M/s. Virtusa India Pvt Ltd, Hyderabad V. DCIT,Circel-3(3), Hyderabad

ITA 269/HYD/2011

• Counselvise Citation: [2014] 120 COUNSELVISE.COM (IT) 7662 (ITAT-HYDERABAD)
• Duration Of Justice: 3 year(s) 6 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-09-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 23-08-2011
• Assessment Year: 2005-2006
• Appeal Filed On: 21-02-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: D SUDHAKAR RAO
• Assessee Lawyers: RAVI BHARDWAJ
• Keywords: Transfer pricing; Double taxation relief; Opportunity of being heard; International transaction; Wholly owned subsidiary
• Section: 92C; 43B; 143(3); 234B; 90; 154

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B, HYDERABAD BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER ITA NO. 269/HYD/2011 ASSESSMENT YEAR : 2005-06 M/S VIRTUSA (INDIA) PVT. LTD., HYDERABAD. PAN AABCV 4077 E DY. COMMISSIONER OF INCOME- TAX, CIRCLE 3(3),HYDERABAD. (APPELLANT) (RESPONDENT) ITA NO. 267/HYD/2011 ASSESSMENT YEAR : 2005-06 DY. COMMISSIONER OF INCOME- TAX, CIRCLE 3(3),HYDERABAD. M/S VIRTUSA (INDIA) PVT. LTD., HYDERABAD. PAN AABCV 4077 E (APPELLANT) (RESPONDENT) ASSESSEE BY SHRI RAVI BHARDWAJ REVENUE BY SHRI D. SUDHAKAR RAO DATE OF HEARING 18-08-2014 DATE OF PRONOUNCEMENT 16-09-2014 O R D E R PER SAKTIJIT DEY, J.M.: THESE CROSS APPEALS ARE DIRECTED AGAINST THE ORDER DATED 15/12/2010 OF CIT(A)-III, HYDERABAD FOR THE ASSESSM ENT YEAR 2005- 06. 2 ITA NOS. 267 & 269/HYD/2011 M/S VIRTUSA INDIA PVT. LTD. ITA NO. 269/HYD/2011- APPEAL BY THE ASSESSEE 2. IN TOTAL ASSESSEE HAS RAISED 17 GROUNDS. HOWEVER , AT THE TIME OF HEARING, THE LEARNED AR HAS RESTRICTED HIS ARGUM ENT TO THE FOLLOWING TWO ISSUES: 1) TP ADJUSTMENT OF RS. 63,91,764 RELATING TO INTER NATIONAL TRANSACTIONS WITH VIRTUSA, U.K. 2) SELECTION OF COMPARABLES BY TPO. IN VIEW OF THE AFORESAID, REMAINING GROUNDS RAISED BY THE ASSESSEE ARE TREATED AS NOT PRESSED AND DISMISSED ACCORDINGL Y. 3. BRIEFLY THE FACTS ARE, ASSESSEE A PRIVATE LIMITE D COMPANY, IS A WHOLLY OWNED SUBSIDIARY OF VIRTUSA INC.USA. ASSESSE E IS ENGAGED IN THE BUSINESS OF RENDERING SOFTWARE DEVELOPMENT SERV ICES TO ITS OVERSEAS ASSOCIATED ENTERPRISES WITHIN THE GROUP. A SSESSEE IS REGISTERED WITH THE SOFTWARE TECHNOLOGY PARKS OF IN DIA (STPI) SCHEME OF GOVT. OF INDIA AS A 100% EOU). FOR THE AY UNDER DISPUTE, ASSESSEE FILED ITS RETURN OF INCOME ON 23/11/2006 D ECLARING NIL INCOME AFTER CLAIMING DEDUCTION U/S 10A OF THE ACT. DURING SCRUTINY ASSESSMENT PROCEEDING, AO NOTICING THAT INTERNATION AL TRANSACTIONS ENTERED INTO BY ASSESSEE DURING THE YEAR HAS EXCEED ED MORE THAN RS. 5 CRORES, MADE A REFERENCE TO THE TRANSFER PRICING OFFICER (TPO) FOR DETERMINATION OF ARMS LENGTH PRICE (ALP). IN COURS E OF PROCEEDING, THE TPO EXAMINED THE TP DOCUMENT OF THE ASSESSEE AN D OTHER RELEVANT MATERIALS AND NOTICED THAT DURING THE RE LEVANT PREVIOUS YEAR ASSESSEE HAD THE FOLLOWING REVENUE FROM INTERNATION AL TRANSACTIONS: 1) SOFTWARE DEVELOPMENT SERVICES RS. 90,23,79,98 9 2) RECEIPT OF REIMBURSEMENT OF EMPLOYEE TRAVEL EXPE NSES RS. 9,15,46,361 3) FIXED ASSETS RS. 2,42,463 ON GOING THROUGH THE TP STUDY OF THE ASSESSEE, TPO NOTICED THAT ASSESSEE HAS ADOPTED TRANSACTION NET MARGIN METHOD (TNMM) AS MOST APPROPRIATE METHOD AND AFTER CONDUCTING A SEAR CH IN THE DATA 3 ITA NOS. 267 & 269/HYD/2011 M/S VIRTUSA INDIA PVT. LTD. BASES IN ITES CATEGORY HAS SELECTED 45 COMPARABLES WITH AVERAGE MARGIN OF 9.97% AS AGAINST ASSESSEES MARGIN OF 13. 34% THEREBY TREATING PRICE CHARGED TO BE WITHIN ARMS LENGTH. T PO, HOWEVER, POINTING OUT VARIOUS DEFECTS AND DEFICIENCIES IN TH E TP DOCUMENT OF THE ASSESSEE, REJECTED THE SAME THOUGH HE ACCEPTED TNMM AS THE MOST APPROPRIATE METHOD. AFTER REJECTING THE TP DOC UMENT OF THE ASSESSEE, TPO HIMSELF UNDERTOOK A SEARCH IN THE DAT A BASES, BY APPLYING SOME OF THE FILTERS SELECTED BY THE ASSESS EE AS WELL APPLYING CERTAIN ADDITIONAL FILTERS WHICH RESULTED IN SELECT ION OF 17 COMPARABLES WITH ARITHMETIC MEAN PLI OF 26.59%. AFTER ALLOWING DEDUCTION OF WORKING CAPITAL ADJUSTMENT OF 2.89%, ADJUSTED ARITH METIC MEAN PLI WAS WORKED OUT AT 23.75%. APPLYING AFORESAID ARITHM ETIC MEAN PLI TO THE OPERATING COST, THE ALP WAS DETERMINED AT RS. 1 04,34,80,489. ASSESSEE HAVING REPORTED REVENUE FROM INTERNATIONAL TRANSACTION AT RS. 95,39,59,994, SHORTFALL OF RS. 8,95,20,495 WAS TREATED AS ADJUSTMENT U/S 92C OF THE ACT. IN PURSUANCE TO THE ORDER PASSED BY THE TPO, AO COMPLETED ASSESSMENT U/S 143(3) OF THE ACT BY ADDING TP ADJUSTMENT OF RS. 8,95,20,495. APART FROM THE AD DITION MADE ON ACCOUNT OF TP ADJUSTMENT, AO ALSO RESTRICTED THE CL AIM U/S 10A TO RS. 9,38,38,481 THEREBY DISALLOWING A SUM OF RS. 2,04,4 3,269. AS A RESULT THE TOTAL INCOME WAS DETERMINED AT RS. 10,99 ,63,764 RESULTING IN EXCESS DEMAND OF RS. 5,81,53,904. BEING AGGRIEVE D OF THE ASSESSMENT ORDER SO PASSED ASSESSEE PREFERRED APPEA L BEFORE THE CIT(A). 4. DURING THE PENDENCY OF THE PROCEEDING BEFORE THE CIT(A), ASSESSEE INITIATED MUTUAL AGREEMENT PROCEEDING (MA P) UNDER ARTICLE 27 OF THE INDO-US DOUBLE TAXATION AVOIDANCE AGREEME NT (DTAA) AND ACCORDINGLY REQUESTED THE CIT(A) TO KEEP PROCEEDING S IN ABEYANCE TILL THE COMPLETION OF MAP PROCEEDINGS. SUBSEQUENTLY, AS SESSEE VIDE LETTER DATED 9/11/2010 INFORMED CIT(A) THAT THEY HA VE RECEIVED A NOTICE DATED 06/10/2010 FROM ACIT, CIRCLE 3(3), H YDERABAD