Acusis Software India Private Limited, Bangalore V. ITO, Bangalore

ITA 442/BANG/2011

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 9270 (ITAT-BANGALORE)
• Duration Of Justice: 5 year(s) 6 month(s) 20 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-11-2016
• Appeal Filed By: Assessee
• Bench Allotted: A
• Next Hearing Date: 09-08-2016
• Assessment Year: 2004-2005
• Appeal Filed On: 19-04-2011
• Court: TRIBUNAL
• Department Lawyers: D SUDHAKAR RAO
• Assessee Lawyers: CHAVALI NARAYANA
• Keywords: Business income; Transfer pricing; International transaction; Retrospective amendment; Wholly owned subsidiary
• Section: 92C; 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, BANGALORE ` BEFORE SHRI SUNIL KUMAR YADAV, JUDICIAL MEMBER AND SHRI INTURI RAMA RAO, ACCOUNTANT MEMBER IT(TP)A NO.442/BANG/2011 (ASSESSMENT YEAR: 2004-05) ASSESSEES APPEAL REVENUES APPEAL THE INCOME TAX OFFICER , WARD-11(1), BANGALORE. VS. M/S. ACUSIS SOFTWARE INDIA PVT. LTD., BANGALORE 560 027. PAN : AADCA2415P APPELLANT RESPONDENT ASSESSEE BY : SHRI. CHAVALI NARAYANA, CA REVENUE BY : SHRI. D. SUDHAKAR RAO, CIT-DR DATE OF HEARING : 10.08.2016 DATE OF PRONOUNCEMENT : 09. 11.2016 M/S. ACUSIS SOFTWARE INDIA PVT. LTD., NO. 17/2, DOLLARS CHAMBERS, LALBAGH ROAD, BANGALORE 560 027. PAN : AA DCA2415P VS. THE INCOME TAX OFFICER , WARD-11(1), BANGALORE. APPELLANT RESPONDENT IT(TP)A NO.444/BANG/2011 (ASSESSMENT YEAR: 2004-05) THE INCOME TAX OFFICER , WARD-11(1), BANGALORE. VS. M/S. ACUSIS SOFTWARE INDIA PVT. LTD., BANGALORE 560 027. PAN : AADCA2415P APPELLANT RESPONDENT IT(TP)A NO. 445/BANG/2011 (ASSESSMENT YEAR: 2005-06) IT(TP)A NO.442/BANG/2011& IT(TP)A NO.444&445/BANG/2011 PAGE 2 OF 39 ORDER PER INTURI RAMA RAO, AM : THESE CROSS APPEALS FILED BY THE ASSESSEE COMPANY A S WELL AS THE REVENUE DIRECTED AGAINST THE CONSOLIDAT ED ORDER OF LEARNED COMMISSIONER OF INCOME TAX (APPEALS), BANGALORE DATED 21.01.2011 FOR THE ASSESSMENT YEARS 2004-05 AND 2005-06. 2. WE SHALL NOW DEAL WITH THE APPEALS FOR THE ASSES SMENT YEARS 2004-05. BRIEFLY THE FACTS OF THE CASE ARE T HAT THE ASSESSEE IS A COMPANY INCORPORATED UNDER THE COMPAN IES ACT, 1956. IT IS A WHOLLY OWNED SUBSIDIARY OF M/S. ACUSIS HOLDING COMPANY LTD., BRITISH VIRGIN ISLANDS, WHICH IN TURN IS A WHOLLY OWNED SUBSIDIARY OF ACUSIS LLC, USA. I T IS ENGAGED IN THE BUSINESS OF PROVIDING MEDICAL TRANSC RIPTION SERVICES FALLING WITHIN THE CATEGORY OF INFORMATION TECHNOLOGY ENABLED SERVICES [ITES] TO ITS AES I.E ., ACUSIS LLC, USA. 3. THE RETURN OF INCOME FOR THE ASSESSMENT YEAR 200 4-05 WAS FILED ON 27.10.2004 DECLARING INCOME OF NIL UND ER THE NORMAL PROVISIONS OF ACT. AGAINST THE SAID RETURN OF INCOME, THE CASE WAS SELECTED FOR SCRUTINY BY ISSUING NOTIC E UNDER SECTION 143(2) OF THE ACT. THE ASSESSEE COMPANY AL SO REPORTED THE INTERNATIONAL TRANSACTIONS WITH ITS AE OF PROVISION OF MEDICAL TRANSCRIPTION SERVICES AT RS.10,93,59,573/-. IT(TP)A NO.442/BANG/2011& IT(TP)A NO.444&445/BANG/2011 PAGE 3 OF 39 4. THE ASSESSEE COMPANY SOUGHT TO JUSTIFY THE CONSIDERATION RECEIVED FOR THE ABOVE INTERNATIONAL TRANSACTIONS ENTERED WITH ITS AE TO BE AT ARMS LEN GTH PRICE. THE ASSESSEE COMPANY ALSO SUBMITTED A TRANSFER PRIC ING STUDY REPORT ADOPTING THE OPERATING PROFIT TO TOTAL COST AS A PROFIT LEVEL INDICATOR FOR THE TRANSFER PRICING STU DY. THE ASSESSEE COMPANY APPLIED THE TRANSACTIONAL NET MARG IN METHOD (TNMM) WHICH WAS CONSIDERED TO BE THE MOST APPROPRIATE METHOD FOR THE PURPOSE OF BENCH MARKING THE INTERNATIONAL TRANSACTIONS. THE ASSESSEE COMPANY U SED THE MULTIPLE YEARS FINANCIAL DATA I.E., DATA PERTAININ G TO FINANCIAL YEAR 2001-02 TO 2002-03. THE ASSESSEE COMPANYS PR OFIT MARGIN WAS COMPUTED AT 11.04%. THE ASSESSEE COMPA NY CLAIMED THAT THE SAME WAS COMPARABLE WITH THE OTHER COMPANIES RENDERING IT ENABLED SERVICES. FOR THE P URPOSE OF TP STUDY, THE ASSESSEE COMPANY HAD CHOSEN 14 COMPARABLE ENTITIES AND ARITHMETIC MARGIN AND OPERA TING PROFIT MARGIN OF SAID COMPARABLES WAS COMPUTED AT 7 .18%. THEREFORE, IT WAS CLAIMED THAT ITS MARGIN WAS MORE THAN THE AVERAGE OF COMPARABLE ENTITIES. THUS IT WAS CLAIME D THAT THE TRANSACTIONS WITH AE ARE AT ARMS LENGTH. THE ASSESSEE COMPANY FOR THE PURPOSE OF ITS TP STUDY HAD ADOPTED CERTAIN FILTERS FOR THE PURPOSE OF ITS TP STUDY: 5. APPLYING THE FILTERS ADOPTED, 14 ENTITIES WERE C HOSEN AS COMPARABLES WHOSE AVERAGE PROFIT MARGIN WAS COMP UTED AT 11.04%. HOWEVER, DURING THE COURSE OF PROCEEDIN GS IT(TP)A NO.442/BANG/2011& IT(TP)A NO.444&445/BANG/2011 PAGE 4 OF 39 BEFORE THE TPO, AN UPDATED SET OF 12 COMPARABLES WE RE SUBMITTED USING THE SINGLE YEARS DATA AND THE FOLLOWING 12 COMPARABLES WERE CHOSEN: WHOSE AVERAGE ARITHMETIC M ARGIN WAS COMPUTED AT 3.12%. 