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TMI Blog2016 (6) TMI 583X X X X Extracts X X X X X X X X Extracts X X X X ..... Officer only in circumstances where the assessing officer considers it necessary or expedient so to do and also without specifying the relevant- clause under section 92C(3) which necessitated the reference. The learned Commissioner of Income Tax (Appeals) - IV ['CIT(A) - IV'] has further erred in confirming the action of the Assessing officer. 3. The learned Assessing Officer, learned Transfer Pricing Officer and Commissioner of Income Tax (Appeals) IV have erred in a. passing the order without demonstrating that appellant had the motive of shifting profits outside India by manipulating prices charged in its international transactions: and, b. not appreciating that the charging or computation provision relating to income under the head "Profits & Gains of Business or Profession" do not refer to or include the amounts computed under Chapter X and therefore the addition made under Chapter X is bad in law. GROUNDS ON COMPARABLES AND REJECTION OF TP ANALYSIS OF THE APPELLANT 4. The learned Assessing Officer and learned Transfer Pricing Officer have erred in a. rejecting the transfer pricing analysis undertaken by the appellant without specifying the relevant-clause und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that marketing expenses of INR 64,76,000 were incurred for non-AE business only. iii. TP Analysis of Onsite Services Rendered by AE 8. The learned Commissioner of Income Tax (Appeals) - IV has erred in a. adopting CPM as the most appropriate method for evaluating the software development services received by the appellant without justifying how the same was most appropriate method; b. adopting inappropriate methodology and process in arriving at the arm's length price; c. selecting Indian companies having onsite revenues as comparable after selecting AE (a company based in USA) as the tested party. Without prejudice, CIT(A) has erred in rejecting similarly placed Indian companies as comparable on unjustifiable reasons; and. d. adopting net margin of the comparable in computing the arm's length price without appreciating that under CPM gross margin are to be considered. GROUNDS ON ADJUSTMENT FOR DIFFERENCES 9. The learned Assessing Officer, learned Transfer Pricing Officer and Commissioner of Income Tax (Appeals) - IV have erred in not making proper adjustment for enterprise level and transactional level differences between the appellant and the comparable comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed CIT(A) has erred in not directing the AO to grant appropriate credit for foreign taxes. 16. INTEREST UNDER SECTION 234B OF THE ACT The learned C IT(A) has erred in confirming the levy of interest under section 234B of the Act amounting to Rs. 10,928,569. 17. INTEREST UNDER SECTION 234D OF THE ACT The learned CIT(A) has erred in confirming the levy of interest under section 234D of the Act amounting to Rs. 128.352. 18. PENALTY UNDER SECTION 271(1)(C) The learned CIT(A) has erred in directing the AO to re-compute the penalty in view of the enhanced total income of the Company. 19. RELIEF a) The Appellant prays that directions be given to grant all such relief arising from the above grounds and also all relief consequential thereto. b) The Appellant craves leave to add to or alter, by deletion, substitution, modification or otherwise, the above grounds of appeal. either before or during the hearing of the appeal. c) Further, the Appellant prays that all the above adjustments / additions / disallowances made by the learned AO / TPO and upheld by the CIT(A) are bad in law and liable to be deleted." 3. The assessee company was incorporated in the year 1997 to provide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erefore there is no privity of contract between the assessee and the ultimate recipient of the service. The assessee is undertaking software development from its AE under the sub-contract. The assessee bench marked its international transactions by applying Transactional Net Margin Method ('TNMM') as Most Appropriate Method ('MAM') at entity level. The assessee's margin at entity level is 12.61%. The assessee selected 15 comparables for bench marking its transactions, the details of comparables are as under :- Sl.No. Name of the company 1. Akshay Software Technologies Ltd. 2. Aztec Software and Technologies Services Ltd. 3. Geometric Softweare Solutions Company Ltd. 4. iGate Global Solutions Ltd. 5. Maars Software International Ltd. 6. Mascon Global Ltd. 7. Melstar InformationTEchnologies Ltd. 8. Mphasis BFL Ltd. 9. Orient Information Technologies Ltd. 10. PSI Data Systems Ltd. 11. R S Software (India) Ltd. 12. Sasken Communication Technology Ltd. 13. Sonata Software Ltd. 14. Visualsoft Technologies Ltd. 15. VJIL Consulting Ltd. The mean margin of the comparables selected by the assessee is arrived at 6.99% and therefore the assessee cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has tested party Thus the CIT (Appeals) selected MAARS Software International Ltd., an Indian Company as comparable to test the price at the hand of the various AEs of the assessee in different countries. The operating margin of the MAARS was computed at 9.61% whereas the operating margin of the AEs of the assessee was recomputed by the CIT (Appeals) by disallowing marketing / selling expenses and accordingly the CIT (Appeals) made a TP Adjustment of Rs. 2,54,18,865 on this account. 4. Before us, the learned Authorised Representative of the assessee has submitted that the CIT (Appeals) has adopted a new method without giving any show cause notice to the assessee for the same. Further the CIT (Appeals) has committed an error by considering the AEs of the assessee as tested party and further margins of the AEs have been compared with a domestic company selected as comparable. Therefore the CIT (Appeals) has taken completely different approach to the issue which is not permissible. He has further pointed out that since there was an acquisition of the assessee by the Mphasis BFL Limited therefore, due to this event of acquisition a proper representation could not be made before ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. (supra) as well as ITO Vs. Vendo Technology Pvt. Ltd. in ITA No.1374/Bang/2011 vide order dt.19.9.2014. 