Asst.C.I.T., Bangalore V. M/s Yokogawa 1A Technologies India Pvt. Ltd., Bangalore

ITA 466/BANG/2016

• Counselvise Citation: [2018] 125 COUNSELVISE.COM (IT) 5029 (ITAT-BANGALORE)
• Duration Of Justice: 2 year(s) 4 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-08-2018
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: A
• Assessment Year: 2011-2012
• Appeal Filed On: 17-03-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: NEERA MALHOTRA BENGALURU
• Assessee Lawyers: P C KHINCHA
• Keywords: Transfer pricing; International transaction; Working capital adjustments; Bad and doubtful debts
• Section: 143(3); 234B; 133(6); 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, JUDICIAL MEMBER AND SHRI JASON P. BOAZ , ACCOUNTANT MEMBER I T (TP) A NO. 466/BANG/2016 ASSESSMENT YEAR : 2011 - 12 THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE 7(1)(2), BANGALORE. VS. M/S. YOKOGAWA IA TECHNOLOGIES INDIA PVT. LTD., UMIYA BUSINESS BAY, TOWER 1, 6 TH FLOOR, CESSNA BUSINESS PARK, SARJAPUR OUTER RING ROAD, BANGALORE 560 037. PAN: AAACY 2823L APPELLANT RESPONDENT IT(TP)A NO.606/BANG/2016 ASSESSMENT YEAR : 2011 - 12 M/S. YOKOGAWA IA TECHNOLOGIES INDIA PVT. LTD., BANGALORE 560 037. PAN: AAACY 2823L VS. THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE 7(1)(2), BANGALORE. REVENUE BY : MS. NEERA MALHOTRA, CIT(DR)(ITAT), BENGAL URU. RE SPONDENT BY : SHRI P.C. KHINCHA, CA DATE OF HEARING : 27 .06 .201 8 DATE OF PRONOUNCEMENT : 08 .08.2018 ITA NOS. IT(TP)A NOS.466 & 606/BANG/2016 PAGE 2 OF 16 O R D E R PER N.V. VASUDEVAN, JUDICIAL MEMBER IT(TP)A NO. 466/BANG/2016 IS AN APPEAL BY THE R EVENUE WHILE IT(TP)A NO.606/BANG/2016 IS AN APPEAL BY THE ASSESS EE. BOTH THESE APPEALS ARE DIRECTED AGAINST THE FINAL ORDER OF ASS ESSMENT DATED 29.11.2016 PASSED BY THE ACIT, CIRCLE 7(1)(2), BANG ALORE U/S. 143(3) R.W.S. 144C(13) OF THE INCOME-TAX ACT, 1961 [THE ACT]. 2. FIRST WE SHALL TAKE UP FOR CONSIDERATION THE AP PEAL BY THE ASSESSEE. IN GROUNDS NO.1 TO 4 RAISED BY THE ASSESSEE, THE AS SESSEE HAS CHALLENGED THE DETERMINATION OF ARMS LENGTH PRICE (ALP) AND CO NSEQUENT ADDITION MADE TO THE TOTAL INCOME IN RESPECT OF INTERNATIONA L TRANSACTION ENTERED INTO BY THE ASSESSEE WITH ITS ASSOCIATED ENTERPRISE (AE) . AT THE TIME OF HEARING, THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT GROUND NO.3 RAISED BY THE ASSESSEE IN ITS APPEAL, IF ADJUDICATED, WOUL D BE SUFFICIENT AND OTHER GROUNDS ARE NOT PRESSED FOR ADJUDICATION. GROUND N O.3 RAISED BY THE ASSESSEE IN ITS APPEAL READS AS FOLLOWS:- 4. WITHOUT PREJUDICE, THE LOWER AUTHORITIES HAVE E RRED IN: A. REJECTING THE COMPARABLES SELECTED AND TRANSFER PRICING ANALYSIS UNDERTAKEN BY THE ASSESSEE ON UNJUSTIFIABLE GROUNDS . B. CONDUCTING A FRESH TRANSFER PRICING ANALYSIS DE SPITE ABSENCE OF ANY DEFECTS IN THE TRANSFER PRICING ANALYSIS SUBMIT TED BY THE ASSESSEE; C. ADOPTING INAPPROPRIATE FILTERS LIKE 25% RPT FIL TER ETC. IN THE PROCESS OF SELECTING COMPARABLES; D. ADOPTING COMPANIES AS COMPARABLES EVEN THOUGH T HEY ARE NOT COMPARABLE IN TERMS OF FUNCTIONS PERFORMED, RISKS A SSUMED, ASSETS UTILIZED, DESPITE UNUSUAL BUSINESS CIRCUMSTANCES OR HIGH MARGINS ETC. ITA NOS. IT(TP)A NOS.466 & 606/BANG/2016 PAGE 3 OF 16 E. IGNORING ADDITIONAL COMPARABLES PROPOSED DURING THE ASSESSMENT PROCEEDINGS. F. CONSIDERING PROVISION FOR DOUBTFUL DEBTS AS NON -OPERATING IN NATURE WHILE COMPUTING OPERATING MARGINS; G. NOT MAKING PROPER ADJUSTMENT FOR ENTERPRISE LEV EL AND TRANSACTIONAL LEVEL DIFFERENCES BETWEEN