REQUIRING THEM TO COMMUNICATE THEIR VIEWS ON ACCEPT ANCE OF 4 ITA NOS. 267 & 269/HYD/2011 M/S VIRTUSA INDIA PVT. LTD. RESOLUTION REACHED BY THE US AND INDIAN COMPETENT A UTHORITIES IN TERMS OF SECTION 90 OF THE IT ACT, 1961, READ WITH ARTICLE 27 OF THE DTAA BETWEEN INDIAN AND USA. IN THE SAID LETTER, AO ALSO SOUGHT ASSESSEES OPINION IN TERMS OF RULE 44A OF IT RULES WHETHER ASSESSEE WANTS TO ACCEPT THE RESOLUTION UNDER MAP P ROCEDURE FOR WHICH IT IS NECESSARY TO WITHDRAW THE APPEAL PENDIN G ON THE ISSUE WHICH WAS THE SUBJECT MATTER OF ADJUDICATION UNDER THE MAP. ASSESSEE BROUGHT IT TO THE NOTICE OF CIT(A) THAT TH EY, IN PRINCIPLE, HAVE STATED BEFORE THE AO THAT THEY ARE IN AGREEMEN T WITH THE RESOLUTION REACHED BETWEEN US AND INDIAN COMPETENT AUTHORITIES. IT WAS ALSO BROUGHT TO THE NOTICE OF THE CIT(A), ASSES SEE TO THAT EFFECT HAS FILED A LETTER DATED 09/11/10 BEFORE AO CONFIRM ING THEIR ACCEPTANCE OF THE MAP RESOLUTION. AS MENTIONED BY C IT(A) IN PARA 4.2 OF HIS ORDER, SINCE ASSESSEE WANTED TO WITHDRAW THEIR GROUND ON TP ADJUSTMENT AND WANTED TO PURSUE THE APPEAL ON OT HER ISSUES ONLY, THE CIT(A) DISMISSED THE GROUND RELATING TO THE ADD ITION MADE OF RS. 8,95,20,495 ON ACCOUNT OF TP ADJUSTMENT. RELEVANT P ORTION FROM THE ORDER OF THE CIT(A) EXTRACTED FOR THE SAKE OF CONVE NIENCE: 4.41 AFTER CONSIDERING SUCH SUBMISSIONS OF THE APPE LLANT, `MADE VIDE THEIR SAID LETTER FILED IN THIS OFFICE O N 09/11/2010 AND THE ABOVE REPORT OF THE AO CONFIRMING ACCEPTANCE BY THE APPELLANT OF THE SAID RESOLUTION REACHED BETWEEN TH E US AND INDIAN COMPETENT AUTHORITIES, IN TERMS OF SECTION 9 0 OF THE ACT READ WITH ARTICLE 27 OF THE DTAA BETWEEN INDIA AND USA AND HAVING REGARD TO THE PROVISIONS OF RULE 44H OF INCO ME TAX RULES, 1962, THE ENTIRE GROUND OF APPEAL NO. 1, WIT H SUB- GROUNDS FROM 1A TO 1H, RELATING TO ADDITION OF RS. 8,95,20,945/- TOWARDS ADJUSTMENT IN ARMS LENGTH PRICE OF THE INT ERNATIONAL TRANSACTIONS U/S 92CA OF THE ACT, I.E. PERTAINING T O TRANSFER PRICING MATTER RAISED IN THIS CASE, IS DISMISSED AS WITHDRAWN W.E.F. 09/11/2010. ASSESSEE CHALLENGING THE DISMISSAL OF ITS GROUND ON TP ADJUSTMENT IS IN APPEAL BEFORE US. 5. LEARNED AR SUBMITTED BEFORE US THAT THE DISPUTE REL ATING TO MAP PROCEEDING IS CONFINED TO THE INTERNATIONAL TRA NSACTION WITH 5 ITA NOS. 267 & 269/HYD/2011 M/S VIRTUSA INDIA PVT. LTD. VIRTUSA, USA, WHICH IS COVERED UNDER THE DTAA BETWE EN INDIA AND USA. IT WAS SUBMITTED THAT APART FROM THE TRANSACTI ON WITH VIRTUSA, USA, ASSESSEE HAS ALSO EARNED REVENUE FROM INTERNAT IONAL TRANSACTIONS WITH OTHER ENTITIES, VIZ., VIRTUSA, UK , WHICH IS NOT COVERED UNDER THE MAP PROCEEDING. IN THIS CONTEXT, LEARNED AR REFERRED