DCIT, V. M/s ABB Global Industries & Services Pvt. Ltd., Bangalore

ITA 620/BANG/2013

• Counselvise Citation: [2018] 125 COUNSELVISE.COM (IT) 2316 (ITAT-BANGALORE)
• Duration Of Justice: 5 year(s) 4 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-09-2018
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 13-07-2017
• Assessment Year: 2005-2006
• Appeal Filed On: 03-05-2013
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: B R RAMESH
• Assessee Lawyers: T SURYANARAYANA
• Keywords: Related party transaction; Transfer pricing; Opportunity of being heard; International transaction
• Section: 143(3); 133(6)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH C BEFORE S HRI N.V. VASUDEVAN , JUDICIAL MEMBER AND SHRI JASON P BOAZ , ACCOUNTANT MEMBER I.T . (T.P) A. NO. 620 /BANG/20 13 (ASSESSMENT YEAR : 20 05 - 06) DY. COMMISSIONER OF INCOME TAX, CIRCLE 11(1), BANGALORE. . APPELLANT. VS. M/S.ABB GLOBAL INDUSTRIES & SERVICES P. LTD. KHANIJA BHAVAN, R C ROAD, BANGALORE. .. RESPONDENT. APPELLANT BY : SHRI B.R. RAMESH, JCIT (D.R) R E SPONDENT BY : SHRI T.SURYANARAYANA, ADVOCATE. DATE OF H EARING : 29.06.2018. DATE OF P RONOUNCEMENT : 07 .09 .201 8 . O R D E R PER SHRI JASON P BOAZ, A .M . : THIS APPEAL BY REVENUE IS DIRECTED AGAINST THE ORDER OF COMMISSIONER OF INCOME TAX (APPEALS) - IV , BANGALORE DT.19.2.2013 FOR THE ASSESSMENT YEAR 20 05 - 06. 2. BRIEFLY STATED, THE FACTS OF THE CASE ARE AS UNDER : - 2 IT(TP)A NO.620/BANG/2013 2.1 THE ASSESSEE, A RESIDENT PRIVATE LIMITE D COMPANY, IS PART OF THE ABB A S EA BROWN BOVE RI GROUP AND IS ENGAGED IN THE PROVISION OF SOFTWARE DEVELOPMENT AND SUPPORT SERVICES TO ITS ASSOCIATED ENTERPRISES (AE). THE ASSESSEE FILED ITS RETURN OF INCOME FOR ASSESSMENT YEAR 2005 - 06 ON 28.10.2005 DECLARING TOTAL INCOME OF RS.3,35,741. THE RETURN WAS PROCESSED UNDER SECTION 143(1) OF THE INCOME TAX ACT, 1961 (IN SHORT 'THE ACT') AND THE CASE WAS SUBSEQUENTLY TAKEN UP FOR SCRUTINY. THE AS SESSING OFFICER ( A.O ) MADE A REFERENCE TO THE TRANSFER PRICING OFFICER (TPO) UNDER SECTION 92CA OF THE ACT FOR DETERMINATION OF THE ARM S LENGTH PRICE (ALP) OF THE INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE ASSESSEE WITH ITS AES IN THE YEAR UNDER CO NSIDERATION. 2.2 THE TPO PASSED AN ORDER UNDER SECTION 92CA OF THE ACT DT.4.8.2008 PROPOSING A TRANSFER PRICING ADJUSTMENT OF RS.1,47,92,474 TO THE ALP OF INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE ASSESSEE IN RESPECT OF ITS SOFTWARE DEVELOPMEN T SERVICES. AFTER RECEIPT OF THE TPO S ORDER, THE ASSESSING OFFICER PROCEEDED TO COMPLETE THE ASSESSMENT UNDER SECTION 143(3) OF THE ACT VIDE DT.10.12.2008, WHREIN THE ASSESSEE'S INCOME WAS DETERMINED AT RS.1,65,96,800 INCLUDING, INTER ALIA, THE TRANSFER PRICING ADJUSTMENT OF RS.1,47,92,474 PROPOSED BY THE TPO. 3 IT(TP)A NO.620/BANG/2013 2.3 AGGRIEVED BY THE ORDER OF ASSESSMENT DT.10.12.2008 FOR ASSESSMENT YEAR 2005 - 06, THE ASSESSEE CARRIED THE MATTER IN APPEAL TO THE CIT (APPEALS) IV, BANGALORE. THE LEARNED CIT (APPEALS) D ISPOSED OFF THE APPEAL VIDE THE IMPUGNED ORDER DT.19.2.2013 GRANTING THE ASSESSEE PARTIAL RELIEF. 3. REVENUE, BEING AGGRIEVED BY THE ORDER OF THE CIT (APPEALS) IV, BANGALORE DT.19.2.2013, HAS PREFERRED THIS APPEAL, WHEREIN IT HAS RAISED THE FOLLOWING GROUNDS : - 4 IT(TP)A NO.620/BANG/2013 5 IT(TP)A NO.620/BANG/2013 4. GROUNDS 1, 18 & 19 , BEING GENERAL IN NATURE, NO ADJUDICATION IS CALLED FOR THEREON. 6 IT(TP)A NO.620/BANG/2013 5. GROUND NOS.2 TO 14 TRANSFER PRICING ISSUES. BEFORE PROCEEDING TO DEAL WITH THE ABOVE GROUNDS OF APPEAL, THE APPROACH O F THE ASSESSEE AND THE TPO ON TRANSFER PRICING ISSUES IS SUMMARIZED HEREUNDER. 5.1 THE ASSESSEE IS ENGAGED IN THE PROVISION OF SOFTWARE DEVELOPMENT SERVICES TO ITS AES. FOR THE YEAR UNDER CONSIDERATION, THE ASSESSEE HAS REPORTED, INTER ALIA, IN TERNATIONAL TRANSACTIONS OF EXPORT O F SOFTWARE DEVELOPMENT SERVICES AGGREGATING TO RS.24,73,14,000. THE ASSESSEE, IN ITS TP STUDY HAS ADOPTED TNMM AS THE MOST APPROPRIATE METHOD (MAM) AND ARRIVED A SET OF 45 COMPARABLES (LISTED AT PAGE 19 OF THE TPO S ORDER UNDER SECTION 92CA OF THE ACT) WITH AVERAGE MEAN MARGIN OF 9.97%. THE ASSESSEE'S PROFIT MARGIN BEING HIGHER AT 16.17%, THE ASSESSEE CONCLUDED THAT ITS TRANSACTIONS IN THE SOFTWARE DEVELOPMENT SERVICES SEGMENT ARE AT ARM S LENGTH. 5.2 THE TP O REJECTED THE ASSESSEE'S TP STUDY FOR VARIOUS REASONS MENTIONED IN HIS TP STUDY AND CONDUCTED HIS OWN COMPARABILITY ANALYSIS, APPLYING VARIOUS FILTERS, AND SELECTED THE FOLLOWING SET OF 17 COMPARABLE COMPANIES; AS LISTED AT PARA 15 ON PAGE 151 OF HIS ORD ER : - 7 IT(TP)A NO.620/BANG/2013 THE ARITHMETIC MEAN OF THESE 17 COMPARABLES WAS COMPUTED AT 26.59%. AFTER ALLOWING WORKING CAPITAL ADJUSTMENT OF 3.47% , THE ADJUSTED ARITHMETIC MEAN MARGIN OF THESE COMPARABLES WAS ADOPTED A 23.12%. THE RESULTANT SHORTFALL IN THE PR ICE AMOUNTING TO RS.1,47,82,474 WAS PROPOSED AS THE TRANSFER PRICING ADJUSTMENT TO THE ALP OF INTERNATIONAL TRANSACTIONS OF THE ASSESSEE WITH ITS AES AND THE SAME WAS 8 IT(TP)A NO.620/BANG/2013 ADDED TO THE ASSESSEE'S INCOME BY THE ASSESSING OFFICER WHILE PASSING THE ORDER OF ASSESS MENT FOR ASSESSMENT YEAR 2005 - 06. 5.3 IN THE IMPUGNED ORDER, THE LEARNED CIT (APPEALS), AFTER CONSIDERING THE VIEWS OF THE TPO AND THE SUBMISSIONS OF THE ASSESSEE, DISPOSED OFF THE ASSESSEE'S APPEAL EXCLUDING CERTAIN COMPANIES CHOSEN BY THE TPO AS COMP ARABLES TO THE ASSESSEE. WHILE DECIDING ON THE EXCLUSION OF THE COMPANIES FROM THE FINAL SET OF 17 COMPARABLES COMPANIES CHOSEN BY THE TPO, THE LEARNED CIT (APPEALS) HAS AD JUDICATED ON THE FOLLOWING ISSUES. 5.4 TURNOVER AND ABNORMAL PROFITS FILTER . 5.4.1 UNDER THE CAPTION OF TURNOVER AND ABNORMAL PROFITS FILTER , THE LEARNED CIT (APPEALS) HAS DISCUSSED THE EXCLUSION OF COMPANIES. RELYING ON THE DECISION OF THE CO - ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF GENISYS INTEGRATING SYSTEMS (INDIA) P. LTD. VS. DCIT (2012) 53 SOT 159 (BANG), THE LEARNED CIT (APPEALS) HELD THAT SINCE THE ASSESSEE'S TURNOVER WAS APPROX. RS.24.73 CRORES, THE TURNOVER RANGE OF RS.1 CRORE TO RS.200 CRORES BE APPLIED AND CONSEQUENTLY DIRECTED EXCLUSION OF THE FOLLOWING SE VEN COMPANIES (LISTED AT PARA 103 OF CIT (APPEALS) ORDER) WHICH HAD TURNOVER IN EXCESS OF RS.200 CRORES : - 9 IT(TP)A NO.620/BANG/2013 1. EXENSYS SOFTWARE SOLUTIONS LTD. 2. FLEXTRONICS LTD. (SEG.) 3. I - GATE GLOBAL SOLUTIONS LTD. 4. L & T INFOTECH LTD. 5. SATYAM COMPUTERS LTD. 6 . THIRDWARE SOLUTIONS LTD. 7. INFOSYS TECHNOLOGIES LIMITED. 