6. THE ASSESSING OFFICER AFTER NOTICING ABOVE INTER NATIONAL TRANSACTIONS, REFERRED THE MATTER TO THE TRANSFER P RICING OFFICER (TPO). THE TPO, BY ORDER DATED 20.12.2006, PASSED UNDER SECTION 92CA(3) OF INCOME TAX ACT COMPUTED TH E TRANSFER PRICING ADJUSTMENT AT RS.2,35,24,271/-. T HE LEARNED TPO ACCEPTED THE TNMM ADOPTED BY THE ASSESS EE COMPANY BUT REJECTED THE TRANSFER PRICING REPORT. THEN THE TPO PROCEEDED TO IDENTIFY THE DIFFERENT SET OF COMP ARABLES FOR THE PURPOSE OF DETERMINING ALP. WHILE DOING SO , THE TPO HAD APPLIED THE FOLLOWING FILTERS: IT(TP)A NO.442/BANG/2011& IT(TP)A NO.444&445/BANG/2011 PAGE 5 OF 39 I. USE OF CONTEMPORANEOUS DATA II. COMPANIES WHICH ARE SHOWING DIMINISHING REVENUE ARE EXCLUDED. III. COMPANIES THAT HAVE SUBSTANTIAL UNDERUTILISATION OF ASSETS WERE EXCLUDED. IV. COMPANIES HAVING PERSISTENT LOSSES ARE EXCLUDED. V. COMPANIES WHOSE FINANCIAL INFORMATION NOT ON THE PUBLIC DOMAIN ARE EXCLUDED. VI. COMPANIES HAVING EXPORT EARNINGS LESS THAN 25% OF TOTAL REVENUE ARE EXCLUDED. 7. THE TPO HAS REJECTED ALL COMPARABLES SELECTED BY THE ASSESSEE COMPANY IN THE TP STUDY AND INTRODUCED 9 N EW COMPANIES WHICH ARE IN PAGE NO. 25 OF THE TPO ORDE R. THE FINAL SET OF COMPARABLES SELECTED BY TPO ARE AS UND ER: IT(TP)A NO.442/BANG/2011& IT(TP)A NO.444&445/BANG/2011 PAGE 6 OF 39 8. THE TPO COMPUTED THE AVERAGE PROFIT MARGIN OF TH E COMPARABLES FINALLY SELECTED AT 33% AND AFTER GIVIN G WORKING CAPITAL ADJUSTMENT OF 2%, ADJUSTED ARITHMET IC MEAN WAS DETERMINED AT 31% AND ON THE ABOVE SAID BASIS, TPO COMPUTED TRANSFER PRICING ADJUSTMENT IN RESPECT OF ITES SERVICES AS FOLLOWS: 9. THE ASSESSING OFFICER PASSED THE ASSESSMENT ORDE R DATED 26.12.2006 U/S. 143(3) INCORPORATING THE ABOV E ADJUSTMENTS AND ALSO DISALLOWING THE CLAIM U/S 10A TO THE EXTENT OF RS.15,25,550/- IN RESPECT OF TRAVEL AND COMMUNICATION EXPENDITURE INCURRED BY REDUCING THE SAME FROM THE EXPORT TURNOVER ALONE. IT(TP)A NO.442/BANG/2011& IT(TP)A NO.444&445/BANG/2011 PAGE 7 OF 39 10. BEING AGGRIEVED BY THE ABOVE ASSESSMENT ORDER, AN APPEAL WAS PREFERRED BEFORE THE LEARNED COMMISSIONE R OF INCOME-TAX (APPEALS), CONTENDING INTERALIA THAT THE LEARNED TPO OUGHT TO HAVE ACCEPTED THE USE OF MULTIPLE YEAR DATA FOR COMPUTING THE FINAL MARGIN OF THE COMPARABLES, ACCEPTED THE TRANSFER PRICE STUDY UNDERTAKEN BY THE ASSESSEE COMPANY, THE FOREIGN EXCHANGE FLUCTUATION GAIN/LOSS SHOULD BE CONSIDERED AS OPERATING COST FOR THE PURPOSE OF COMPUTING MARGINS, WORKING CAPITAL ADJUSTMENT SHOUL D BE GIVEN TO THE ASSESSEE COMPANY ON ACCOUNT OF DIFFERE NCE IN WORKING CAPITAL. THE ASSESSEE COMPANY ALSO CONTEND ED THAT THE CRITERIA ADOPTED BY THE ASSESSEE COMPANY FOR CH OOSING THE COMPARABLES SHOULD NOT HAVE BEEN REJECTED BY TH E TPO. THE ASSESSEE COMPANY ALSO CONTENDED THAT THE TPO SH OULD NOT HAVE REJECTED PERSISTENT LOSS MAKING COMPANIES AS COMPARABLES. FINALLY IT WAS CONTENDED THAT THE BE NEFIT OF PROVISO TO SUB SECTION (2) TO 92C OF THE ACT SHOULD BE GRANTED TO THE ASSESSEE AS A STANDARD DEDUCTION. 11. AS REGARDS THE ENTITIES M/S. ULTRA MARINE PIGME NTS LIMITED AND M/S. VISHAL INFO TECH LTD., IT WAS CONT ENDED THAT THESE COMPANIES CANNOT BE CONSIDERED AS COMPAR ABLES WITH THAT OF ASSESSEE COMPANY AS THESE COMPANIES WE RE MAKING SUPER ABNORMAL PROFITS. THE ASSESSEE COMPAN Y ALSO CONTENDED THAT IN RESPECT OF TRAVELLING EXPENDITURE AND TELEPHONE EXPENDITURE INCURRED IN FOREIGN EXCHANGE, REDUCING THE SAME FROM EXPORT TURNOVER ALONE IS NOT CORRECT. IT(TP)A NO.442/BANG/2011& IT(TP)A NO.444&445/BANG/2011 PAGE 8 OF 39 12. AFTER CONSIDERING THE ABOVE SUBMISSIONS OF THE ASSESSEE COMPANY, THE LEARNED CIT(A) VIDE ORDER DAT ED 21.01.2011, UPHELD THE FILTER APPLIED BY THE LEARN ED TPO AND APPLICATION OF USE OF ONLY CURRENT YEAR DATA AS AGAINST MULTIPLE DATA AS ADOPTED BY THE ASSESSEE. AND IN R ESPECT OF SELECTION OF COMPARABLES IS CONCERNED, THE LEARNED CIT(A) HELD THAT THE ENTITIES MAKING SUPER ABNORMAL PROFIT S ARE TO BE EXCLUDED. HOWEVER, IN RESPECT OF TRAVELLING AND TELECOMMUNICATION EXPENDITURE INCURRED IN FOREIGN C URRENCY, THE CIT(A) DIRECTED THE TPO/AO TO REDUCE FROM BOTH THE EXPORT TURNOVER AS WELL AS THE TOTAL TURNOVER FOR T HE PURPOSE OF COMPUTING OF DEDUCTION UNDER SECTION 10A. THE C IT(A) ALSO HELD THAT THE FOREIGN EXCHANGE GAIN/LOSS SHOUL D BE CONSIDERED AS A PART OF OPERATING PROFIT FOR THE PU RPOSE OF COMPUTING MARGINS. BEING AGGRIEVED BY THAT PART OF THE ASSESSMENT ORDER, THE ASSESSEE COMPANY IS IN APPEAL BEFORE US RAISING THE FOLLOWING GROUNDS OF APPEAL IN ITA NO. 442/B/2011: IT(TP)A NO.442/BANG/2011& IT(TP)A NO.444&445/BANG/2011 PAGE 9 OF 39 13. THE ASSESSEE COMPANY RAISED THE FOLLOWING GROUN DS OF APPEAL : IT(TP)A NO.442/BANG/2011& IT(TP)A NO.444&445/BANG/2011 PAGE 10 OF 39 IT(TP)A NO.442/BANG/2011& IT(TP)A NO.444&445/BANG/2011 PAGE 11 OF 39 14. GROUND NO. 1 IS GENERAL IN NATURE AND DO NOT RE QUIRE ANY ADJUDICATION. GROUND NOS. 2 TO 12 CHALLENGES T HE SELECTION OF COMPARABLES. THE