CAPGEMINI INDIA P. LTD, MUMBAI V. ADDL CIT RG 10(2), MUMBAI

ITA 7729/MUM/2010

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 48851 (ITAT-MUMBAI)
• Duration Of Justice: 6 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-05-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Next Hearing Date: 11-05-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 10-11-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: AJIT KUMAR SINHA
• Keywords: Business income; Depreciation; Transfer pricing; Opportunity of being heard; International transaction; Unabsorbed depreciation
• Section: 6; 92; 80HHC; 133(6)

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH, MUMBAI BEFORE SHRI D. K.AGARWAL (JM) AND SHRI RAJENDRA SI NGH(AM) ITA NO.7729/M/2010 ASSESSMENT YEAR 2006-07 CAPGEMINI INDIA PVT. LTD. THE ADDL.COMMISSIONER O F INCOME-TAX (FORMERLY CAPGEMINI CONSULTING INDIA RANGE -10(2), MUMBAI PVT.LTD.), C/O. KALYANIWALLA & MISTRY AAYAKAR BHAVA N, M.K. ROAD ARMY & NAVY BUILDING, 3 RD FLOOR MUMBAI 400 020. 148, MAHATMA GANDHI ROAD FORT, MUMBAI 400 001. PAN : AAACE2443A APPELLANT RESPONDENT ASSESSEE BY : SHRI M.M.GOLVALA, MR.AKRAM KH AN SHRI SANDEEP CHETIWAL REVENUE BY : SHRI AJIT KUMAR SINHA ORDER PER RAJENDRA SINGH (AM) THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST TH E ORDER DATED 30.08.2010 OF ADDITIONAL COMMISSIONER, RANGE-10(2) FOR THE ASSESSMENT YEAR 2006-07. THOUGH THE ASSESSEE IN THIS APPEAL HAS RAI SED SEVERAL GROUNDS OF APPEAL, EFFECTIVELY THERE WERE ONLY THREE GROUNDS W HICH RELATE TO ADJUSTMENT OF LOSS OF 10A UNIT AGAINST PROFIT OF OTHER UNITS; EXC LUSION OF DATA LINE COST FROM EXPORT TURNOVER; AND TRANSFER PRICING ADJUSTMENT, W HILE COMPUTING TOTAL INCOME. 2 2. WE FIRST TAKE UP THE DISPUTE RELATING TO ADJUSTM ENT OF LOSS FROM 10A UNIT AGAINST THE PROFITS OF OTHER UNITS. UNDER THE PROV ISIONS OF SECTION 10A, DEDUCTION IS ALLOWED IN RESPECT OF PROFITS AND GAIN DERIVED BY AN UNDERTAKING FROM THE EXPORT OF ARTICLES OR THINGS OR COMPUTER S OFTWARE FOR A PERIOD OF 10 CONSECUTIVE ASSESSMENT YEARS BEGINNING WITH THE YEA R IN WHICH THE UNDERTAKING BEGINS TO MANUFACTURE OR PRODUCE SUCH ARTICLE OR TH INGS OR COMPUTER SOFTWARE WHILE COMPUTING THE TOTAL INCOME. THE ASSESSEE HAD FOUR 10A UNITS TWO AT MUMBAI NAMELY MUMBAI-II AND MUMBAI III UNITS AND ON E EACH AT BANGALORE AND KOLKATA. THE ASSESSEE ALSO HAD ONE NON 10A UNIT AT MUMBAI, NAMELY, MUMBAI I UNIT. THE ASSESSEE DURING THE RELEVANT YE AR HAD CLAIMED DEDUCTIONS OF RS.22,42,07,255/- RS.11,77,03,498/- AND RS.6,11, 18,437/- IN RESPECT OF MUMBAI-II, MUMBAI-III AND BANGALORE UNIT RESPECTIVE LY. IN THE KOLKATA UNIT, THE ASSESSEE HAD INCURRED A LOSS OF RS.22,02,698/-. THE ASSESSEE HAD SET OFF THE LOSS FROM KOLKATA UNIT AGAINST INCOME FROM OTHER UN ITS AFTER CLAIMING DEDUCTION UNDER SECTION 10A IN RESPECT OF EACH UNIT. THE AO D URING THE ASSESSMENT PROCEEDINGS ASKED THE ASSESSEE TO EXPLAIN AS TO WHY THE LOSS FROM KOLKATA UNIT SHOULD NOT BE IGNORED AS INCOME WAS EXEMPT OR ALTER NATIVELY THE CLAIM OF DEDUCTION UNDER SECTION 10A SHOULD NOT BE REDUCED T O THAT EXTENT. THE ASSESSEE EXPLAINED THAT, IN VIEW OF THE AMENDED PRO VISIONS OF SECTION 10A FROM 1.4.2001, IT WAS NO LONGER AN EXEMPTED PROVISION