THE ASSESSE E AND COMPARABLE COMPANIES; H. NOT RECOGNIZING THAT THE ASSESSEE WAS INSULATED FROM RISKS, AS AGAINST COMPARABLES, WHO ASSUME THESE RISKS AND THE REFORE HAVE TO BE CREDITED WITH A RISK PREMIUM ON THIS ACCOUNT; AN D I. NOT APPROPRIATELY COMPUTING THE WORKING CAPITAL ADJUSTMENT WHILE COMPUTING THE ALP. 3. AS FAR AS APPEAL BY THE REVENUE IS CONCERNED, GR OUND NOS.2 &3 RAISED BY THE REVENUE IN ITS APPEAL CAN BE CONVENIE NTLY ADJUDICATED ALONG WITH GROUND NO.3 RAISED BY THE ASSESSEE, AS THESE G ROUNDS RELATE TO DETERMINATION OF ALP IN RESPECT OF INTERNATIONAL TR ANSACTION ENTERED INTO BY THE ASSESSEE WITH ITS AE. GR.NO.2 & 3 RAISED BY TH E REVENUE READS THUS: 2. WHETHER THE DRP HAS ERRED TO INCLUDE FOREX GAIN /LOSS AS OPERATING IN NATURE WITHOUT ASCERTAINING THE NEXUS WITH THE BUSINESS ACTIVITY OF THE TAX PAYER. 3. WHETHER THE DRP HAS ERRED IN GRANTING 1% RISK A DJUSTMENT ARBITRARILY WITHOUT APPRECIATING THE FACTS OF THE C ASE AND ITS COMPARABLES. 4. THE FACTS WITH REGARD TO DETERMINATION OF ALP IN RESPECT OF INTERNATIONAL TRANSACTION BETWEEN THE ASSESSEE AND ITS AE ARE AS FOLLOWS. THE ASSESSEE IS A COMPANY ENGAGED IN THE BUSINESS O F RENDERING SOFTWARE DEVELOPMENT SERVICES. THE ASSESSEE IS A 100% EOU S ET UP UNDER THE SOFTWARE TECHNOLOGY PARKS OF INDIA (STPI) SCHEME OF THE GOVT. OF INDIA. THE ASSESSEE IS A CAPTIVE SOFTWARE DEVELOPMENT SERV ICE PROVIDER FOR THE ITA NOS. IT(TP)A NOS.466 & 606/BANG/2016 PAGE 4 OF 16 YOKOGAWA GROUP. YOKOGAWA GROUP IS ENGAGED IN THE B USINESS OF PROCESS AUTOMATION, FIELD INSTRUMENTATION, ANALYTICAL EQUIP MENT, SAFETY SYSTEMS AND PRODUCTION MANAGEMENT SOFTWARE. YOKOGAWA GROUP IS A NON-RESIDENT. THE ASSESSEE, AS WE HAVE ALREADY SEEN, PROVIDES SOFTWAR E DEVELOPMENT SERVICES TO THE NON-RESIDENT ENTITIES OF YOKOGAWA G ROUP. IT IS NOT IN DISPUTE THAT THE TRANSACTION OF PROVIDING SOFTWARE DEVELOPM ENT (SWD) SERVICES BY THE ASSESSEE TO THE NON-RESIDENT YOKOGAWA GROUP ENT ITIES WAS AN INTERNATIONAL TRANSACTION AND THEREFORE THE PRICE R ECEIVED BY THE ASSESSEE IN SUCH TRANSACTION HAS TO PASS THE ARMS LENGTH PR ICE (ALP) TEST AS LAID DOWN IN SECTION 92 OF THE ACT. 5. IN SUPPORT OF THE ASSESSEES CLAIM THAT THE PRIC E PAID BY IT IN THE INTERNATIONAL TRANSACTION WAS AT ARMS LENGTH, THE ASSESSEE FILED A TP ANALYSIS WHEREIN THE ASSESSEE HAD CHOSEN 11 COMPANI ES AS COMPARABLE COMPANIES. THE PROFIT LEVEL INDICATOR (PLI) CHOSEN FOR THE PURPOSE OF COMPARISON OF ASSESSEES PROFIT MARGIN WITH THAT OF THE COMPARABLE COMPANIES WAS OPERATING PROFIT TO OPERATING COST (O P/OC). THE PLI OF THE ASSESSEE WAS 15.41%. THE ARITHMETIC MEAN OF TH E PROFIT MARGIN OF THE COMPARABLES I.E., PLI OF THE COMPARABLES WAS 14.12% . SINCE THE PROFIT MARGIN OF THE ASSESSEE WAS MUCH MORE THAN THE ARITH METIC MEAN OF THE PROFIT MARGIN OF THE COMPARABLES CHOSEN BY THE ASSE SSEE, THE ASSESSEE CLAIMED THAT THE PRICE RECEIVED BY THE ASSESSEE IN THE INTERNATIONAL TRANSACTION HAS TO BE CONSIDERED AS AT ARMS LENGTH AND NO ADJUSTMENT SHOULD BE MADE AND CONSEQUENT ADDITION TO BE MADE T O THE TOTAL INCOME ON ACCOUNT OF DETERMINATION OF ALP. 6. THE TPO, TO WHOM THE AO MADE A REFERENCE FOR DET ERMINATION OF ALP UNDER THE PROVISIONS OF SECTION 92CA OF THE ACT , DID NOT ACCEPT THE CLAIM OF ASSESSEE. THE TPO, SELECTED 13 COMPANIES AS COMPARABLES AND ARRIVED AT THE ARITHMETIC MEAN OF THE PROFIT MARGIN OF THESE COMPANIES ITA NOS. IT(TP)A NOS.466 & 606/BANG/2016 PAGE 5 OF 16 BEFORE AND AFTER WORKING CAPITAL ADJUSTMENTS AT 24. 