LEARNED AR VEHEMENTL Y CONTENDED THE FOLLOWING COMPARABLES CANNOT BE INCLU DED IN THE LIST OF COMPARABLES: I. M/S. TRICOM INDIA LIMITED II. M/S. WIPRO BPO LIMITED THE LEARNED AR HAD PLEADED FOR INCLUSION OF THE FOLLOWING COMPANIES IN THE LIST OF COMPARABLES: I. M/S. ALLSEC TECHNOLOGIES LIMITED II. M/S. MERCURY OUTSOURCING LIMITED III. M/S. MAPRO INDUSTRIES LIMITED IV. M/S. COSMIC GLOBAL LIMITED V. M/S. C. S. SOFTWARE ENTERPRISE LIMITED NOW WE SHALL DEAL WITH EACH OF THEM: (I) M/S. TRICOM INDIA LIMITED : THE LEARNED AR VEHEMENTLY CONTENDED THAT ENTITY M/S. TRICOM INDIA LIMITED., CANNOT BE COMPARED WITH THE ASSESSEE COMPANY AS IT IS FUNCTIONALLY DISSIMILAR. IT IS SUBMITTED THAT THIS COMPANY IS ENGAGED IN IN- IT(TP)A NO.442/BANG/2011& IT(TP)A NO.444&445/BANG/2011 PAGE 12 OF 39 HOUSE DEVELOPMENT OF SOFTWARE PRODUCTS THAT ARE USED FOR SERVICE DELIVERY AND THIS HAS LED TO HIGH PROFIT MARGINS. EVEN BEFORE TPO IT WAS CONTENDED THAT THE FINANCIAL INFORMATION PERTAINING TO THE FINANCIAL YEAR 2003-04 WAS NOT AVAILABLE IN THE PUBLIC DOMAIN. THEREFORE THIS COMPANY CANNOT BE COMPARED WITH THAT OF ASSESSEE COMPANY AND RELIANCE IN THIS REGARD WAS PLACED ON THE FOLLOWING DECISION OF THE COORDINATE BENCH IN THE CASE OF M/S. 24/7 CUSTOMER.COM PVT. LTD., VS. DY. COMMISSIONER OF INCOME TAX (BANGALORE) ITA NO. 227/BANG/2010. ON THE OTHER HAND, THE LEARNED CIT(DR) RELIED ON TH E ORDERS OF THE LOWER AUTHORITIES. WE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. FROM PAGE NO. 23 OF THE ANNUAL REPORT OF M/S. TRICOM INDIA LIMITED., IT IS CLEAR THAT THE REVENUE IS DERIVED ONLY FROM THE INFORMATION AND TECHNOLOGY SE RVICES OF RS.9,24,39,411/-. EVEN IN THE SCHEDULE TO THE C URRENT ASSETS OF THE BALANCE SHEET NO CLOSING STOCK IS SHO WN. FURTHER, THE COMPANY HAD EXPRESSLY STATED IN SCHEDU LE S THAT IT IS ENGAGED WHOLLY IN ITES AND BPO BUSINESS AS UNDER: AFTER THE SCHEME OF ARRANGEMENT AND RECONSTRUCTION , THE COMPANY IS ENGAGED IN THE PROVIDING THE SERVICE S IN THE INFORMATION & TECHNOLOGY ENABLED SERVICES (ITES)/BP O : TRANSACTION PROCESSING TO CUSTOMERS IN OVERSEAS MAR KET. IT(TP)A NO.442/BANG/2011& IT(TP)A NO.444&445/BANG/2011 PAGE 13 OF 39 THE DECISION OF THE COORDINATE BENCH IN THE CASE OF 24/7 CUSTOMERS CITED SUPRA IS BASED ON THE FUNCTION AL DISSIMILARITY I.E., THE COMPANY IS ENGAGED IN THE DEVELOPMENT OF SOFTWARE PRODUCTS. BUT THE EVIDENCE ON THE RECORD AS STATED ABOVE IS CONTRARY. THEREFORE THE DECISION OF THE COORDINATE BENCH IN THE CASE OF 24/7 CUSTOME R IS PER INCURIAM, AS SAID DECISION WAS RENDERED BY THE COORDINATE BENCH WITHOUT REFERRING TO ANY MATERIAL ON RECORD I N SUPPORT OF THE CONCLUSION THAT COMPANY IS ENGAGED IN SOFTWA RE DEVELOPMENT. IN THE CIRCUMSTANCES, WE ARE UNABLE TO AGREE WITH THE SUBMISSION THAT THE COMPANY WAS ENGAGED IN SOFTWARE DEVELOPMENT. HENCE WE UPHOLD THE ACTION OF TPO/AO IN INCLUDING THIS COMPANY IN THE LIST OF COMPARABLES. (II) M/S. WIPRO BPO LTD: THE LEARNED AR CONTENDS THAT THIS COMPANY CANNOT BE COMPARED WITH THAT OF ASSESSEE COMPANY AS IT IS FUNCTIONALLY DISSIMILAR HAVING HIGH BRAND VALUE, GOODWILL AND HI GH TURNOVER. THE LEARNED AR HAS PLACED RELIANCE ON TH E FOLLOWING DECISIONS: A. 24/7 CUSTOMER.COM PVT. LTD., B. MARKET TOOLS RESEARCH PRIVATE LIMITED C. DELOITTE CONSULTING INDIA PVT. LTD., D. MAERSK GLOBAL SERVICE CENTER (INDIA) P. LTD., VS. ACIT IT(TP)A NO.442/BANG/2011& IT(TP)A NO.444&445/BANG/2011 PAGE 14 OF 39 ON THE OTHER HAND, THE LEARNED DR PLACED RELIANCE O N THE ORDERS OF THE LOWER AUTHORITIES. IT IS UNDISPUTED FACT THAT THE COMPANY WIPRO BPO LT D., IS HAVING HIGH BRAND VALUE, GOODWILL WITH HIGH TURN OVER. NOW IT IS TRITE LAW THAT THE COMPANY HAVING HIGH BR AND VALUE AND INTANGIBLES CANNOT BE COMPARED WITH A COMPANY RENDERING PURELY ITES SERVICES. AND IN THIS REGARD , RELIANCE CAN BE PLACED ON THE FOLLOWING DECISIONS: (A) GENISYS INTEGRATINGN SYSTEMS (INDIA) (P.) LTD., VS. DY. CIT [2012] 20 TAXMANN.COM 715/53 SOT 159 (BANG.-TRIB.) (B) KODIAK NETWORKS (INDIA) (P.) LTD, V. ASSTT. CIT [2012] 18 TAXMANN.COM 32/51 SOT 191 (BANG.- TRIB.) (C) TELCORDIA TECHNOLOGIES INDIA (P.) LTD., V. ASSTT. CIT [2012] 22 TAXMANN.COM 96/137 ITD 1 (MUM.-TRIB.) WE DO NOT FIND ANY REASON TO DIFFER WITH THE RATIO LAID DOWN IN THE ABOVE CASES. THEREFORE, WE DIRECT THE TPO/AO TO EXCLUDE THIS COMPANY FROM THE LIST OF THE COMPAR ABLES. (III) M/S. ALLSEC TECHNOLOGIES LIMITED: THE ASSESSEE COMPANY HAD ARGUED FOR INCLUSION OF THIS IT(TP)A NO.442/BANG/2011& IT(TP)A NO.444&445/BANG/2011 PAGE 15 OF 39 COMPANY IN THE LIST OF COMPARABLES. THERE IS NO DISPUTE ABOUT THE FUNCTIONAL COMPARABILITY OF THIS COMPANY. THE CIT(A) HAD DELETED THIS COMPANY FROM THE LIST OF COMPARABLES ON THE GROUND OF LOW MARGINS. NOW IT IS TRITE LAW THAT THE COMPANIES CANNOT BE EXCLUDED FOR THE REASON OF ABNORMAL PROFITS OR ABNORMAL LOSSES AS HELD BY THE SPECIAL BENCH IN THE CASE OF DCIT VS. M/S. QUARK SYSTEMS PVT LTD., [2010] 38 SOT 307 (CHD.) (SB). HOWEVER, THE TPO/AO IS EXPECTED TO GO INTO THE REASONS FOR THE ABNORMAL LOSSES OR ABNORMAL PROFITS. IF IT IS DEMONSTRATED WITH SOME EVIDENCE THAT THE ABNORMAL LOSSES/PROFITS ARE INCURRED ON ACCOUNT OF SOME SPECIAL REASONS, THE SAME MAY BE EXCLUDED. THE COORDINATE BENCH IN THE CASE OF 24/7 CUSTOMER.COM (P.) LTD. VS. DY. CIT [2012] 28 TAXMANN.COM 258/[2013] 140 ITD 344 (BANG. TRIB.) FOLLOWING THE DECISION OF EXXON MOBIL COMPANY INDIA (P.) LTD. VS. DY. CIT [2011] 12 TAXMANN.COM 84/46 SOT 294 (URO) (MUM.