BU T ONLY A DEDUCTION WAS ALLOWED UNDER SECTION 10A AND THEREFORE LOSS FROM T HE 10A UNIT HAS TO BE SET OFF AGAINST THE TAXABLE PROFITS OF OTHER BUSINESSES UNDER THE PROVISIONS OF SECTION 70. IT WAS ALSO SUBMITTED THAT DEDUCTION AL LOWABLE UNDER SECTION 10A WAS IN RESPECT OF A PARTICULAR UNDERTAKING AND NOT FROM THE TOTAL INCOME WHICH HAD ALSO BEEN CLARIFIED BY THE CIRCULAR ISSUED BY T HE CBDT. THE AO HOWEVER DID NOT ACCEPT THE ARGUMENTS ADVANCED AND HELD THAT TOT AL INCOME OF THE ASSESSEE WAS REQUIRED TO BE COMPUTED WITH RESPECT TO THE VAR IOUS UNDERTAKING AND 3 THEREAFTER DEDUCTION WAS REQUIRED TO BE GIVEN IN RE SPECT OF THESE UNITS FROM THE TOTAL INCOME. HE ACCORDINGLY REDUCED THE LOSS FROM KOLKATA UNIT FROM THE DEDUCTION CLAIMED IN RESPECT OF MUMBAI-II UNIT AND DEDUCTION TO THAT EXTENT IN RESPECT OF MUMBAI-II UNIT WAS THUS REDUCED. AGGRIEV ED BY THE SAID DECISION THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL. 2.1 BEFORE US THE LEARNED AR FOR THE ASSESSEE REITE RATED THE SUBMISSIONS MADE BEFORE THE AUTHORITY BELOW THAT AFTER THE AMEN DMENT OF SECTION 10A FROM ASSESSMENT YEAR 2001-02, ONLY DEDUCTION WAS ALLOWED IN RESPECT OF PROFIT DERIVED FROM THE UNDERTAKING AND IT WAS NO LONGER A N EXEMPTION PROVISION AND THEREFORE LOSS FROM A 10A UNIT HAS TO BE ADJUSTED A GAINST TAXABLE PROFIT OF OTHER UNITS. RELIANCE WAS PLACED ON THE JUDGMENT OF HONB LE HIGH COURT OF MUMBAI IN CASE OF HINDUSTAN UNI LIVER LTD. VS DCIT (325 ITR 1 02) AND ON THE DECISION OF THE TRIBUNAL IN CASE OF HONEY WELL INTERNATIONAL IN DIA PVT. LTD. VS DCIT (26 SOT 503). THE LEARNED DR ON THE OTHER HAND PLACED RELIA NCE ON THE ORDER OF THE AO. 2.2 WE HAVE PERUSED THE RECORDS AND CONSIDERED THE RIVAL CONTENTIONS CAREFULLY. THE DISPUTE IS REGARDING SET OFF OF LOSS OF A 10A UNIT AGAINST THE TAXABLE PROFIT OF OTHER UNITS. THE ASSESSEE HAD FOU R 10A UNITS IN RESPECT OF WHICH DEDUCTION UNDER SECTION 10A WAS ALLOWABLE AND ONE NON 10A UNIT. THE ASSESSEE HAD INCURRED LOSS FROM ONE 10A UNIT WHICH HAD BEEN SET OFF AGAINST THE TAXABLE PROFIT OF OTHER 10A UNITS. THE AO HOWEV ER TOOK THE VIEW THAT SINCE INCOME FROM 10A UNIT WAS EXEMPT, LOSS FROM 10A UNIT HAS TO BE IGNORED OR ALTERNATIVELY THE LOSS HAS TO BE ADJUSTED AGAINST T HE PROFIT OF ANOTHER 10A UNIT BEFORE ALLOWING DEDUCTION UNDER SECTION 10A. WE HAV E GONE THROUGH THE PROVISIONS OF SECTION 10A AND FIND THAT AS PER THE PROVISIONS IN FORCE PRIOR TO 4 ASSESSMENT YEAR 2001-02, THE PROFIT AND GAIN FROM T HE ELIGIBLE UNDERTAKING WAS NOT TO BE INCLUDED IN THE TOTAL INCOME WHICH MEANT THAT THE INCOME FROM THE ELIGIBLE UNIT WAS EXEMPT FROM TAX. HOWEVER, PROVISI ONS WERE AMENDED WITH EFFECT FROM ASSESSMENT YEAR 2001-02 AND AS PER THE AMENDED PROVISIONS, THE PROFIT AND GAIN DERIVED BY AN ELIGIBLE UNDERTAKING IS REQUIRED TO BE DEDUCTED FROM THE TOTAL INCOME. THUS FROM ASSESSMENT YEAR 20 01-02, SECTION 10A IS NO LONGER AN EXEMPTION PROVISION AND IT ALLOWS ONLY DE DUCTION FROM TOTAL INCOME. THE DEDUCTION IS TO BE ALLOWED IN RESPECT OF EACH E LIGIBLE UNDERTAKING SEPARATELY WHICH HAS ALSO BEEN CLARIFIED BY THE CBD T. WE ALSO NOTE THAT PRIOR TO ASSESSMENT YEAR 2001-02 WHEN SECTION 10A WAS AN EXE MPTION PROVISION, SECTION 10(6) PROVIDED RESTRICTION