C IN G T R AVE L EXPE N D I TURE I N CURRED IN FOREIGN CURRENCY AMOU N T IN G TO RS . 8 , 8 26,999 F ROM T H E EXPORT TURNOVER WHILE COMPUTING THE DEDUCT I ON UNDER SECTION 1OA OF TH E ACT IR R ES P EC TI VE OF T H E FACT T H AT THE SAME WAS NOT ATTRIBUTAB L E TO DELIVERY OF COM PUT ER SO F TWA R E O U TS I D E IND IA . ( B ) ON T H E FACTS A ND C IRCU MSTANCES OF THE CASE, THE LD . D R P ERRED IN CONFIRMING THE ACTIO N OF THE LD. AO. 8. DIRECTIONS ISSUED BY THE HONBLE DRP THE LD. PANEL HAS ERRED IN LAW AND ON FACTS IN NOT TAKING COGNIZANCE OF THE OBJECTIONS FILED BY THE APPELLANT IN RELATION TO THE DRAFT ASSESSMENT ORDER ISSUED BY THE AO/TPO ORDER AND CONFIRMING THE DRAFT ORDER OF THE AO. IT(TP)A NO.166 & 181(B)2016 8 9. PENALTY PROCEEDINGS THE APPELLANT SUBMITS THAT BASED ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THERE WAS NO BASIS FOR THE AO TO INITIATE PROCEEDINGS UNDER SECTION 274 READ WITH SECTION 271 OF THE ACT. 10. RELIEF THE APPELLANT CRAVES LEAVE TO ADD OR TO OR ALTER, BY DELETION, SUBSTITUTION, MODIFICATION OR OTHERWISE, THE ABOVE GROUNDS OF APPEAL, EITHER BEFORE OR DURING THE HEARING OF THE APPEAL. THE APPELLANT SUBMITS THAT THE ABOVE GROUNDS ARE INDEPENDENT AND WITHOUT PREJUDICIAL TO ONE ANOTHER. 3. THE GROUNDS RAISED BY THE REVENUE ARE AS UNDER:- 1. THE ORDERS OF THE DISPUTE RESOLUTION PANEL IS OPPOSED TO LAW AND THE FACTS OF THE CASE. 2. THE DRP ERRED IN DIRECTING THE AO/TPO TO EXCLUDE M/S ACROPETAL TECHNOLOGIES LTD. M/S MINDTREE LTD. AND M/S R.S.SOFTWARE (IN.) LTD. FROM THE LIST OF COMPARABLES, HOLDING THEM TO BE FUNCTIONALLY DISSIMILAR AS THEY ARE HAVING SIGNIFICANT ONSITE REVENUES, THEREBY SEEKING EXACT COMPARABILITY WHILE SEARCHING FOR COMPARABLE COMPANIES OF THE ASSESSE UNDER TNMM METHOD, WHEREAS REQUIREMENT OF LAW AND INTERNATIONAL JURISPRUDENCE REQUIRE SEEKING SIMILAR COMPARABLE COMPANIES. ALSO, THE NATURE OF ACTIVITY, I.E., SOFTWARE DEVELOPMENT REMAINS THE SAME, IRRESPECTIVE OF THE COMPANY ENGAGED IN IT(TP)A NO.166 & 181(B)2016 9 PROVIDING ONSITE OR OFFSHORE SERVICES. 3. THE DRP ERRED IN DIRECTING EXCLUSION OF M/S. R.S. SOFTWARE PVT. LTD., M/S. MINDTREE LTD., AND M/S. ACROPETAL TECHNOLOGIES LTD., ON THE GROUND THAT THEY HAVE SIGNIFICANT ONSITE REVENUE, WITHOUT APPRECIATING THE FACT THAT ONSITE DEVELOPMENT OF SOFTWARE ENTAILS MORE COST AND THEREBY RESULTS IN LOWER PROFIT MARGINS. 