-TRIB), HELD TO THE SAME EFFECT. WE FIND FROM THE RECORD THAT THE TPO/AO HAD NOT UNDERTAKEN THE EXERCISE OF GOING INTO THE REASONS FOR ABNORMAL LOSSES. THEREFORE WE REMIT BACK TO THE FILE OF TPO/AO TO UNDERTAKE THIS EXERCISE, AND IF IT IS FOUND THAT TH E LOSSES ARE INCURRED NOT ON ACCOUNT OF ANY SPECIAL REASONS AND IS A NORMAL BUSINESS LOSS TO INCLUDE IT IN THE LIST OF COMPARABLES OTHERWISE TO EXCLUDE THE SAME FROM LIST OF THE COMPARABLES. IT(TP)A NO.442/BANG/2011& IT(TP)A NO.444&445/BANG/2011 PAGE 16 OF 39 IV) M/S. MERCURY OUTSOURCING LIMITED: THE ASSESSEE COMPANY HAD ARGUED FOR INCLUSION OF THIS COMPANY IN THE LIST OF COMPARABLES. THERE IS NO DISPUTE ABOUT THE FUNCTIONAL COMPARABILITY OF THIS COMPANY. THE CIT(A) HAD DELETED THIS COMPANY FROM THE LIST OF COMPARABLES ON THE GROUND OF LOW MARGINS. NOW IT IS TRITE LAW THAT THE COMPANIES CANNOT BE EXCLUDED FOR THE REASON OF HIGH/LOW PROFITS AS HELD BY THE SPECIAL BENCH IN THE CASE OF DCIT VS. M/S. QUARK SYSTEMS PVT LTD., [2010] 38 SOT 307 (CHD.) (SB). THEREFORE, THE REASONING OF THE CIT(A) TO EXCLUDE THIS COMPANY FROM THE LIST OF COMPARABLES IS NOT IN CONSONANCE WITH THE SETTLE POSITION OF LAW ON THE ABOVE ISSUE. THEREFORE WE DIRECT THE TPO/AO TO INCLUDE IN THE LIST OF COMPARABLES. V) M/S. MAPRO INDUSTRIES LIMITED: THE ASSESSEE COMPANY HAD PLEADED FOR INCLUSION OF THIS COMPANY AS FUNCTIONALLY COMPARABLE WITH THE ASSESSEE COMPANY. HE FURTHER SUBMITTED THAT THE COMPANY MADE PROFIT IN THE FINANCIAL YEAR 2001-02. IT IS ONLY IN THE FINANCIAL YEAR 2002-03, 2003-04 THE COMPANY INCURRED LOSSES ON ACCOUNT OF UNDER UTILIZATION OF RESOURCES. THUS ACCORDING TO THE ASSESSE COMPANY, THIS COMPANY IS NOT A PERSISTENT LOSS COMPANY. NORMAL LOSS MAKING IT(TP)A NO.442/BANG/2011& IT(TP)A NO.444&445/BANG/2011 PAGE 17 OF 39 COMPANY CANNOT BE EXCLUDED FOLLOWING THE LAW LAID DOWN BY SPECIAL BENCH IN QUARK SYSTEMS PVT. LTD. WE HEARD THE RIVAL SUBMISSIONS. AS HELD BY US IN T HE PARA SUPRA THAT A COMPARABLE CANNOT BE EXCLUDED ONL Y BECAUSE IT IS MAKING LOSSES. IT CANNOT BE SAID THA T THIS COMPANY WAS PERSISTENTLY INCURRING LOSSES AND THERE FORE THIS COMPANY CANNOT BE EXCLUDED FROM THE LIST OF COMPARA BLES. WE PLACE RELIANCE ON THE FOLLOWING 2 DECISIONS: I) TECHNIMOUNT ICB (P.) LTD. V. ASSTT. CIT [2011] 11 TAXMANN.COM 49 (MUM.) II) ITO V. CRM SERVICES INDIA (P.) LTD., [2011] 14 TAXMANN.COM 96/48 SOT 41 (RO) (DELHI-TRIB.) FOLLOWING THE RATIO LAID DOWN IN THE ABOVE CASES, W E DIRECT THE TPO/AO TO INCLUDE THIS COMPANY IN THE LI ST OF COMPARABLES. VI) M/S. COSMIC GLOBAL LIMITED: THE ASSESSEE COMPANY IS SEEKING INCLUSION OF THIS COMPANY IN THE LIST OF COMPARABLES. THERE IS NO DISPUTE ABOUT THE FUNCTIONAL COMPARABILITY WITH THAT OF THE ASSESSEE COMPANY. THE CIT(A) DELETED THIS COMPANY ON ACCOUNT OF LOSS MAKING COMPANY. WE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. THE REASONING GIVEN BY US IN R ESPECT OF MAPRO INDUSTRIES HOLDS GOOD EVEN IN RESPECT OF THIS IT(TP)A NO.442/BANG/2011& IT(TP)A NO.444&445/BANG/2011 PAGE 18 OF 39 COMPARABLE. IT IS NOT THE CASE OF THE TPO/AO THAT THE COMPANY IS INCURRING PERSISTENT LOSSES. THEREFORE, WE DIRECT THE TPO/AO TO INCLUDE THIS COMPANY IN THE LIST OF COMPARABLES. VII) M/S. CS SOFTWARE ENTERPRISE LIMITED: THIS COMPANY WAS INCLUDED IN THE LIST OF COMPARABLES BY THE ASSESSEE COMPANY. THE TPO REJECTED THIS COMPANY AS ACCORDING TO HIM IT DOES NOT PASS THE FILTER THE EXPORT TURNOVER OF 25%. THE ASSESSEE CONTENDS THAT THIS COMPANY SHOULD BE INCLUDED IN THE LIST OF COMPARABLES AS THE EXPORT EARNINGS HAVE NO BEARING ON THE COMPARABILITY. ON OTHER HAND, THE LEARNED DR PLACED RELIANCE ON THE LOWER ORDERS. WE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. THE CONDITIONS PREVAILING IN T HE EXPORT AND DOMESTIC MARKET IN WHICH THE RESPECTIVE PARTIES TO THE TRANSACTIONS OPERATE ARE DIFFERENT AND THEREFORE TH E FILTER OF 25% EXPORT EARNINGS TO TOTAL SALES IS HELD TO BE VA LID BY THE DECISIONS OF CUSTOMER.COM PVT LTD V DCIT [2012] 28 TAXMANN.COM 258 (BANG.) : [2013] 140 ITD 344 (BANG. ) : [2013] 21 ITR (TRIB) 514 (BANG.), ITO V CRM SERVICE S INDIA (P) LTD., [2011] 48 SOT 41 (DEL (URO), M/S. STREAM INTERNATIONAL SERVICES PVT. LTD V ADIT [2013] 31 TAXMANN.COM 227 (MUM.). IT IS NOT THE CASE OF ASSESSEE COMPANY THAT IT PASS ES THROUGH THE EXPORT FILTER OF 25% TO TOTAL REVENUE. THEREFORE IT(TP)A NO.442/BANG/2011& IT(TP)A NO.444&445/BANG/2011 PAGE 19 OF 39 THE RATIO LAID DOWN IN THE CASES CITED SUPRA IS SQU ARELY APPLICABLE TO THE FACTS OF THE PRESENT CASE. WE TH EREFORE UPHOLD THE ACTION OF TPO/AO IN INCLUDING THIS COMPA NY IN THE LIST OF COMPARABLES. 