TO THE MAP ORDER AT PAGE 601 OF ASSESSEE S PAPER BOOK. LEARNED AR SUBMITTED THAT AS WOULD BE EVIDENT FROM THE MAP ORDER, THE US SHARE IS ONLY 92.86% WHEREAS REST 7.14% RELA TES TO VIRTUSA, UK. IT WAS SUBMITTED, ASSESSEE HAS ONLY AGREED TO ADDITION OF RS. 4,59,35,715 COVERED UNDER MAP, WHEREAS THE BALANCE TP ADJUSTMENT OF RS. 63,91,764 RELATING TO INTERNATIONAL TRANSACT IONS WITH VIRTUSA, UK WAS NOT WITHDRAWN BY THE ASSESSEE. IN OTHER WORDS, LEARNED AR SUBMITTED THAT ASSESSEE HAS WITHDRAWN GROUND RELATI NG TO THE ADDITIONS IN RESPECT OF TRANSACTIONS WITH VIRTUSA, USA, WHICH WAS SUBJECT MATTER OF MAP. IN THIS CONTEXT, LEARNED AR SUBMITTED A WORKING TO SHOW TP ADJUSTMENT ON TRANSACTIONS RELAT ING TO VIRTUSA, USA AND VIRTUSA UK, WHICH IS AS UNDER: PARTICULARS AMOUNT IN INR TOTAL OPERATING COST AS PER MAP ORDER (PAGE 601) A 84,32,16,557 COST RELATED TO TRANSACTIONS WITH VIRTUSA UK (7.14% OF A) B 6,02,05662 MARK UP @ 23.75% AS COMPUTED BY TPO (PAGE 229 OF THE TP ORDER) C=B*23.75% 1,42,98,845 ARMS LENGTH PRICE D=B+C 7,45,04,507 LESS: -PRICE RECEIVED FROM VIRTUSA UK 1,65,76,447 -REIMBURSEMENTS (PAGE 228 OF TP ORDER) 5,15,80,005 TOTAL E 6,81,56,452 TP ADJUSTMENT ON TRANSACTIONS WITH VIRTUSA UK F=D-E 63,48,055 TP ADJUSTMENT ON TRANSACTIONS WITH VIRTUSA US AS PER MAP ORDER G 4,59,35,715 TOTAL H=F+G 5,22,83,770 6 ITA NOS. 267 & 269/HYD/2011 M/S VIRTUSA INDIA PVT. LTD. LEARNED AR SUBMITTED, AS THE CIT(A) HAS DISMISSED G ROUND RELATING TO TP ADJUSTMENT IN RESPECT OF INTERNATIONAL TRANSA CTION WITH VIRTUSA, UK ALSO, THE SAME NEEDS TO BE ADJUDICATED UPON. FUR THER, LEARNED AR CHALLENGING THE TP ADJUSTMENT IN RESPECT OF ALP OF THE INTERNATIONAL TRANSACTION WITH VIRTUSA, UK SUBMITTED THAT THE TPO AFTER REJECTING THE TP DOCUMENTATION OF THE ASSESSEE HAS UNDERTAKEN SEA RCH PROCESS AND SELECTED 17 COMPARABLES FOR ANALYZING THE ARMS LENGTH MARGIN. LEARNED AR SUBMITTED THAT OUT OF 17 COMPARABLES, TH OUGH 10 ARE ACCEPTABLE TO THE ASSESSEE, BUT, SEVEN COMPANIES SE LECTED BY THE TPO ARE NOT COMPARABLE TO THE ASSESSEE UNDER ANY CI RCUMSTANCES. THE COMPARABLES OBJECTED TO BY THE ASSESSEE, IN THE GROUNDS ORIGINALLY RAISED AS WELL AS IN THE COURSE OF HEARI NG BEFORE US ARE AS UNDER: 1. EXENSYS SOFTWARE SOLUTIONS LTD. 2. SANKHYA INFOTECH LTD. 3. FOUR SOFT LTD. 4. THIRDWARE SOLUTIONS LTD. 5. BODHTREE CONSULTING LTD. 6. SATYAM COMPUTER DEVELOPMENT SERVICES LTD. 7. INFOSYS TECHNOLOGIES LTD. LEARNED AR OBJECTING TO SELECTION OF THE AFORESAID COMPARABLES SUBMITTED THAT ALL THESE COMPARABLES IN DIFFERENT ORDERS OF THE TRIBUNAL HAVE BEEN HELD TO BE UNCOMPARABLE TO A SOF TWARE DEVELOPMENT SERVICES PROVIDER. IN THIS CONTEXT, LEA RNED AR SPECIFICALLY REFERRED TO THE DECISIONS OF THE ITAT, HYDERABAD BENCH IN ASSESSEES OWN CASE FOR AY 2007-08 IN ITA NO. 1962/ HYD/2011 DATED 30/08/2013 AND IN CASE OF INVENSYS DEVELOPMENT CENT RE PVT. LTD., IN ITA NO. 1256?HYD/2010 DATED 28/02/14. THUS, LEARNED AR SUBMITTED THAT THE ISSUE RELATING TO COMPARABLES BEING SQUARE LY COVERED BY THE DECISIONS OF THE COORDINATE BENCH SHOULD BE DECIDED IN FAVOUR OF THE ASSESSEE. 