ON SET OFF AND C ARRIED FORWARD OF BUSINESS LOSS AND UNABSORBED DEPRECIATION. HOWEVER SUBSEQUEN TLY, SECTION 10(6) WAS AMENDED BY FINANCE ACT 2003 WITH EFFECT FROM ASSESS MENT YEAR 2001-02 AND SUCH RESTRICTION WAS WITHDRAWN WHICH WAS CONSISTENT WITH THE NEW SCHEME OF SECTION 10A WHICH IS A DEDUCTION PROVISION AND NOT EXEMPTION PROVISION FROM A.Y.2001-02. THEREFORE THE LOSS FROM 10A UNIT HAS T O BE ADJUSTED AGAINST TAXABLE PROFITS OF OTHER UNITS AFTER DEDUCTION UNDE R SECTION 10A HAS BEEN ALLOWED IN RESPECT OF EACH ELIGIBLE UNIT. SAME VIEW HAS BEEN TAKEN BY THE HONBLE HIGH COURT OF MUMBAI IN CASE OF HINDUSTAN U NI LIVER LTD. VS DCIT (SUPRA) IN WHICH IT WAS HELD THAT DEDUCTION HAS TO BE ALLOWED IN RESPECT OF THREE ELIGIBLE UNITS AND LOSS OF THE FOURTH 10A UNI T HAS TO BE SET OFF AGAINST THE NORMAL BUSINESS INCOME. THE TRIBUNAL IN CASE OF HON EY WELL INTERNATIONAL INDIA PVT.LTD. VS DCIT (SUPRA) HAS ALSO FOLLOWED THE SAME VIEW. THEREFORE RESPECTFULLY FOLLOWING THE ABOVE JUDGMENTS, THE ORD ER OF THE ADDITIONAL CIT CANNOT BE SUSTAINED. WE ACCORDINGLY SET ASIDE THE O RDER OF THE ADDITIONAL CIT AND ALLOW THE CLAIM OF THE ASSESSEE. 5 3. THE SECOND DISPUTE IS REGARDING DEDUCTION OF DAT A LINE COST FROM EXPORT TURNOVER WHILE COMPUTING DEDUCTION UNDER SECTION 10 A. THE ASSESSEE HAD INCURRED DATA LINE COST AMOUNTING TO RS.1,68,47,257 /-; RS.1,13,54,505/-; AND RS.1,07,75,007/- RESPECTIVELY IN RESPECT OF MUMBAI- II UNIT, MUMBAI-III UNIT AND BANGALORE UNIT. THE AO ASKED THE ASSESSEE TO EXPLAI N AS TO WHY THE ABOVE EXPENDITURE SHOULD NOT BE DEDUCTED FROM THE EXPORT TURNOVER IN VIEW OF THE PROVISIONS OF EXPLANATION 2(IV) OF SECTION 10A AS P ER WHICH EXPENSES OF FREIGHT, TELECOMMUNICATION CHARGES AND INSURANCE CHARGES ATT RIBUTABLE TO THE DELIVERY OF ARTICLE OR THINGS OR COMPUTER SOFTWARE OUTSIDE I NDIA OR EXPENSES INCURRED IN FOREIGN EXCHANGE IN PROVIDING TECHNICAL SERVICES OU TSIDE INDIA WERE REQUIRED TO BE DEDUCTED FROM EXPORT TURNOVER. THE ASSESSEE EXPL AINED THAT IT WAS ENGAGED IN THE BUSINESS OF DEVELOPMENT AND EXPORT OF COMPUT ER SOFTWARE. THE SOFTWARE DEVELOPMENT WORK WAS CARRIED OUT IN INDIA AT ITS DE VELOPMENT CENTRES IN INDIA AND ALSO IN SOME CASES ON SITES. THE ASSESSEE WAS N OT ENGAGED IN PROVIDING ANY TECHNICAL SERVICES OUTSIDE INDIA. IT WAS ALSO S UBMITTED THAT THE ASSESSEE HAD NOT INCURRED ANY FREIGHT EXPENSES DURING THE YE AR AND THAT INSURANCE EXPENDITURE RELATED ONLY TO FIRE, BURGLARY, THEFT I N RELATION FOR VARIOUS ASSETS OF THE ASSESSEE. SIMILARLY TELECOMMUNICATION CHARGES W ERE ALSO NOT ATTRIBUTABLE TO THE DELIVERY OF COMPUTER SOFTWARE OUTSIDE INDIA AND HAD BEEN INCURRED IN THE BUSINESS OF SOFTWARE DEVELOPMENT AT THE SOFTWARE UN ITS OF THE ASSESSEE IN INDIA. THUS NONE OF THE EXPENSES WERE ATTRIBUTABLE TO THE DELIVERY OF COMPUTER SOFTWARE OUTSIDE INDIA AND THEREFORE THESE WERE NOT REQUIRED TO BE DEDUCTED FROM THE EXPORT TURNOVER. ALTERNATIVELY IT WAS ALSO SUBMITTED THAT IN CASE THESE EXPENSES WERE EXCLUDED FROM THE EXPORT TURNOVER THE SE SHOULD ALSO BE DEDUCTED FROM THE TOTAL TURNOVER. THE ASSESSEE PLAC ED RELIANCE ON THE DECISION OF THE SPECIAL BENCH OF THE TRIBUNAL IN CASE OF ITO VS SAK SOFT LTD. (313 ITR 353). THE ASSESSEE ALSO DREW