15. THUS THE GROUNDS OF APPEAL 2 TO 12 ARE DISPOSED OFF. THE OTHER GROUNDS OF APPEAL ARE NEITHER PRESSED NOR ARGUED DURING THE COURSE OF HEARING OF APPEAL AND THEREFOR E DISMISSED AS SUCH. 16. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED. DEPARTMENTAL APPEAL NO. 444/BANG/2011 17. THE REVENUE BEING AGGRIEVED BY THAT PART OF THE ORDER OF CIT(A) WHICH IS AGAINST THE REVENUE HAD FILED TH E PRESENT APPEAL RAISING THE FOLLOWING GROUNDS OF APPEAL: IT(TP)A NO.442/BANG/2011& IT(TP)A NO.444&445/BANG/2011 PAGE 20 OF 39 IT(TP)A NO.442/BANG/2011& IT(TP)A NO.444&445/BANG/2011 PAGE 21 OF 39 IT(TP)A NO.442/BANG/2011& IT(TP)A NO.444&445/BANG/2011 PAGE 22 OF 39 18. THE REVENUE HAS RAISED 13 GROUNDS OF APPEAL. G ROUND NO. 1, 12 & 13 ARE GENERAL IN NATURE AND DO NOT REQ UIRE ANY ADJUDICATION. THE GROUND NO. 2, 3 & 4 CHALLENGE DI RECTION OF THE CIT(A) TO INCLUDE THE FOREIGN EXCHANGE FLUCTUAT ION PROFIT AS A PART OF OPERATING PROFIT FOR THE PURPOSE OF CO MPUTING THE MARGINS. 19. THE LEARNED CIT(A) FOLLOWING THE DECISION OF TH E COORDINATE BENCH, BANGALORE IN THE CASE OF SAP LABS P. LTD., HELD THAT THE FOREIGN EXCHANGE FLUCTUATION GAIN SHO ULD BE TREATED AS A PART OF THE OPERATING PROFIT FOR THE P URPOSE OF COMPUTING THE MARGINS OF THE COMPARABLES AND THE AS SESSEE COMPANY. 20. THERE IS NO DISPUTE THAT THE GAIN ON ACCOUNT OF FOREIGN EXCHANGE FLUCTUATION IS MADE ON ACCOUNT OF THE SALE PROCEEDS OF THE EXPORTS. THEREFORE SUCH GAIN IS IN EXTRICABLY CONNECTED WITH THE BUSINESS ACTIVITIES OF THE ASSES SEE COMPANY AND THEREFORE SHOULD BE TREATED AS OPERATIN G INCOME. AS HELD BY THE FOLLOWING DECISIONS OF COOR DINATE BENCH: IT(TP)A NO.442/BANG/2011& IT(TP)A NO.444&445/BANG/2011 PAGE 23 OF 39 21. THEREFORE WE DO NOT FIND ANY REASON TO INTERFER E WITH THE ORDER OF THE CIT(A). 22. IN THE RESULT, THE GROUNDS OF APPEAL RAISED BY THE REVENUE IN THIS REGARD ARE DISMISSED. 23. GROUND NOS. 5 TO 7 CHALLENGES THE DIRECTION OF CIT(A) TO GRANT THE BENEFIT OF THE PROVISO TO SUB SECTION (2) OF SECTION 92C OF IT ACT AS A STANDARD DEDUCTION. THI S ISSUE IS IT(TP)A NO.442/BANG/2011& IT(TP)A NO.444&445/BANG/2011 PAGE 24 OF 39 COVERED AGAINST THE ASSESSEE BY THE DECISION OF BOM BAY BENCH IN THE CASE OF BAYER CROP SCIENCE LTD. V. ADD L. CIT [2012] 25 TAXMANN.COM 575 (MUM. TRIB) WHEREIN IT HAS BEEN HELD AS FOLLOWS: LAST GROUND OF THE ASSESSEE'S APPEAL IS AGAINST TH E REJECTION OF BENEFIT OF 5% MARGIN AS PRESCRIBED IN PROVISO TO SE CTION 92C(2) IN DETERMINING THE ARM'S LENGTH PRICE (ALP) OF ITS EXP ORT TRANSACTIONS. FILTERING OUT UNNECESSARY DETAILS IT IS OBSERVED TH AT THE ASSESSEE'S INTERNATIONAL TRANSACTIONS WERE REFERRED TO THE TPO FOR DETERMINATION OF ALP. THE TPO PROPOSED ADJUSTMENT OF RS. 19,23,948, FOR WHICH ADDITION WAS MADE BY THE A.O. IT WAS ARGUED BEFORE THE LD. F IRST APPELLATE AUTHORITY THAT THE TPO OUGHT TO HAVE ALLOWED STANDARD ADJUSTM ENT OF 5% BEFORE MAKING ADDITION AS PER PROVISO TO SECTION 92C(2). T HE LEARNED CIT(A) REJECTED THIS CONTENTION BY HOLDING THAT SINCE THE ALP EXCEEDED THE PRICE DECLARED BY THE ASSESSEE BY MORE THAN 5%, THE ENTIR E EXCESS WAS LIABLE TO BE ADDED. IT IS THIS DIRECTION OF THE LEARNED CIT(A) A GAINST WHICH THE ASSESSEE HAS COME UP IN APPEAL BEFORE US. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND PERUSIN G THE RELEVANT MATERIAL ON RECORD, WE FIND THAT THE DISPUTE ABOUT THE QUESTION AS TO WHETHER PLUS MINUS 5% STANDARD ADJUSTMENT SHOULD BE ALLOWED WHILE DETERMINING THE ALP OR THE ENTIRE AMOUNT REPRESENTING DIFFERENC E BETWEEN ALP AND THE DECLARED PRICE SHOULD BE ADDED WHERE THE DIFFERENCE EXCEEDS 5%, HAS BEEN SET TO REST BY THE FINANCE ACT, 2012 WITH THE INSER TION OF SUB-SECTION (2A) TO SECTION 92C WITH RETROSPECTIVE EFFECT. WITH THIS AM ENDMENT IT HAS BEEN MADE CLEAR THAT WHERE THE VARIATION BETWEEN ARITHMETICAL MEAN AND PRICE AT WHICH THE TRANSACTION HAS ACTUALLY BEEN UNDERTAKEN EXCEEDS 5% OF ARITHMETICAL MEAN, THE ASSESSEE SHALL NOT BE ENTITL ED TO EXERCISE THE OPTION. THE LEARNED AR WAS FAIR ENOUGH TO CONCEDE THAT THE RETROSPECTIVE AMENDMENT BY THE FINANCE ACT, 2012 HAS THE EFFECT O F UPHOLDING THE OPINION TAKEN BY THE LEARNED CIT(A). IN VIEW OF THIS AMENDM ENT TO SECTION 92C, WE HOLD THAT THE LEARNED CIT(A) WAS JUSTIFIED IN NOT G RANTING STANDARD ADJUSTMENT OF 5%. THIS GROUND IS NOT ALLOWED. 