82% AND 24.43% RESPECTIVELY. THE TPO THEREAFTER COMPUTED THE ALP A ND THE CONSEQUENT ADDITION TO BE MADE TO THE TOTAL INCOME IN THE FOLL OWING MANNER:- MARGINS AS COMPUTED BY TPO SL.NO. NAME OF THE COMPANY OPERATING MARGIN ON COST ADJUSTED MARGIN ON COST 1 ACROPETAL TECHNOLOGIES LTD (SEG) 31.98% 29.12% 2 E-ZEST SOLUTIONS LTD 21.03% 19.39% 3 E-INFOCHIPS LTD 56.44% 56.53% 4 EVOKE TECHNOLOGIES PVT LTD 8.11% 8.42% 5 I C R A TECHNO ANALYTICS LTD. 24.83% 23.25% 6 INFOSYS TECHNOLOGIES LTD. 43.39% 43.87% 7 LARSEN ET TOUBRO INFOTECH LTD. 19.83% 20.29% 8 MINDTREE LTD.(SEG) 10.66% 9.67% 9 PERSISTENT SYSTEMS ET SOLUTIONS LTD. 22.12% 21.60% 10 PERSISTENT SYSTEMS LTD. 22.84% 22.04% 11 R S SOFTWARE (INDIA) LTD. 16.35% 16.64% 12 SASKEN COMMUNICATION TECHNOLOGIES 24.13% 24.93% 13 TATA ELXSI (SEG) 20.91% 19.37% ARITHMETIC MEAN 24.82% 24.43% COMPUTATION OF ARM'S LENGTH PRICE BY THE AO/TPO AND THE ADJUSTMENT MADE: ARM'S LENGTH MEAN MARGIN 24.82% LESS: WORKING CAPITAL ADJUSTMENT 0.39% ADJUSTED MEAN MARGIN AFTER WORKING CAPITAL ADJUSTME NT 24.43% OPERATING COST (A)* 12,51,12,940 ARM'S LENGTH PRICE - 124.43% OF OPERATING COST (B) 15,56,78,031 TOTAL OPERATING REVENUE (C) 14,01,26,490 SHORT FALL BEING ADJUSTMENT U/S 92CA (B - C) 1,55,51,541 REFER PG 20 OF TP ORDER ITA NOS. IT(TP)A NOS.466 & 606/BANG/2016 PAGE 6 OF 16 7. THE ASSESSEE CHALLENGED THE DETERMINATION OF AL P BY FILING OBJECTIONS BEFORE THE DRP. THE CONTENTIONS OF THE ASSESSEE BEFORE THE DRP WERE THAT WHILE DETERMINING THE OPERATING PROFI TS FOR THE PURPOSE OF ARRIVING AT THE PROFIT MARGIN OF THE COMPANY, THE A O SHOULD INCLUDE FOREIGN EXCHANGE GAIN/LOSS AS PART OF THE OPERATING INCOME AND THE ACTION OF THE TPO IN NOT TREATING SUCH GAIN/LOSS AS PART OF OPERA TING PROFIT/LOSS OF THE ASSESSEE AS WELL AS COMPARABLE COMPANIES WAS NOT PR OPER. THIS ARGUMENT OF THE ASSESSEE WAS ACCEPTED BY THE DRP. THE DRP AT PAGE 10 OF ITS ORDER HELD AS FOLLOWS:- IN CASE FORWARD CONTRACT IS NOT PRESENT, THE DECIS ION OF BANGALORE BENCH OF ITAT IN THE CASE OF SAP LAB INDIA PVT LTD (2010-TII-44-ITAT-BANG-TP) IS APPLICABLE. FOLLOWING THE SAME, OBJECTION OF THE ASSESSEE IS TO BE ACCEPTED A ND ASSESSING OFFICER/TPO IS DIRECTED TO CONSIDER THE FOREIGN EXC HANGE FLUCTUATION IN RESPECT OF THE ASSESSEE AS WELL AS T HE COMPARABLES AS OPERATING IN NATURE WHILE DETERMINING THE ALP IN THE CASE OF THE ASSESSEE. 8. THE ASSESSEE HAD CONTENDED BEFORE THE DRP THAT P ROPER ADJUSTMENT ON ACCOUNT OF ASSUMPTION OF RISK BY THE ASSESSEE AND THE COMPARABLE COMPANIES SHOULD GIVE GIVEN. THE DRP IN ITS DIRECTION HELD AS FOLLOWS:- THE OBJECTION REGARDING ADJUSTMENT ON ACCOUNT OF ECONOMIC AND RISK PROFILE HAS BEEN CONSIDERED FOLLOWING THE DECISION OF THE HONBLE ITAT BANGALORE IN INTELLINET TECHNOLOGIES INDIA PVT. LTD. VS ITO (ITA NO.1237/BANG/2010) . BY MEANS OF GUIDANCE, IT IS MENTIONED THAT IN THE CASE OF DCIT VS. HELLO SOF T PVT. LTD. (2013) 32 TAXMANN.COM 101 (ITAT, HYD) 1% ADJUSTMENT TO THE AVERAGE MARGIN WAS PROVIDED TOWARDS RISK DIFFERENTI AL. SINCE THE FACTS OF THE CASE REMAIN THE SAME, THE TPO IS DIREC TED TO DO THE NEEDFUL AS ABOVE. ITA NOS. IT(TP)A NOS.466 & 606/BANG/2016 PAGE 7 OF 16 9. THE ASSESSEE HAD OBJECTED TO INCLUSION OF 6 COM PANIES OUT OF 13 COMPANIES CHOSEN BY THE TPO ON THE GROUND THAT THEI R TURNOVER WAS MORE THAN RS.200 CRORES, WHEREAS THE ASSESSEES TURNOVER WAS ONLY RS.14 CRORES AND THEREFORE BY APPLYING THE TURNOVER FILTE R, THESE COMPANIES SHOULD BE EXCLUDED FROM THE LIST OF COMPARABLE COMP ANIES. THIS PLEA OF THE ASSESSEE WAS ACCEPTED BY THE DRP