E4e Business Solutions India Private Limited, Bangalore V. DCIT, Bangalore

ITA 324/BANG/2015

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 95340 (ITAT-BANGALORE)
• Duration Of Justice: 7 month(s) 29 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-11-2015
• Appeal Filed By: Assessee
• Bench Allotted: A
• Next Hearing Date: 28-10-2015
• Assessment Year: 2010-2011
• Appeal Filed On: 06-03-2015
• Court: TRIBUNAL
• Department Lawyers: G R REDDY CIT DRI
• Keywords: Transfer pricing; International transaction
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRI BUNAL BANGALORE BENCH A, BANGALORE BEFORE SMT ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER AND SHRI JASON P BOAZ, ACCOUNTANT MEMBER IT(TP)A NO.324(B)/2015 (ASSESSMENT YEAR : 2010-11) M/S E4E BUSINESS SOLUTIONS INDIA PVT.LTD., UNIT NO.1303-1304, 13 TH FLOOR, PRESTIGE MERIDIAN II, NO.30, MG ROAD, BANGALORE PAN NO.AAACI6324A APPELLANT VS THE DEPUTY COMMISSIONER OF INCOME-TAX CIRCLE-3(1)(2) BANGALORE RESPONDENT AND IT(TP)A NO.220(BANG.)/2015 (ASSESSMENT YEAR : 2010-11) THE DEPUTY COMMISSIONER OF INCOME-TAX CIRCLE-3(1)(2) BANGALORE APPELLAN T VS M/S E4E BUSINESS SOLUTIONS INDIA PVT.LTD., UNIT NO.1303-1304, 13 TH FLOOR, PRESTIGE MERIDIAN II, NO.30, MG ROAD, BANGALORE RESPONDENT PAN NO.AAACI6324A ASSESSEE BY : SHRI AJITH KUMAR JAIN, CA REVENUE BY : SHRI G.R.REDDY, CIT, DR-I DATE OF HEARING : 28-10-2015 DATE OF PRONOUNCEMENT : 04-11-2015 IT(TP)A NOS.324 (B)/15 & 220(B)15 2 O R D E R PER SMT ASHA VIJAYARAGHAVAN, JM: THESE ARE CROSS APPEALS BY THE ASSESSEE AND THE RE VENUE DIRECTED AGAINST THE DRP DIRECTION DATED 26-11-2014 FOR THE ASSESSMENT YEARS 2010-11. 2. THE FACTS OF THE CASE ARE THAT THE ASSESSEE 2.1 THE ASSESSEE M/S E4E BUSINESS SOLUTIONS INDIA P VT.LTD.,(E4E INDIA OR THE COMPANY) (FORMERLY KNOWN AS ISEVA SYS TEMS PVT.LTD ) WAS INCORPORATED IN MARCH, 2000 UNDER THE COMPANIES ACT , 1956. THE COMPANY IS ENGAGED IN THE BUSINESS OF CUSTOMER RELA TIONSHIP MANAGEMENT SERVICES AND RELATED BUSINESS PROCESS OU TSOURCING SERVICES THROUGH A VARIETY OF CUSTOMER CONTRACT CHANNELS SUC H AS VOICE, E MAIL, CHAT AND WEB-BASED SERVICES. THE COMPANY ACQUIRED ALL THE BUSINESS (ALL ASSETS, LIABILITIES, EMPLOYEES AND BUSINESS) FROM E 4E TECH SUPPORT ((INDIA) PVT.LTD. A GROUP COMPANY, WITH EFFECT APRIL 1, 2007 ON SLUMP SALE BASIS. CONSEQUENT TO THE SAME, THE COMPANY HAS ALSO STARTE D RENDERING INFRASTRUCTURE MANAGEMENT SERVICES, WHICH IS IN THE NATURE OF INFORMATION TECHNOLOGY ENABLED SERVICES (ITES) E4E INDIA REND ERS SUCH IT ENABLED SERVICES TO ITS AES AND OTHER THIRD PARTIES. IT(TP)A NOS.324 (B)/15 & 220(B)15 3 3. FOR THE ASSESSMENT YEAR 2010-11, RELEVANT TO THE FINANCIAL YEAR 2009-10, THE ASSESSEE E-FILED ITS RETURN OF INCOME ON OCTOBER 15,2010 DECLARING A TAXABLE INCOME OF RS.23,945,375/- 3.1 THE CASE WAS SELECTED FOR SCRUTINY ASSESSMENT P ROCEEDINGS AND DURING THE COURSE OF THE PROCEEDINGS FOR THE AY: 20 10-11, THE INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE ASSE SSEE WERE REFERRED BY THE LEARNED DCIT, CIRCLE-11(3) TO THE DCIT (TRANSFE R PRICING)-IV FOR DETERMINATION OF ARMS LENGTH PRICE (ALP) UNDER SE C.92CA OF THE IT ACT, 19161 ( THE ACT). 