24. EVEN THE SPECIAL BENCH IN THE CASE OF IHG IT SE RVICES (INDIA) (P.) LTD. V. ITO [2013] 33 TAXMANN.COM 1 (D ELHI TRIB.) (SB) HELD THAT AFTER THE AMENDMENT BY THE FI NANCE (NO.2) ACT, 2009 WITH EFFECT FROM 1.10.2009, SUCH B ENEFIT OF 5% TOLERANCE MARGIN WAS RESTRICTED TO THE CASES WHE RE VARIATION BETWEEN THE ARMS LENGTH PRICE AND THE PR ICE AT IT(TP)A NO.442/BANG/2011& IT(TP)A NO.444&445/BANG/2011 PAGE 25 OF 39 WHICH THE INTERNATIONAL TRANSACTION HAS ACTUALLY TA KEN PLACE DOES NOT EXCEED 5%. IN OTHER WORDS THE BENEFIT UND ER THE PROVISO CANNOT BE GIVEN AS A STANDARD DEDUCTION. I N THE RESULTS, THE GROUNDS OF APPEAL RAISED BY THE REVENU E ON THIS ISSUE ARE ALLOWED. 25. GROUND NOS. 8 TO 10 CHALLENGES THE DIRECTION OF CIT(A) TO EXCLUDE THE COMPANIES MAKING SUPER PROFITS AND T HE LOW MARGIN LOSS MAKING COMPANIES AS COMPARABLES. AS HE LD BY US IN THE ASSESSEES APPEAL SUPRA, NO COMPANY CAN B E EXCLUDED FROM THE LIST OF COMPARABLES MAINLY ON THE GROUND THAT THE COMPANIES MAKING ABNORMAL PROFITS WITHOUT GOING INTO THE REASONS FOR SUCH ABNORMAL PROFITS. THEREF ORE THE REASONING OF CIT(A) IS NOT ACCEPTABLE AND DOES NOT HOLD WATER. HOWEVER, THE AR HAD PLEADED FOR EXCLUSION O F ULTRAMARINE PIGMENTS LTD., AND VISHAL INFORMATION TECHNOLOGIES LIMITED FOR DIFFERENT REASONS. WE SHA LL DEAL WITH EACH OF THEM: (I) M/S. ULTRAMARINE PIGMENTS LIMITED: IT IS CONTENDED BEFORE US THAT THIS COMPANY CANNOT BE COMPARED WITH THAT OF THE ASSESSEE COMPANY AS IT IS FUNCTIONALLY DIFFERENT AND IT IS ENGAGED IN THE BUSINESS OF PUBLISHING, HEALTHCARE AND LITIGATION SUPPORT. THUS IT WAS SUBMITTED THAT IT IS FUNCTIONALLY DISSIMILAR WITH THAT OF ASSESSEE COMPANY. THIS COMPANY WAS CONSIDERED BY THE COORDINATE BENCH FOR THE SAME ASSESSMENT YEAR IN THE CASE OF 24/7 CUSTOMER.COM PVT. LTD., VS. DCIT IT(TP)A NO.442/BANG/2011& IT(TP)A NO.444&445/BANG/2011 PAGE 26 OF 39 TS 708 ITAT 2012 (BANG. TRIB) WHEREIN IT WAS HELD THAT THE SEGMENTAL RESULTS WERE AVAILABLE IN THE AUDITED FINANCIAL STATEMENTS OF SAID COMPANY. HENCE, THE COORDINATE BENCH FOUND NO REASON TO REJECT THIS COMPANY AS A COMPARABLE. THEREFORE FOLLOWING THE SAME REASONING, WE UPHOLD THE INCLUSION OF THIS COMPANY IN THE LIST OF COMPARABLE S. (II) M/S. VISHAL INFORMATION TECHNOLOGIES LIMITED: THIS COMPANY WAS REJECTED BY CIT(A) ON THE GROUND OF ABNORMAL PROFITS. THE ASSESSEE COMPANY CONTENDED BEFORE US THAT THIS COMPANY IS NOT COMPARABLE WITH THAT OF ASSESSEE COMPANY AS IT SIGNIFICANTLY OUTSOURCED ITS SERVICES AND VERY LOW EMPLOYEE COST, WHEREAS THE ASSESSEE COMPANY HAD CARRIED OUT THE ENTIRE OPERATION BY ITSELF. THE LEARNED AR HAD PLACED RELIANCE ON THE DECISION OF COORDINATE BENCH IN THE CASE OF 24/7 CUSTOMER.COM PVT. LTD., V. DCIT [2012] 28 TAXMANN.COM 258 (BANG). 26. WE HEARD THE RIVAL SUBMISSION AND PERUSED THE MATERIAL ON RECORD. THIS COMPANY WAS CONSIDERED BY THE COORDINATE BENCH IN THE CASE OF 24/7 CUSTOMER.COM P VT. LTD., V. DCIT [2012] 28 TAXMANN.COM 258 (BANG) WHER EIN FOLLOWING THE DECISION OF COORDINATE BENCH, MUMBAI BENCH HELD IN THE CASE OF MEARSK GLOBAL SERVICES (I) PVT. LTD. THIS COMPANY WAS HELD TO BE INCOMPARABLE ON THE REASONS THAT THIS COMPANY HAD OUTSOURCED A CONSIDERABLE PORTION OF ITS BUSINESS AND WHEREAS THE TAX PAYER HAD CARRIED OUT THE IT(TP)A NO.442/BANG/2011& IT(TP)A NO.444&445/BANG/2011 PAGE 27 OF 39 ENTIRE OPERATIONS BY ITSELF WHICH MADE IT UNCOMPARA BLE. HENCE FOLLOWING THE ABOVE DECISION, WE HOLD THAT TH IS COMPANY CANNOT BE COMPARED WITH THAT OF ASSESSEE COMPANY. 27. GROUND NO. 11 CHALLENGES THE DIRECTION OF CIT(A ) TO GRANT WORKING CAPITAL ADJUSTMENT OF 2% BASED ON THE 9 COMPARABLES SELECTED BY THE TPO AND WHEREAS THESE WORKING CAPITAL ADJUSTMENT WAS REQUIRED TO BE RECOM PUTED IN CONSEQUENCE OF CIT(A) ORDER TO EXCLUDE CERTAIN COMPANIES SELECTED BY THE TPO. THIS GROUND OF APPE AL IS ONLY CONSEQUENTIAL IN NATURE AND DOES NOT REQUIRE A NY ADJUDICATION. 28. IN THE RESULT, APPEAL FILED BY THE REVENUE IS P ARTLY ALLOWED. ITA NO. 445/B/2011, ASSESSMENT YEAR 2005-06: 29. IN THE TP STUDY, THE ASSESSEE HAS CHOSEN 12 COMPARABLES. THE RETURN OF INCOME FOR THE ASSESSME NT YEAR 2005-06 WAS FILED ON 27.10.2005 DECLARING A TOTAL I NCOME OF RS. NIL. AGAINST THE SAID RETURN OF INCOME THE ASSE SSMENT WAS COMPLETED UNDER SECTION 143(3) AFTER ISSUING NO TICE UNDER SECTION 143(2) AFTER REFERRING THE MATTER TO TPO FOR DETERMINING OF ARMS LENGTH PRICE IN RESPECT OF THE INTERNATIONAL TRANSACTION OF PROVISION OF PROVIDING MEDICAL TRANSCRIPTION SERVICES OF RS.15,32,19,356/- TO ITS AE I.E., ACUSIS LLC, USA ON THE BASIS OF COST PLUS 10% MARGI N. IT(TP)A NO.442/BANG/2011& IT(TP)A NO.444&445/BANG/2011 PAGE 28 OF 39 30. THE ASSESSEE COMPANY SOUGHT TO JUSTIFY THE CONSIDERATION RECEIVED FOR THE ABOVE INTERNATIONAL TRANSACTIONS ENTERED WITH ITS AE TO BE AT ARMS LEN GTH PRICE. THE ASSESSEE COMPANY ALSO SUBMITTED A TP STUDY REPO RT ADOPTING THE OPERATING COST TO THE TOTAL COST AS A PROFIT LEVEL INDICATOR FOR THE TP STUDY. THE