7 ITA NOS. 267 & 269/HYD/2011 M/S VIRTUSA INDIA PVT. LTD. 6. THE LEARNED DR, ON THE OTHER HAND SUBMITTED THAT THE GROUND RELATING TO TP ADJUSTMENT HAVING BEEN WITHDRAWN BY THE ASSESSEE BEFORE THE CIT(A),THE ISSUE CANNOT BE REVIVED AGAIN . SO FAR AS ASSESSEES OBJECTION TO SELECTION OF CERTAIN COMPAR ABLES, LEARNED DR SUBMITTED THAT THE TPO HAVING UNDERTAKEN AN OBJECTI VE ANALYSIS BEFORE SELECTING THE COMPARABLES, HIS DECISION CANN OT BE CHALLENGED. 7. WE HAVE CONSIDERED THE SUBMISSIONS OF THE PARTIE S AND PERUSED THE ORDERS OF THE REVENUE AUTHORITIES AS WELL AS MA TERIALS SUBMITTED IN THE FORM OF PAPER BOOK. UNDISPUTEDLY, DURING PENDEN CY OF THE APPEAL BEFORE THE CIT(A), ASSESSEE, FOR RESOLVING DISPUTE RELATING TO DETERMINATION OF ALP IN RESPECT OF INTERNATIONAL TR ANSACTIONS WITH VIRTUSA, USA TOOK RECOURSE TO MAP UNDER ARTICLE 27 OF THE INDO US DTAA. SUBSEQUENTLY, THE COMPETENT AUTHORITIES UNDER THE INDO US DTAA PASSED A RESOLUTION ON 12/08/2010, A COPY OF W HICH IS PLACED AT PAGE 601 OF ASSESSEES PAPER BOOK. WHEN AO CALLED U PON THE ASSESSEE SEEKING ITS ACCEPTANCE OF THE MAP ORDER, A SSESSEE VIDE LETTER DATED 09/11/2010, A COPY OF WHICH IS PLACED AT PAGE 603 OF THE ASSESSEES PAPER BOOK, SUBMITTED BEFORE THE AO AS U NDER: NOVEMBER 09, 2010 THE ASSISTANT COMMISSIONER OF INCOME-TAX CIRCLE 3(3), 7 TH FLOOR, 'S' BLOCK I.T. TOWERS, A. C. GUARDS HYDERABAD DEAR MADAM. ASSESSEE: VIRTUSA (INDIA) PRIVATE LIMITED ('VIRTUSA INDIA' OR 'THE COMPANY') SUB: MUTUAL AGREEMENT PROCEDURE ('MAP') UNDER THE INDIA-USA D OUBLE TAXATION AVOIDANCE AGREEMENT ('OTAA' OR 'TREATY') REF: (1) PAN : AABCV4 077 E (2) ASSESSMENT YEAR : 2005-06 (3) NOTICE RECEIVED ON OCTOBER 8, 2010 8 ITA NOS. 267 & 269/HYD/2011 M/S VIRTUSA INDIA PVT. LTD. WE REFER TO YOUR NOTICE DATED OCTOBER 06. 2010 (REC EIVED ON OCTOBER 8. 2010) ISSUED BY YOUR GOODSELF AND YOUR PERMISSION TO EXTE ND THE TIME TO COMMUNICATE OUR VIEW TILL NOVEMBER 10. 