AND ACCORDINGL Y FOLLOWING 6 COMPANIES WHOSE TURNOVER WAS MORE THAN RS.200 CRORE S WERE EXCLUDED FROM THE LIST OF COMPARABLE COMPANIES VIZ., INFOSYS TECHNOLOGIES LTD., LARSEN & TOUBRO INFOTECH LTD., MINDTREE LTD., PERSI STENT SYSTEMS LTD., SASKEN COMMUNICATION TECHNOLOGIES AND TATA ELXSI LT D. THE ASSESSEE SOUGHT TO EXCLUDE CERTAIN OTHER COMPANIES CHOSEN AS COMPARABLE COMPANIES BY THE TPO, BUT THAT WAS NOT ACCEPTED BY THE DRP. 10. IN THE REVENUES APPEAL, IN GROUND NO.2 THE REV ENUE HAS CHALLENGED THE DIRECTION OF DRP IN DIRECTING THE TPO TO CONSID ER FOREIGN EXCHANGE GAIN/LOSS AS PART OF OPERATING PROFIT/LOSS, AS THE CASE MAY BE. IN GROUND NO.3, THE REVENUE HAS CHALLENGED THE ORDER OF DRP W HEREBY THE DRP GRANTED ADJUSTMENT OF 1% TO THE PROFIT MARGIN OF TH E ASSESSEE AND THE COMPARABLES ON ACCOUNT OF RISKS ASSUMED. 11. AS FAR AS THE ASSESSEES APPEAL IS CONCERNED, T HE ASSESSEE SEEKS TO EXCLUDE THE FOLLOWING 5 COMPARABLES FROM THE LIS T OF REMAINING 7 COMPANIES AFTER EXCLUSION OF 6 COMPANIES FROM THE 1 3 COMPARABLES CHOSEN BY THE TPO VIZ., (I) ACROPETAL TECHNOLOGIES LTD. (II) E-ZEST SOLUTIONS LTD. (III) E-INFOCHIPS LTD. (IV) ICRA TEC HNO ANALYTICS LTD. (V) PERSISTENT SYSTEMS & SOLUTIONS LTD. 12. AS REGARDS THE ASSESSEES APPEAL, THE COMPARABI LITY OF 5 COMPANIES WHICH THE ASSESSEE SEEKS TO EXCLUDE, THESE COMPANIE S WERE CONSIDERED AND DECIDED BY THIS TRIBUNAL FOR THE VERY SAME ASSE SSMENT YEAR I.E. AY ITA NOS. IT(TP)A NOS.466 & 606/BANG/2016 PAGE 8 OF 16 2011-12 IN THE CASE OF A SOFTWARE SERVICE DEVELOPME NT PROVIDER SUCH AS THE ASSESSEE IN ELECTRONICS FOR IMAGING INDIA PVT. LTD. IN IT(TP)A NO.1506/BANG/2015 & IT(TP)A NO.16/BANG/2016 FOR AY 2011-12, ORDER DATED 14.07.2017. IN THE AFORESAID ORDER, THE TRIBUNAL HELD THAT (I) ACROPETAL TECHNOLOGIES LTD. (II) E-ZEST SOLUTIONS L TD. (III) LARSEN & TOUBRO INFOTECH LTD. AND (IV) PERSISTENT SYSTEMS & SOLUTIO NS LTD. ARE NOT COMPARABLE WITH THE THAT OF ASSESSEE IN PARA 8 OF I TS ORDER. THE TRIBUNAL CAME TO THE CONCLUSION THAT THESE COMPANIES WERE AL SO IN THE BUSINESS OF DEVELOPING SOFTWARE PRODUCTS AND THEREFORE CANNOT B E COMPARED WITH A COMPUTER SOFTWARE DEVELOPER. AS FAR AS E-INFOCHIPS LTD. AND ICRA TECHNO ANALYTICS LTD. ARE CONCERNED, IN THE VERY SAME DECI SION, THE TRIBUNAL IN PARA 9 & 10 OF ITS ORDER HELD THAT THESE TWO COMPAN IES WERE NOT FUNCTIONALLY COMPARABLE WITH A PURE SOFTWARE DEVELOPMENT SERVICE PROVIDER SUCH AS THE ASSESSEE AND WERE ALSO IN THE BUSINESS OF SOFTWARE PRODUCTS. IN VIEW OF THE AFORESAID DECISION OF THE TRIBUNAL, WE ARE OF T HE VIEW THAT THE AFORESAID 5 COMPANIES SHOULD BE EXCLUDED FROM THE LIST OF COM PARABLE COMPANIES. 13. THE LD. DR, HOWEVER, POINTED OUT THAT PERSISTEN T SYSTEMS & SOLUTIONS LTD. WAS A COMPARABLE CHOSEN BY THE ASSES SEE ITSELF AND THE ASSESSEE DID NOT OBJECT TO THIS COMPANY CHOSEN AS A COMPARABLE COMPANY BEFORE THE DRP. THIS CONTENTION WAS FOUND TO BE NOT CORRECT AS IN THE OBJECTION OF THE ASSESSEE BEFORE THE DRP, A SPECIFI C OBJECTION WAS RAISED IN THIS REGARD IN PARA 5.153 TO 5.159 OF ASSESSEES OBJECTIONS BEFORE THE DRP. IN VIEW OF THE ABOVE, WE DO NOT FIND THE OBJE CTION RAISED BY THE LD. DR BEFORE US TO BE OF ANY SIGNIFICANCE. 14. AS FAR AS APPEAL OF REVENUE IS CONCERNED, THE S UBMISSION OF THE LD. DR BEFORE US WAS THAT THE FOREIGN EXCHANGE GAIN/LOS S RELATING TO TRANSACTIONS OF THE RELEVANT PREVIOUS YEAR ALONE SH OULD BE CONSIDERED AND ITA NOS. IT(TP)A NOS.466 & 606/BANG/2016 PAGE 9 OF 16 IN THIS REGARD, THE LD. DR PLACED RELIANCE ON 3 DEC ISIONS OF ITAT BANGALORE BENCH AS FOLLOWS:- (I) TEKTRONIX (INDIA) P. LTD. V DCIT, IT(TP)A NO.293/ BANG/2014 DATED 27.10.2017. (II) M/S. AKAMAI TECHNOLOGIES INDIA PVT. LTD. V. DCIT, IT(TP)A NO.1122/BANG/2011 DATED 08.09.2017. (III) DCIT V. ABB GLOBAL SERVICES PVT. LTD., IT(TP)A NO.97/BANG/2014 DATED 5.5.2017. 