ASSESSEE COMPANY A PPLIED THE TRANSACTIONAL NET MARGIN METHOD (TNMM) WHICH WA S CONSIDERED TO BE THE MOST APPROPRIATE METHOD FOR TH E PURPOSE OF BENCH MARKING THE INTERNATIONAL TRANSACT IONS. THE ASSESSEE COMPANYS PROFIT MARGIN WAS COMPUTED A T 11.6%. THE ASSESSEE COMPANY CLAIMED THAT THE SAME WAS COMPARABLE WITH THE OTHER COMPANIES RENDERING IT EN ABLED SERVICES. FOR THE PURPOSE OF TP STUDY, THE ASSESSE E COMPANY HAD CHOSEN 12 COMPARABLES AND WEIGHTED ARITHMETIC MARGIN OF THESE COMPARABLES WAS COMPUTED AT 8.48%. THUS IT WAS CLAIMED THAT THE TRANSACTIONS W ITH AE ARE AT ARMS LENGTH. THE ASSESSEE COMPANY SELECTED THE FOLLOWING 12 COMPARABLES: IT(TP)A NO.442/BANG/2011& IT(TP)A NO.444&445/BANG/2011 PAGE 29 OF 39 31. THE AO, AFTER NOTICING THE ABOVE INTERNATIONAL RANSACTIONS REFERRED THE MATTER TO THE TPO. THE TP O, BY ORDER DATED 23.09.2008, PASSED UNDER SECTION 92CA O F THE ACT AND COMPUTED TRANSFER PRICING ADJUSTMENT AT RS.1,33,59,948/-. THE LEARNED TPO ACCEPTED THE TNM M ADOPTED BY THE ASSESSEE COMPANY BUT REJECTED THE TR ANSFER PRICING REPORT. THEN THE TPO PROCEEDED TO IDENTIFY THE DIFFERENT SET OF COMPARABLES FOR THE PURPOSE OF DET ERMINING IT(TP)A NO.442/BANG/2011& IT(TP)A NO.444&445/BANG/2011 PAGE 30 OF 39 ARMS LENGTH PRICE. WHILE DOING SO, THE LEARNED TPO HAD APPLIED THE FOLLOWING FILTERS: USE OF CURRENT YEARS DATA, ETC. 32. THE TPO HAD ALSO NOT CONSIDERED THE FOREIGN EXC HANGE FLUCTUATIONS GAIN/LOSS AS A PART OF OPERATING PROFI T. THE TPO WHILE APPLYING THE ABOVE FILTERS ACCEPTED THE 5 COM PARABLES CHOSEN BY THE ASSESSEE COMPANY AND INTRODUCED 4 NEW COMPARABLES. THUS FINALLY THE TPO SELECTED FOLLOWI NG SET OF COMPARABLES: 33. THE TPO COMPUTED THE AVERAGE PROFIT MARGIN OF T HE COMPARABLES FINALLY SELECTED AT 21.03%. THE TPO CO MPUTED THE TRANSFER PRICING ADJUSTMENT AT RS.1,33,59,948/- AS FOLLOWS: IT(TP)A NO.442/BANG/2011& IT(TP)A NO.444&445/BANG/2011 PAGE 31 OF 39 34. THE AO PASSED THE ASSESSMENT ORDER UNDER SECTIO N 143 VIDE ORDER DATED 26.12.2008 INCORPORATING THE A BOVE TP ADJUSTMENT AND REDUCING THE TELECOMMUNICATION CHARG ES AND INTERNET CHARGES OF RS.19,93,519/- REDUCING FRO M EXPORT TURNOVER FOR THE PURPOSE OF COMPUTING THE DE DUCTION UNDER SECTION 10A OF THE INCOME TAX ACT. 35. BEING AGGRIEVED BY THE ASSESSMENT ORDER, APPEAL WAS FILED BEFORE CIT(A)-IV, BANGALORE, WHO VIDE CONSOLI DATED ORDER DATED 21.1.2011 FOR THE ASSESSMENT YEAR 2004- 05 AND 2005-06 HAD HELD THAT THE HIGH PROFIT COMPANIES AND THE LOW MARGIN COMPANIES CANNOT BE CONSIDERED AS COMPARABLES FOLLOWING THE LAW LAID BY THE JURISDICT IONAL HIGH COURT IN SAP LABS PVT. LTD. THUS THE FOLLOWING 3 C OMPANIES WERE HELD TO BE UNCOMPARABLE WITH THAT OF ASSESSEE COMPANY: 1. VISHAL INFO TECH LTD 2. NUCLEUS NET SOFT AND GIS LTD 3. TRANSWORKS INFORMATION SERVICE LTD IT(TP)A NO.442/BANG/2011& IT(TP)A NO.444&445/BANG/2011 PAGE 32 OF 39 36. THE CIT(A) ALSO HELD THAT IN RESPECT OF TELECOMMUNICATION AND INTERNET CHARGES INCURRED TO THE EXTENT OF RS.19,93,519/-, THE SAME SHOULD BE REDUCE D FROM THE TOTAL TURNOVER AS WELL AS FROM EXPORT TURNOVER AND IN RESPECT OF TOLERANCE, THE BENEFIT OF PROVISO TO SUB SECTION (2) OF 92CA, THE CIT(A) HELD THAT THE SAME SHOULD B E ALLOWED AS A STANDARD DEDUCTION. 37. THE CIT(A) ALSO HELD THAT THE FOREIGN EXCHANGE FLUCTUATIONS GAIN/LOSS SHOULD BE CONSIDERED AS OPER ATING PROFIT. BEING AGGRIEVED BY THE ORDER, THE REVENUE IS IN APPEAL BEFORE US RAISING THE FOLLOWING GROUNDS OF A PPEAL: IT(TP)A NO.442/BANG/2011& IT(TP)A NO.444&445/BANG/2011 PAGE 33 OF 39 IT(TP)A NO.442/BANG/2011& IT(TP)A NO.444&445/BANG/2011 PAGE 34 OF 39 IT(TP)A NO.442/BANG/2011& IT(TP)A NO.444&445/BANG/2011 PAGE 35 OF 39 38. THE REVENUE HAD RAISED 15 GROUNDS OF APPEAL. G ROUND NOS. 1, 14 AND 15 ARE GENERAL IN NATURE AND DO NO R EQUIRE ANY ADJUDICATION. GROUND NO. 2 AND 3 CHALLENGES TH E DIRECTIONS OF CIT(A) TO EXCLUDE THE TELECOMMUNICATI ON EXPENDITURE OF RS.19,93,519/- TO REDUCE FROM EXPORT TURNOVER AS WELL AS FROM TOTAL TURNOVER FOR THE PUR POSE OF COMPUTING DEDUCTION UNDER SECTION 10A OF THE INCOME TAX ACT. 39. THIS ISSUE IS NO MORE RESINTEGRA AS IT IS COVERED IN FAVOUR OF THE ASSESSEE COMPANY. ACCORDING TO THE R EVENUE, THE ORDER OF THE HONBLE HIGH COURT IN THE CASE OF CIT VS. TATA ELXSI LTD. (349 ITR 98) HAS NOT BEEN ACCEPTED BY THE DEPARTMENT AND A SLP HAS BEEN FILED BEFORE THE HON BLE SUPREME COURT. THEREFORE, THE ORDER OF THE CIT(A) SHOULD BE REVERSED. THUS THE GROUND NOS. 2 AND 3 RAISED BY REVENUE ARE DISMISSED. IT(TP)A NO.442/BANG/2011& IT(TP)A NO.444&445/BANG/2011 PAGE 36 OF 39 40. GROUND NOS. 4, 5 AND 6: THE ISSUE RAISED IN THE GROUND NOS. 4, 5 AND 6 IS WITH REGARD TO THE DIRECT ION OF THE LEARNED CIT(A) TO TREAT THE GAIN ON ACCOUNT OF FORE IGN EXCHANGE FLUCTUATIONS ARISING OUT OF EXPORTS MADE A S A PART OF OPERATING PROFIT. THIS ISSUE IS ALREADY DECIDED BY US IN FAVOUR OF THE ASSESSEE COMPANY IN THE ASSESSMENT YE AR 2004-05 IN ITA NO. 442/BANG/2011. FOLLOWING THE SA ME, WE DISMISS THIS GROUND OF APPEAL. 