5.4.2 EVEN THOUGH IN THE IMPUGNED ORDER, IT IS CAPTIONED AS TURNOVE R AND ABNORMAL PROFITS FILTER , THE DISCUSSION AT PARAS 94 TO 103 IN THE LEARNED CIT (APPEALS) S ORDER IS ONLY ON TURNO VER FILTER AND THERE IS NO DISCUSSION WHATSOEVER ON ABNORMAL PROFITS . HOWEVER, FROM A PERUSAL OF THE FIGURES MENTIONED N THE TABLE AT PARA 103 OF THE CIT (A) S ORDER, IT WOULD APPEAR THAT 2 COMPANIES, NAMELY, (I) EXENSYS SOFTWARE SOLUTIONS LIMITED AN D (II) THIRDWARE SOLUTIONS HAVE BEEN EXCLUDED UNDER THE ABNORMAL PROFIT FILTER AS THESE TWO COMPANIES WOULD NOT QUALIFY TO BE EXCLUDED UNDER THE TURNOVER FILTER ADOPTED BY THE LEARNED CIT (APPEALS). 5.5 DIFFERENT ACCOUNTING YEAR FILTER. 5.5.1 THE LEARNED CIT (APPEALS) HAS DISAPPROVED THE APPLICATION OF THIS FILTER BY HOLDING THAT IN THE ABSENCE OF EVIDENCE TO SHOW THAT THERE HAS BEEN A SIGNIFICANT IMPACT ON MARGINS DUE TO DIFFERENT REPORTING OR 10 IT(TP)A NO.620/BANG/2013 ACCOUNTING PERIODS THE SAID FILTER CANNOT BE APPLI ED. IN THAT VIEW OF THE MATTER, THE LEARNED CIT (APPEALS) DIRECTED THE INCLUSION OF QUINTEGRA SOLUTIONS LTD., AS A COMPARABLE IN THE FINAL SET OF COMPARABLES AND ALSO DIRECTED THAT THE OPERATING MARGIN BE ADOPTED AT 8.77%; BEING THE AVERAGE OF MARGINS OF 6.85% AND 10.68% FOR THE FINANCIAL YEARS ENDED 30.9.2004 AND 30.9.2005 RESPECTIVELY. 5.6 APART FROM THE ABOVE, THE LEARNED CIT (APPEALS) HAS DISCUSSED THE FUNCTIONAL COMPARABILITY AND OTHER CRITERIA OF CERTAIN COMPANIES AND HAS DIRECTED THEIR EXCLUSION AS UNDER : - (I) TATA ELXSI L TD. ON GROUND OF NOT BEING FUNC T IO NALLY COMPARABLE; (II) BODHTREE CONSULTING LTD.; ON GROUNDS OF NOT BEING FUNCTIONALLY COMPARABLE AND ALSO FOR NON - AVAILABILITY OF SEGMENTAL DETAILS; (III) GEOMETRIC SOFTWARE SOLUTIONS LTD., ON GROUNDS OF NOT BEING FUNCTIONALLY COMPARABLE AND ALSO FOR NON - AVAILABILITY OF SEGMENTAL DETAILS. 11 IT(TP)A NO.620/BANG/2013 5.7 FURTHER, THE LEARNED CIT (APPEALS) HAS DISCUSSED THE FUNCTIONAL COMPARABILITY AND OTHER CRITERIA OF CERTAIN COMPANIES AND DIRECTED THEIR INCLUSIO N AS UNDER : - (I) VJIL CONSULTING LTD., AS THE TPO AFTER INITIALLY PROPOSING THIS COMPANY IN THE SHOW CAUSE NOTICE HAS SUBSEQUENTLY REJECTED THE SAME WITHOUT ASSIGNING ANY REASONS. (II) AKSHAY SOFTWARE TECHNOLOGY LTD., AS IT WAS REJECTED BY WRONGLY AP PLYING THE ON SITE FILTER. 5.8 HAVING HELD AS ABOVE, THE LEARNED CIT (APPEALS) AT PARA 164 OF THE IMPUGNED ORDER, UNDER THE CAPTION SUMMARY OF COMPARABLES , HAS GIVEN THE FINAL SET OF COMPARABLES FOR COMPUTING THE MEAN OPERATING MARGIN FOR DETERMINA TION OF ALP AS UNDER : - SL.NO. COMPARABLE COMPANY OP/TC 1 AKSHAY SOFTWARE TECHNOLOGIES LTD. 07.72 2 FOUR SOFT LTD. 22.98 3 LANCO GLOBAL SYSTEMS LTD. 13.65 4 QUINTEGRA SOLUTIONS LTD. 08.07 5 RS SOFTWARE (INDIA) LTD. 08.07 6 SANKHYA INFOTECH LIMITED 27.39 7 SASKEN COMMUNICATION TECHNOLOGIES LTD. 14.42 12 IT(TP)A NO.620/BANG/2013 (SEG.) 8 SASKEN NETWORK SYSTEMS LTD. 16.64 9 VISUAL SOFT TECHNOLOGIES LTD. (SEG.) 23.52 10 VJIL CONSULTING LTD. 06.68 ARITHMETIC MEAN 14.98 5.9 THE LEARNED CIT (APPEALS) ALSO REJECTED THE ASS ESSEE'S CONTENTION / CLAIM THAT RISK ADJUSTMENT SHOULD BE ALLOWED. 5.10 BEFORE US, REVENUE HAS CHALLENGED VARIOUS FINDINGS RENDERED BY THE LEARNED CIT (APPEALS), AS DISCUSSED ABOVE. IN SUP P ORT OF REVENUE S CONTENTIONS, THE LEARNED DEPARTMENTAL REPRES ENTATIVE HAS PLACED RELIANCE ON CERTAIN DECISIONS OF THE CO - ORDINATE BENCH OF THIS TRIBUNAL. 5.11.1 ON ITS PART, THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE PUT FORTH BOTH ORAL AND WRITTEN SUBMISSIONS FILED PAPER BOOKS CONTAINING DETAILS/DO CUMENTS, COMPILATION OF CASE LAWS AND ANNUAL REPORTS OF COMPANIES. THE ASSESSEE ALSO SUBMITTED A SYNOPSIS OF ARGUMENTS, AND A CHART OF COMPARABLES, IN WHICH IT HAS SOUGHT UPHOLDING OF EXCLUSION OF THE FOLLOWING 10 COMPANIES FR O M THE LIST OF COMPARABLE COM PANIES, FOR THE REASONS CITED HEREUNDER : - 13 IT(TP)A NO.620/BANG/2013 S.NO. NAME OF THE COMPANY REASONS FOR EXCLUSION 1 BODHTREE CONSULTING LTD. FUNCTIONALLY DIFFERENT. 2 EXENSYS SOFTWARE SOLUTIONS LTD. FUNCTIONALLY DIFFERENT AND OTHER REASONS. 3 THIRDWRE SOLUTIONS LTD. FUNCTIO NALLY DIFFERENT FAILS EXPORT REVENUE FILTER AND SUPER PROFIT S . 4 GEOMETRIC SOFTWARE SOLUTIONS LTD. FUNCTIONALLY DIFFERENT AND SEGMENTAL DETAILS ARE NOT AVAILABLE. 5 TATA ELXS I LTD. FUNCTIONALLY DIFFERENT AND SEGMENTAL DETAILS ARE NOT AVAILABLE. 6 I - GAT E GLOBAL SOLUTIONS LTD. HIGHTURNOVER. 7 FLEXTRONICS SOFTWARE SYSTEMS LTD. HIGH TURNOVER AND FUNCTIONALLY DIFFERENT. 8 L & T INFOTECH LTD. HIGH TURNOVER. 9 SATYAM COMPUTER SERVICES LTD. HIGH TURNOVER AND UNRELIABLE DATA. 10 INFOSYS TECHNOLOGIES LTD. HIG H TURNOVER AND FUNCTIONALLY DIFFERENT. THE ASSESSEE ALSO PRAYED FOR UPHOLDING THE INCLUSION OF THE FOLLOWING COMPANIES IN THE FINAL SET OF COMPARABLES, FOR THE REASONS GIVEN HEREUNDER : - 14 IT(TP)A NO.620/BANG/2013 SL.NO. NAME OF THE COMPANY REASONS FOR INCLUSION 1 QUINTEGR A SOLU TIONS LTD. FUNCTIONALLY COMPARABLE AND ITS REJECTION ON DIFFERENT ACCOUNTING YEAR IS ERRONEOUS. 2 VJIL CONSULTING LTD. FUNCTIONALLY COMPARABLE, PASSES ALL FILTERS. BASIS OF REJECTIONS IS ERRONEOUS. 3 AKSHAY SOFTWARE TECHNOLOGIES LTD. FUNCTIONALLY COMPAR ABLE, PASSES ALL FILTERS. BASIS OF REJECTION IS ERRONEOUS. 5.1.2 WE HAVE HEARD THE RIVAL CONTENTIONS, PERUSED AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD; THE TPO S ORDER UNDER SECTION 92CA OF THE ACT, THE ORDER OF ASSESSMENT, THE IMPUGNED ORD ER OF THE LEARNED CIT (APPEALS), THE SUBMISSIONS PUT FORTH BY BOTH THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR REVENUE AND THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE INCLUDING THE JUDICIAL PRONOUNCEMENTS CITED AND PLACED RELIANCE UPON AND NOW PR OCEED TO CONSIDER THE VARIOUS TRANSFER PRICING ISSUES RAISED. 