15. FOR THE SAKE OF READY REFERENCE, WE MAY QUOTE THE FOLLOWING OBSERVATIONS OF THE TRIBUNAL IN THE CASE OF AKAMAI TECHNOLOGIES INDIA PVT. LTD. (SUPRA) :- 10. REGARDING GROUND NO. 12, THE LD. AR OF ASSESS EE SUBMITTED THAT THIS ISSUE SHOULD BE DECIDED IN FAVOUR OF THE ASSESSEE IN LINE WITH THE TRIBUNAL ORDER ON THIS ISSUE IN THE ASSESS MENT YEAR 2006-07 IN IT (TP) A NO. 1227/BANG/2010 DATED 11.08 .2016 AND HE FILED A COPY OF THIS TRIBUNAL ORDER AND DRAWN OU R ATTENTION TO PARA NO. 48 OF THIS TRIBUNAL ORDER. AT THIS JUNCTUR E, IT WAS POINTED OUT BY THE BENCH THAT IT HAS TO BE SEEN AS TO WHETH ER THE GAIN IS ON THE TURNOVER OF THE PRESENT YEAR OR AN EARLIER YEAR . IN REPLY, IT WAS SUBMITTED THAT SUCH DETAILS ARE NOT READILY AVAILAB LE AND THEREFORE, THE MATTER BE RESTORED BACK TO THE FILE OF AO FOR F RESH DECISION WITH SUITABLE DIRECTIONS. THE LD. DR OF REVENUE ALS O SUBMITTED THAT THE MATTER MAY BE RESTORED BACK TO THE FILE OF AO WITH SUITABLE DIRECTIONS. 11. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. WE FI ND THAT IN ASSESSMENT YEAR 2006-07, THE TRIBUNAL ORDER FOLLOWE D THE TRIBUNAL ORDER RENDERED IN THE CASE OF SAP LABS IND IA PVT. LTD. AS REPORTED IN ITA NOS. 398 & 418/BANG/2008 DATED 30.0 8.2010 RELEVANT PARA OF THIS TRIBUNAL ORDER HAVE BEEN REPR ODUCED BY TRIBUNAL IN THAT ORDER AS PER WHICH IT WAS HELD THA T FOREIGN EXCHANGE GAIN IS NOTHING BUT AN INTEGRAL PART OF TH E SALES PROCEEDS OF AN ASSESSEE CARRYING ON EXPORT BUSINESS. TO THIS EXTENT, THERE IS NO QUARREL BUT IN OUR CONSIDERED OPINION, EVEN AFTE R HOLDING THAT ITA NOS. IT(TP)A NOS.466 & 606/BANG/2016 PAGE 10 OF 16 THE FOREIGN EXCHANGE FLUCTUATION GAIN IS OPERATING PROFIT, IT HAS TO BE SEEN AS TO WHETHER THE SAME CAN BE CONSIDERED FO R THE PURPOSE OF COMPUTING ALP IF THE SAID GAIN IS NOT IN RESPECT OF SALE OF THE PRESENT YEAR. THIS IS SO BECAUSE FOR THE PURPOSE OF ALP UNDER TNMM, WHAT IS DETERMINED IS THE PERCENTAGE OF PROFI T BY DIVIDING THE PROFIT OF THE YEAR BY TURNOVER OF THE YEAR AND SUCH PROFIT PERCENTAGE OF THE ASSESSEE IS COMPARED WITH THE AVERAGE PROFIT PERCENTAGE OF THE COMPARABLES. HENCE, EVEN A FTER HOLDING THAT FOREIGN EXCHANGE FLUCTUATION GAIN IS OPERATING PROFIT, IT HAS TO BE SEEN AS TO WHETHER THE SAID GAIN IS IN RESPECT O F TURNOVER OF THE PRESENT YEAR OR TURNOVER OF THE EARLIER YEAR BECAUS E IF THE GAIN IS ON ACCOUNT OF TURNOVER OF THE PRESENT YEAR THAN THE GAIN IS INCLUDED IN THE NUMERATOR I.E. PROFIT BUT THE RELEV ANT TURNOVER IS NOT INCLUDED IN THE DENOMINATOR AND THEREFORE, THE RESULT WILL BE ABSURD. HENCE, WE RESTORE THIS MATTER TO THE FILE O F THE A.O. WITH THE DIRECTION THAT THE FOREIGN EXCHANGE GAIN SHOULD BE CONSIDERED FOR COMPUTING PROFIT PERCENTAGE FOR THE PURPOSE OF ALP IF IT IS IN RESPECT OF TURNOVER OF THE PRESENT YEAR. BUT IF IT IS IN RESPECT OF TURNOVER OF THE EARLIER YEAR THEN THE SAME SHOULD N OT BE CONSIDERED IN THE OPERATING PROFIT IN THE PRESENT Y EAR FOR THE PURPOSE OF COMPUTING ALP. THIS SUBMISSION WAS ALSO MADE BY THE LD. AR OF THE ASSESSEE THAT SUCH DETAILS REGARD ING THE YEAR OF SALE IN RESPECT OF FOREIGN EXCHANGE GAIN OF THE COM PARABLE MAY NOT BE AVAILABLE. WE FEEL IT PROPER THAT EITHER THE FOREIGN EXCHANGE GAIN OF COMPARABLE SHOULD NOT BE CONSIDERE D IN THAT SITUATION OR SUCH DETAILS SHOULD BE OBTAINED FROM T HE RESPECTIVE COMPARABLE COMPANIES U/S. 133(6) OF THE IT ACT, 196 1. GROUND NO. 12 IS ALLOWED FOR STATISTICAL PURPOSES IN THE T ERMS INDICATED ABOVE. 