ANALOGY TO THE PARALLE L PROVISIONS OF SECTION 6 80HHC IN WHICH THE TOTAL TURNOVER WAS DEFINED AS PE R WHICH THE FREIGHT, TELECOMMUNICATION CHARGES OR INSURANCE ATTRIBUTABLE TO THE DELIVERY OF COMPUTER SOFTWARE OUTSIDE INDIA WAS REQUIRED TO BE DEDUCTED. THE AO HOWEVER DID NOT ACCEPT THE EXPLANATION GIVEN. AS REGARDS TH E ALTERNATE CLAIM THAT SUCH EXPENSES SHOULD ALSO DEDUCTED FROM TOTAL TURNOVER, THE AO OBSERVED THAT THERE WERE NO PROVISIONS IN SECTION 10A AS PER WHICH THES E EXPENSES COULD BE EXCLUDED FROM TOTAL TURNOVER ALSO. THE AO THEREFORE EXCLUDED THE DATA LINE COSTS FROM THE EXPORT TURNOVER ONLY AND COMPUTED DE DUCTION ACCORDINGLY AGGRIEVED BY WHICH THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL. 3.1 BEFORE US, THE LEARNED AR FOR THE ASSESSEE REIT ERATED THE SUBMISSIONS MADE BEFORE THE AUTHORITY BELOW THAT UNDER THE PROV ISIONS OF EXPLANATION 2(IV) ONLY THE FREIGHT, TELECOMMUNICATION CHARGES AND INS URANCE ATTRIBUTABLE TO THE DELIVERY OF COMPUTER SOFTWARE OUTSIDE INDIA HAS TO BE EXCLUDED FROM EXPORT TURNOVER. IN CASE OF THE ASSESSEE, IT WAS POINTED O UT, THAT THE TELECOMMUNICATION EXPENSES HAD BEEN INCURRED IN THE BUSINESS OF SOFTWARE DEVELOPMENT AT THE SOFTWARE DEVELOPMENT CENTRE IN I NDIA AND THEREFORE WERE NOT ATTRIBUTABLE TO THE DELIVERY OF COMPUTER SOFTWA RE OUTSIDE INDIA AND THUS IT COULD NOT BE EXCLUDED FROM THE EXPORT TURNOVER. ALT ERNATIVELY IT WAS ALSO SUBMITTED THAT IN CASE THESE ARE EXCLUDED FROM EXPO RT TURNOVER, DEDUCTION SHOULD ALSO BE ALLOWED IN RESPECT OF TOTAL TURNOVER . RELIANCE WAS PLACED ON THE JUDGMENT OF HONBLE HIGH COURT OF MUMBAI IN CASE OF CIT VS GEM JEWELLERY INDIA LTD. (330 ITR 175) AND ON THE DECISION OF THE SPECIAL BENCH OF THE TRIBUNAL IN CASE OF ITO VS SAK SOFT LTD. (313 ITR ( AT) 353). THE LEARNED DR ON THE OTHER HAND SUPPORTED THE ORDER OF AO AND PLACED RELIANCE ON THE FINDINGS GIVEN THEREIN. 7 3.2 WE HAVE PERUSED THE RECORDS AND CONSIDERED THE MATTER CAREFULLY. THE DISPUTE IS REGARDING EXCLUSION OF DATA LINE COST IN CURRED BY THE ASSESSEE FROM THE EXPORT TURNOVER. UNDER THE PROVISIONS OF EXPLAN ATION 2(IV) OF SECTION 10A, EXPENSES ON FREIGHT, TELECOMMUNICATION CHARGES AND INSURANCE ATTRIBUTABLE TO THE DELIVERY OF ARTICLE OR THINGS OR COMPUTER SOFTW ARE OUTSIDE INDIA OR EXPENSES INCURRED IN FOREIGN EXCHANGE IN PROVIDING TECHNICAL SERVICES OUTSIDE INDIA ARE REQUIRED TO BE EXCLUDED FROM THE EXPORT TURNOVER. I N THIS CASE THE DATA LINE COST BEING THE TELECOMMUNICATION EXPENSES HAVE BEEN EXCLUDED BY THE AO FROM THE EXPORT TURNOVER. THE CASE OF THE ASSESSEE IS THAT THE TELECOMMUNICATION EXPENSES HAD BEEN INCURRED IN THE BUSINESS OF SOFTWARE DEVELOPMENT AT THE SOFTWARE UNDERTAKINGS OF THE ASS ESSEE IN INDIA. THIS CLAIM HAS NOT BEEN CONTRAVERTED BY THE AO BY PLACING ANY MATERIAL ON RECORD. THE EXPENSES INCURRED ON DEVELOPMENT OF SOFTWARE IN IND IA CANNOT BE CONSIDERED AS EXPENSES ATTRIBUTABLE TO THE DELIVERY OF COMPUTER S OFTWARE OUTSIDE INDIA. THEREFORE IN OUR VIEW SUCH EXPENSES CANNOT BE EXCLU DED FROM THE EXPORT TURNOVER AND IN CASE THESE ARE EXCLUDED, THESE HAVE TO BE EXCLUDED FROM TOTAL TURNOVER ALSO FOLLOWING THE JUDGMENT OF HONBLE HIG H COURT OF MUMBAI IN CASE OF CIT VS GEM PLUS JEWELLERY INDIA LTD. (SUPRA) AND DECISION OF THE TRIBUNAL IN CASE OF ITO VS SAK SOFT LTD. (SUPRA). IN ANY CASE S INCE WE HAVE HELD THAT THESE EXPENSES HAVE BEEN INCURRED IN THE BUSINESS OF SOFT WARE DEVELOPMENT IN INDIA, THESE COULD NOT BE CONSIDERED AS EXPENDITURE ATTRIB UTABLE TO DELIVERY OF COMPUTER SOFTWARE OUTSIDE INDIA. WE THEREFORE SET A SIDE THE ORDER OF AO ON THIS POINT AND HOLD THAT THESE EXPENSES ARE NOT TO BE EX CLUDED FROM THE EXPORT TURNOVER. 