3.2 THE COMPANY HAS ADOPTED TRANSACTIONAL NET MARG IN METHOD (TNMM) AS THE MOST APPROPRIATE METHOD (MAM) TO ARRI VE AT THE ALP WHICH IS EVIDENT FROM THE TRANSFER PRICING (TP) DOCUMENTA TION MAINTAINED FOR AY: 2009-10. THE PROFIT LEVEL INDICATOR (PLI) ADO PTED BY THE COMPANY IS OPERATING PROFIT TO THE TOTAL COSTS AS APPLICABLE T O THE AE SEGMENT ALONE, AND ON THIS BASIS, THE ASSESSEE HAD COMPUTED ITS PL I AT 17.61 PERCENT. THE COMPANY HAS SELECTED 8 COMPARABLE COMPANIES WIT H AN ARITHMETIC MEAN OF 14.39 PERCENT, SINCE THE MARGIN EARNED BY T HE COMPANY IS HIGHER THAN THE ARMS LENGTH PRICE DETERMINED THE INTERNAT IONAL TRANSACTIONS WERE CONCLUDED TO BE AT ALP. 4. THE CASE WAS REFERRED TO THE LEARNED TPO WHO RE JECTED THE TP DOCUMENTATION MAINTAINED BY THE ASSESSEE. THE TPO RE-DETERMINED THE ALP CONSIDERING COMPANIES AS COMPARABLE TO THE BUS INESS OF THE IT(TP)A NOS.324 (B)/15 & 220(B)15 4 ASSESSEE. THESE 10 COMPANIES INCLUDED 8 NEW COMPANI ES AND 2 OF THE COMPANIES SELECTED BY THE ASSESSEE IN THE TP STUDY. ACCORDINGLY, THE TPO DETERMINED THE ALP AT 27.70- PERCENT BASED ON THE P ROFIT MARGINS COMPUTED FOR THE 10 SELECTED COMPANIES AFTER MAKING AN ADJUSTMENT OF (0.84) PERCENT TOWARDS WORKING CAPITAL DIFFERENCES. SUBSEQUENTLY, THE TPO PASSED AN ORDER UNDER SECTION 92CA OF THE ACT, MAKING AN ADJUSTMENT TO THE ALP AMOUNTING TO RS.61,981,771/- 4.1 THE AO ON TAKING THE ABOVE INTO CONSIDERATION CONCLUDED THE ASSESSMENT PROCEEDINGS AS PER THE PROVISIONS OF SEC .144C OF THE ACT, AND ACCORDINGLY, FORWARDED A DRAFT ASSESSMENT ORDER (DA O) IN THE DRAFT ASSESSMENT ORDER, THE AO HAD PROPOSED THE FOLLOWING ADJUSTMENTS. SL.NO ADDITIONS/DISALLOWANCE AMOUNT(RS.) 1 TP ADJUSTMENT 61,981,771 2 EXCESS CLAIM UNDER SECTION 10A OF THE ACT 1,846 ,246 TOTAL ADDITIONS/DISALLOWANCES 63,828,017 ON CONSIDERING THE ABOVE, THE AO COMPUTED THE TOTAL INCOME OF THE ASSESSEE AT RS.87,773,397/- AND DETERMINED THE TOTA L TAX PAYABLE AT RS.33,530,390/- (INCLUDING INTEREST UNDER SECTION 2 34B,234C AND 234D OF THE ACT). 5. THE ASSESSEE FILED ITS OBJECTIONS WITH THE DISPUTE RESOLUTION PANEL (DRP) AGAINST THE SAID DRAFT ASSESSMENT ORDER ON MARCH 24, 2014. THE DRP VIDE ITS DIRECTIONS DATED NOVEMBER 26, 201 4 HAS UPHELD THE IT(TP)A NOS.324 (B)/15 & 220(B)15 5 REJECTION OF TP DOCUMENTATION AND THE FILTERS APPLI ED BY THE TPO. FURTHER, THE DRP HAS SUO-MOTO MODIFIED THE EXPORT FILTER TO 75 PERCENT SALES AS AGAINST 25 PERCENT TO SALES ADOPTED BY THE TPO. 5.1 FURTHER, AS REQUESTED BY THE ASSESSEE, THE DRP DIRECTED TO REJECT THE FOLLOWING COMPANIES IN THE DRP DIRECTION S. ACROPETAL TECHNOLOGIES LTD. ECLERX SERVICES LTD. ICRA ONLINE LTD INFORMED TECHNOLOGIES INDIA LTD. INFOSYS BPO LTD. 5.2 THE DRP HAS SUO-MOTO DIRECTED TO REJECT SUNDAR AM BUSINESS SERVICES LTD. 6. WITH REGARD TO THE ADJUSTMENT MADE BY THE AO OF RS.1,846,246 IN THE DAO FOR