6. GROUND NO.2 TURNOVER FILTER. 6.1 IN THIS GROUND (SUPRA), REVENUE HAS ASSAILED THE DECISION OF THE LEARNED CIT (APPEALS) IN UPHOLDING THE APPLICABILITY OF THE UPPER TURNOVER 15 IT(TP)A NO.620/BANG/2013 FILTER AND THEREBY EXCLUDING THE FOLLOWING COMPANIES FROM THE SET OF COMPARABLES : - (I) I - GATE GLOBAL SOLUTIONS LTD. (II) L & T INFOTECH LTD. (III) SATYAM COMPUTER SERVICES LTD. (IV) INFOSYS TECHNOLOGIES LTD. (V) FLEXTRONICS SOFTWARE SYSTEMS LTD. 6.2 THE BASIC FACTS BORNE OUT FORM THE RECORD GOVERNING THE APPLICATION OF TURNOVER FILTER ARE THAT THE ASSESSEE'S TURNOVER WAS RS.24.73 CRORE. THE TPO HAD APPLIED A LOWER TURNOVER FILTER AND EXCLUDED COMPANIES WHOSE TURNOVER WAS LESS THAN RS.1 CRORE. THE ASSESSE E S CONTENTION, BEFORE THE LEARNED CIT (APPEALS) WAS, THAT WHILE THE TPO EXCLUDED COMPANIES WITH LOW TURNOVER, HE FAILED TO APPLY THE SAME YARDSTICK TO EXCLUDE COMPANIES WITH HIGH TURNOVER AS COMPARE TO THE ASSESSEE. THE REASONS GIVEN FOR EXCLUSION OF CO MPANIES WITH LOW TURNOVER WAS THAT SUCH COMPANIES DO NOT REFLECT THE INDUSTRY TRENDS AS THEIR LOW COST TO SALES RATIO MADE THEIR RESULTS UNRELIABLE. THE CONTENTION OF THE ASSESSEE IS THAT THERE WOULD BE EFFECT ON PROFITABILITY WHENEVER THERE IS HIGH OR LO W TURNOVER AND THEREFORE COMPANIES WITH HIGH 16 IT(TP)A NO.620/BANG/2013 TURNOVER SHOULD ALSO BE EXCLUDED FROM THE LIST OF COMPARABLE COMPANIES. THE LEARNED CIT (APPEALS) AGREED WITH THE ASSESSEE'S CONTENTIONS AND EXCLUDED THE ABOVE LISTED 5 COMPANIES. IN COMING TO THIS DECISION, T HE LEARNED CIT (APPEALS) PLACED RELIANCE ON THE DECISION OF THE CO - ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF GENISYS INTEGRATING SYSTEMS (INDIA) PVT. LTD. (2012) 53 SOT 159 (BANG), WHEREIN IT WAS HELD THAT WHEN THERE IS A LIMIT FOR THE LOWER END FOR I DENTIFYING THE COMPARABLE COMPANIES, THERE IS NO REASON WHY THERE SHOULD NOT BE AN UPPER TURNOVER LIMIT ALSO; AS SIZE MAT T ER S IN BUSINESS. 6.3.1 THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR REVENUE SUBMITTED THAT TURNOVER IS NOT A RELEVANT CRITERIA TO RE GARD A COMPANY AS NOT COMPARABLE, SO LONG A THE TWO COMPANIES ARE FUNCTIONALLY COMPARABLE. IF THE FUNCTIONS OF TWO COMPANIES ARE IDENTICAL THEN THEY HAVE TO BE REGARDED AS COMPARABLE. ACCORDING TO THE LEARNED DEPARTMENTAL REPRESENTATIVE, THEREFORE, THE L EARNED CIT (APPEALS) WAS NOT JUSTIFIED IN EXCLUDING THE ABOVE 5 COMPANIES F R O M THE LIST OF COMPARABLES ON THE GROUND THAT THEIR TURNOVER WAS ABOVE RS.200 CRORES 17 IT(TP)A NO.620/BANG/2013 AND CANNOT BE COMPARED WITH THE ASSESSEE WHOSE TURNOVER IS APPROXIMATELY RS.24.73 CRORES. 6 .3.2 THE LEARNED DEPARTMENTAL REPRESENTATIVE ALSO FILED BEFORE US, WRITTEN SUBMISSIONS TO CONTEND THAT IN THE SOFTWARE INDUSTRY SIZE HAS NO INFLUENCE ON THE MARGINS EARNED BY AN ENTITY. ACCORDING TO THE LEARNED DEPARTMENTAL REPRESENTATIVE, ECONOMIES OF SCALE ARE RELEVANT ONLY IN CAPITAL INTENSIVE COMPANIES WHICH HAVE SUBSTANTIAL FIXED ASSETS IN THE FORM OF PLANT AND MACHINERY. THE LEARNED DEPARTMENTAL REPRESENTATIVE SUBMITS THAT IN THE SOFTWARE INDUSTRY, SIZE DOES NOT MATTER; WHAT MATTERS IS THE HUM AN CAPITAL. ACCORDING TO HIM THE APPLICATION OF TURNOVER FILTER MIGHT BE JUSTIFIED FOR EXCLUDING COMPANIES WITH LOW TURNOVER ; SAY RS.1 CRORE OR LESS, BECAUSE THE MARGINS EARNED BY THESE COMPANIES MIGHT FLUCTUATE WIDELY DUE TO NARROW CAPITAL BASE AND LACK OF COMPETITIVE STRENGTH, LACK OF OPERATIONAL EFFICIENCY AND ALSO LACK OF HUMAN RESOURCES. IN SUPPORT OF HIS CONTENTIONS, THE LEARNED DEPARTMENTAL REPRESENTATIVE HAD PREPARED A CHART OF THE TURNOVER AND MARGINS OF INFOSYS TECHNOLOGIES LTD. FOR VARIOUS F.YS 1997 TO 2010 TO SHOW THAT THERE IS NO LINEAR CORRELATION BETWEEN TURNOVER AND MARGINS. THE LEARNED 18 IT(TP)A NO.620/BANG/2013 DEPARTMENTAL REPRESENTATIVE ALSO FILED A CHART SHOWING THE TURNOVER AND MARGINS OF ABOUT 20 COMPANIES IN THE IT INDUSTRY FOR 3 YEARS, TO SHOW THAT THE PROF IT MARGINS ARE DIFFERENT FOR COMPANIES OPERATING IN THE SAME TURNOVER RANGE. IN THE LIGHT OF THESE DATA, THE LEARNED DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT THERE IS NO RELATION BETWEEN THE MARGINS EARNED THE TURNOVER OF A COMPANY. ACCORDING TO THE LEA RNED DEPARTMENTAL REPRESENTATIVE, SOFTWARE INDUSTRY OPERATES LARGELY ON THE BASIS OF COST PLUS MARK UP OF MARGIN OF PROFIT AND THEREFORE TURNOVER WOULD BE IRRELEVANT AND HAVE NO IMPACT ON THE PROFIT MARGINS. IT WAS FURTHER SUBMITTED THAT UNDER RULE 10B(3) OF THE INCOME TAX RULES, 1962 (IN SHORT THE RULES ) IT IS ONLY FUNCTIONS PERFORMED, ASSETS EMPLOYED AND THE RISKS TAKEN / ASSUMED THAT ARE THE RELEVANT CRITERIA FOR COMPARISON AND TURNOVER IS NOT A PRESCRIBED CRITERIA FOR HE PURPOSE OF COMPARABILITY. IN SUPPORT OF HIS CONTENTIONS, THE LEARNED DEPARTMENTAL REPRESENTATIVE PLACED RELIANCE ON THE FOLLOWING JUDICIAL PRONOUNCEMENTS : - (I) WILLIS PROCESSING SERVICES (I) PVT. LTD. (2014) 30 ITR (T) 39 (MUMBAI TRIB.) (II)CAPGEMINI INDIA PVT. LTD. (ITA NO.78 61/MUM/2011 DT.28.2.2013) 19 IT(TP)A NO.620/BANG/2013 (III) NTT DATA GLOBAL DELIVERY SERVICES LTD. ( IT(TP)A NO.1487/BANG/2013 DT.6.4.2016) (IV) SOCIETE GENERALE GLOBAL SOLUTION CENTRE PVT. LTD. ( IT(TP)A NO.1188/BANG/2011 DT.22.4.2016 FOR A.Y. 2007 - 08) 6.4 PER CONTRA, THE LEARNE D AUTHORISED REPRESENTATIVE OF THE ASSESSEE SUBMITTED THAT THE CO - ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF DELL INTERNATIONAL SERVICES INDIA (P) LTD. VS. DCIT (2018) 89 TAXMAN.COM 44 (BANG TRIB.) DT.13.10.2017 ALSO FOR ASSESSMENT YEAR 2005 - 06 HAS CONSIDERED THE VARIOUS ASPECTS OF THE APPLICATION OF THE TURNOVER FILTER FOR EXCLUDING COMPANIES AND HAS OBSERVED THAT THE FIRST DECISION RENDERED ON THE APPLICATION OF THIS FILTER WAS IN THE CASE OF GENISYS INTEGRATING SYSTEMS (INDIA) PVT. LTD. (2012) 53 SOT 159 (BANG TRIB.) ON 5.8.2011. FURTHER, IN THAT CASE I.E. DELL INTERNATIONAL SERVICES INDIA PVT. LTD. (SUPRA), THE CO - ORDINATE BENCH OF THIS TRIBUNAL HAD DISCUSSED THE APPARENT DIVERGENT VIEW OF TWO NON - JURISDICTIONAL HIGH COURTS AND ALSO THE DECISI ON OF THIS TRIBUNAL IN THE CASE OF SYSARRIS SOFTWARE PVT . LTD. VS. DCIT (2016) 67 TAXMAN.COM 243 (BANG TRIB), WHEREIN THE TRIBUNAL; AFTER NOTICING THE DECISION OF THE HON'BLE HIGH COURT OF DELHI IN THE CASE OF 20 IT(TP)A NO.620/BANG/2013 CHRYSCAPITAL INVESTMENT ADVISORS (INDIA) PVT. LTD. (2015) 376 ITR 183 (DEL) AND THE DECISION TO THE CONTRARY OF THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. PENTAIR WATER INDIA (P) LD. IN ITA NO.18 OF 2015 DT.16.9.2015; HELD THAT SINCE THERE WERE CONTRARY VIEWS ON THE ISSUE, THEREFORE THE VI EW FAVOURABLE TO THE ASSESSEE LAID DOWN IN THE CASE OF PENTAIR WATER INDIA (P) LTD. (SUPRA) SHOULD BE ADOPTED. 