4. THE THIRD DISPUTE IS REGARDING TRANSFER PRICING ADJUSTMENT AMOUNTING TO R.18,46,75,062/- MADE BY THE AO. THE ASSESSEE DURIN G THE YEAR HAD ENTERED 8 INTO CERTAIN INTERNATIONAL TRANSACTIONS WITH ITS A SSOCIATED ENTERPRISES. UNDER THE PROVISIONS OF SECTION 92(1), INCOME FROM INTERN ATIONAL TRANSACTIONS HAS TO BE DETERMINED HAVING REGARD TO THE ARMS LENGTH PRI CE (ALP). SECTION 92 C PRESCRIBES VARIOUS METHODS OF COMPUTATION OF ALP; ( I) COMPARABLE UNCONTROLLED PRICE METHOD; (II) RESALE PRICE METHOD ; (III) COST PLUS METHOD; (IV) PROFIT SPLIT METHOD; (V) TRANSACTIONAL NET MARGIN METHOD (TNNM) AND (VI) SUCH OTHER METHODS AS MAY BE PRESCRIBED BY THE BOARD AND IT AL SO SAYS THAT ALP MUST BE DETERMINED BY APPLYING THE MOST APPROPRIATE METHOD. FURTHER, IN TERMS OF THE PROVISO INSERTED FROM 1.4.2002, WHERE MORE THAN ONE PRICE IS DETERMINED BY THE MOST APPROPRIATE METHOD THE ALP HAS TO BE TAKEN AS ARITHMETIC MEAN OF ALL SUCH PRICES OR AT THE OPTION OF THE ASSESSEE, A PRI CE WHICH MAY VARY FROM THE ARITHMETIC MEAN BY AN AMOUNT NOT EXCEEDING 5%. 4.1 THE AO REFERRED THE ISSUE OF DETERMINATION OF A LP TO THE TRANSFER PRICING OFFICER (TPO) THE TPO IN THIS CASE SELECTED THE TNN M METHOD FOR COMPUTATION OF ARMS LENGTH PRICE. A SEARCH FOR COMPARABLE CASE S WAS CONDUCTED AND A SET OF 36 COMPANIES WERE SELECTED AS COMPARABLES TO WHI CH SOME MORE COMPANIES WERE ADDED LATER AND FINALLY THE AO SHORT LISTED 20 COMPANIES, THE ARITHMETIC MEAN OF WHICH WAS COMPUTED AT 20.68%. AFTER MAKING ADJUSTMENT ON ACCOUNT OF WORKING CAPITAL OF 1.42% , THE AO DETERMINED THE ADJUSTED ARITHMETIC MEAN AT 19.26% AS PER DETAILS GIVEN BELOW. SR NO NAME OF THE COMPANY MARGIN 1. AZTEC SOFTWARE & TECHNOLOGY SERVICES LTD. 18.09% 2. GEOMETRIC SOFTWARE LTD. 6.70% 3. INFOSYS TECHNOLOGIES LIMITED 40.38% 4. KALS INFOSYSTEMS LTD. 39.75% 9 5. MINDTREE CONSULTING 14.67% 6. PERSISTENT SYSTEMS LIMITED 24.67% 7. R SYSTEMS INTERNATIONAL LTD. 22.20% 8. SASKEN COMMUNICATION TECHNOLOGIES LIMITED 13.90% 9. TATA ELXSI LTD 27.65% 10. LUCID SOFTWARE 8.92% 11. MEDIA SOFT SOLUTIONS 6.29% 12 R S SOFTWARE (INDIA) LIMITED 15.69% 13 S I P TECHNOLOGIES AND EXPORTS LIMITED 3.06% 14 BODHTREE CONSULTING 15.99% 15 ACCEL TRANMATICS LTD. 44.07% 16 SYNFOSYS SOLUTIONS LTD. 10.61% 17 FLEXTRONICS SOFTWARE SYSTEMS LTD. 27.24% 18 LANCO GLOBAL SYSTEMS LIMITED 5.27% 19 MEGASOFT LTD. 52.74% 20 IGATE GLOBAL SOLUTIONS LTD. 15.61% ARITHMETIC MEAN 20.68% LESS WORKING CAPITAL ADJUSTMENT 1.42% ADJUSTED ARITHMETIC MEAN 19.26% 4.2 THE ASSESSEE FILED OBJECTIONS AGAINST THE PROPO SED TRANSFER PRICING ADJUSTMENTS BY THE TPO ON THE BASIS OF 20 COMPARABL ES MENTIONED ABOVE BEFORE THE DISPUTE RESOLUTION PANEL (DRP). THE DRP AFTER CONSIDERATION OF RECORDS AT THE SUBMISSIONS OF THE ASSESSEE OBSERVED THAT THE ASSESSEE