THE DEDUCTION CLAIMED U/S 10A OF THE ACT, THE DRP DIRECTED THE AO TO REDUCE THE TELECOMMUNICATION EXP ENSES INCURRED IN FOREIGN CURRENCY FROM BOTH EXPORT TURNOVER AS WELL AS TOTAL TURNOVER. PURSUANT TO THE ABOVE DIRECTIONS , THE AO PASSED TH E FINAL ASSESSMENT ORDER UNDER SECTION 143(3) R.W.S.144C OF THE ACT, D ATED DECEMBER 30,014 (RECEIVED ON JANUARY 6, 2015) DETERMINING THE TOTAL INCOME OF THE ASSESSEE AT RS.100,873,056/- AND RAISED A TAX DEMAN D OF RS.42,605,150/-. IN THE FINAL ASSESSMENT ORDER TH E AO HAS MADE THE FOLLOWING ADJUSTMENTS. IT(TP)A NOS.324 (B)/15 & 220(B)15 6 SL.NO ADDITIONS/DISALLOWANCE AMOUNT(RS.) 1 TP ADJUSTMENT 76,342,156 2 EXCESS CLAIM UNDER SECTION 10A OF THE ACT 58 5,520 TOTAL ADDITIONS/DISALLOWANCES 76,927,676 6.1 AGGRIEVED BY THE SAID FINAL ASSESSMENT ORDER, T HE ASSESSEE HAS FILED THIS APPEAL BEFORE THE ITAT RAISING THE FOLLO WING GROUNDS; A. THE ASSESSMENT ORDER DATED 30-12-2014 PASSED BY THE AO/TPO PURSUANT TO THE DIRECTIONS PASSED BY THE DRP IS NOT IN ACCORDANCE WITH THE LAW AND IS CONTRA RY TO THE FACTS AND CIRCUMSTANCES OF THE PRESENT CASE AND IN ANY CASE IN VIOLATION OF THE PRINCIPLE OF EQUITY AND N ATURAL JUSTICE. TRANSFER PRICING ADJUSTMENT B. THE DRP AND THE AO ERRED IN FACT AND IN LAW IN CONFIRMING THE ACTION OF THE TPO IN MAKING AN ADJUS TMENT AMOUNTING TO RS.76,342,156/-TO THE ALP OF THE INTER NATIONAL TRANSACTIONS OF THE ASSESSEE. C. THE DRP AND THE AO HAVE ERRED IN UPHOLDING THE ACTION OF THE TPO IN REJECTING THE TP DOCUMENTATION MAINTAINED AND THE DETAILED BENCH MARKING ANALYSIS CONDUCTED BY THE ASSESSEE, WHICH HAS BEEN PREPARED BY THE ASSESSEE IN THE MATTER AS CONTEMPLATED UNDER TH E RELEVANT PROVISIONS OF THE ACT AND THE IT RULES, 19 62. D. THE DRP AND THE AO HAVE ERRED IN UPHOLDING THE ACTION OF THE TPO IN DISREGARDING THE MULTIPLE/PRIO R YEAR IT(TP)A NOS.324 (B)/15 & 220(B)15 7 DATA CONSIDERED BY THE ASSESSEE IN DETERMINING THE ALP AND ADOPTING THE FINANCIAL DATA FOR A SINGLE YEAR ( I.E THE FINANCIAL YEAR-200910 OF THE COMPARABLE DESPITE THE FACT THAT SAME WAS NOT AVAILABLE TO THE ASSESSEE AT THE TIME OF PREPARING THE TP DOCUMENTATION. E. THE DRP AND THE AO HAVE ERRED IN UPHOLDING THE ACTION OF THE TPO IN REJECTING CERTAIN COMPARABLES IDENTIFIED BY THE ASSESSEE IN ITS TP STUDY USING UNREASONABLE COMPARABILITY CRITERIA AND CONTRARY TO FACTS AS EVI DENCED BY THE AUDITED FINANCIAL STATEMENTS OF THE SAID COMPA NIES, DESPITE THE ARGUMENTS SUBMITTED BY THE ASSESSEE. F. THE DRP AND THE AO HAVE ERRED IN UPHOLDING THE ACTION OF THE TPO IN FINALIZING THE TRANSFER PRICIN G ORDER WITH COMPANIES AS COMPARABLE TO THE ASSESSEE DESPITE SUC H COMPANIES FAILING THE TEST OF COMPARABILITY ON SOME OR ALL THE FACTORS SUCH AS FUNCTIONAL DISSIMILARITY, PRODU CT LED REVENUES, DIFFERING TURNOVER/SCALES OF OPERATION, A SSET BASE, RISK PROFILE ETC. AND FAILURE OF TPOS OWN FI LTERS. G. THE DRP AND THE AO HAVE ERRED IN UPHOLDING THE ACTION FOR THE TPO IN ADOPTING/MODIFYING THE FILTER S ADOPTED FOR CONDUCTING TP ANALYSIS, WITHOUT