6.5.1 WE HAVE HEARD THE RIVAL CONTENTIONS, PERUSED AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD; INCLUDING THE JUDICIAL PRONOUNCEMENTS CI TED. THE CO - ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF DELL INTERNATIONAL SERVICES INDIA (P) LTD. VS. DCIT (SUPRA) HAD UPHELD THE APPLICABILITY OF THE TURNOVER FILTER, RELYING ON THE DECISION OF THIS TRIBUNAL IN THE CASE OF GENISYS INTEGRATING SYSTEM S (INDIA) PVT. LTD. (SUPRA), HOLDING AS UNDER AT PARAS 39 TO 42 THEREOF : - 27. THUS A SUM OF RS.13,68,82,572 WAS DIRECTED TO BE ADDED TO THE TOTAL INCOME OF THE ASSESSEE BY WAY OF ADJUSTMENT TO THE ALP. THIS DIRECTION OF THE TPO WAS CARRIED OUT BY THE AO BY MAKING ADDITION OF THE SAID SUM TO THE TOTAL INCOME OF THE ASSESSEE. 28. ON APPEAL BY THE ASSESSEE, THE CIT(APPEALS) HELD THAT COMPANIES CHOSEN BY THE TPO AS FINAL COMPARABLE COMPANIES WHOSE PROFIT MARGINS WERE TO BE COMPARED WITH THAT OF THE ASSESS EE, EVEN IF THEY HAD RELATED PARTY TRANSACTIONS (RPT) THEN SUCH COMPANIES SHOULD BE EXCLUDED FROM THE LIST OF COMPARABLE 21 IT(TP)A NO.620/BANG/2013 COMPANIES. THUS THE CIT(A) APPLIED 0% RPT AS A FILTER TO EXCLUDE COMPANIES FOR THE PURPOSE OF COMPARISON. AS A RESULT OF THIS RULING BY THE CIT(APPEALS), 12 OUT OF 17 COMPARABLE COMPANIES FINALLY CHOSEN BY THE TPO STOOD EXCLUDED. OUT OF 12 COMPANIES EXCLUDED BY APPLYING 0% RPT FILTER, 5 COMPANIES WERE ALSO REJECTED AS NOT COMPARABLE FOR THE REASON THAT THEIR TURNOVER WAS VERY HIGH COMPARE D TO THE TURNOVER OF THE ASSESSEE. 29. THE CIT(APPEALS) ALSO HELD THAT COMPANIES HAVING ABNORMAL TURNOVER CANNOT BE REGARDED AS COMPARABLE WITH THAT OF THE ASSESSEE. THE CIT(APPEALS) FOLLOWING THE DECISION OF THE ITAT IN THE CASE OF GENESIS INTEGRATING SY STEMS (INDIA) PVT. LTD. V. DCIT, ITA NO.1231/BANG/2010, WAS OF THE VIEW THAT FOR THE PURPOSE OF COMPARISON OF TURNOVER, COMPANIES WILL HAVE TO BE CATEGORIZED AS COMPANIES HAVING TURNOVER OF < 200 CRORES AS SMALL, COMPANIES HAVING TURNOVER OF 200 & 2000 CR ORES AS MEDIUM AND COMPANIES HAVING TURNOVER > 2000 CRORES AS LARGE. BY DOING SO, THE CIT(APPEALS) FOUND THAT THE ASSESSEE S TURNOVER WAS ONLY 109.86 CRORES AND THEREAFTER COMPARABLE COMPANIES CHOSEN BY THE TPO WHICH HAD TURNOVER BEYOND 200 CRORES HAD TO B E EXCLUDED FROM THE LIST OF COMPARABLE COMPANIES, AS THEY WERE MEDIUM SIZED COMPANIES AND ASSESSEE WAS A SMALL SIZED COMPANY AND THEREFORE IT CANNOT BE COMPARED. BY THIS PROCESS, 5 COMPANIES WERE EXCLUDED FROM THE LIST OF COMPARABLE COMPANIES. THESE 5 COMP ANIES, AS WE HAVE ALREADY MENTIONED, ALSO GOT EXCLUDED BY APPLICATION OF RPT FILTER. THESE COMPANIES ARE: - (1) IGATE SOLUTIONS LTD. (2) INFOSYS TECHNOLOGIES LTD. (3) SATYAM COMPUTER SERVICES LTD. (4) L&T INFOTECH LTD. AND (5) FLEXTRONICS SOFTWARE SYST EMS LTD. 6.5.2 RESPECTFULLY FOLLOWING THE AFORESAID DECISION OF THE CO - ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF DELL INTERNATIONAL SERVICES INDIA (P) 22 IT(TP)A NO.620/BANG/2013 LTD. (SUPRA), WE UPHOLD THE DECISION OF THE LEARNED CIT (APPEALS) IN APPLYING THE UPPER TURNO VER FILTER AND EXCLUDING THE FIVE COMPANIES LISTED ABOVE (AT PARA 6.1 OF THIS ORDER) FROM THE LIST OF COMPARABLE COMPANIES. 7. GROUND NO.3 - ABNORMAL PROFITS. 7.1 IN GROUND NO.3 (SUPRA), REVENUE AS S AILS THE DECISION OF THE LEARNED CIT (APPEAL S) IN THE IMPUGNED ORDER IN EXCLUDING COMPANIES WITH ABNORMAL PROFIT MARGINS FROM THE FINAL SET OF COMPARABLE COMPANIES. REVENUE CONTENDS THAT THE LEARNED CIT (APPEALS) HAS SOUGHT TO EXCLUDE COMPANIES WITH ABNORMAL PROFITS EVEN WITHOUT DEFINING WHAT CONST ITUTES ABNORMAL PROFITS FILTER AND HOW THE SAME IS DETERMINED AND THEREBY ERRED IN EXCLUDING THE COMPARABLE COMPANIES (I) EXENSYS SOFTWARE SOLUTIONS LTD. AND (II) THIRDWARE SOLUTIONS LTD. 7.2.1 ACCORDING TO THE LEARNED AUTHORISED REPRESENTATIVE FOR THE ASSESSEE, EXENSYS SOFTWARE SOLUTIONS LTD. IS FUNCTIONALLY DIFFERENT; HAS SIGNIFICANT INTANGIBLES AND IT HAS NO SEGMENTAL DETAILS. THEREFORE, IT WAS SUBMITTED THAT BESIDES BEING A SUPER PROFIT COMPANY, THERE ARE MANY OTHER REASONS AS TO WHY THIS COMPA NY SHOULD NOT BE TREATED AS COMPARABLE TO THE ASSESSEE. 23 IT(TP)A NO.620/BANG/2013 7.2.2 AS REGARDS THIRDWARE SOLUTIONS L T D., THE LEARNED AUTHORISED REPRESENTATIVE FOR THE ASSESSEE CONTENDED THAT THIS COMPANY IS FUNCTIONALLY DIFFERENT FROM THE ASSESSEE AS IT HAS DIVERSE FUNCT IONS; WHICH INCLUDE SOFTWARE DEVELOPMENT SERVICES, PRODUCT DEVELOPMENT AND TRADING IN SOFTWARE LICENSES. THEREFORE , IT IS SUBMITTED THAT APART FRO M BEING A SUPER PROFIT COMPANY, THERE ARE OTHER REASONS AS TO WHY THIS COMPANY SHOULD NOT BE TREATED AS COM PARABLE TO THE ASSESSEE. 7.2.3 IN SUPPORT OF THE ASSESSEE'S ABOVE CONTENTIONS, THE LEARNED AUTHORISED REPRESENTATIVE PLACED RELIANCE ON THE DECISION OF THE CO - ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF ITO VS. NET DEVICES INDIA PVT. LTD. (TS 354 ITAT 2016 (BANG) TP) ALSO FOR ASSESSMENT YEAR 2005 - 06; WHEREIN THESE TWO COMPANIES HAVE BEEN EXCLUDED ON GROUNDS OF FUNCTIONAL DISSIMILARITY. 