2010 VIDE OU R REQUEST LETTER DATED OCTOBER 20.2010. IN THE SAID NOTICE YOUR GOODSE L F HAS REQUESTED THE COMPANY TO SUBMIT A REPLY ON ACCEPTANCE OF RESOLUTION REACH ED BY THE US AND INDIAN COMPETENT AUTHORITIES IN TERMS OF SECTION 90 OF THE INCOME-TAX ACT. 1961 (,THE ACT') READ WITH ARTICLE 27 OF DTAA; IN THIS REGARD. WE WOULD LIKE TO CONFIRM THAT THE C OMPANY IS IN AGREEMENT WITH THE RESOLUTION REACHED BETWEEN THE US AND INDIAN CO MPETENT AUTHORITIES. FURTHER, WE WISH TO SUBMIT THAT THE COMPANY HAD PRE FERRED AN APPEAL BEFORE THE COMMISSIONER OF INCOME-TAX (APPEALS) HYDERABAD FOR THE ASSESSMENT YEAR ('AY') 2005-06 AGAINST THE FOLLOWING ADJUSTMEN TS MADE IN THE ASSESSMENT ORDER- A. ADJUSTMENT TO ARM'S LENGTH PRICE UNDER SECTION 9 2CA OF THE ACT OF RS. 8,95,20,495; B. EXCLUSION OF COMMUNICATION EXPENSES OF RS. 2,33,80 ,78. INSURANCE CHARGES OF RS. 16.70.399 AND TP ADJUSTMENT OF RS. 8.95,20,4 95 FROM THE EXPORT TURNOVER C. ADDITION OF OTHER INCOME OF RS. 362,797 TO THE T OTAL TURNOVER, D. LOSS ON SALE OF ASSETS, PROVISION FOR GRATUITY AND DISALLOWANCES UNDER SECTION 438 & 40(A)(IA) HAVE NOT BEEN ADDED TO THE PROFITS FOR ARRIVING AT INCOME FROM BUSINESS FOR RS. 67,52,963 E. ERROR IN COMPUTATION OF INCOME FROM BUSINESS. THE LEARNED AO DEDUCTED THE 10A DEDUCTION AMOUNT COMPUTED FROM THE BUSINESS PRO FITS COMPUTED BY THE COMPANY IN ITS RETURN INSTEAD OF REDUCING THE SAME FROM THE BUSINESS PROFITS COMPUTED BY HIM. IN THIS CONNECTION, WE WISH TO SUBMIT AS FOLLOWS: A) ADJUS TM ENT TO ARM'S LENGTH PRICE UNDER SECTION 92CA OF THE ACT OF RS. 8,95,20,495 (TRANSFER PRICING ADJUS TM ENT) - THE COMPANY WITHDRAWS ITS APPEAL, ON THE TRANSFER PRICING ISSUE AS THE COMPANY IS IN AGREEME NT WITH THE RESOLUTION REACHED BETWEEN THE US AND INDIAN COMPETENT AUTHORI TIES. FURTHER, THE COMPANY PROPOSES TO PURSUE THE REMAINI NG MATTERS AS DISCUSSED BELOW IN ITS APPEAL FILED BEFORE THE COMMISSIONER O F INCOME-TAX (APPEALS) - IV, HYDERABAD B) EXCLUSION OF COMMUNICATION EXPENSES OF RS. 2,33,80 ,788. INSURANCE CHARGES OF RS. 16,70.399 AND TP ADJUSTMENT OF RS. 8 ,95,20,495 FROM THE 9 ITA NOS. 267 & 269/HYD/2011 M/S VIRTUSA INDIA PVT. LTD. EXPORT TURNOVER C) ADDITION OF OTHER INCOME OF RS. 362,797 TO THE T OTAL TURNOVER; D) LOSS ON SALE OF ASSETS, PROVISION FOR GRATUITY AND DISALLOWANCES UNDER SECTION 438 & 40(A)(IA) HAVE NOT BEEN ADDED TO THE PROFITS FOR AR RIVING AT INCOME FROM BUSINESS FOR RS. 67,52,963 E) ERROR IN COMPUTATION OF INCOME FROM BUSINESS. THE LEARNED AO DEDUCTED THE 10A DEDUCTION AMOUNT COMPUTED FROM THE BUSINESS PRO FITS COMPUTED BY THE COMPANY IN ITS RETURN INSTEAD OF REDUCING THE SAME FROM THE BUSINESS PROFITS COMPUTED BY HIM (F) . IMPOSITION OF INTEREST U/S 234B WE WOULD BE PLEASED TO PROVIDE YOU WITH ANY FURTHER INFORMATION THAT YOUR KINDSELF MAY REQUIRE IN THIS REGARD. THANKING YOU, YOURS FAITHFULLY, FOR VIRTUSA (INDIA) PRIVATE LIMITED AUTHORIZED SIGNATORY IN TERMS WITH THE AFORESAID LETTER SUBMITTED BEFORE THE AO, ASSESSEE ALSO SUBMITTED A LETTER BEFORE THE CIT(A) WITHDRAWI