APPRECIATING TH E TP DOCUMENTATION PREPARED BY THE ASSESSEE. H. THE DRP AND THE AO HAVE ERRED IN UPHOLDING THE COMPUTATION OF OPERATING MARGINS OF THE COMPARABLE COMPANIES AND THE ASSESSEE BY THE TPO THEREBY IGNOR ING THE FACTUAL ERRORS AND IGNORING OF CERTAIN ITEMS WH ICH OUGHT TO HAVE BEEN CONSIDERED AS OPERATING OR NON-OPERATI NG ITEMS, AS THE CASE MAY BE. IT(TP)A NOS.324 (B)/15 & 220(B)15 8 I. THE DRP AND THE AO HAVE ERRED IN UPHOLDING THE ACTION OF THE TPO IN NOT GRANTING THE WORKING CAPIT AL/RISK ADJUSTMENT AS CLAIMED BY THE ASSESSEE. J. THE DRP AND THE AO/TPO ERRED IN LAW AND ON FACTS IN UPHOLDING THE ARMS LENGTH MARGIN ARRIVED AT BY THE LEARNED TPO WITHOUT GRANTING THE BENEFIT OF THE PRO VISO TO SECTION 92C(2) OF THE ACT. ADJUSTMENTS UNDER SECTION 10A OF THE ACT K. THE DRP AND THE AO HAVE ERRED IN LAW AND ON FACT S IN CONCLUDING THAT THE TELECOMMUNICATION EXPENDITUR E AND EXPENDITURE INCURRED IN FOREIGN CURRENCY ARE TO BE EXCLUDED FROM THE EXPORT TURNOVER FOR THE PURPOSE OF COMPUTA TION OF RELIEF UNDER SECTION 10A OF THE ACT. THE ASSESSEE ALSO FILED ADDITIONAL GROUNDS WHICH ARE AS UNDER; A. WITHOUT PREJUDICE TO THE GROUNDS RAISED IN THE APPEAL SET, AFTER REALIZING THE FACT THAT THE ASSES SEE RENDERS SIMILAR SERVICE TO BOTH ITS ASSOCIATED ENTE RPRISES (AE) AND ITS NON-AES FOR THE SUBJECT YEAR (THIS IS APPARENT FROM THE TRANSFER PRICING ORDER), THE LEARNED TRANS FER PRICING OFFICER (TPO) OUGHT TO HAVE APPLIED INTERNA L TRANSACTIONAL NET MARGIN METHOD (INTERNAL TNMM) FOR DETERMINING THE ALP OF THE ASSESSEE. THE LEARNED DI SPUTE RESOLUTION PANEL (DRP) HAS ERRED IN UPHOLDING THE APPROACH FOLLOWED BY THE TPO AND; IT(TP)A NOS.324 (B)/15 & 220(B)15 9 B. THE DRP HAS ERRED IN SUO-MOTO REJECTING SUNDARAM BUSINESS SERVICES LIMITED AS A COMPARABLE TO THE ASSESSEE BY APPLYING AN INAPPROPRIATE FILTER EV EN AFTER LEARNED TPO HAVING FOUND THAT IT IS COMPARABL E TO THE ASSESSEE FOR THE SUBJECT YEAR. 7. FIRST WE SHALL ADJUDICATE THE ADDITIONAL GROUND S. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT SEVERAL RUL INGS OF THE HONBLE TRIBUNAL, SUBSEQUENT TO THE PETITIONER FINALIZING I TS TP STUDY HAVE ACCEPTED INTERNAL ALP IN CASE THE ASSESSEE RENDERS SIMILAR SERVICES TO BOTH ASSOCIATED ENTERPRISES (AE) AND NON-AES. THE COU NSEL RELIED ON THE DECISION IN THE CASE OF MYLAN LABS LTD. I(TP)A NO.1 79/BANG/2015 AND 214/BANG/2015. 7.1 WE FIND THAT IN IT(TP)A NO.214/BANG/2015 AND I T(TP)A NO.179/BANG/15 IN THE CASE OF M/S MYLAN LABS LTD. A T PARA-10 IT HAS BEEN HELD AS FOLLOWS; 10. THE TPO HAD APPLIED EXTERNAL TNMM ON ENTITY LEVEL AND ON THIS ISSUE, THE THIRD MEMBER DECISION OF THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF M/S. TECHNIMON T ICB PVT. LTD. V. ADDL. CIT IN ITA NO.4608/MUM/2010 FOR AY 20 05-06, ORDER DATED 17.7.2012 IS RELEVANT. IN PARA 10 OF T HE SAID ORDER, THE TRIBUNAL HELD AS UNDER:- 10. CLAUSE (I) OF RULE 1OB(E) STIPULATES THAT NE T PROFIT MARGIN FROM AN INTERNATIONAL TRANSACTION WITH AN AE IS COM PUTED IN RELATION TO COST INCURRED OR SALES