7.3.1 WE HAVE HEARD THE RIVAL CONTENTIONS, PERUSED AND CAREFULLY CONSIDERED THE MATERIAL ON REC ORD; INCLUDING THE JUDICIAL PRONOUNCEMENTS CITED. IT IS NOW SETTLED PRINCIPLE, UPHELD IN SEVERAL DECISIONS THAT COMPANIES CANNOT BE EXCLUDED FROM THE SET OF COMPARABLES ONLY BECAUSE OF ABNORMAL PROFITS, AND THE MATTER OF 24 IT(TP)A NO.620/BANG/2013 COMPARABILITY ANALYSIS IN SUCH CA SES WOULD REQUIRE FURTHER INVESTIGATION TO ASCERTAIN THE REASONS FOR UNUSUALLY HIGH PROFITS IN ORDER TO ESTABLISH WHETHER THE ENTITIES WITH SUCH HIGH PROFITS CAN BE TAKEN AS COMPARABLE OR NOT. AS OBSERVED IN THE EARLIER PARAGRAPHS, THERE IS NO DISCUSSION BY THE LEARNED CIT (APPEALS) IN THE IMPUGNED ORDER ON THE ISSUE OF ABNORMAL PROFITS; EVEN THOUGH THERE WAS A CAPTION TO THIS EFFECT AND THEREFORE THE COMPARABILITY OR OTHERWISE OF THESE TWO COMPANIES NAMELY, M/S. EXENSYS SOFTWARE SOLUTIONS LTD. AND M/S. THIRDWARE SOLUTIONS LTD. HAS NOT BEEN DISCUSSED AT ALL. FURTHER, THE ASSESSEE HAS ALSO RAISED ISSUES / ARGUMENTS OF NON - COMPARABILITY DUE TO OTHER REASONS ALSO, WHICH REQUIRE TO BE EXAMINED. IN VIEW OF THE ABOVE FACTUAL MATRIX OF THE CASE, WE DEEM IT A PPROPRIATE TO REMAND THE ISSUE OF COMPARABILITY OF THE TWO COMPANIES, (I) M/S. EXENSYS SOFTWARE SOLUTIONS LTD. AND (II) M/S. THIRDWARE SOLUTIONS LTD. TO THE FILE OF THE LEARNED CIT (APPEALS) FOR PROPER EXAMINATION, DISCUSSION AND ADJUDICATION ON TH E POINTS RAISED BY THE ASSESSEE ON THE COMPARABILITY OF THESE TWO COMPANIES. NEEDLESS TO ADD THE ASSESSEE SHALL BE AFFORDED ADEQUATE OPPORTUNITY OF BEING HEARD AND FILE DETAILS / SUBMISSIONS, WHICH SHALL BE DULY CONSIDERED BEFORE DECIDING THE ISSUE. WE H OLD AND DIRECT ACCORDINGLY. 25 IT(TP)A NO.620/BANG/2013 CONSEQUENTLY, GROUND NO.3 OF REVENUE S APPEAL IS ALLOWED FOR STATISTICAL PURPOSES. 8. GROUND NO.4 8.1 IN THIS GROUND (SUPRA), REVENUE HAS ASSAILED THE DECISION OF THE LEARNED CIT (APPEALS) IN REJECTING THE DIMINISHING RE VENUE FILTER USED BY THE TPO TO EXCLUDE COMPANIES NOT REFLECTING THE INDUSTRY TREND. 8.2 ON A PERUSAL OF THE IMPUGNED ORDER, WE FIND THAT NONE OF THE COMPARABLE COMPANIES HAVE BEEN EITHER EXCLUDED OR INCLUDED BY THE LEARNED CIT (APPEALS) DUE TO DECISI ON ON THIS FILTER. AS SUCH, THIS GROUND NO.4 IS ACADEMIC, NEED S NO ADJUDICATION AND IS ACCORDINGLY DISMISSED AS INFRUCTUOUS. 9. GROUND NOS.5 O 7 - DIFFERENT ACCOUNTING YEAR QUINTEGRA SOLUTIONS L TD. 9.1 IN THESE GROUNDS (SUPRA), REVENUE HAS ASSAILED THE DECISION OF THE LEARNED CIT (APPEALS) IN DISAPPROVING THE APPLICATION OF THE DIFFERENT ACCOUNTING YEAR FILTER AND THEREBY INCLUDING M/S. QUINTEGRA SOLUTIONS LTD. AS A COMPARABLE COMPANY. REV ENUE ASSAILS THE ORDER OF THE LEARNED 26 IT(TP)A NO.620/BANG/2013 CIT (APPEALS) DIRECTING THE TPO TO ADOPT THE MARGIN AT 8.77%, BEING THE AVERAGE OF THE MARGINS OF M/S. QUINTEGRA SOLUTIONS LTD. FOR THE F.Y. ENDING 30.09.2004 AND 30.9.2005. BEFORE US, THE LEARNED DEPARTMENTAL REPRESE NTATIVE ARGUED THAT THE DECISION OF THE LEARNED CIT (APPEALS) WAS PATENTLY WRONG AS THE DIFFERENT ACCOUNTING YEAR FILTER IS A VALID FILTER CONSISTENTLY APPLIED BY TPO S FOR SEVERAL YEARS. FURTHER, THE LEARNED CIT (APPEALS) S DECISION TO ADOPT AVERAGE M ARGIN IN THIS CASE IS TOTALLY WRONG, AS THE CIT (APPEALS) HIMSELF HAD REJECTED THE USE OF MULTIPLE YEAR DATA IN HIS ORDER. 9.2 PER CONTRA, THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE SUPPORTED THE IMPUGNED ORDER OF THE LEARNED CIT (APPEALS) AND IN THIS CONTEXT PLACED RELIANCE ON THE DECISION OF THE ITAT, DELHI BENCH IN THE CASE OF EXEVO INDIA PVT. LTD. VS. ITO (2016) 72 TAXMANN.COM 339 (DELHI TRIB.) 9.3.1 WE HAVE HEARD THE RIVAL CONTENTIONS, PERUSED AND CAREFULLY CONSIDERED THE MATERI AL ON RECORD. IN OUR CONSIDERED VIEW, THE RELIANCE PLACED BY THE ASSESSEE ON THE TRIBUNAL DECISION IN THE CASE OF EXEVO INDIA PVT. LTD. (SUPRA) IS MISPLACED. IN THE SAID DECISION, IT HAS BEEN HELD THAT IF 27 IT(TP)A NO.620/BANG/2013 A COMPARABLE IS FUNCTIONALLY THE SAME AS THE TE STED PARTY, THEN THE SAME CANNOT BE REJECTED MERELY ON THE GROUND THAT THE DATA FOR THE ENTIRE FINANCIAL YEAR IS NOT AVAILABLE. IF FROM THE AVAILABLE DATA ON RECORD, THE RESULTS OF THE FINANCIAL YEAR CAN BE REASONABLY EXTRAPOLATED, THEN THE COMPARABLE CAN NOT BE EXCLUDED SOLELY ON THE GROUND OF DIFFERENT ACCOUNTING YEAR. THEREFORE, THE DECISION THAT COMPANIES HAVING DIFFERENT FINANCIAL YEAR ENDING CAN BE COMPARED IS SUBJECT TO THE CONDITION THAT THE RESULTS CAN BE REASONABLY EXTRAPOLATED FROM THE DATA AVAI LABLE ON RECORD. 9.3.2 IN THE CASE ON HAND, THE ASSESSEE HAS NOT FURNISHED ANY DETAILS OF THE FINANCIAL RESULTS OF THE COMPANY. IT IS NOT KNOWN AS TO WHETHER THE QUARTERLY RESULTS OF THE COMPANY ARE AVAILABLE ON RECORD. IT IS ALSO NOT KNOWN WHETHER S UCH RESULTS, EVEN IF AVAILABLE, ARE RELIABLE OR NOT. IT IS ALSO NOT KNOWN WHETHER FROM SUCH DETAILS, THE RESULTS CAN BE EXTRAPOLATED OR NOT. NO EVIDENCE HAS BEEN BROUGHT ON RECORD TO SUBSTANTIATE THE ABOVE. IN THE ABSENCE OF ANY DETAILS, WE ARE UNABLE TO AGREE / CONCUR WITH THE ASSESSEE'S CONTENTION. 28 IT(TP)A NO.620/BANG/2013 9.3.3 AS REGARDS THE COMPUTATION OF MARGIN, IT IS SETTLED PRINCIPLE THAT ONLY THE CURRENT FINANCIAL YEAR S DATA HAS TO BE CONSIDERED ; WHICH HAS NOT BEEN FOLLOWED BY THE LEARNED CIT (APPEALS). NO REA SONS HAVE BEEN ADDUCED BY THE LEARNED CIT (APPEALS) FOR HIS DIRECTION THAT THE AVERAGE OF TWO YEARS MARGIN HAS TO BE TAKEN AS THE MARGIN IN THIS CASE. IN THIS VIEW OF THE MATTER, WE DO NOT AGREE WITH THE DECISIONS OF THE LEARNED CIT (APPEALS) ON BOTH DISA PPROVING OF THE DIFFERENT ACCOUNTING YEAR FILTER AND IN ADOPTING THE AVERAGE OF TWO YEARS MARGIN, AND CONSEQUENTLY SET ASIDE THE ORDERS OF THE LEARNED CIT (APPEALS) ON THIS ISSUE AND RESTORE THAT OF THE TPO. THE GROUND NOS.5 TO7 OF REVENUE ARE ALLOWED. 10 . GROUND N O .8 EXCLUSION OF TATA ELXSI LTD. 10.1 IN THIS GROUND (SUPRA), REVENUE ASSAILS THE DECISION OF THE LEARNED CIT (APPEALS) IN EXCLUDING THIS COMPANY FROM THE LIST OF COMPARABLES. REVENUE CONTENDS THAT THIS COMPANY SATISFIES ALL THE QUALITATI VE AND QUANTITATIVE FILTERS APPLIED BY THE TPO AND THEREFORE THE LEARNED CIT (APPEALS) ERRED IN EXCLUDING IT FROM THE LIST OF COMPARABLES. 10.2 PER CONTRA, THE LEARNED AUTHORISED REPRESENTATIVE FOR THE ASSESSEE CONTENDS THAT THIS COMPANY IS FUNCTIONAL LY DIFFERENT AND 29 IT(TP)A NO.620/BANG/2013 PERFORMS DIVERSE FUNCTIONS SUCH AS DEVELOPMENT OF NICHE PRODUCTS. IN SUPPORT OF THIS CONTENTION, THE LEARNED AUTHORISED REPRESENTATIVE PLACED RELIANCE ON THE DECISION OF THE CO - ORDINATE BENCH IN THE ASSESSEE'S OWN CASE FOR ASSESSMENT YEA R 2009 - 10 IN IT(TP)A NOS.49 & 97/BANG/2014 AND ALSO ON THE DECISION OF BANGALORE TRIBUNAL IN THE CASE OF ITO VS. NET DEVICES INDIA (P) LTD. [TS - 354 - ITAT - 2016 (BANG) TP]. 