WHICH WAS A SUBSIDIARY OF CAP GEMINI WAS ENGAGED IN THE B USINESS OF PROVIDING INFORMATION TECHNOLOGY SERVICES AND MAIN AREA OF OP ERATION WAS SOFTWARE 10 DEVELOPMENT AND INTEGRATION, BUSINESS STRATEGY AND TRANSFORMATION AND IMPLEMENTATION OF ENTERPRISES RESOURCE PLANNING. DR P ALSO OBSERVED THAT THE INFORMATION COLLECTED BY THE TPO REGARDING THE COMP ARABLES HAD BEEN CONFRONTED TO THE ASSESSEE. DRP CONSIDERED THE PLEA OF THE ASSESSEE REGARDING EXCLUSION OF MEGA SOFT LTD. AND ACCEL TRANSMATICS L TD. FROM THE LIST OF COMPARABLES. THE ASSESSEE SUBMITTED THAT MEGA SOFT LTD WAS ENGAGED IN A DIFFERENT LINE OF BUSINESS AND ENCLOSED THE DIRECTO RS REPORT OF THE COMPANY IN SUPPORT OF THE CLAIM. THE DRP NOTED FROM THE REPORT THAT THE COMPANY HAD MADE A TRANSITION FROM GENERIC SOFTWARE SERVICES PR OVIDER TO PRODUCT DEVELOPMENT COMPANY DURING THE CURRENT FINANCIAL YE AR AND THAT DURING THE FINANCIAL YEAR ENDING 2006, IT WAS ONLY A GENERIC S OFTWARE COMPANY. THEREFORE DRP REJECTED THE PLEA OF THE ASSESSEE THAT MEGA SOF T WAS NOT A COMPARABLE CASE. IN REGARD TO ACCEL TRANSMATICS LTD. THE ASSES SEE SUBMITTED THE COMPANY PROFILE AND ITS ANNUAL REPORT FOR FINANCIAL YEAR 20 05-06 FROM WHICH THE DRP NOTED THAT THE BUSINESS ACTIVITIES OF THE COMPANY W ERE AS UNDER. (I) TRANSMATIC SYSTEM DESIGN, DEVELOPMENT AND MANUFAC TURE OF MULTI FUNCTION KIOSKS QUEUE MANAGEMENT SYSTEM, TICK ET VENDING SYSTEM (II) USHUS TECHNOLGIES- OFFSHORE DEVELOPMENT CENTRE FOR EMBEDDED SOFTWARE, NET WORK SYSTEM, IMAGING TECHNOL OGIES, OUTSOURCED PRODUCT DEVELOPMENT (III) ACCEL IT ACADEMY (THE NET STOP FOR ENGINEERS)- TRAI NING SERVICES IN HARDWARE AND NETWORKING, ENTERPRISE SYSTEM MANAG EMENT, EMBEDDED SYSTEM, VLSI DESIGNS, CAD/ CAM/ BPO (IV) ACCEL ANIMATION STUDIES SOFTWARE SERVICES FOR 2D/ 3 D ANIMATION, SPECIAL EFFECT, ERECTION, GAME ASSET DEV ELOPMENT. 11 4.3 ON CAREFUL PERUSAL OF THE BUSINESS ACTIVITIES O F ACCEL TRANSMATIC LTD. DRP AGREED WITH THE ASSESSEE THAT THE COMPANY WAS F UNCTIONALLY DIFFERENT FROM THE ASSESSEE COMPANY AS IT WAS ENGAGED IN THE SERVI CES IN THE FORM OF ACCEL IT AND ACCEL ANIMATION SERVICES FOR 2D AND 3D ANIMA TION AND THEREFORE ASSESSEES CLAIM THAT THIS COMPANY WAS FUNCTIONALLY DIFFERENT WAS ACCEPTED. DRP THEREFORE DIRECTED THE AO TO EXCLUDE ACCEL TRAN SMATIC LTD. FROM THE FINAL LIST OF COMPARABLES FOR THE PURPOSE OF DETERM INING TNNM MARGIN. 4.4 THE AO THEREAFTER EXCLUDED ACCEL TRANSMATIC LTD . FROM THE LIST OF COMPARABLES AND COMPUTED THE FINAL COMPARABLE MARGI N AT 18.03% ON THE BASIS OF 19 COMPARABLE AS PER DETAILS GIVEN BELOW. SR NO NAME OF THE COMPANY MARGIN 1. AZTEC SOFTWARE & TECHNOLOGY SERVICES LTD. 18.09% 2. GEOMETRIC SOFTWARE LTD. 6.70% 3. INFOSYS TECHNOLOGIES LIMITED 40.38% 4. KALS INFOSYSTEMS LTD. 39.75% 5. MINDTREE CONSULTING 14.67% 6. PERSISTENT SYSTEMS LIMITED 24.67% 7. R SYSTEMS INTERNATIONAL LTD. 22.20% 8. SASKEN COMMUNICATION TECHNOLOGIES LIMITED 13.90% 9. TATA ELXSI LTD 27.65% 10. LUCID SOFTWARE 8.92% 12 11. MEDIA SOFT SOLUTIONS 6.29% 12 R S SOFTWARE (INDIA) LIMITED 15.69% 13 S I P TECHNOLOGIES AND EXPORTS LIMITED 3.06% 14 BODHTREE CONSULTING 15.99% 15 SYNFOSYS SOLUTIONS LTD. 10.61% 16 FLEXTRONICS SOFTWARE SYSTEMS LTD. 27.24% 17 LANCO GLOBAL