4. THE DRP ERRED IN DIRECTING THE AO TO EXCLUDE M/S. ACROPETAL TECHNOLOGIES LTD., FROM THE LIST OF FINAL COMPARABLES ALSO FOR THE REASON THAT CLEAR SEGMENTAL INFORMATION OF THE EMPLOYEE COST AND EXPORT EARNING FILTER WAS NOT AVAILABLE WITHOUT APPRECIATING THAT PROPER SEGMENTAL INFORMATION WAS AVAILABLE ON PROWESS DATABASE AS WELL AS AUDITED FINANCIALS. 5. THE DRP ERRED IN DIRECTING THE AO TO EXCLUDE M/S. MINDTREE LTD., FROM THE LIST OF COMPARABLES HOLDING IT TO BE FUNCTIONALLY DISSIMILAR ALSO FOR THE REASON THAT THERE WERE EXTRAORDINARY EVENT OF MERGER WHEN IT HAS NOT BEEN PROVED THAT SUCH MERGER HAS ANY MATERIAL EFFECT ON PROFIT MARGIN. 6. THE DRP ERRED IN DIRECTING TO EXCLUDE E- INFOCHIPS LTD., FROM THE LIST OF COMPARABLES HOLDING THAT NO SEGMENTAL INFORMATION IS AVAILABLE AND THAT IT FAILS 75% SERVICE REVENUE FILTER, BY NOT ACKNOWLEDGING THE FACT THAT ENTIRE REVENUE OF THE COMPANY COMES FROM PROVISION OF SERVICES, AND SERVICE INCOME BEING 100% OF ITS IT(TP)A NO.166 & 181(B)2016 10 SALES, THE COMPANY QUALIFIES THE FILTER. 7. THE DRP ERRED IN DIRECTING EXCLUSION OF M/S. ICRA TECHNO ANALYTICS LTD., FROM THE LIST OF COMPARABLES ON THE GROUND THAT IT IS INTO DIVERSIFIED ACTIVITY AND NO SEGMENTAL DATA IS AVAILABLE, WITHOUT APPRECIATING THAT THE BASIC FUNCTION OF THE COMPANY IS DEVELOPING SOFTWARE SOLUTIONS IN THOSE AND OTHER VERTICALS. THE COMPANY'S BUSINESS OF ANALYSIS OF STATISTICAL DATA OF ITS CLIENTS BEFORE PROVIDING SOFTWARE SOLUTIONS DOES NOT RENDER THE SERVICES TO BE FUNCTIONALLY UNCOMPARABLE. 8. THE DRP ERRED IN DIRECTING TO EXCLUDE M/S. E- ZEST SOLUTIONS LTD., FROM THE LIST OF COMPARABLES HOLDING IT TO BE FUNCTIONALLY UNCOMPARABLE, THEREBY SEEKING EXACT COMPARABILITY BY IMPOSING CONDITION BEYOND LAW WHEREAS REQUIREMENT OF LAW IS TO ACKNOWLEDGE ONLY THOSE DIFFERENCES THAT ARE LIKELY TO MATERIALLY AFFECT THE MARGIN. THE DRP OUGHT TO HAVE APPRECIATED THAT THE COMPARABLE QUALIFIED ALL THE QUALITATIVE AND QUANTITATIVE FILTERS APPLIED BY THE TPO AND IN A COMPUTER SOFTWARE SERVICES, IF CONSIDERED AS A SECTOR OF BUSINESS, THE 15 DIFFERENT LINES PREVAILING IN THE BUSINESS CANNOT BE CONSIDERED FUNCTIONALLY DIFFERENT FROM EACH OTHER. 9. THE DRP ERRED IN DIRECTING EXCLUSION OF M/S. INFOSYS LTD., FROM THE LIST OF COMPARABLES HOLDING IT TO BE FUNCTIONALLY UNCOMPARABLE, IT(TP)A NO.166 & 181(B)2016 11 WITHOUT APPRECIATING THAT THE PRIMARY SOURCE OF INCOME OF THE COMPARABLE IS FROM PROVISION OF SOFTWARE DEVELOPMENT SERVICES. ALSO, THE DRP ERRED IN IMPOSING A CONDITION BEYOND LAW IN SEEKING EXACT COMPARABILITY, WHEREAS REQUIREMENT OF LAW IS TO ACKNOWLEDGE ONLY THOSE DIFFERENCES THAT ARE LIKELY TO MATERIALLY AFFECT THE MARGIN. 