10.3.1 WE HAVE HEARD THE RIVAL CONTENTIONS, PERUSED AND CAREFULLY CONSIDERED THE M ATERIAL ON RECORD. WE FIND FROM THE IMPUGNED ORDER, THAT THE LEARNED CIT (APPEALS) HAS EXAMINED THE ANNUAL REPORT OF M/S. TATA ELXSI LTD. AND AFTER ANLAYSING THE FACTS STATED THEREIN, RENDERED A FINDING THAT THIS COMPANY WAS NOT ONLY ENGAGED IN DEVELOPME NT OF SOFTWARE SERVICES BUT OTHER ACTIVITIES ALSO. FURTHER, THERE WAS NO BREAK UP OR INFORMATION ON SEGMENTAL DETAILS. THE LEARNED CIT (APPEALS) HAS ALSO RELIED UPON THE DECISION OF THE ITAT, MUMBAI IN THE CASE OF TELECORDIA TECHNOLOGIE S INDIA PVT. LTD. (ITA NO.7821/MUM/2011). 10.3.2 WE ALSO FIND THAT THE CO - ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF NET DEVICES INDIA PVT. LTD. (SUPRA) FOR THE SAME ASSESSMENT YEAR 2005 - 06 HAS DIRECTED EXCLUSION OF THIS COMPANY FROM THE SET OF 30 IT(TP)A NO.620/BANG/2013 COMPARABLES, BY REL YING ON THE DECISION OF THE TRIBUNAL IN THAT ASSESSEE'S OWN CASE FOR ASSESSMENT YEAR 2006 - 07 IN ITA NO.1485/BANG/2010. THE RELEVANT PARAGRAPHS AT PARAS 18.4.1 TO 18.4.3 THEREOF IS EXTRACTED HEREUNDER : - 18.4.3 WE HAVE HEARD THE RIVAL SUBMISSIONS AS WELL AS CONSIDERED THE RELEVANT MATERIAL ON RECORD. AT THE OUTSET, WE NOTE THAT THE FUNCTIONAL COMPARABILITY HAS BEEN CONSIDERED BY THIS TRIBUNAL IN ASSESSEE'S OWN CASE FOR THE ASSESSMENT YEAR 2006 - 07 VIDE ORDER DT.30.6.2015 IN ITA NO.1485/BANG/2010 I N PARA 13 TO 18 AS UNDER : 13. HAVING REGARD TO THE RIVAL CONTENTIONS AND THE MATERIAL ON RECORD, WE FIND THAT BEING THE VERY SAME ASSESSMENT YEAR VIZ., 2006 - 07 IN THE CASE OF M/S.ARIBA TECHNOLOGIES INDIA PVT. LTD. THIS TRIBUNAL HAD OCCASION TO GO INTO THE COMPARABILITY OF THESE COMPANIES WITH THE SAID COMPANY AND THE TRIBUNAL HAS HELD IT TO BE FUNCTIONALLY DISSIMILAR FROM THE SIMILAR ACTIVITY OF SOFTWARE DEVELOPMENT SERVICE. WE FIND THAT THE TRIBUNAL, AT PARA.12 & 13 OF ITS ORDER, HAS HELD AS UNDER: 12. THE FOLLOWING WERE THE RELEVANT OBSERVATIONS OF THE TRIBUNAL ON THE AFORESAID COMPARABLE COMPANIES IN THE CASE OF TRIOLOGY E - BUSINESS SOFTWARE INDIA PVT.LTD.(SUPRA): XXXXXX XXXXXX 17. AS FAR AS COMPARABLE COMPANY CHOSEN BY THE TPO VIZ., TATA ELXSI LT D., IS CONCERNED, THE COMPARABILITY OF THE AFORESAID COMPANY WITH THAT OF THE SOFTWARE SERVICE PROVIDER SUCH AS THE ASSESSEE WAS CONSIDERED BY THE MUMBAI BENCH OF THIS TRIBUNAL IN THE CASE OF LOGICA PVT.LTD. IT (TP) 1129/BANG/2011 AY 07 - 08) WHEREIN ON THE COMPARABILITY OF THE AFORESAID COMPANY, THE TRIBUNAL HELD AS FOLLOWS: - 14. AS FAR AS COMPARABLE AT SL.NO.6 & 24 ARE CONCERNED, THE COMPARABILITY OF THE AFORESAID TWO COMPANIES WITH THAT OF THE SOFTWARE SERVICE PROVIDER WAS CONSIDERED BY THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF TELCORDIA TECHNOLOGIES INDIA PRIVATE LTD. (SUPRA) WHEREIN ON THE AFORESAID TWO COMPANIES, THE TRIBUNAL HELD AS FOLLOWS: - 7.7.TATA ELXSI LIMITED.: FROM THE FACTS AND MATERIAL ON RECORD AND SUBMISSIONS MADE BY THE LEARNED A R, IT IS SEEN THAT THE TATA ELXSI IS ENGAGED IN DEVELOPMENT OF NICHE PRODUCT AND DEVELOPMENT SERVICES, WHICH IS ENTIRELY DIFFERENT FROM THE ASSESSEE COMPANY. WE AGREE WITH THE CONTENTION OF THE LEARNED AR THAT THE NATURE OF PRODUCT DEVELOPED AND SERVICES P ROVIDED BY THIS COMPANY ARE DIFFERENT FROM THE ASSESSEE AS HAVE BEEN NARRATED IN PARA 6.6 ABOVE. EVEN THE SEGMENTAL DETAILS FOR REVENUE SALES HAVE NOT BEEN PROVIDED BY THE TPO SO AS TO 31 IT(TP)A NO.620/BANG/2013 CONSIDER IT AS A COMPARABLE PARTY FOR COMPARING THE PROFIT RATIO FROM P RODUCT AND SERVICES. THUS, ON THESE FACTS, WE ARE UNABLE TO TREAT THIS COMPANY FIT FOR COMPARABILITY ANALYSIS FOR DETERMINING THE ARMS LENGTH PRICE FOR THE ASSESSEE, HENCE, SHOULD BE EXCLUDED FROM THE LIST OF COMPARABLE PARTIES. 15. IN VIEW OF THE ABOVE , THE LD. COUNSEL FOR THE ASSESSEE FAIRLY ADMITTED THAT COMPARABLE COMPANY AT SL.NO.6 VIZ., FLEXTRONICS SOFTWARE SYSTEMS PVT. LTD. SHOULD BE TAKEN AS A COMPARABLE, WHILE COMPARABLE AT SL.NO.24 VIZ., TATA ELXSI LTD. SHOULD BE REJECTED AS A COMPARABLE. 18 . IN VIEW OF THE AFORESAID DECISION, WE HOLD THAT TATA ELXSI HAS TO BE EXCLUDED FROM THE LIST OF COMPARABLE CHOSEN BY THE TPO. RESPECTFULLY FOLLOWING THE SAME, WE DIRECT THE AO TO EXCLUDE THESE COMPANIES FROM THE FINAL LIST OF COMPARABLES. WE FIND THA T THERE IS NO CHANGE IN THE BUSINESS ACTIVITY OF THIS COMPANY IN THE YEAR UNDER CONSIDERATION IN COMPARISON TO THE ASSESSMENT YEAR 2006 - 07. WE FURTHER NOTE THAT A SIMILAR VIEW HAS BEEN TAKEN BY THIS TRIBUNAL IN THE OTHER CASES AS RELIED UPON BY THE ASSESS EE PERTAINING TO THE ASSESSMENT YEAR 2005 - 06. ACCORDINGLY, BY FOLLOWING THE EARLIER DECISIONS OF THIS TRIBUNAL, WE ARE OF THE VIEW THAT THIS COMPANY CANNOT BE CONSIDERED AS A GOOD COMPARABLE TO THE ASSESSEE. HENCE, THE ASSESSING OFFICER / TPO IS DIRECTED TO EXCLUDE THIS COMPANY FROM THE LIST OF COMPARABLES. 10.3.3 IN THE CASE ON HAND FOR ASSESSMENT YEAR 2009 - 10 (SUPRA) THIS COMPANY WAS HELD TO BE FUNCTIONALLY NOT COMPARABLE TO THE ASSESSEE BY THE ORDER OF THE CO - ORDINATE BENCH OF THIS TRIBUNAL. IN THE CITED CASE (SUPRA), THE CO - ORDINATE BENCH HAS GIVEN A FINDING THAT THERE IS NO CHANGE IN THE BUSINESS ACTIVITY OF THIS COMPANY AND HENCE THE FINDING IS APPLICABLE TO THE CASE ON HAND ALSO. IN THE ABOVE FACTUAL AND LEGAL MATRIX OF THE CASE, WE UPHOL D THE DECISION OF THE LEARNED CIT (APPEALS) IN 32 IT(TP)A NO.620/BANG/2013 EXCLUDING THIS COMPANY FROM THE SET OF COMPARABLES. CONSEQUENTLY, GROUND NO.8 OF REVENUE S APPEAL IS DISMISSED. 11. GROUND NO.9 - EXCLUSION OF (1) BODHTREE CONSULTING LTD. AND (2) GEOMETRIC SOFTWARE SOLUTIONS COMPANY LTD. 11.1 IN THIS GROUND (SUPRA), REVENUE ASSAILS THE DECISION OF THE LEARNED CIT (APPEALS) IN EXCLUDING THE ABOVE TWO COMPANIES FROM THE SET OF COMPARABLES. REVENUE CONTENDS THAT THESE CO MPANIES SATISFY ALL THE QUALITATIVE AND QUANTITATIVE FILTERS APPLIED BY THE TPO AND HENCE THE LEARNED CIT (APPEALS) ERRED IN DIRECTING THEIR EXCLUSION FROM THE SET OF COMPARABLES. 