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TMI Blog2012 (5) TMI 208X X X X Extracts X X X X X X X X Extracts X X X X ..... e incurred for purchase of computer software is capital or revenue. - IT Appeal Nos. 974 & 983 (Bang.) of 2008 - - - Dated:- 24-2-2012 - N. K. Saini, George George K., JJ. Kunj Vaidya for the Appellant. Etwa Munda for the Respondent. ORDER Per Bench These appeals instituted by the assessee and the revenue are directed against the order of the Ld. CIT(A)-IV, Bangalore dated 28.04.2008. The relevant assessment year is 2004-05. 2. Since these appeals pertain to the same assessee, they are heard together and dispose off by this consolidated order for the sake of convenience and brevity. First we shall consider the assessee's appeal. ITA No.974/Bang/2008 (Assessee's appeal) 3. The grounds raised by the assessee reads as follows:- ( i ) That the order passed by the learned CIT(A) to the extent prejudicial to the appellant is bad in law and liable to be quashed. ( ii ) That on the facts and in the circumstances of the case, the learned CIT(A) erred in upholding the Assessing Officer's action in invoking the provisions of section 92CA(1) of the I T Act, 1961 and referring the computation of the Arm's Length Price to the Transfer Pricing Officer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e case, the learned CIT(A) erred in reinstating the following companies namely Intertec Communications Private Limited and Igate Global Solutions Limited as comparables for the purpose of determining the arm's length price of IT services. ( xi ) That the learned CIT(A) erred in upholding the action of the Assessing Officer/Transfer Pricing Officer in making a presumptive adjustment for normalization of expenses for the uncontrolled comparable companies. ( xii ) That the learned CIT(A) erred in holding that it was mandatory for the Assessing Officer/Transfer Pricing Officer to use only the data of comparable companies for the same financial year as under appeal, while determining the mark-up on total cost of comparables under TNMM. ( xiii ) That the learned CIT(A) erred in not considering the risk free nature of the appellant's business while determining the Arm's Length Price of the international transactions. ( xiv ) That the learned CIT(A) erred in not allowing the benefit of +/-5% as provided in proviso to section 92C(2) of the Act while recomputing the Arm's Length Price. ( xv ) That the learned CIT(A) erred in upholding the charging of interest under section 234 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n-operating expenses such as forex loss, interest etc.) 19,96,33,798 ( b ) Net margin of the comparables in TNMM as discussed after making adjustments 25.35% ( c ) Arm's Length Price of the international transactions applying the Net margin (19,96,33,798 125.35/100) 25,02,40,965 ( d ) ALP of the international transactions as per the books of account 20,96,15,489 ( e ) Adjustment to ALP under section 92CA (c-d) 4,06,25,476 R D Services Segment: Table : 18 Particulars Amount in (Rs.) ( a ) Total operating cost (excluding non-operating expenses such as forex loss, etc.) 2,04,83,570 ( b ) Net margin of the comparables in TNMM as discussed after making adjustments 31.73% ( c ) Arm's Length Price of the international transactions applying the Net margin (2,04,83,570 131.73/100) 2,69,83,006 ( d ) ALP of the international transactions as per the books of account 2,15,07,749 ( e ) Adjustment to ALP under section 92CA (c-d) 54,75,257" ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) 25.35% (with working capital adjustment) Adjustment amount Rs.4,00,66,493 Rs.4,06,25,476 II. Research Development Services: Determination of arm's length price (mark-up) for FY 2003-04 Particulars The Appellant The TPO The CIT(A) IT enabled Services Most appropriate method Transactional Net Margin Method Profit Level Indicator (PLI Operating profit/total cost Number of comparables 9 7 7 Financial data of comparables Financial data for FY 2001-02, FY 2002-03 And FY 2003-04 (to the Extent available for The latest year) FY 2003-04 FY 2003-04 Arithmetical Mean operating Mark up on cost 7.56% (post working Capital adjustment) 32.09% (without working capital Adjustment) 30.09% (with working capital Adjustment) 33.95% (without working capital adjustment) 31.73% (with working capital Adjustment) Adjustment amount Rs.51,39,327/- Rs.54,75,257/- 3.4 The assessee being aggrieved by the re-computation of adjustment to the ALP is in appeal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the notice of the Appellant vide the above mentioned letter from Chairman of Satyam Computer Services Ltd. dated January 7, 2009. Hence, the same is now relied upon by the Appellant for the rejection of the company as comparable. Also, as submitted before the Hon'ble Tribunal, Infosys Technologies Ltd., a company selected as comparable, charges premium in the pricing for its services over the peers in the industry due to the brand value and the leading position that it enjoys. Therefore, Infosys cannot be compared with the captive operations of the appellant. This claim of the appellant is substantiated by the above article came in the public domain on January 12, 2011. As mentioned earlier, apart from the above documents, the appellant had also submitted copies of the annual reports of the comparables contested in the synopsis in the paper book submitted on November 29, 2011. These annual reports contain facts, which came to the notice of the appellant subsequently and now necessary for the disposal of the appeal equitably. For ease of reference of the Hon'ble Tribunal following