EFFECTED OR ASSE TS EMPLOYED ETC. IT(TP)A NOS.324 (B)/15 & 220(B)15 10 CLAUSE (II) IS MATERIAL FOR THE PRESENT PURPOSE. IT PROVIDES THAT THE NET PROFIT MARGIN REALIZED BY THE ENTERPRISE OR BY AN UNRELATED ENTERPRISE FROM A COMPARABLE UNCONTROLLED TRANSACTI ON OR A NUMBER OF SUCH TRANSACTIONS IS COMPUTED HAVING REGA RD TO THE SAME BASE. THE BASE OF THIS PROVISION TAKES ONE B ACK TO CLAUSE (I) WHICH REFERS TO COST INCURRED OR SALES EFFECTED OR ASSETS EMPLOYED OR TO BE EMPLOYED. ON SPLITTING CLAUSE ( II) INTO TWO PARTS, IT DIVULGES THAT THE REFERENCE IS MADE TO IN TERNAL AND EXTERNAL COMPARABLES. ONE PART OF CLAUSE (II) REFE RS TO THE NET PROFIT MARGIN REALISED BY THE ENTERPRISE FR OM A COMPARABLE UNCONTROLLED TRANSACTION AND THE OTHER PART TALKS OF THE NET PROFIT MARGIN REALISED BY AN UNCON TROLLED ENTERPRISE FROM A COMPARABLE UNCONTROLLED TRANSACTI ON. IT TRANSPIRES THAT WHEREAS THE FIRST PART REFERS TO TH E PROFIT MARGIN FROM INTERNAL COMPARABLE UNCONTROLLED TRANSACTIONS, THE SECOND PART REFERS TO PROFIT MARGIN FROM AN EXTERNAL COMPA RABLE UNCONTROLLED TRANSACTION. THUS IT IS DISCERNIBLE TH AT WHAT IS TO BE COMPARED UNDER THIS METHOD IS PROFIT FROM A COMPARA BLE UNCONTROLLED TRANSACTION. THE WORD COMPARABLE MAY ENCOMPASS INTERNAL COMPARABLE OR EXTERNAL COMPARABLE. THERE I S CUE IN THE RULE ITSELF AS TO PREFERENCE TO BE GIVEN TO INTERNA L COMPARABLE UNCONTROLLED TRANSACTIONS VIS--VIS EXTERNALLY COMP ARABLE UNCONTROLLED TRANSACTIONS. IT IS BECAUSE THE DELEGA TED LEGISLATURE HAS FIRSTLY REFERRED TO THE NET PROFIT MARGIN REALI ZED BY THE ENTERPRISE (INTERNAL) FROM A COMPARABLE UNCONTROLLE D TRANSACTION AND, THEREAFTER, IT POINTS TOWARDS NET PROFIT MARGI N REALIZED BY AN UNRELATED ENTERPRISE (EXTERNAL) FROM A COMPARABLE U NCONTROLLED TRANSACTION. THUS WHERE POTENTIAL COMPARABLE IS AVA ILABLE IN THE IT(TP)A NOS.324 (B)/15 & 220(B)15 11 SHAPE OF AN UNCONTROLLED TRANSACTION OF THE SAME AS SESSEE, IT IS LIKELY TO HAVE HIGHER DEGREE OF COMPARABILITY VIS- -VIS COMPARABLES IDENTIFIED AMONGST THE UNCONTROLLED TRA NSACTIONS OF THIRD PARTIES. THE UNDERLYING OBJECT BEHIND COMPUTI NG ALP OF AN INTERNATIONAL TRANSACTION IS TO FIND OUT THE PROFIT S WHICH SUCH ENTERPRISE WOULD HAVE EARNED IF THE TRANSACTION HAD BEEN WITH SOME THIRD PARTY INSTEAD OF RELATED PARTY. WHEN THE DATA IS AVAILABLE SHOWING PROFIT MARGIN OF THAT ENTERPRISE ITSELF FROM A THIRD PARTY, IT IS ALWAYS SAFE AND ADVISABLE TO HAV E RECOURSE TO SUCH INTERNAL COMPARABLE CASE. THE REASON IS PATENT THAT THE VARIOUS FACTORS HAVING BEARING ON THE QUALITY OF OU TPUT. ASSETS EMPLOYED, INPUT COST ETC. CONTINUE TO REMAIN BY AND LARGE SAME IN CASE OF AN INTERNAL COMPARABLE. THE EFFECT OF DIFFE RENCE DUE TO SUCH INHERENT FACTORS ON COMPARISON MADE WITH THE T HIRD PARTIES, GETS NEUTRALIZED WHEN COMPARISON IS MADE WITH INTER NAL COMPARABLE. EX CONSEQUENTI, IT FOLLOWS THAT AN INT ERNAL COMPARABLE UNCONTROLLED TRANSACTION IS MORE NOTEWOR THY VIS--VIS ITS COUNTERPART I.E. EXTERNAL COMPARABLE. 