11.2 PER CONTRA, THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE CO NTENDED THAT THESE TWO COMPANIES ARE FUNCTIONALLY DIFFERENT FROM THE ASSESSEE IN THE CASE ON HAND. IT WAS SUBMITTED THAT BODHTREE CONSULTING LTD., IS ENGAGED IN PRODUCT DEVELOPMENT AND ITES AND HAS A DIFFERENT REVENUE RECOGNITION POLICY ON ACCOUNT OF WHIC H ITS MARGINS HAVE WIDELY FLUCTUATED OVER VARIOUS YEARS. AS REGARDS GEOMETRIC SOFTWARE SOLUTIONS LTD., IT WAS SUBMITTED THAT THIS COMPANY IS FUNCTIONALLY DISSIMILAR, PERFORMING DIVERSE FUNCTIONS AND SEGMENTAL DETAILS ARE NOT AVAILABLE. IN 33 IT(TP)A NO.620/BANG/2013 SUPPORT OF TH E ASSESSEE'S CONTENTIONS, THE LEARNED AUTHORISED REPRESENTATIVE PLACED RELIANCE ON THE DECISION OF THE CO - ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF NET DEVICES INDIA (P) LTD (SUPRA). 11.3.1 WE HAVE CONSIDERED THE RIVAL CONT ENTI ONS AND PERU S ED AN D CAREFULLY CONSIDERED THE MATERIAL ON RECORD, INCLUDING THE JUDICIAL PRONOUNCEMENT CITED (SUPRA). WE FIND THAT IN THE CITED CASE, NAMELY NET DEVICES INDIA PVT. LTD. (SUPRA), BODHTREE CONSULTING LTD. HAS BEEN EXCLUDED ON THE BASIS OF RPT FILTER. AS THI S IS NOT A GROUND IN THE CASE ON HAND, THIS DECISION WOULD NOT BE OF ANY HELP TO THE ASSESSEE. IN THE ASSESSEE'S OWN CASE FOR ASSESSMENT YEAR 2009 - 10 (SUPRA), THE TRIBUNAL HAS EXCLUDED THIS COMPANY FROM THE SET OF COMPARABLE BY RELYING ON THE DECISION I N THE CASE OF INFINERA INDIA PVT. LTD. VS. ITO (72 TAXMANN.COM 68). WE, HOWEVER, NOTE THAT THERE HAS NEITHER BEEN DISCUSSION THEREIN OF THE FUNCTIONAL PROFILE OF INFINERA INDIA PVT. LTD. NOR HAS ANY MATERIAL BEEN BROUGHT ON RECORD TO DEMONSTRATE THAT THE FUNCTIONAL PROFILE OF THE ASSESSEE WAS THE SAME IN ASSESSMENT YEAR 2005 - 06 AND IN ASSESSMENT YEAR 2009 - 10. IN THE ABSENCE OF ANY DETAILS OF THE FUNCTIONAL PROFILE OF THE RESPECTIVE ASSESSMENT YEARS, THE DECISION OF THE CO - ORDINATE BENCH IN 34 IT(TP)A NO.620/BANG/2013 THE ASSESSEE'S OWN CASE FOR ASSESSMENT YEAR 2009 - 10 CANNOT BE MECHANICALLY APPLIED FOR ASSESSMENT YEAR 2005 - 06, WHICH IS BEFORE US FOR CONSIDERATION. 11.3.2 IT IS ALSO SEEN THAT THE LEARNED CIT (APPEALS) HAS RENDERED A FINDING THAT THE COMPANY, BODHTREE CONSULTING LTD., IS ENGAGED IN PRODUCT DEVELOPMENT, SOFTWARE DEVELOPMENT AND ITES AND SEGMENTAL DETAILS ARE NOT AVAILABLE. THIS FINDING OF THE LEARNED CIT (APPEALS) HAS NOT BEEN CONTROVERTED BY THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR REVENUE. IN THIS VIEW OF TH E MATTER, WE FIND NO REASON TO INTERFERE WITH THE DECISION RENDERED BY THE LEARNED CIT (APPEALS) IN EXCLUDING THIS COMPANY FROM THE LIST OF COMPARABLES. 11.4.1 AS REGARDS M/S. GEOMETRIC SOFTWARE SOLUTIONS CO. LTD., THE LEARNED CIT (APPEALS) HAS REN DERED A FINDING THAT THIS COMPANY IS ENGAGED IN DEVELOPING AND LICENSING OF PRODUCTS AND PRODUCT LIFE CYCLE MANAGEMENT SERVICES WHICH ARE NOT SIMILAR TO THE FUNCTIONS OF THE ASSESSEE. THE LEARNED CIT (APPEALS) HAS ALSO OBSERVED THAT THE REVENUE BREAK UP B ETWEEN PRODUCTS AND SERVICES IS NOT AVAILABLE AND THEREFORE DIRECTED EXCLUSION OF THIS COMPANY FROM THE SET OF COMPARABLES. THIS 35 IT(TP)A NO.620/BANG/2013 FINDING OF THE LEARNED CIT (APPEALS) THAT THIS COMPANY IS FUNCTIONALLY DISSIMILAR TO THE ASSESSEE, HAS NOT BEEN CONTROVERTED B Y THE LEARNED DEPARTMENTAL REPRESENTATIVE. IN THIS VIEW OF THE MATTER, WE FIND NO REASON TO INTERFERE WITH THE DECISION OF THE LEARNED CIT (APPEALS) IN DIRECTING EXCLUSION OF THIS COMPANY, M/S. GEOMETRIC SOFTWARE SOLUTIONS COMPANY LTD., FROM THE SET OF CO MPARABLES. 11.4.2 CONSEQUENTLY, WE DISMISS GROUND NO.9 OF REVENUE S APPEAL. 12. GROUND NO.10 INCLUSION OF VJIL CONSULTING LTD. 12.1 IN THIS GROUND, REVENUE ASSAILS THE DECISION OF THE LEARNED CIT (APPEALS) IN INCLUDING THIS COMPANY IN T HE SET OF COMPARABLES. ACCORDING TO REVENUE, THE LEARNED CIT (APPEALS) ERRED IN DOING SO SINCE THIS COMPANY FAILED TO SATISFY THE QUALITATIVE FILTERS APPLIED BY THE TPO AND THEREFORE WAS NOT AN APPROPRIATE COMPARABLE TO THE ASSESSEE IN THE CASE ON HAND. 1 2.2 PER CONTRA, THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE SUPPORTED THE DECISION OF THE LEARNED CIT (APPEALS) IN INCLUDING THIS COMPANY IN THE SET OF COMPARABLES AND IN SUPPORT OF THE ASSESSEE'S CONTENTIONS PLACED RELIANCE ON THE DECISION OF THE DELHI BENCH OF ITAT IN 36 IT(TP)A NO.620/BANG/2013 THE CASE OF QUALCOMM INDIA PVT. LTD. VS. ACIT (2013) 37 TAXMANN.COM 306 (DELHI TRIB.). 12.3.1 WE HAVE HEARD THE RIVAL CONTENTIONS, PERUSED AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD; INCLUDING THE JUDICIAL PRONOUN CEMENT CITED (SUPRA). THE LEARNED CIT (APPEALS), IN THE IMPUGNED ORDER, HAS OBSERVED THAT THE TPO, AFTER SELECTING THIS COMPANY AS A CO M PARABLE IN THE SHOW CAUSE NOTICE HAS REJECTED THIS COMPANY IN THE FINAL ORDER, WITHOUT ASSIGNING ANY PROPER REASONS. THE ONLY REASON GIVEN BY THE TPO FOR REJECTING THIS COMPANY IS THAT THE COMPANY HAS PAID SUBSTANTIAL AMOUNT AS VAT, WHICH INDICATED THAT THIS COMPANY IS NOT INTO SOFTWARE DEVELOPMENT SERVICES. THE LEARNED CIT (APPEALS) HELD THE AFORESAID OBSERVATION OF THE TPO TO BE FACTUALLY INCORRECT, AS THE VAT HAS BEEN PAID IN UK AND NOT IN INDIA. IN THIS VIEW OF THE MATTER, THE LEARNED CIT (APPEALS) HAS HELD THIS COMPANY TO BE A COMPARABLE COMPANY. 12.3.2 IN THE DECISION IN THE CASE OF QUALCOMM INDIA PVT. L TD. (SUPRA), CITED BY THE LEARNED AUTHORISED REPRESENTATIVE, THE DELHI TRIBUNAL HAS RENDERED A FINDING THAT THIS COMPANY I.E. VJIL CONSULTING LTD., IS PREDOMINANTLY AN EXPORTER OF SOFTWARE DEVELOPMENT SERVICES. 37 IT(TP)A NO.620/BANG/2013 THOUGH THIS DECISION IS FOR ASSESSMENT YEAR 2006 - 07, IT DOES SUPPORT THE FINDINGS RENDERED BY THE CIT (APPEALS) IN THE CASE ON HAND. BEFORE US, REVENUE HAS NOT BROUGHT ON RECORD ANY EVIDENCE TO CONTROVERT THE SAME. IN THIS FACTUAL AND LEGAL MATRIX OF THE CASE, WE FIND NO REASON TO INTERFERE WITH OR DEVIATE FROM THE DECISION OF THE LEARNED CIT (APPEALS) IN INCLUDING THIS COMPANY, VJIL CONSULTING LTD., IN THE FINAL SET OF COMPARABLES. 