10. THE DRP ERRED IN DISREGARDING THE POSITION OF LAW THAT THERE COULD BE DIFFERENCES BETWEEN THE ENTERPRISES COMPARED UNDER TNMM METHOD THAT ARE NOT LIKELY TO MATERIALLY AFFECT THE PRICE OR COST CHARGED OR THE PROFITS ACCRUING TO SUCH ENTERPRISES. 11. THE DRP ERRED IN DIRECTING THE AO TO EXCLUDE M/S. TATA ELXSI LTD., FROM THE LIST OF COMPARABLES, HOLDING IT TO BE FUNCTIONALLY UNCOMPARABLE, WITHOUT APPRECIATING THE FACT THAT THE COMPARABLE QUALIFIED ALL THE QUALITATIVE AND QUANTITATIVE FILTERS APPLIED BY THE TPO AND IT IS A SIMILAR COMPARABLE COMPANY AND MOREOVER, THE REQUIREMENT OF LAW AND INTERNATIONAL JURISPRUDENCE REQUIRE SEEKING SIMILAR COMPARABLE COMPANIES WHILE SEARCHING FOR COMPARABLE COMPANIES UNDER TNMM. THE DRP HAS ALSO NOT APPRECIATED THAT THERE HAVE BEEN NO PROJECTS IN VISUAL COMPUTING LABS DURING THE RELEVANT PREVIOUS YEAR. 12. THE DRP ERRED IN DIRECTING THE AO/TPO TO EXCLUDE M/S. EVOKE TECHNOLOGIES LTD., FROM THE IT(TP)A NO.166 & 181(B)2016 12 LIST OF COMPARABLES, HOLDING IT TO BE FUNCTIONALLY UNCOMPARABLE DUE TO THE PECULIAR ECONOMIC CIRCUMSTANCES WITHOUT APPRECIATING THAT THE EXPENDITURE INCURRED IS A NORMAL PHENOMENA AND A COMPANY CANNOT BE EXCLUDED MERELY ON ABNORMAL PROFIT MARGINS. 13. THE DRP ERRED IN DIRECTING THE AO/TPO TO EXCLUDE MIS. R.S. SOFTWARE (INDIA) LTD., FROM THE LIST OF COMPARABLES MERELY TO MAINTAIN CONSISTENCY, EVEN IN THE ABSENCE OF OBJECTION WITH RESPECT TO INCLUSION OF THE SAID COMPARABLES IN THE LIST. 14. THE DRP ERRED IN DIRECTING THE AO/TPO TO CONSIDER THE FOREIGN EXCHANGE FLUCTUATION TO BE OPERATING IN NATURE, WITHOUT APPRECIATING THAT THE RULE 10B(2)(D) STIPULATES THAT THE NET PROFIT MARGIN REALIZED BY THE ASSESSEE IN .. THE INTERNATIONAL TRANSACTION SHALL ALONE BE COMPUTED FOR COMPARABILITY UNDER TNMM. CORPORATE ISSUE: 15.THE DRP ERRED IN DIRECTING THE AO TO FOLLOW THE RATIO LAID DOWN BY THE HON'BLE COURT IN THE'- CASE OF TATA ELXSI LIMITED 349 ITR 98 AND EXCLUDE EXPENSES INCURRED IN FOREIGN CURRENCY FROM THE TOTAL TURNOVER ALSO, WHILE COMPUTING THE DEDUCTION U/S 1OA OF THE LT. ACT, WITHOUT APPRECIATING THE FACT THAT THERE IS NO PROVISION IN SECTION 1OA THAT SUCH EXPENSES SHOULD BE REDUCED FROM THE TOTAL TURNOVER ALSO, AS CLAUSE (IV) OF THE IT(TP)A NO.166 & 181(B)2016 13 EXPLANATION TO SECTION 1OA