16. THE LD. COUNSEL FOR THE ASSESSEE, HOWEVER, POI NTED OUT THAT THE HONBLE DELHI HIGH COURT IN THE CASE OF PR. CIT V. AMERIPRISE INDIA PVT. LTD. IN ITA NO.206/2016, JUDGMENT DATED 23.03.2016 HAS T AKEN THE FOLLOWING VIEW:- THE ITAT HAS IN THE IMPUGNED ORDER NOTED THE FACT THAT THE FOREIGN EXCHANGE GAIN EARNED BY THE ASSESSEE IS IN RELATION TO THE TRADING ITEMS EMANATING FROM THE INTERNATIONAL TRAN SACTIONS. ITA NOS. IT(TP)A NOS.466 & 606/BANG/2016 PAGE 11 OF 16 SINCE THE FOREIGN EXCHANGE LOSS DIRECTLY RESULTED F ROM TRADING ITEMS, IT COULD NOT BE CONSIDERED AS A NON-OPERATIN G LOSS. FURTHER, IT IS NOTED BY THE DISPUTE RESOLUTION PANEL THAT TH E SERVICE AGREEMENT BETWEEN THE ASSOCIATED ENTERPRISE (AE) AN D THE ASSESSEE STATED THAT FOR THE SPECIFIED PRODUCTS AND SERVICES PROVIDED BY THE ASSESSEE, IT SHALL RAISE INVOICES ON AMERIPRISE USA ON THE BASIS OF A COST PLUS PRICING METHODOLOGY . THE ITAT WAS THEREFORE RIGHT IN HOLDING THAT THE AO WAS NOT JUSTIFIED IN CONSIDERING THE FOREIGN EXCHANGE LOSS AS A NON-OPER ATING COST. 17. IN VIEW OF THE DECISION OF THE HONBLE DELHI HI GH COURT (SUPRA) , WE ARE OF THE VIEW THAT THERE IS NO MERIT IN GROUND NO .2 RAISED BY THE REVENUE. 18. AS FAR AS GROUND NO.3 RAISED BY THE REVENUE IS CONCERNED, THE LD. DR SUBMITTED BEFORE US THAT THERE CANNOT BE ANY FIX ED OR STANDARD ALLOWANCE OF DEDUCTION ON ACCOUNT OF RISK AS ALLOWE D BY THE DRP IN ITS DIRECTION. IN THIS REGARD, THE LD. DR PLACED RELIA NCE ON THE DECISION OF THE DELHI BENCH OF THE TRIBUNAL IN THE CASE OF ACTIS GLOBAL SERVICES (P) LTD. V. ITO [2017] 81 TAXMANN.COM 457 (DELHI-TRIB.) WHEREIN THE TRIBUNAL TOOK THE VIEW THAT THE ASSESSEE SHOULD DEMONSTRATE THE NATUR E OF RISK AND HOW THE RISK HAS AFFECTED THE MARGIN. IT WAS ALSO SUBMITTE D BY THE LD. DR THAT EVEN QUANTIFICATION OF THE RISK SHOULD BE MADE ON SOME B ASIS AND CANNOT BE ALLOWED ON AN ADHOC BASIS. 19. WE HAVE CONSIDERED THE SUBMISSION OF THE LD. DR AND ARE OF THE VIEW THAT THE ISSUE REQUIRES RE-EXAMINATION BY THE TPO/AO. THE ORDER OF DRP IS SET ASIDE AND THE AO/TPO IS DIRECTED TO EXAM INE THE ADJUSTMENT ON ACCOUNT OF RISK AFRESH. THE ASSESSEE IS DIRECTED T O GIVE THE NECESSARY DETAILS OF THE NATURE OF RISK AND THE IMPACT ON PRO FIT MARGINS AND ALSO THE BASIS OF QUANTIFICATION OF ADJUSTMENT TOWARDS RISK. GROUND NO.3 RAISED BY THE REVENUE IS ACCORDINGLY PARTLY ALLOWED. ITA NOS. IT(TP)A NOS.466 & 606/BANG/2016 PAGE 12 OF 16 20. THE ABOVE DISCUSSION WILL CONCLUDE THE ISSUE OF DETERMINATION OF ALP U/S. 92 OF THE ACT. 21. WE SHALL NOW DEAL WITH THE OTHER CORPORATE TAX ISSUES RAISED BY THE ASSESSEE IN ITS APPEAL. 22. GROUND NOS. 5 & 6 RAISED BY THE ASSESSEE READS AS FOLLOWS:- 5. THE LOWER AUTHORITIES HAVE ERRED IN A. DISALLOWING REIMBURSEMENT OF WAN LINK CHARGES A ND SOFTWARE LICENSES (TOTALING TO RS.36,10,836/-) U/S. 40(A)(I) ON THE GROUND THAT THE ASSESSEE HAS NOT DEDUCTED TDS A S PER PROVISIONS OF SECTION 195; B. STATING THAT ASSESSEE WAS OBLIGATED TO FILE AN A PPLICATION U/S. 195(2) FOR DETERMINATION OF TDS LIABILITY IN RESPEC T OF REIMBURSEMENTS PAID TO NON-RESIDENT AE; C. CONCLUDING THAT THE ASSESSEE HAS NO OBLIGATION, WHATSOEVER, TO REIMBURSE SUMS TO ITS AES; AND D. CONCLUDING THAT REMITTANCES MADE BY THE ASSESSE E CANNOT BE CALLED AS REIMBURSEMENT BUT A PAYMENT FOR SERVI CE RENDERED. 