SYSTEMS LIMITED 5.27% 18 MEGASOFT LTD. 52.74% 19 IGATE GLOBAL SOLUTIONS LTD. 15.61% ARITHMETIC MEAN 19.45% LESS: WORKING CAPITAL ADJUSTMENT 1.42% FINAL COMPARABLE MARGIN 18.03% 4.5 AFTER THE DRP ISSUED DIRECTIONS TO THE AO, THE ASSESSEE FILED A LETTER DATED 26.10.10 BEFORE THE AO WHICH WAS NOT CONSIDER ED BY THE AO ON THE GROUND THAT UNDER THE PROVISIONS OF SECTION 144C(13 ), THE AO ON RECEIPT OF DIRECTIONS FROM DRP WAS REQUIRED TO COMPLETE THE AS SESSMENT WITHOUT PROVIDING ANY FURTHER OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. THE AO ACCORDINGLY COMPUTED THE TRANSFER PRICE ADJUSTMENTS AT RS.18,46,75,062/- AS PER THE COMPUTATION MENTIONED BELOW: OPERATING COST RS.343,95,40,000/- ARMS LENGTH MARGINE 18.03% OF THE OPERATING COST ALP @118.03% OF OPERATING COST RS.405,96,89,062/- 13 PRICE CHARGED BY THE ASSESSEE IN THE INTERNATIONAL TRANSACTION RS.387,50,14,000/- SHORT FACE BEING ADJUSTMENT UNDER SECTION 92CA RS.1 8,46,75,062/- 4.6 AO ACCORDINGLY MADE ADDITION OF RS.18,46,75,062 /- TO THE TOTAL INCOME ON ACCOUNT OF TRANSFER PRICING ADJUSTMENTS. AGGRIEV ED BY THE SAID DECISION THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL. 4.7 BEFORE US, THE LEARNED AR FOR THE ASSESSEE SUBM ITTED THAT THE TPO HAD OBTAINED CERTAIN INFORMATION UNDER THE PROVISIONS O F SECTION 133(6) AND THE ASSESSEE WAS NOT CONFRONTED WITH THE COMPLETE INFOR MATION OBTAINED. IT WAS POINTED OUT THAT DRP WAS NOT CORRECT IN STATING THA T THE ASSESSEE HAD BEEN CONFRONTED WITH THE INFORMATION OBTAINED BY THE TPO . IT WAS ALSO SUBMITTED THAT THE ASSESSEE HAD POINTED OUT TO DRP THAT 12 CO MPARABLES SELECTED BY THE TPO WERE FUNCTIONALLY DIFFERENT. BUT THE DRP CONSID ERED ONLY TWO COMPARABLES OUT OF 12 COMPARABLES POINTED OUT BY THE ASSESSEE. IT WAS ALSO SUBMITTED THAT VARIOUS CONTENTIONS RAISED BY THE ASSESSEE BEFORE T HE DRP WERE NOT CONSIDERED WHICH WERE PLACED AT PAGES 166 ONWARDS IN THE PAPER BOOK. THE LEARNED AR ALSO SUBMITTED THAT EVEN ON THE BASIS OF DIRECTIONS OF DRP TO EXCLUDE ACCEL TRANSMATIC LTD. THE PRICE CHARGED BY THE ASSESSEE C AME WITHIN PLUS/MINUS 5% OF THE ALP COMPUTED ON THE BASIS OF 19 COMPARABL ES AND THEREFORE UNDER THE PROVISIONS OF THE ACT, NO ADJUSTMENT WAS REQUIR ED TO BE MADE. IT WAS ARGUED THAT A.O WAS REQUIRED TO COMPUTE THE TP ADJU STMENTS ON THE BASIS OF DIRECTIONS OF DRP CORRECTLY UNDER THE PROVISIONS OF LAW WHICH HAD NOT BEEN DONE. THE LEARNED AR GAVE THE FOLLOWING WORKING OF THE ALP ON THE BASIS OF ARMS LENGTH MARGIN OF 18.02% BASED ON 19 COMPARABL E WHICH SHOWED THAT 14 PRICE CHARGED BY THE ASSESSEE WAS WITHIN THE 5% VAR IATION BELOW THE ARMS LENGTH PRICE. OPERATING COST RS/343,05,40,000/- ARMS LENGTH MARGIN (ALP) 18.02% ALP @ 118.02% OF OPERATING COST RS.405,93,45,108/- 5% VARIANCE BELOW ARMS LENGTH PRICE RS.385,63,77,8 53/- PRICE CHARGED BY THE ASSESSEE IN THE INTERNATIONAL TRANSACTION RS.387,50,14,000/- 4.8 IT WAS ACCORDINGLY URGED BY THE LEARNED AR THAT ADDITION MADE ON ACCOUNT OF TP ADJUSTMENT SHOULD BE DELETED. THE LEA RNED DR ON THE OTHER HAND PLACED RELIANCE ON THE ORDER OF THE AO AND THE TPO. 4.9 WE HAVE PERUSED THE RECORDS AND CONSIDERED THE RIVAL CONTENTIONS CAREFULLY. THE DISPUTE RAISED IN THIS GROUND IS REG ARDING ADDITION