PROVIDES THAT SUCH EXPENSES ARE TO BE REDUCED ONLY FROM THE EXPORT TURNOVER. L6. THE DRP ERRED IN NOT APPRECIATING THE FACT THAT THE JURISDICTIONAL HIGH COURT'S DECISION IN THE CASE OF TATA ELXSI LIMITED 349 ITR 98 HAS NOT BEEN ACCEPTED BY THE DEPARTMENT AND AN APPEAL HAS BEEN FILED BEFORE THE HON'BLE SUPREME COURT. L7. FOR THESE AND SUCH OTHER GROUNDS THAT MAY BE URGED AT THE TIME OF HEARING, IT IS HUMBLY PRAYED THAT THE ORDER OF THE DRP BE REVERSED AND THAT OF THE ASSESSING OFFICER BE RESTORED. L8. THE APPELLATE CRAVES LEAVE TO ADD, TO ALTER, TO AMEND OR DELETE ANY OF THE GROUNDS THAT MAY BE URGED AT THE TIME OF HEARING OF THE APPEAL. 4. LEARNED DR OF THE REVENUE SUPPORTED THE ORDER OF THE A.O./T.P.O. LEARNED AR OF THE ASSESSEE SUBMITTED THAT THE GROUN DS RAISED IN THE APPEAL OF THE REVENUE ON CORPORATE TAX ISSUE AS PER GROUND S NO. 15 TO 17 ARE COVERED IN FAVOUR OF THE ASSESSEE BY THE JUDGMENT O F HONBLE KARNATAKA HIGH COURT RENDERED IN THE CASE OF TATA ELXSI LTD. AS RE PORTED IN 349 ITR 98. REGARDING THE TP ISSUES AS PER THE REMAINING GROUND S IN THE APPEAL OF THE REVENUE AND THE APPEAL OF THE ASSESSEE, HE SUBMITTE D A CHART AND POINTED OUT THAT THE ISSUE ABOUT EXCLUSION OF SOME COMPARAB LES AND INCLUSION OF SOME COMPARABLES MAY BE DECIDED AS PER THIS CHART I N WHICH IT IS POINTED OUT THAT THE SAME ARE COVERED BY SOME TRIBUNAL ORDE R AS STATED IN THE CHART. IT(TP)A NO.166 & 181(B)2016 14 HE ALSO SUBMITTED THAT THERE IS ONE CORPORATE TAX I SSUE IN ASSESSEES APPEAL ALSO AS PER GROUND NO. 7 BUT IF THE GROUND OF REVEN UE ON CORPORATE TAX ISSUE IS REJECTED THEN THIS GROUND IS NOT PRESSED. HE ALS O SUBMITTED THAT AS PER GROUND NO. 2 (B) OF THE ASSESSEES APPEAL, THIS IS THE GRIEVANCE OF THE ASSESSEE THAT EXCHANGE FLUCTUATION GAIN SHOULD BE C ONSIDERED AS OPERATING PROFIT. AT THIS JUNCTURE, THE BENCH WANTED TO KNOW AS TO WHETHER SUCH EXCHANGE FLUCTUATION GAIN IS FOR THE TURNOVER OF TH E CURRENT YEAR OR FOR THE TURNOVER OF AN EARLIER YEAR. IN REPLY, HE SUBMITTED THAT THIS DETAIL IS NOT READILY AVAILABLE AND THEREFORE, ON THIS ASPECT, TH E MATTER MAY BE RESTORED TO AO/TPO WITH SUITABLE DIRECTIONS. 5. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. REGA RDING THE CORPORATE TAX ISSUE AS PER GROUND NO. 15 TO 17 OF REVENUES A PPEAL, WE HOLD THAT THIS ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY THE J UDGMENT OF HONBLE KARNATAKA HIGH COURT RENDERED IN THE CASE OF TATA E LXSI LTD. (SUPRA) WHEREIN IT WAS HELD THAT TOTAL TURNOVER IS SUM TOTA L OF EXPORT TURNOVER AND DOMESTIC TURNOVER AND THEREFORE, IF AN AMOUNT IS RE DUCED FROM EXPORT TURNOVER THEN TOTAL TURNOVER ALSO GOES DOWN BY THE SAME AMOUNT AUTOMATICALLY. RESPECTFULLY FOLLOWING THIS JUDGMENT , WE DECLINE TO INTERFERE IN THE ORDER OF CIT (A) ON THIS ISSUE. ACCORDINGLY, GROUNDS 15 TO 17 OF THE REVENUES APPEAL ARE REJECTED. REGARDING GROUND 7 O F ASSESSEES APPEAL, WE REJECT IT AS NOT PRESSED IN VIEW OF THE SUBMISSIONS OF THE LEARNED AR OF THE ASSESSEE AS NOTED ABOVE. 6. NOW, WE ARE LEFT WITH T P ISSUES IN BOTH APPEALS , WHICH WE DECIDE IN THE LIGHT OF THE CHART. BUT BEFORE THAT, WE HOLD TH AT THE ISSUE INVOLVED IN IT(TP)A NO.166 & 181(B)2016 15 GROUND NO. 2 (B) OF THE ASSESSEES APPEAL IS RESTOR ED BACK TO THE FILE OF AO/TPO FOR A FRESH DECISION BECAUSE THESE DETAILS A RE NOT AVAILABLE AS TO WHETHER THE EXCHANGE FLUCTUATION GAIN IS ON ACCOUNT OF CURRENT YEARS TURNOVER OR EARLIER YEARS TURNOVER. WITHOUT THIS DETAIL, THIS ISSUE CANNOT BE DECIDED BECAUSE IN OUR CONSIDERED OPINION, EVEN AFT ER HOLDING THAT THE EXCHANGE FLUCTUATION GAIN IS OPERATING PROFIT, IT H AS TO BEEN THAT WHETHER THE SAME CAN BE CONSIDERED TO COMPUTE THE PROFIT MARGIN OF THE ASSESSEE FOR THE CURRENT YEAR. IN OUR CONSIDERED OPINION IT CANNOT B E CONSIDERED IF IT ARISES IN RESPECT OF THE TURNOVER OF AN EARLIER YEAR BECAUSE WE ARE CONCERNED WITH THE OPERATING PROFIT OF THE CURRENT YEAR FOR WORKING OU T ASSESSEES MARGIN OF PROFIT TO COMPARE WITH THE MARGIN OF PROFIT OF THE COMPARABLES AND SINCE THE RELATED TURNOVER IS NOT INCLUDED IN THE TURNOVER TA KEN IN THE DENOMINATOR, IF THE EXCHANGE FLUCTUATION GAIN IS NOT EXCLUDED FROM THE NUMERATOR, IT WILL RESULT IN ABSURD RESULT. WE THEREFORE RESTORE THIS MATTER TO AO/TPO FOR A FRESH DECISION WITH THE DIRECTION THAT IF THE RELAT ED TURNOVER FROM WHICH THE EXCHANGE FLUCTUATION GAIN HAS ARISEN IS THE TURNOVE R OF THE CURRENT YEAR THEN THE EXCHANGE FLUCTUATION GAIN SHOULD BE CONSID ERED AS OPERATING PROFIT OF THE CURRENT YEAR FOR WORKING OUT THE PERC ENTAGE OF PROFIT OF THE ASSESSEE FOR CURRENT YEAR TO COMPARE IT WITH RATE O F PROFIT OF THE COMPARABLES BUT IF IT IS IN RESPECT OF THE TURNOVER OF AN EARLI ER YEAR, THEN SUCH EXCHANGE FLUCTUATION GAIN SHOULD BE EXCLUDED FROM OPERATING PROFIT OF THE CURRENT YEAR FOR WORKING OUT THE PERCENTAGE OF PROFIT OF TH E ASSESSEE FOR CURRENT YEAR. 7. NOW, WE DECIDE THE ISSUE OF VARIOUS