NG ITS GROUND ON TP ADJUSTMENT. AS CAN BE SEEN FROM THE CONTENTS OF THE AFORESAID LETTER, ASSESSEE CATEGORICALLY STATED THAT IT IS WITHDRAWIN G ITS APPEAL IN RESPECT OF TP ADJUSTMENT OF RS. 8,95,20,495/. IN VI EW OF THE AFORESAID CATEGORICAL AND VOLUNTARY STATEMENT BY ASSESSEE IN WITHDRAWING ITS APPEAL RELATING TO ENTIRE TP ADJUSTMENT OF RS. 8,95 ,20,495, CIT(A) CANNOT BE BLAMED FOR HAVING DISMISSED ASSESSEES GR OUND ON TP ADJUSTMENT. HOWEVER, FROM THE FACTS AND MATERIALS O N RECORD, VIZ., MAP ORDER, MAP RESOLUTION, AT PAGE 601 AND 606 OF T HE ASSESSEES PAPER BOOK, IT APPEARS THAT THE MAP RESOLUTION, WHI CH IS UNDER THE INDO-US DTAA IS IN RESPECT OF INTERNATIONAL TRANSAC TIONS WITH VIRTUSA, USA INVOLVING OPERATION COST ATTRIBUTABLE TO US ENT ITY OF RS. 78,30,10,895 OUT OF THE TOTAL OPERATING COST OF RS. 84,32,16,557, 10 ITA NOS. 267 & 269/HYD/2011 M/S VIRTUSA INDIA PVT. LTD. WHICH WORKS OUT TO 92.86%. FROM THE AFORESAID FACTS , IT APPEARS THAT MAP RESOLUTION IS IN RESPECT OF 92.86% OF THE OPERA TING COST WHICH RELATE TO TRANSACTIONS WITH VIRTUSA, USA, THEREBY G IVING CREDENCE TO THE FACT THAT BALANCE 7.14% OF THE OPERATING COST R ELATES TO INTERNATIONAL TRANSACTION WITH OTHER ENTITIES I.E. VIRTUSA, UK. HOWEVER, SINCE THE CIT(A) BY TAKING INTO COGNIZANCE ASESSSEE S LETTER, DISMISSED THE GROUND RELATING TO TP ADJUSTMENT, THE SE FACTS WERE NOT AT ALL EXAMINED. FURTHER, IT IS BROUGHT TO OUR NOTI CE THAT ASSESSEE ALSO FILED A PETITION U/S 154 OF THE ACT BEFORE THE CIT( A) SEEKING RECTIFICATION OF THE ORDER WHICH IS STILL PENDING. IN THE AFORESAID CIRCUMSTANCES, WE ARE OF THE VIEW THAT THE MATTER N EEDS TO BE EXAMINED BY CIT(A) ON THE ISSUE OF TP ADJUSTMENT OF RS. 63,91,764, WHICH AS CLAIMED BY ASSESSEE, RELATES TO TRANSACTIO NS WITH VIRTUSA, UK. ACCORDINGLY, WE REMIT THE ISSUE BACK TO THE FI LE OF THE CIT(A) FOR DECIDING AFRESH AFTER CONSIDERING ALL FACTS AND MAT ERIALS TO BE SUBMITTED BY ASSESSEE AS WELL AS AVAILABLE ON RECOR D AND AFTER DUE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. WHILE D OING SO, THE CIT(A) MUST ALSO CONSIDER ASSESSEES SUBMISSIONS IN RESPECT OF SELECTION OF SEVEN COMPARABLES, SPECIFICALLY OBJEC TED TO BY THE ASSESSEE, KEEPING IN VIEW DECISIONS OF THE ITAT ON THE ISSUE WHICH ASSESSEE WILL RELY UPON. BEFORE PARTING, WE NEED TO CLARIFY OUR AFORESAID DIRECTION IS ONLY IN RESPECT OF TP ADJUST MENT OF 63,91,764 CLAIMED TO BE RELATING TO VIRTUSA, UK. 8. IN THE RESULT, ASSESSEES APPEAL IS CONSIDERED T O BE PARTLY ALLOWED FOR STATISTICAL PURPOSES. ITA NO. 267/HYD/2011 BY REVENUE 9. THE DEPARTMENT HAS RAISED FOUR GROUNDS. GROUND N OS. 1 & 4 BEING GENERAL IN NATURE ARE NOT REQUIRED TO BE ADJU DICATED. GROUND NO. 2 RELATES TO THE DIRECTION OF CIT(A) IN EXCLUDI NG THE 11 ITA NOS. 267 & 269/HYD/2011 M/S VIRTUSA INDIA PVT. LTD. COMMUNICATION EXPENSES AND INSURANCE CHARGES AMOUNT ING TO RS. 2,23,80,788 BOTH FROM THE EXPORT TURNOVER AS WELL A S TOTAL TURNOVER. 