ON ACCOUNT OF TP ADJUSTMENT. THE ASSESSEE WHICH IS A SUBSIDIARY OF CAP GEMINI, WAS ENGAGED IN THE BUSINESS OF PROVIDING INFORMATION TE CHNOLOGY SERVICES. THE ASSESSEE HAD TRANSACTIONS WITH IT ASSOCIATE ENTERPR ISE INCOME FROM WHICH UNDER THE PROVISIONS OF ACT HAS TO BE COMPUTED ON THE BAS IS OF ARMS LENGTH PRICE. THE AO SELECTED TNNM METHOD FOR DETERMINATION OF AL P AND THERE IS NO DISPUTE REGARDING THE METHOD SELECTED BY THE TPO. TPO ALSO SELECTED 20 COMPARABLES WHICH HAVE BEEN LISTED IN PARA 4.1 EARLIER AND ON T HE BASIS OF WHICH ARITHMETIC MEAN MARGIN OF THE COMPARABLES WAS COMPUTED AT RS.1 9.26% AND BASED ON THAT TPO PROPOSED TRANSFER PRICING ADJUSTMENT OF RS .22,69,81,000. THE ASSESSEE FILED OBJECTIONS BEFORE THE DRP AGAINST TH E ORDER OF THE TPO AND DRP AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE A GREED FOR EXCLUSION OF 15 ACCEL TRANSMATIC LTD. FROM THE LIST OF COMPARABLES AND DIRECTED THE AO TO COMPUTE THE TRANSFER PRICING ADJUSTMENT AFTER EXCLU DING ACCEL TRANSMATIC LTD. AS A COMPARABLE. THE AO COMPUTED THE FINAL COMPARAB LE MARGIN ON THE BASIS OF REMAINING 19 COMPARABLE AT 18.03% AND ON THAT BASIS ARMS LENGTH PRICE WAS COMPUTED AT RS.405,96,89,062/-. SINCE THE PRICE CHA RGED BY THE ASSESSEE WAS RS.387,50,14,000/-, THE AO MADE ADJUSTMENT OF RS.18 ,46,75,062/- UNDER SECTION 92CA TO THE TOTAL INCOME. THE LEARNED AR FO R THE ASSESSEE HAS POINTED OUT THAT EVEN IF THE ALP WAS COMPUTED ON THE BASIS OF AVERAGE MARGIN OF 19 COMPARABLES, THE PRICE CHARGED BY THE ASSESSEE IS W ITHIN PLUS/ MINUS 5% MARGIN OF THE ALP. IT HAS BEEN POINTED OUT THAT ALP COMES TO RS.405,93,45,108/- AND 5% VARIATION BELOW ARMS LEN GTH PRICE COMES TO RS.385,63,77,853/- AND THE PRICE CHARGED BY THE ASS ESSEE WAS RS.387,50,14,000/- AND THEREFORE THE SAME WAS WITHI N THE 5% MARGIN. WE FIND THAT AO WHILE GIVING EFFECT TO THE DIRECTIONS OF TH E DRP HAS NOT CONSIDERED THE PLUS/MINUS 5% VARIATIONS WHICH IS ALLOWABLE UNDER T HE PROVISIONS OF LAW. AO IS REQUIRED TO COMPUTE THE TP ADJUSTMENT CORRECTLY UND ER THE PROVISIONS OF LAW ON THE BASIS OF DIRECTIONS OF THE DRP WHICH IT APPEARS HAS NOT BEEN DONE. THE COMPUTATION FILED BY THE ASSESSEE BEFORE US PRIMA F ACIE, SHOWS THAT THE PRICE CHARGED BY THE ASSESSEE WAS WITHIN 5% VARIATION OF THE MEAN ALP AND IN SUCH A CASE, NO ADDITION IS REQUIRED TO BE MADE. WE THER EFORE DIRECT THE AO TO RECOMPUTED THE TP ADJUSTMENT AFTER ALLOWING THE BE NEFIT OF PLUS/ MINUS 5% VARIATION FROM THE MEAN ALP AND MAKE ADDITION ONLY, IF THE PRICE CHARGED BY THE ASSESSEE IS BEYOND THE 5% VARIATION ALLOWED UND ER LAW. THE AO WILL ALLOW OPPORTUNITY OF HEARING TO THE ASSESSEE IN CASE ANY DISCREPANCY IS FOUND IN THE COMPUTATION GIVEN BY THE ASSESSEE BEFORE US AS MENT IONED ABOVE. 16 5. IN THE RESULT APPEAL OF THE ASSESSEE IS ALLOWED IN TERMS OF THE ORDER ABOVE. THE DECISION WAS PRONOUNCED IN THE OPEN COURT ON 25.05.2011. SD/- SD/- ( D. K. AGARWAL ) (RAJENDRA SIN GH) JUDICIAL MEMBER ACCOUNTANT MEMBER DATE : 25 .05.2011 AT :MUMBAI COPY TO : 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A), MUMBAI CONCERNED 4. THE CIT, MUMBAI CITY CONCERNED 5. THE DR C BENCH, ITAT, MUMBAI // TRUE COPY// BY ORDER ASSISTANT REGISTRAR ITAT, MUMBAI BENCHES, MUMBAI ALK