COMPARABLES. THE ASSESSEE SELECTED 14 COMPARABLES AND THE TPO TOOK 13 COMPARA BLES. DRP DIRECTED FOR IT(TP)A NO.166 & 181(B)2016 16 EXCLUSION OF 9 COMPARABLES FOR WHICH THE REVENUE IS IN APPEAL SEEKING THEIR INCLUSION. THE ASSESSEE IS IN APPEAL FOR EXCLUSION OF 5 COMPARABLES WHICH WERE RETAINED BY DRP. AT THE SAME TIME, THE ASSESSE E IS ASKING FOR INCLUSION OF 1) EVOKE TECHNOLOGIES PVT. LTD., 2) MINDTREE LTD . (SEG) AND 3) R S SOFTWARE (INDIA) LTD. BEING 3 COMPARABLES OUT OF 9 COMPARABL ES EXCLUDED BY DRP. THE ASSESSEE IS ALSO SEEKING INCLUSION OF LGS GLOBAL LT D. 8. WE DECIDE THE ISSUE OF VARIOUS EXCLUSIONS AND IN CLUSIONS IN THESE CROSS APPEALS. REGARDING INCLUSION OF 3 COMPARABLES OUT OF 9 COMPARABLES EXCLUDED BY DRP, WE FIND THAT WHEN BOTH SIDES ARE S EEKING INCLUSION OF THESE 3 COMPARABLES BEING 1) EVOKE TECHNOLOGIES PVT . LTD., 2) MINDTREE LTD. (SEG) AND 3) R S SOFTWARE (INDIA) LTD. AND THEIR IN CLUSION IS PROPER AS PER THE TRIBUNAL ORDER RENDERED IN THE CASE OF APPLIED MATE RIALS INDIA PVT. LTD. VS. ACIT AS REPORTED IN TS 815 ITAT 2016, WE REVE RSE THE ORDER OF DRP ABOUT EXCLUSION OF THESE 3 COMPARABLES AND DIRECT T HE AO/TPO TO INCLUDE THESE THREE IN FINAL LIST OF COMPARABLES. 9. NOW WE DECIDE ABOUT THE REMAINING 6 COMPARABLES EXCLUDED BY DRP AND 4 COMPARABLES RETAINED BY DRP BUT FOR WHICH THE ASSESSEE IS SEEKING EXCLUSION. OUT OF THESE 6 COMPARABLES EXCLU DED BY DRP, ONE COMPARABLE ICRA TECHNO ANALYTICS LTD. IS HAVING RPT IN EXCESS OF 15% AND THEREFORE, FOR THIS REASON ALONE, THIS COMPARABLE H AS TO BE EXCLUDED ALTHOUGH DRP HAS EXCLUDED IT FOR A DIFFERENT REASON THAT IT IS HAVING VARIOUS ACTIVITIES AND SEGMENTAL DATA ARE NOT AVAILABLE. WE UPHOLD ITS EXCLUSION ON ACCOUNT OF RPT FILTER. EXCLUSION OF ACROPETAL TECHN OLOGIES LTD. (SEG) IS COVERED IN FAVOUR OF THE ASSESSEE BY THE SAME TRIBU NAL ORDER RENDERED IN THE CASE OF APPLIED MATERIALS INDIA PVT. LTD. VS. ACIT (SUPRA). RESPECTFULLY IT(TP)A NO.166 & 181(B)2016 17 FOLLOWING THE SAME, WE UPHOLD ITS EXCLUSION. EXCLUS ION OF 1) E ZEST SOLUTIONS LTD., 2) INFOSYS LTD., 3) LARSEN & TOUBRO INFOTECH LTD., 4) PERSISTENT SYSTEMS & SOLUTIONS LTD., 5) PERSISTENT SYSTEMS LTD., 6) SASKEN COMMUNICATION TECHNOLOGIES LTD. AND 7) TATA ELXSI L TD. ARE ALSO COVERED IN FAVOUR OF THE ASSESSEE BY THE SAME TRIBUNAL ORDER R ENDERED IN THE CASE OF APPLIED MATERIALS INDIA PVT. LTD. VS. ACIT (SUPRA). RESPECTFULLY FOLLOWING THE SAME, WE UPHOLD THE EXCLUSION OF