6. WITHOUT PREJUDICE TO THE ABOVE, THE LOWER AUTHOR ITIES HAVE ERRED IN NOT GRANTING DEDUCTION U/S. 10A ON SUM OF RS.36,10,836 BEING DISALLOWANCE U/S. 40(A)(I). 23. AS FAR AS THE AFORESAID GROUNDS OF APPEAL ARE CONCERNED, THE FACTS ARE THAT THE ASSESSEE PAID WAN LINK CHARGES AND SOF TWARE LICENSES FEES OF RS.14,24,051 AND RS.21,86,785 IN ALL TOTALING RS.36 ,10,836 TO NON- RESIDENTS. ACCORDING TO THE AO, ASSESSEE WAS OBLIG ED TO DEDUCT TAX AT SOURCE U/S. 195 OF THE ACT AT THE TIME OF MAKING PA YMENTS TO NON-RESIDENTS. SINCE THE ASSESSEE FAILED TO DO SO, THE AO WAS OF T HE VIEW THAT THE AFORESAID SUM SHOULD BE DISALLOWED AND NOT ALLOWED AS AN EXPENDITURE ITA NOS. IT(TP)A NOS.466 & 606/BANG/2016 PAGE 13 OF 16 WHILE COMPUTING TOTAL INCOME U/S. 40(A)(IA) OF THE ACT. THE PLEA OF THE ASSESSEE WAS THAT THE AMOUNTS IN QUESTION WERE REIM BURSEMENTS AND THEREFORE THERE WAS NO OBLIGATION TO DEDUCT TAX AT SOURCE. THIS WAS NOT ACCEPTED BY THE REVENUE AUTHORITIES AND THE AFORESA ID SUM WAS DISALLOWED AND ADDED TO TOTAL INCOME OF THE ASSESSEE U/S. 40(A )(IA) OF THE ACT. 24. ON APPEAL BY THE ASSESSEE, THE DRP CONFIRMED TH E ORDER OF AO. 25. AGGRIEVED BY THE ORDER OF DRP, THE ASSESSEE HAS RAISED GROUND NO.6 BEFORE THE TRIBUNAL. 26. IN GROUND NO.6, THE LD. COUNSEL FOR THE ASSESSE E HAS SUBMITTED THAT EVEN ASSUMING DISALLOWANCE U/S. 40(A)(IA) OF THE AC T HAS TO BE SUSTAINED, THE ADDITION MADE CONSEQUENT TO SUCH DISALLOWANCE W ILL GO TO INCREASE THE PROFITS OF THE UNIT WHICH IS ENTITLED TO CLAIM DEDU CTION ON SUCH PROFITS U/S. 10A OF THE ACT AND THEREFORE THE IMPUGNED ADDITION EVEN IF SUSTAINED, WILL BE TAX NEUTRAL. IN OTHER WORDS, THE ASSESSEE CLAIM S THAT EVEN ON THE ADDITION MADE CONSEQUENT TO DISALLOWANCE U/S. 40(A) (IA) OF THE ACT, DEDUCTION U/S. 10A SHOULD BE ALLOWED. 27. IN THIS REGARD, THE DL. COUNSEL FOR THE ASSESSE E HAS PLACED RELIANCE ON THE DECISION OF TWO HIGH COURTS VIZ., HONBLE BO MBAY HIGH COURT IN THE CASE OF CIT V. GEM PLUS JEWELLERY INDIA LTD. (2010) 194 TAX MAN 192 (BOM) AND HONBLE GUJARAT HIGH COURT IN THE CASE OF ITO V. KEWAL CONSTRUCTION, 354 ITR 13 (GUJ) . IN THE DECISION OF THE HONBLE GUJARAT HIGH COURT, IT WAS HELD THAT WHEN DISALLOWANCE U/S. 40(A )(IA) OF THE ACT GOES TO ENHANCE THE PROFITS THAT ARE ELIGIBLE FOR DEDUCTION UNDER CHAPTER VIA OF THE ACT, THE DEDUCTION UNDER CHAPTER VIA SHOULD BE ALLO WED ON SUCH INCREASED PROFIT. THIS POSITION HAS ALSO BEEN NOW CONFIRMED BY THE CBDT IN ITS ITA NOS. IT(TP)A NOS.466 & 606/BANG/2016 PAGE 14 OF 16 CIRCULAR NO.37/2016 DATED 02.11.2016 WHEREIN THE BO ARD HAS OBSERVED AS FOLLOWS:- 3. IN VIEW OF THE ABOVE, THE BOARD HAS ACCEPTED TH E SETTLED POSITION THAT THE DISALLOWANCES MADE UNDER SECTIONS 32, 40(A)(IA), 40A(3), 43B, ETC. OF THE ACT AND OTHER SPECIFIC DIS ALLOWANCES, RELATED TO THE BUSINESS ACTIVITY AGAINST WHICH THE CHAPTER VI-A DEDUCTION HAS BEEN CLAIMED, RESULT IN ENHANCEMENT O F THE PROFITS OF THE ELIGIBLE BUSINESS, AND THAT DEDUCTION UNDER CHAPTER VI-A IS ADMISSIBLE ON THE PROFITS SO ENHANCED BY THE DISALL OWANCE. 28. IN VIEW OF THE ABOVE, WE ACCEPT GROUND NO.6 OF THE ASSESSEE AND DIRECT THE AO TO ALLOW DEDUCTION U/S. 10A OF THE AC T ON THE AMOUNT DISALLOWED U/S. 40(A)(IA) OF THE ACT. IN VIEW OF T HE ABOVE DIRECTION, GROUND NO.5 BECOMES ACADEMIC AND NO ADJUDICATION IS REQUIR ED IN GROUND NO.5. 