11. IT HAS ALSO BEEN BROUGHT TO OUR NOTICE THAT IN THE SUBSEQUENT YEAR I.E. AY 2011-12, THE TPO HAS ACCEPTED THE INTE RNAL COMPARABILITY. 12. THE LD. DR RELIED ON THE ORDER OF DRP. 13. WE ARE IN CONFORMITY AND ARE INCLINED TO FOLLOW THE DECISION OF THE THIRD MEMBER, ITAT MUMBAI BENCH IN THE CASE OF M/S. TECNIMONT ICB PRIVATE LTD. (SUPRA) WHEREIN IT IS HE LD THAT .. THE UNDERLYING OBJECT BEHIND COMPUTING ALP O F AN INTERNATIONAL TRANSACTION IS TO FIND OUT THE PROFIT S WHICH SUCH IT(TP)A NOS.324 (B)/15 & 220(B)15 12 ENTERPRISE WOULD HAVE EARNED IF THE TRANSACTION HAD BEEN WITH SOME THIRD PARTY INSTEAD OF RELATED PARTY. WHE N THE DATA IS AVAILABLE SHOWING PROFIT MARGIN OF THAT ENT ERPRISE ITSELF FROM A THIRD PARTY, IT IS ALWAYS SAFE AND AD VISABLE TO HAVE RECOURSE TO SUCH INTERNAL COMPARABLE CASE. . 14. HENCE WE ARE OF THE OPINION THAT THE TPO HAD ER RED IN CHOOSING AN EXTERNAL COMPARABLE, WHEN THERE WAS AN INTERNAL COMPARABLE UNCONTROLLED TRANSACTION WHICH THE ASSES SEE HAD TAKEN IN ITS TP STUDY. THE ASSESSEES APPEAL IS A LLOWED. RESPECTFULLY FOLLOWING THE DECISION OF THE CO-ORDI NATE BENCH AUTHORED BY JM IN THIS APPEAL, WE DIRECT THE TPO TO CHOOSE INTERNAL COMPARABLE IN CONTROLLED TRANSACTION AS AGAINST AN EXTERNAL COMPARABLE. HENCE, WE CONCLUDE OUR DECISION AS FOLLOWS; 8. GROUND NO.1 & 2 ARE GENERAL IN NATURE AND NEEDS NO ADJUDICATION. GROUND NO.3,4 & 5 ARE NOT PRESSED. G ROUND NO.7,8 & 9 ARE INFRUCTUOUS AND GROUND NO.6 & 10 ARE ALLOWED. 8.1 WITH RESPECT TO GROUND NO.11, WE HEREBY SUMMAR IZE THE PROCEEDING AS FOLLOWS; 8.2 DURING THE COURSE OF ASSESSMENT PROCEEDINGS FO R AY: 2010-11 THE INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE COMPANY WERE REFERRED BY THE AO TO THE TPO FOR DETERMINATION OF ARMS LEN GTH PRICE. ON CONCLUSION OF THE TRANSFER PRICING PROCEEDINGS, THE TPO PASSED AN ORDER DATED JANUARY 30,2014 PROPOSING AN ADJUSTMENT OF RS .61,981,771/- UNDER SECTION 92CA OF THE ACT. IT(TP)A NOS.324 (B)/15 & 220(B)15 13 8.3 TAKING THE ABOVE ORDER INTO CONSIDERATION, THE AO CONCLUDED THE ASSESSMENT PROCEEDINGS AND PASSED A DRAFT ASSES SMENT ORDER ON FEBRUARY 20,2014 (SERVED ON FEB.24, 2014) IN THE DA O, THE AO REDUCED TELECOMMUNICATION EXPENSES OF RS.13,090,703/- AND T RAVELLING EXPENSES INCURRED IN FOREIGN CURRENCY OF RS.731,249 FROM THE ADJUSTED EXPORT TURNOVER AND ADDED SIMILAR AMOUNTS TO THE ADJUSTED TOTAL TURNOVER OF THE COMPANY. BASED ON SUCH ADJUSTMENT, THE AO RE-COMPU TED THE RELIEF UNDER SECTION 10A OF THE IT ACT AT RS.25,131,114/- AS AGAINST A CLAIM OF RS.26,977,360/- THEREBY RESULTING IN AN UPWARD ADJU STMENT OF RS.1,846,246/- TO THE TOTAL INCOME OF THE COMPANY. THE AO WAS OF THE VIEW THAT THE AFOREMENTIONED EXPENSES NEED TO BE RE DUCED ONLY FROM THE ET AND NO SUCH REDUCTION WAS WARRANTED FROM THE ET. AS PER THE AO, EVEN THOUGH THE SUBJECT ISSUE OF REDUCTION OF EXPEN SE FROM BOTH ET AND TT HAS BEEN DECIDED BY THE JURISDICTIONAL KARNATAKA HIGH COURT IN FAVOUR OF THE ASSESSEE, SINCE THE REVENUE HAS PREFERRED AN APPEAL AGAINST THE SAID DECISION AND THE ISSUE HAS NOT REACHED FINALIT Y, THE ADJUSTMENT HAS BEEN PROPOSED. 