THESE SEVEN COMPAR ABLES ALSO. EXCLUSION OF E INFOCHIPS LTD. IS COVERED IN FAVOUR OF THE A SSESSEE BY THE TRIBUNAL ORDER RENDERED IN THE CASE OF SAXO INDIA PVT. LTD. VS. ACIT IN ITA NO. 6148/DEL/2015 DATED 05.02.2016 PARA 10.1 & 10.2 AVA ILABLE AT PAGES 221 TO 223. RESPECTFULLY FOLLOWING THE SAME, WE UPHOLD ITS EXCLUSION. IN THIS MANNER, WE UPHOLD THE EXCLUSION OF SIX COMPARABLES EXCLUDED BY DRP OUT OF 9 COMPARABLES EXCLUDED BY DRP AND EXCLUDE 4 COMPARA BLES RETAINED BY DRP AND WE HAVE ALREADY HELD THAT OUT OF 9 COMPARAB LES EXCLUDED BY DRP, 3 HAVE TO COME BACK BEING 1) EVOKE TECHNOLOGIES PVT . LTD., 2) MINDTREE LTD. (SEG) AND 3) R S SOFTWARE (INDIA) LTD. NOW, WE DECI DE ABOUT LGS GLOBAL LTD. AS PER THE TRIBUNAL ORDER RENDERED IN THE CASE OF A PPLIED MATERIALS INDIA PVT. LTD. VS. ACIT (SUPRA), THIS IS A GOOD COMPARABLE AN D THEREFORE, WE DIRECT THE A.O. AND TPO TO INCLUDE THIS COMPARABLE. SO, THERE SHOULD BE 4 COMPARABLES IN THE FINAL LIST OF COMPARABLE AND ON THE BASIS OF THAT, THE AO/TPO SHOULD WORK OUT THE ALP. IT(TP)A NO.166 & 181(B)2016 18 10. IN THE RESULT, THE APPEAL OF THE ASSESSEE AND R EVENUE ARE PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON THE DATE MENT IONED ON THE CAPTION PAGE. SD/- (SUNIL KUMAR YADAV) SD/- (A.K. GARODIA) JUDICAL MEMBER ACCOUNTANT MEMBER PLACE: BANGALORE: D A T E D : 22.02.2017 AM * COPY TO : 1 APPELLANT 2 RESPONDENT 3 CIT(A)-II BANGALORE 4 CIT 5 DR, ITAT, BANGALORE. 6 GUARD FILE BY ORDER AR, ITAT, BANGALORE IT(TP)A NO.166 & 181(B)2016 19 1. DATE OF DICTATION 2. , , DATE ON WHICH TYPED DRAFT IS PLACED BEFORE THE DICT ATING MEMBER .. 3. !' # . $ %# / $ %# # & DATE ON WHICH THE APPROVED DRAFT COMES TO THE PS/SR .PS. 4. ''() & * + DATE ON WHICH THE ORDER IS PLACED BEFORE THE DICTAT ING MEMBER FOR PRONOUNCEMENT 5. * . %# / # . . %# # + DATE ON WHICH THE ORDER COMES BACK TO THE PS/SR.PS .. 6 * !', + DATE OF UPLOADING THE ORDER ON WEBSITE .. 7. ! !', ' , - ) IF NOT UPLOADED, FURNISH THE REASON FOR DOING SO . 8. .% / 0 + DATE ON WHICH THE FILE GOES TO THE BENCH CLERK .. 9. * 1'2 / 34 & 5 + DATE ON WHICH ORDER GOES FOR XEROX &ENDORSEMENT 10. 0 6 / + DATE ON WHICH THE FILE GOES TO THE HEAD CLERK 11. * 7 & 0 8 + THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT RE GISTRAR FOR SIGNATURE ON THE ORDER . 12. !) * 9() & 0 9() /#5 . + THE DATE ON WHICH THE FILE GOES TO DESPATCH SECTION FOR DESPATCH OF THE TRIBUNAL ORDER 13. * 9() + DATE OF DESPATCH OF ORDER .