13. GROUND NO.11 - INCLUSION OF AKSHAY SOFTWARE TECHNOLOGIES LTD. 13.1 IN THIS GROUND, REVENUE ASSAILS THE DECISION OF THE LEARNED CIT (APPEALS) IN INCLUDING THIS COMPANY IN THE SET OF COMPARABLES TO THE ASSESSEE; ON THE GROUND THAT THIS IS NOT A PROPER COMPARABLE AS IT IS PREDOMINANTLY AN ON SITE COMPANY. 13.2 IN THE IMPUGNED ORDER, THE LEARNED CIT (APPEALS) HAS OBSERVED THAT THE TPO, AFTER SELECTING THIS AS A COMPARABLE IN THE SHOW CAUSE NOTICE, HAS REJECTED THIS WHILE SELECTING THE FINAL SET OF COMPARABLES ON THE GROUND OF ON - SITE FILTER ON THE BASIS OF DETAILS OBTAINED UNDER SECTION 133(6) OF TH E ACT. THE LEARNED CIT (APPEALS) HAS RENDERED A FINDING THAT THE REJECTION OF THIS COMPANY BY THE TPO IS BASED ON EXPENDITURE 38 IT(TP)A NO.620/BANG/2013 INCURRED ON FOREIGN BRANCH AND NOT ON THE BASIS OF ON - SITE REVENUES. THE LEARNED CIT (APPEALS) WAS OF THE VIEW THAT THE TPO S D ECISION IS BASED ON SURMISES AND MISPLACED UNDERSTANDING OF FOREIGN BRANCH EXPENSES AS ON - SITE REVENUE AND NOT BY ANY CORROBORATIVE EVIDENCE IN THIS REGARD. THIS FINDING OF THE LEARNED CIT (APPEALS) HAS NOT CONTROVERTED BY REVENUE BEFORE US. WE FIND THAT IN THE CITED DECISION, QUALCOMM INDIA (P) LTD. (SUPRA), THE DELHI BENCH OF THE TRIBUNAL HAS RENDERED A FINDING THAT THI S COMPANY IS ENGAGED IN PROVISION OF SOFTWARE DEVELOPMENT SERVICES, WHICH IS FUNCTIONALLY SIMILAR TO TH A T OF THE ASSESSEE. THOUGH THIS DECISION (SUPRA) IS FOR ASSESSMENT YEAR, IT DOES SUPPORT THE FINDING OF THE LEARNED CIT (APPEALS) AND ALSO REVENUE HAS NOT BROUGHT ON RECORD ANY CONTRARY DECISION OR EVIDENCE TO CONTROVERT THE SAME. IN THIS VIEW OF THE MATTER, WE FIND NO REASON TO INTERFE RE WITH OR DEVIATE FROM THE DECISION OF THE LEARNED CIT (APPEALS) IN INCLUDING THIS COMPANY; AKSHAY SOFTWARE TECHNOLOGIES LTD., IN THE LIST OF COMPARABLES. CONSEQUENTLY, GROUND NO.11 OF REVENUE S APPEAL IS DISMISSED. 39 IT(TP)A NO.620/BANG/2013 14. GROUND NOS.12 TO 14 (SUPRA), ARE CONCEPTUAL GROUND S , ACADEMIC IN NATURE AND NOT HAVING BEEN URGED BEFORE US, ARE DISMISSED AS INFRUCTUOUS. 15. GROUND NOS.15 TO 17 COMPUTATION OF DEDUCTION UNDER SECTION 10A OF THE ACT. 15.1 THE LEARNED DEPARTMENTAL REPRESENTATIVE OF REVENUE WAS HEARD IN SUPPORT OF THE GROUNDS RAISED (SUPRA). 15.2 THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE SUBMITTED THAT THERE WAS NO ERROR ON THE PART OF THE LEARNED CIT (APPEALS) - 1, IN ALLOWING THE ASSESSEE'S CLAIM FOR DEDUCTION UNDER SECTION 10A OF THE ACT BY RELYING ON THE JUDGMENT OF THE KARNATAKA HIGH COURT IN THE CASE OF CIT VS. TATA ELXSI LTD. (349 ITR 98)(KAR). IT WAS FURTHER SUBMITTED THAT THIS ISSUE IS NOW COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF THE HON'BLE APEX CO URT IN THE CASE OF CIT V. HCL TECHNOLOGIES LTD. (2018) 93 TAXMANN.COM 33 (SC). 15.3.1 WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD; INCLUDING THE JUDICIAL 40 IT(TP)A NO.620/BANG/2013 PRONOUNCEMENT CITED. HE JURISDICTIONAL H IGH COURT OF KARNATAKA IN THE CASE OF CIT V TATA ELXSI LTD (349 ITR 98) (KAR) HAS HELD THAT WHEN CERTAIN EXPENSES ARE EXCLUDED FROM THE EXPORT TURNOVER FOR THE PURPOSES OF COMPUTING DEDUCTION ADMISSIBLE UNDER THE ACT; LIKE U/S. 10A OF THE ACT, SUCH EXPENSE S ARE ALSO TO BE EXCLUDED FROM TOTAL TURNOVER, AS EXPORT TURNOVER IS A PART OF TOTAL TURNOVER. THE DECISION IN THE CASE OF TATA ELXSI LTD (SUPRA) HAS ALSO BEEN FOLLOWED BY THE HON BLE COURT IN ITS ORDER IN THE CASE OF DCIT V MOTOR INDUSTRIES CO. LTD., (ITA NO. 776/2006, 744/2007 AND 1155/2006 DATED 13.06.2014), HOLDING THAT IF ANY EXPENDITURE IS SOUGHT TO BE REMOVED FROM EXPORT TURNOVER, THEN IT SHOULD ALSO BE REDUCED FROM TOTAL TURNOVER FOR THE PURPOSES OF COMPUTING THE ELIGIBLE DEDUCTION U/S. 10A OF THE A CT. THIS ISSUE IS NO LONGER RES INTEGRA, AND HAS BEEN DECIDED IN FAVOUR OF THE ASSESSEE AND AGAINST REVENUE BY THE DECISION OF THE HON'BLE APEX COURT IN THE CASE OF CIT V. HCL TECHNOLOGIES LTD. (2018) 93 TAXMANN.COM 33 (SC); WHEREIN AT PARAS 19 TO 21, IT H AS BEEN HELD AS UNDER : - 19. IN THE INSTANT CASE, IF THE DEDUCTIONS ON FREIGHT, TELECOMMUNICATION AND INSURANCE ATTRIBUTABLE TO THE DELIVERY OF COMPUTER SOFTWARE UNDER SECTION10A OF THE IT ACT ARE ALLOWED ONLY IN EXPORT TURNOVER BUT NOT FROM THE TOTAL TUR NOVER 41 IT(TP)A NO.620/BANG/2013 THEN, IT WOULD GIVE RISE TO INADVERTENT, UNLAWFUL, MEANINGLESS AND ILLOGICAL RESULT WHICH WOULD CAUSE GRAVE INJUSTICE TO THE RESPONDENT WHICH COULD HAVE NEVER BEEN THE INTENTION OF THE LEGISLATURE. 20. EVEN IN COMMON PARLANCE, WHEN THE OBJECT OF THE FORMULA IS TO ARRIVE AT THE PROFIT FROM EXPORT BUSINESS, EXPENSES EXCLUDED FROM EXPORT TURNOVER HAVE TO BE EXCLUDED FROM TOTAL TURNOVER ALSO. OTHERWISE, ANY OTHER INTERPRETATION MAKES THE FORMULA UNWORKABLE AND ABSURD. HENCE, WE ARE SATISFIED THAT SUCH DE DUCTION SHALL BE ALLOWED FROM THE TOTAL TURNOVER IN SAME PROPORTION AS WELL. 21. ON THE ISSUE OF EXPENSES ON TECHNICAL SERVICES PROVIDED OUTSIDE, WE HAVE TO FOLLOW THE SAME PRINCIPLE OF INTERPRETATION AS FOLLOWED IN THE CASE OF EXPENSES OF FREIGHT, TELECO MMUNICATION ETC., OTHERWISE THE FORMULA OF CALCULATION WOULD BE FUTILE. HENCE, IN THE SAME WAY, EXPENSES INCURRED IN FOREIGN EXCHANGE FOR PROVIDING THE TECHNICAL SERVICES OUTSIDE SHALL BE ALLOWED TO EXCLUDE FROM THE TOTAL TURNOVER. 15.3.2 IN THI S LEGAL AND FACTUAL MATRIX OF THE CASE, AS DISCUSSED ABOVE, RESPECTFULLY FOLLOWING THE DECISION OF THE HON'BLE APEX COURT IN THE CASE OF CIT VS. HCL TECHNOLOGIES L TD. (SUPRA) , WE DIRECT THE AO TO ALLOW ASSESSEE'S CLAIM FOR DEDUCTION UNDER SECTION 10A OF THE ACT . CONSEQUENTLY, THE GROUNDS RAISED BY REVENUE ARE DISMISSED. 42 IT(TP)A NO.620/BANG/2013 16. IN THE RESULT, REVENUE S APPEAL FOR ASSESSMENT YEAR 2005 - 06 IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON THE 7TH DAY OF SEPT. 201 8 . SD/ - (N.V. VASUDEVAN) JUDICIAL M EMBER SD/ - (JASON P BOAZ) ACCOUNTANT MEMBER BANGALORE, DT. 07 .09.2018 *REDDY GP COPY TO : 1 APPELLANT 4 CIT(A) 2 RESPONDENT 5 DR. ITAT, BANGALORE 3 CIT 6 GUARD FILE SENIOR PRIVATE SECRETARY INCOME TAX APPELLATE TRIBUNAL BANGALORE.