8.4 M/S E4E FILED ITS OBJECTIONS BEFORE THE DRP ON MARCH 24, 2014. THE DRP VIDE ITS DIRECTIONS DATED NOV.26, 2014 PART LY CONFIRMED THE ADDITIONS MADE BY THE AO IN THE DAO. THE DRP REJEC TED SOME OF THE COMPARABLE COMPANIES ADOPTED BY THE TPO AND CONSEQU ENT TO SUCH REJECTION, THE ADJUSTMENT UNDER SECTION 92CA OF THE ACT INCREASED TO IT(TP)A NOS.324 (B)/15 & 220(B)15 14 RS.76,342,156/-. BASED ON THE DECISION OF THE KHC IN THE CASE OF TATA ELXSI LTD., THE DRP DIRECTED THE AO TO REDUCE THE T ELECOMMUNICATION EXPENSES AND TRAVEL EXPENSES INCURRED IN FOREIGN CU RRENCY FROM BOTH THE IT & TT. AS M/S E4E IS NOT A 100 PERCENT EXPORT OR IENTED UNIT, SUCH ADJUSTMENT FROM BOTH THE ET AND TT REDUCED FROM THE ADDITION ON ACCOUNT OF RE-COMPUTATION OF RELIEF UNDER SECTION 1 0A OF THE ACT, TO RS.585,520/-. 8.5 SUBSEQUENTLY, A FINAL ASSESSMENT ORDER WAS PAS SED ON DECEMBER 30,2014 ( SERVED ON JAN 6, 2015) AS PER T HE FINAL ASSESSMENT ORDER THE AO DETERMINED THE TOTAL INCOME OF E4E AT RS.100,873,056 AND THEREAFTER RAISED A DEMAND FOR TAX OF RS.42,605,150 /-. 8.6 AGAINST THE FINAL ASSESSMENT ORDER BOTH ASSESSE E AND THE DEPARTMENT ARE IN APPEAL. THE ASSESSEE HAS RAISE D GROUND NO.11. THE GROUND RAISED IN THE DEPARTMENT APPEAL IN IT(TP)A N O.220(B)/2015 IS AS FOLLOWS; 1. THE DIRECTIONS OF THE DRP ARE OPPOSED TO LAW AN D FACTS OF THE CASE. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E THE DRP ERRED IN LAW IN DIRECTING THE AO TO EXCLUDE REIMBUR SEMENT OF SPECIFIC EXPENDITURE BOTH FROM THE EXPORT TURNOVER AS WELL AS FROM TOTAL TURNOVER FOR THE PURPOSE OF COMPUTATION OF DEDUCTION U/S 10A, WITHOUT APPRECIATING THE FACT T HAT THE IT(TP)A NOS.324 (B)/15 & 220(B)15 15 STATUTE ALLOWS EXCLUSION OF SUCH EXPENDITURE ONLY F ROM EXPORT TURNOVER BY WAY OF SPECIFIC DEFINITION OF EX PORT TURNOVER AS ENVISAGED BY SUB-CLAUSE(4) OF EXPLANATI ON 2 BELOW SUB-SECTION (8) OF SECTION 10A AND THE TOTAL TURNOVER HAS NOT BEEN DEFINED IN THIS SECTION. 3. ON THE FACTS AND CIRCUMSTANCES OF THE CASE THE D RP ERRED IN DIRECTING THE AO TO COMPUTE DEDUCTION U/S 10A IN THE ABOVE MANNER BY PLACING RELIANCE ON THE DECISION OF HONBLE HIGH COURT OF KARNATAKA IN THE CASE OF M/S TATA ELX SI LTD. WHICH HAS NOT BECOME FINAL SINCE THE SAME HAS NOT B EEN ACCEPTED BY THE DEPARTMENT AND SLPS ARE PENDING BEF ORE THE HONBLE SUPREME COURT. 4. FOR THESE AND OTHER GROUNDS THAT MAY BE URGED AT THE TIME OF HEARING, IT IS PRAYED THAT THE DIRECTIONS O F THE DRP IN SO FAR AS IT RELATES TO THE ABOVE GROUNDS MAY BE RE VERSED. 5. THE ASSESSEE CRAVES LEAVE TO ADD, ALTER, AMEND A ND/OR DELETE ANY OF THE GROUNDS MENTIONED ABOVE. 9. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED B EFORE US THAT THE TELECOMMUNICATION EXPENSES AND TRAVEL EXPENSES INCURRED IN FOREIGN CURRENCY SHOULD NOT BE REDUCED FROM BOTH ET AND TT AS THE SAME HAVE NOT BEEN INCURRED TOWARDS RENDERING OF TECHNICAL SE RVICES OUTSIDE INDIA AS CONTEMPLATED UNDER SECTION 10A OF THE ACT. 9.1 THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE SECOND LIMB OF THE DEFINITION OF ET UNDER SECTION 10A OF T HE ACT, PROVIDES FOR EXCLUSION OF EXPENDITURE INCURRED IN FOREIGN CURREN CY IN CONNECTION WITH PROVIDING THE TECHNICAL SERVICES OUTSIDE INDIA. THE PR4SENCE OF THE WORD IT(TP)A NOS.324 (B)/15 & 220(B)15 16 THE BEFORE THE TERM TECHNICAL SERVICE INDICATES THAT THE ASSESSEE NEEDS TO PROVIDE A PARTICULAR OR SPECIFIC TECHNICAL SERVI CE OUTSIDE INDIA AND EXPENSES INCURRED IN FOREIGN CURRENCY IN PROVIDING THOSE TECHNICAL SERVICES ARE TO BE EXCLUDED. ACCORDINGLY, THIS CLA USE OF EXCLUSION OF FOREIGN CURRENCY EXPENDITURE WOULD BE APPLICABLE ON LY IF THE ASSESSEE IS PROVIDING TECHNICAL SERVICES OUTSIDE INDIA. THE AB OVE ARGUMENT HAS BEEN UPHELD IN THE FOLLOWING DECISIONS; JURISDICTIONAL BANGALORE BENCH OF THE ITAT IN THE C ASE OF INFOSYS TECHNOLOGIES LTD. (108 TTJ 282). JURISDICTIONAL BANGALORE BENCH OF ITAT IN THE CASE OF ROBERT BOSCH ENGINEERING AND BUSINESS SOLUTIONS LTD. IN ITA NO.4 12/BANG/2011). CHENNAI BENCH OF ITAT IN THE CASE OF INAUTIX TECHN OLOGIES PV.LTD. (ITA NOS.541/MDS/2006, 1439/MDS/2007, 20191/MDS/201 0 TO 2093/MDS/2010). CHENNAI BENCH OF ITAT IN THE CASE OF COGNIZANT TEC HNOLOGIES SOLUIONS INDIA PVT.LTD. (ITA NO.209/MDS/2007); AND HYDERABAD BENCH OF ITAT IN THE CASE OF PATNI TELECO M PVT.LTD. (308 ITR 414). 9.2 WE HAVE HEARD BOTH PARTIES. FOLLOWING THE PATNI TELECOM PVT. LTD., WE ARE OF TH E OPINION, THAT E4E IS NOT INVOLVED IN RENDERING TECHNICAL SERVICES OUTSIDE INDIA, BUT IT IN THE BUSINESS OF EXPORT OF BPO SERVICES AS CONTEMPLA TED UNDER THE PROVISIONS OF SECTION 10A OF THE ACT FROM ITS OFFSH ORE CENTRE IN INDIA. IT IS NOT ENGAGED IN RENDERING ONSITE SERVICES AND THEREF ORE, IT(TP)A NOS.324 (B)/15 & 220(B)15 17 TELECOMMUNICATION EXPENSES AND TRAVEL EXPENSES INCU RRED IN FOREIGN CURRENCY SHOULD NOT BE EXCLUDED FROM THE ET AND TT IN COMPUTING THE ELIGIBLE RELIEF UNDER SECTION 10A OF THE ACT. 9.3 FURTHER, BPO SERVICES, UNDERTAKEN FOR THE PURPO SES OF EXPORT CANNOT BE EQUATED TO PROVIDING TECHNICAL SERVICES O UTSIDE INDIA SOLELY FOR THE PURPOSE OF EXCLUDING TRAVEL EXPENSES INCURRED I N FOREIGN CURRENCY FROM THE ET AS ENVISAGED IN THE DEFINITION OF EXPO RT TURNOVER AS PROVIDED IN SECTION 10A OF THE IT ACT. ACCORDINGLY, THE AD JUSTMENT MADE BY THE AO IS TO BE QUASHED IN ENTIRETY. WE DIRECT THE AO TO RE-WORK THE SAME. SINCE WE HAVE DECIDED GROUND NO.11, IN ASSESSEES APPEAL THE GROUNDS RAISED BY REVENUE IN IT(TP)A NO.220(B)/2015 ARE DISMISSED. 10. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS AL LOWED FOR STATISTICAL PURPOSES AND THE REVENUES APPEAL IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON THE 4 TH DAY OF NOVEMBER, 2015. SD/- SD/- (JASON P BOAZ) (ASHA VIJAYARAGHAVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER D A T E D : 04-11-2015 PLACE: BANGALORE AM* COPY TO : 1 APPELLANT 2 RESPONDENT 3 CIT(A) BANGALORE 4 CIT 5 DR, ITAT, BANGALORE. 6 GUARD FILE BY ORDER IT(TP)A NOS.324 (B)/15 & 220(B)15 18 AR, ITAT, BANGALORE