copies of annual reports are submitted in the paper book on November 29, 2011. Sl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bunal in the case of Genisys Integrating Systems (India) (P.) Ltd. ( supra ) are reproduced below for ready reference:- ( a ) The operating revenue and the operating cost of the transactions relating to associated enterprises only shall be considered; ( b ) The comparables having the turnover of more than 1.00 crore but less than 200.00 crores only shall be taken into consideration; ( c ) All the information relating to comparables which are sought to be used against the assessee shall be furnished to the assessee; ( d ) The assessee shall be given an opportunity of cross examining the parties whose replies are sought to be used against the assessee if the assessee so desires; ( e ) To consider the objections of the assessee that relate to additional comparables sought to be adopted by the TPO and pass a detailed order; and ( f ) To give the standard deduction of 5% under the proviso to section 92C(2) of the Act. 3.7.1 The Assessing Officer shall consider the above directions contained in the order of the Tribunal in Genisys Integrating Systems (India) (P.) Ltd. ( supra ) and decide whether it is applicable to the facts of the instant case. According to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar Trades Estates (P.) Ltd v. CIT [1990] 186 ITR 313/[1991] 56 Taxman 170 has held as under: "The Tribunal has discretion to allow the production of additional evidence under Rule 29 of the ITAT Rules, 1963 if the Tribunal requires any document to be produced or affidavit to be filed to enable it to pass orders or for any other substantial cause, it may allow the document to be produced or the affidavits to be filed. Even if there was a failure to produce the documents before the ITO and the A.A.C, the Tribunal has the jurisdiction in the interests of justice to allow the production of such vital documents." 3.7-5 In the present case also, the documents furnished by the assessee are vital which go to the root of the present controversy, so these are to be admitted in the interest of natural justice but these documents are required to be examined and considered at the level of the AO. We, therefore, set aside the impugned order and remand the present issue back to the file of the AO to be decided afresh in accordance with law after providing due and reasonable opportunity of being heard to the assessee. 3.7-6 For the aforesaid view, we are also fortified by the decisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce a judgment is to be understood as the ability to pronounce a judgment satisfactory to the IT mind of court delivering it. This position was reiterated again by the Hon'ble Supreme Court in the case of Syed Abdul Khader v. Rami Reddy AIR, 1979 S.C. 553 cited by the Ld. Counsel for the assessee. In the case of Municipal Corp. of Greater Bombay v. Lala Panchan AIR 1965 S.C. 1008 cited by the Ld. Counsel for the assessee, it was observed by the Hon'ble Supreme Court that the power to admit additional evidence does not entitle the appellate court to let in fresh evidence only for the purpose of pronouncing judgment in a particular way and it is only for removing a lacuna in the evidence that the appellate court is empowered to admit additional evidence. In the case of Arjan Singh v. Kartar Singh AIR 1951 S.C. 193, it was held that the discretion given to the appellate court by Order 41, Rule 27 of CPC to receive and admit additional evidence is not an arbitrary one but is a judicial one circumscribed by the limitations specified in that Rule. It was also held that the legitimate occasion for the application of the said Rule is when on examining the evidence as it stands ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s on whether or not the substantial cause and not to enable the assessee or the Department to tender fresh evidence to support a new point or to make out a new case. In the case of N. Kamalam ( supra ) it was held that the provisions of Rule 27 of Order 41 of CPC, 1908 are not designed to help parties to patch up weak points and make up for omissions earlier made. 33. It is also well settled that once additional evidence is taken into consideration, it has to be read as part or the record and before drawing any inference on the basis of contents of that document admitted as additional evidence, an opportunity has to be given to the other side to explain or rebut the same. As held by Hon'ble Madras High Court in the case of RSS Shanmugam Pillai Sons ( supra ), if the Tribunal finds that the documents filed are quite relevant and for the purpose of deciding the issue before it, it would be well within its powers to admit the evidence, consider the same on merits or remit the matter to the lower authorities for examining the same. in the case of Smt. Urmila Ratilal ( supra ), Hon'ble Gujarat High Court has held that when the additional evidence field by the revenue was admit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... epth examination, we find that it would be fair and proper and in the interest of justice to restore the issue relating to PE to the file of the Assessing Officer for deciding the same afresh after examining the additional evidence as well as explanation offered by the assessee while rebutting the same. The assessee shall also be at liberty to adduce further evidence to support its case before the Assessing Officer who shall take into consideration the same in accordance with law. Since the other issues raised in this appeal related to the main issue of PE, we deem it appropriate to restore these issues also to the file of the Assessing Officer for fresh decision along with the main issue. In so far as the issue relating to the levy of interest u/s 234B is concerned, the Ld. Counsel for the assessee has contended before us that the same is squarely covered in favour of the assessee by the decision of Delhi Special bench of ITAT in the case of Motorola inc. v. Dy. CIT [2005] 95 ITD 269. We, therefore, direct the Assessing Officer to decide the issue relating to levy of interest u/s 234B in the light of the decision of Special Bench in the case of Motorola inc ( supra ). The im ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g.)