41. GROUND NOS. 7, 8 AND 9 CHALLENGES THE DIRECTION OF THE LEARNED CIT(A) TO ALLOW THE BENEFIT UNDER PROVISO T O SUB SECTION (2) OF 92CA AS STANDARD DEDUCTION. THIS IS SUE IS ALREADY DECIDED BY US IN THE ASSESSEES OWN CASE FO R THE ASSESSMENT YEAR 2004-05 IN FAVOUR OF THE REVENUE FO LLOWING THE SAME REASONING WE DISMISS THE GROUND OF APPEAL FILED BY THE REVENUE. HENCE DISMISSED. 42. GROUND NOS. 10, 11 AND 12 CHALLENGES THE ORDERS OF THE CIT(A). THE DIRECTIONS OF THE CIT(A) TO DELETE THE ENTITIES M/S. VISHAL INFO TECH LTD, M/S. NUCLEUS NE T SOFT AND GIS LTD AND M/S. TRANSWORKS INFORMATION SERVICE LTD FOR THE REASONS THAT THE HIGH PROFIT MAKING COMPANIES AND L OW MARGIN COMPANIES CANNOT BE CONSIDERED AS COMPARABLE S. THIS REASONING OF CIT(A) WAS REVERSED BY US IN THE ASSESSEES OWN CASE IN THE ASSESSMENT YEAR 2004-05. HOWEVER, THE LEARNED AR SUBMITTED THAT THESE COMPAN IES NEEDS TO BE EXCLUDED FOR THE REASONS OF FUNCTIONALI TY DIFFERENCES, WHICH WE SHALL DEAL WITH EACH OF THEM AS FOLLOWS: IT(TP)A NO.442/BANG/2011& IT(TP)A NO.444&445/BANG/2011 PAGE 37 OF 39 I. M/S. VISHAL INFO TECH LTD: THE ASSESSEE COMPANY PLEADED THAT THIS COMPANY CANNOT BE COMPARED WITH THAT OF ASSESSEE COMPANY AS IT IS FUNCTIONALLY DIFFERENT. IT WAS SUBMITTED THAT THIS COMPANY HAD OUTSOURCED ITS ACTIVITIES AND HAS GOT VERY LOW EMPLOYEE COST COMPARED TO A TYPICAL ITES COMPANY. THUS IT WAS SUBMITTED THAT THIS COMPANY CANNOT BE COMPARED WITH THAT OF ASSESSEE COMPANY. ON THE OTHER HAND, THE LEARNED CIT (DR) PLACED RELIANCE ON THE ORDERS OF THE LOWER AUTHORITIES. WE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. THIS COMPANY WAS CONSIDERED BY THE COORDINATE BENCH, MUMBAI IN THE CASE OF ACIT V. MAE RSK GLOBAL SERVICE CENTRE (INDIA) P LTD [2011] 16 TAXMA NN.COM 47 (MUM), WHEREIN IT WAS HELD THAT THE COMPANY CANN OT BE CONSIDERED AS COMPARABLE, AS IT OUTSOURCES MAJOR OF ITS ACTIVITIES. THIS DECISION WAS SUBSEQUENTLY FOLLOWED BY THE COORDINATE BENCHES IN THE CASE OF ITO V NEXTLKINX I NDIA PVT LTD V TS-722-ITAT-2012(BANG)-TP, NOMURA FIN SERVICE S (INDIA) (P.) LTD. V ACIT [2013] 33 TAXMANN.COM 4 (M UM- TRIB.) AND ACIT V M/S. HAPAG LLOYD GLOBAL SERVICES PVT LTD TS-47-ITAT-2013 (MUM)-TP AND RESPECTIVELY FOLLOWING THE DECISIONS, WE DIRECT THAT THIS COMPANY CANNOT BE IN CLUDED IN THE LIST OF COMPARABLES WITH THAT OF THE ASSESSEE C OMPANY IT(TP)A NO.442/BANG/2011& IT(TP)A NO.444&445/BANG/2011 PAGE 38 OF 39 AND ACCORDINGLY, WE UPHOLD THE DECISION OF THE CIT( A) TO DELETE THIS COMPANY FROM THE LIST OF COMPARABLES, T HOUGH ON A DIFFERENT REASONING. II. NUCLEUS NET SOFT AND GIS LTD: IT WAS CONTENDED THAT IT IS A FUNCTIONALLY DIFFERENT COMPANY AS IT IS ENGAGED IN THE DEVELOPMENT OF SOFTWARE PRODUCTS. THUS IT WAS SUBMITTED THAT THIS COMPANY CANNOT BE COMPARED WITH THAT OF ITES COMPANY LIKE THAT OF ASSESSEE COMPANY. HOWEVER WE FIND THAT NO MATERIAL WAS FILED BEFORE US ESTABLISHING THIS FACT. IN THE CIRCUMSTANCES, WE REMAND THIS ISSUE BACK TO THE FILE OF TPO/AO TO EXAMINE WHETHER THE COMPANY IS ENGAGED IN THE SOFTWARE DEVELOPMENT. IF IT IS FOUND SO, THEN TO EXCLUDE IT FROM THE LIST OF COMPARABLES. III. TRANSWORKS INFORMATION SERVICE LTD: THE APPELLANT PLEADED FOR THE INCLUSION OF THIS COMPANY IN THE LIST OF COMPARABLES. THERE IS NO DISPUTE ABOUT THE FUNCTIONAL COMPARABILITY WITH THAT OF ASSESSEE COMPANY. THE ONLY GROUND ON WHICH THE CIT(A) HAD DIRECTED EXCLUSION OF THIS COMPANY FROM THE LIST OF COMPARABLES IS THAT THE COMPANY IS MAKING VERY LOW MARGINS. AS HELD BY US IN THE ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2004-05, NO COMPANY CAN BE EXCLUDED FOR THE REASONS OF MAKING HIGH PROFIT AND LOW PROFIT MAKING COMPANIES. THEREFORE THE REASONING OF THE IT(TP)A NO.442/BANG/2011& IT(TP)A NO.444&445/BANG/2011 PAGE 39 OF 39 CIT(A) DOES NOT STAND THE TEST OF THE LAW LAID DOWN BY THE SPECIAL BENCH IN THE QUARK SYSTEMS. IN THE CIRCUMSTANCES, WE DIRECT THE TPO/AO TO INCLUDE THIS COMPANY IN THE LIST OF COMPARABLES FOR THE PURPOSE OF COMPUTING ALP. 43. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IN IT(TP)A NO. 442/BANG/2011 IS PARTLY ALLOWED FOR STA TISTICAL PURPOSE. THE APPEALS FILED BY REVENUE IN IT(TP)A NO. 444/BANG/2011 FOR ASSESSMENT YEAR 2004-05 AND I N IT(TP)A NO. 445/BANG/2011 FOR ASSESSMENT YEAR 2005- 06 ARE PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON THIS DA Y OF NOVEMBER , 2016 SD/- SD/- (SUNIL KUMAR YADAV) (INTURI RAMA RAO) JUDICIAL MEMBER ACCOUNTANT MEMBER PLACE : BANGALORE DATED : 09/11/2016 /NS/ COPY TO : 1. APPELLANT 2. RESPONDENT 3. CIT(A)-II BANGALORE 4. CIT 5. DR, ITAT, BANGALORE 6. GUARD FILE BY ORDER ASSISTANT RE GISTRAR INCOME-TAX APPELLATE TRIBUNAL BANGALORE