29. IN GROUND NO.7, THE ASSESSEE HAS PROJECTED THE FOLLOWING GRIEVANCE:- 7. THE LEARNED AO HAS ERRED IN : A. GIVING CREDIT FOR ADVANCE TAX PAID ONLY TO THE EXTE NT OF RS.25,66,655 WITHOUT APPRECIATING THAT THE ASSESSEE HAS PAID ADVANCE TAX OF RS.38,65,655/- DESPITE DIRECTIO N BY THE DRP. B. WITHOUT PREJUDICE, THE LEARNED AO HAS ERRED IN NOT GIVING MAT CREDIT AS PER THE PROVISIONS OF SECTION 115JAA OF THE ACT DESPITE DIRECTION BY THE DRP. C. LEVYING A SUM OF RS.12,92,876/- AS INTEREST UNDER S ECTION 234B. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, INTEREST UNDER SECTION 234B IS NOT LEVIABLE. EVEN OTHERWISE INTEREST U/S. 234B IS EXCESSIVE. THE APPELLANT SUB MITS THAT EACH OF THE ABOVE GROUNDS/SUB-GROUNDS ARE INDEPENDE NT AND WITHOUT PREJUDICE TO ONE ANOTHER. ITA NOS. IT(TP)A NOS.466 & 606/BANG/2016 PAGE 15 OF 16 30. WE ARE OF THE VIEW THAT AS FAR AS GROUND NO.7(A ) IS CONCERNED, IT WOULD BE JUST AND APPROPRIATE TO DIRECT THE AO TO V ERIFY AND GIVE CREDIT FOR ADVANCE TAX PAID, IF THE CONTENTION OF THE ASSESSEE IS FOUND TO BE CORRECT. 31. GROUND NOS. 7(B) & 7(C) ARE PURELY CONSEQUENTIA L AND THE AO IS DIRECTED TO GIVE CONSEQUENTIAL RELIEF. 32. IN THE RESULT, THE APPEAL BY THE ASSESSEE IS PA RTLY ALLOWED. 33. AS FAR AS THE APPEAL OF REVENUE IS CONCERNED, T HE GROUNDS THAT REQUIRE ADJUDICATION ARE GROUND NOS.4 & 5. AS FAR AS GROUND NOS. 4 & 5 RAISED BY THE REVENUE ARE CONCERNED, THE ISSUE IS W ITH REGARD TO THE QUESTION AS TO WHETHER EXPENDITURE INCURRED IN FORE IGN CURRENCY TOWARDS TELECOMMUNICATION AND INSURANCE HAS TO BE EXCLUDED BOTH FROM THE EXPORT TURNOVER AND TOTAL TURNOVER WHILE COMPUTING THE DED UCTION U/S. 10A OF THE ACT. THE AO EXCLUDED THE TELECOMMUNICATION AND INS URANCE EXPENSES INCURRED IN FOREIGN CURRENCY ONLY FROM THE EXPORT T URNOVER AND HE DID NOT EXCLUDE THE SAME FROM THE TOTAL TURNOVER WHILE COMP UTING DEDUCTION U/S. 10A OF THE ACT. CONSEQUENTLY, DEDUCTION U/S. 10A O F THE ACT WAS ALLOWED AT A MUCH LESSER FIGURE THAT THAT CLAIMED BY THE ASSES SEE. 34. ON APPEAL BY THE ASSESSEE, THE DRP HELD FOLLOWI NG THE DECISION OF THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF TATA ELXSI LTD., 349 ITR 98 (KARN) THAT WHATEVER IS EXCLUDED FROM THE EXPORT TURNOVER SHOULD ALSO BE EXCLUDED FROM THE TOTAL TURNOVER. IF THIS DIRECTIO N IS SUSTAINED, THE CLAIM MADE BY THE ASSESSEE WILL STAND ALLOWED. THE REVEN UE HAS RAISED GROUND NOS. 4 & 5 CONTENDING THAT THE DEPARTMENT HAS FILED SLP BEFORE THE HONBLE SUPREME COURT ON THE ISSUE AND THEREFORE THE DECISI ON OF THE HONBLE HIGH COURT OF KARNATAKA IS NOT FINAL. WE ARE OF THE VIE W THAT THIS CANNOT BE A GROUND NOT TO FOLLOW THE DECISION OF THE JURISDICTI ONAL HIGH COURT. APART ITA NOS. IT(TP)A NOS.466 & 606/BANG/2016 PAGE 16 OF 16 FROM THE ABOVE, THE HONBLE SUPREME COURT HAS IN TH E CASE OF CIT V. HCL TECHNOLOGIES LTD. IN CIVIL APPEAL NO.8489-98490 OF 2013 & ORS. DATED 24.04.2018 UPHELD THE VIEW TAKEN BY THE HONBLE HIGH COURT OF KARNATAKA. IN VIEW OF THE ABOVE, WE ARE OF THE VIEW THAT THERE IS NO MERIT IN THE GROUNDS NO.4 & 5 RAISED BY THE REVENUE. CONSEQUENT LY, THE SAME ARE DISMISSED. 35. IN THE RESULT, THE APPEAL BY THE ASSESSEE IS PA RTLY ALLOWED, WHILE THE APPEAL BY THE REVENUE IS PARTLY ALLOWED FOR STATIST ICAL PURPOSES. PRONOUNCED IN THE OPEN COURT ON THIS 08 TH DAY OF AUGUST, 2018. SD/- SD/- ( JASON P. BOAZ ) ( N.V. VASUDEVAN ) ACCOUNTANT MEMBER JUDICIAL MEMBER BANGALORE, DATED, THE 08 TH AUGUST, 2018. / D ESAI S MURTHY / COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT 4. THE CIT(A) 5. THE DR, ITAT, BANGALORE. 6 . GUARD FILE BY ORDER SENIOR PRIVATE SECRETARY ITAT, BANGALORE.