(Mag.) Dy. CIT v. Binary Semantics Ltd. [2007] 109 TTJ 556 (Delhi). 4.3 At the very outset, it was pointed out by the learned AR that the order of tribunal relied on by the first appellate authority has been affirmed by the Hon'ble jurisdictional High Court in the case of CIT v. Tata Elxsi Ltd. [2012] 204 Taxman 321/17 taxmann.com 100 (Kar.). 4.4 The learned DR was unable to controvert the submissions made by the learned AR. 4.5 We have heard the rival submission and perused the material on record. The Hon'ble Karnataka High Court in the case of Tata Elxsi Ltd. ( supra ) had held that while computing the exemption u/s 10A, if the export turnover in the numerator is to be arrived at after excluding certain expenses, the same should also be excluded in computing the export turnover as it is a component of total turnover in the denominator. The relevant finding of the Hon'ble jurisdictional High Court reads as follows:- " .Section 10A is enacted as an incentive to exporters to enable their products to be competitive in the global market and consequently earn precious foreign exchange for the country. This aspect has to be borne in mind. While computing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of the term 'total turnover' in section 10A, there is nothing in the said section to mandate that, what is excluded from the numerator that is export turnover would nevertheless form part of the denominator. When the statute prescribed a formula and in the said formula, 'export turnover' is defined, and when the 'total turnover' includes export turnover, the very same meaning given to the export turnover by the legislature is to be adopted while understanding the meaning of the total turnover, when the total turnover includes export turnover. If what is excluded in computing the export turnover is included while arriving at the total turnover, when the export turnover is a component of total turnover, such an interpretation would run counter to the legislative intent and impermissible. Thus, there is no error committed by the Tribunal in following the judgements rendered in the context of section 80HHC in interpreting section 10A when the principle underlying both these provisions is one and the same". 4.6 The Hon'ble Mumbai High Court in the case of CIT v. Gem Plus Jewellery India Ltd. [2010] 194 Taxman 192 (Bom.), in identical circumstances, held that since the export ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tutory interpretation. Any other interpretation would lead to an absurdity. If the contention of the Revenue were to be accepted, the same expression viz. 'export turnover' would have a different connotation in the application of the same formula. The submission of the Revenue would lead to a situation where freight and insurance, though these have been specifically excluded from 'export turnover' for the purposes of the numerator would be brought in as part of the 'export turnover' when it forms an element of the total turnover as a denominator in the formula. A construction of a statutory provision which would lead to an absurdity must be avoided. Moreover, a receipt such as freight and insurance which does not have any element of profit cannot be included in the total turnover. Freight and insurance charges do not have any element of turnover. For this reason in addition, these two items would have to be excluded from the total turnover particularly in the absence of a legislative prescription to the contrary - CIT v. Sudarshan Chemicals Industries Ltd. [2000] 163 CTR (Bom) 596: [2000] 245 ITR 769 (Bom) applied; CIT v. Lakshmi Machine Works [2007] 210 CTR (SC) 1: [2007] ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... v. ITO (IT Appeal No.44 (Bang.) 2006, dated 26/10/2007) and decided the matter in favour of the assessee. 5.2 Aggrieved, the revenue is in appeal before us. 5.3 The learned DR submitted that the issue of allowance of expenditure with reference to purchase of software licences has been considered by the Hon'ble jurisdictional High Court in the case of CIT v. Toyota Kriloskar Motors (P.) Ltd. (ITA No.174/2009 dated 23rd March, 2011). The learned DR also relied on the order of the Special Bench in the case of Amway India Enterprises v. Dy. CIT [2008] 111 ITD 112/21 SOT 1 (Delhi)(SB) and stated that the CIT(A) had not analysed the various tests that has been laid down by the Hon'ble Special Bench to determine whether the expenditure incurred for the purchase of computer software is capital or revenue. 5.4 The learned AR on the other hand supported the order of the first appellate authority. 5.5 We have heard the rival submissions and perused the materials on record. The Hon'ble jurisdictional High Court in the case of Toyota Kriloskar Motors (P.) Ltd. ( supra ) has considered whether the expenditure in respect of purchase of software is capital or revenue. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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