10. WE HAVE CONSIDERED THE SUBMISSIONS OF THE PARTI ES AND PERUSED THE MATERIALS ON RECORD. THIS ISSUE IS NO MORE RES- INTEGRA IN VIEW OF THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN CA SE OF CIT VS. GEM PLUS JEWELLERY INDIA LTD. 330 ITR 175 (BOM.) AN D THE DECISION OF ITAT, CHENNAI SPECIAL BENCH IN CASE OF ITO VS SAKSOFT LTD (313 ITR AT 353 (CHENNAI) (SB) WHEREIN IT IS HELD THAT COMMUNICATI ON EXPENSES AND INSURANCE CHARGES HAVE TO BE REDUCED B OTH FROM THE EXPORT TURNOVER AS WELL AS TOTAL TURNOVER WHILE COM PUTING DEDUCTION U/S 10A OF THE ACT. THE DECISION OF THE CIT(A) BEIN G IN CONSONANCE WITH THE DECISIONS REFERRED TO ABOVE, WE DO NOT FIN D ANY INFIRMITY IN THE ORDER OF THE CIT(A), WHICH IS ACCORDINGLY UPHEL D. THIS GROUND RAISED BY THE REVENUE IS DISMISSED. 11. THE NEXT ISSUE AS RAISED IN GROUND NO. 3 RELATE S TO ACTION OF THE CIT(A) IN DIRECTING THE AO TO TREAT THE DISALLO WANCE MADE OF RS. 67,52,963 U/S 40(A)(IA) AND 43B ON ACCOUNT OF LOSS ON SALE OF FIXED ASSETS, PROVISION FOR GRATUITY ETC. AS PART OF BUSI NESS PROFIT WHILE COMPUTING DEDUCTION U/S 10A OF THE ACT. 12. WE HAVE CONSIDERED THE SUBMISSIONS OF THE ASSES SEE AND PERUSED THE MATERIALS ON RECORD. AS CAN BE SEEN, TH IS ISSUE IS SQUARELY COVERED IN FAVOUR OF THE ASSESSEE BY THE D ECISION OF THE COORDINATE BENCH IN ASSESSEES OWN CASE IN ITA NO. 16/HYD/2013, DATED 09/10/2013 WHEREIN THE COORDINATE BENCH HAS H ELD THAT DISALLOWANCES MADE U/S 40(A)(IA) AND 43B, SINCE, EN HANCES THE PROFIT OF THE ASSESSEE, HAVE TO BE TREATED AS PART OF THE ELIGIBLE BUSINESS PROFITS FOR COMPUTATION OF DEDUCTION U/S 10A. ACCOR DINGLY, WE UPHOLD THE DECISION OF THE CIT(A) ON THIS ISSUE. 13. IN THE RESULT, APPEAL OF THE REVENUE IS DISMISS ED. 12 ITA NOS. 267 & 269/HYD/2011 M/S VIRTUSA INDIA PVT. LTD. 14. TO SUM UP, APPEAL OF THE ASSESSEE IN ITA NO. 26 9/H/11 IS PARTLY ALLOWED FOR STATISTICAL PURPOSES AND APPEAL OF THE REVENUE IN ITA NO. 267/HYD/11 IS DISMISSED. PRONOUNCED IN THE OPEN COURT ON 16/09/2014. SD/- SD/- (B. RAMAKOTAIAH) (SAKTIJIT DEY) ACCOUNTANT MEMBER JU DICIAL MEMBER HYDERABAD, DATED: 16 TH SEPTEMBER, 2014 KV COPY TO:- 1) M/S VIRTUSA (INDIA) PVT. LTD., 6-3-1192, 3 RD FLOOR, MY HOME TYCOON, KUNDAN BAGH, BEGUMPET, HYDERAB AD. 2) THE DCIT,CIRCLE 3(3), 7 TH FLOOR, B BLOCK, IT TOWERS, AC GUARDS, HYDERABAD 3) CIT(A)-III, HYDERABAD. 4) CIT-III, HYDERABAD 5)THE DEPARTMENTAL REPRESENTATIVE, I.T.A.T., HYDER ABAD.