6. Sasken Network Systems Ltd. : The learned Authorised Representative of the assessee has submitted that the comparability of this company has also been considered by the co-ordinate bench of this Tribunal in the case of Kodiak Network India Ltd. (supra) as well as ITO Vs. Vendo Technology Pvt. Ltd. in ITA No.1374/Bang/2011 vide order dt.19.9.2014. 7.1 Foursoft Limited & Thirdware Solutions Ltd. : The functional comparability of these two companies are also examined by the Tribunal in the case of Kodiak Network India Ltd. (supra). 7.2 The learned Authorised Representative has pointed out that Related Party Transactions (RPT) in the case of Thirdware Solutions Ltd. is 19.89% and therefore in view of the consistent view taken by this Tribunal regarding the threshold limit of the RPT at 15%, this company cannot be considered as a good comparable. 8. Tata Elxsi Limited (Seg.) : The functional comparability of this company is examined by the Tribunal in the case of Kodiak Network India Ltd. (supra) and it was found that this company is functionally dis-similar to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of Sunquest Information System Ltd. (supra) has observed that this company is also in the software development product service. However, there was no sale of software product during the year. Further, the TPO has considered the segmental data of this company as computed in the Annexure B of the T P order. When the TPO has considered the segmental data, then, this company is functionally comparable. Similarly in the case of Thirdware Solutions Ltd., the TPO has recomputed the margins of the software development services segment of the said company and only segmental results has been taken into consideration for the purpose of determination of ALP. 11.2 In rebuttal, the learned Authorised Representative has submitted that the TPO has recomputed the profit margins of the comparables on adhoc basis without allocation of certain expenses. Therefore, the recomputation made by the TPO cannot be relied upon. 11.3 We have heard the rival submissions and considered the relevant material on record. We find that the assessee took its operating margin at entity level and then compared the same with the mean margins of the selected comparables. The TPO has not objected to its methodology of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relied upon by the assessee. We find that in the series of decisions, this Tribunal has come to a conclusion that the threshold limit of the RPT should not be more than 15% in normal circumstances where there is no difficulty in selecting the comparable companies. Therefore we direct the TPO to apply the RPT filter at 15% instead of 25% and then consider the comparability of the companies. Since the assessee did not fully co- operate with the authorities below in the first round of the proceedings therefore we direct the assessee to co-operate in the proceedings before the A.O./TPO and furnish the relevant and requisite details in order determining the ALP. Needless to say that the Assessing Officer/TPO also consider the benefit of tolerance range of + / - 5% as per the proviso to Section 92C(2) as well as working capital adjustment. 12.1 Ground No.13 regarding the reduction of foreign currency expenses from the export turnover. 12.2 We have heard the rival submissions and considered the relevant material on record. An identical issue has been considered and decided by the Hon'ble jurisdictional High Court in assessee's own case for the Assessment Year 2004-05 vide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anation (3) inserted by Finance Act, 2001 with effect from 1.4.2001 explains that the profits and gains derived from on site development of computer software including services for development of software, outside India shall be deemed to be the profits and gains derived from the export of computer software outside India. Thus, it is clarified by the legislature by inserting explanation (3) to Section 10A that the profits and gains derived from on site development of computer software including services for the development of such software outside India is deemed to be the profits and gains derived from the export of computer software outside India. In other words, the services rendered by the assessee relating to the development of computer software is deemed to be part of export turnover of computer software outside India." Respectfully following the decision of the Hon'ble jurisdictional High Court in assessee's own case, we direct the Assessing Officer/TPO not to reduce the expenses from the export turnover for computation of deduction under Section 10A of the Act. 13.1 Ground No.15 is regarding foreign tax credit. 13.2 We have heard the rival submissions and conside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nding 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 the consideration received from such export turnover, the expenses incurred towards freight, telecommunication charges, or insurance attributable to the delivery of the articles or things or computer software outside India, or expenses if any incurred in foreign exchange, in providing the technical services outside India should not be included. However, the word total turnover is not defined for the purpose of this section. It is because of this omission to define 'total turnover', the word 'total turnover' falls for interpretation by this Court; ........In section 10A, not only the word 'total turnover' is not defined, there is no clue regarding what is to be excluded while arriving at the total turnover. However, while interpreting the provisions of section 80HHC, the courts have laid down various principles, which are independent of the statutory provisions. There should ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dered in the context of section 80HHC in interpreting section 10A when the principle underlying both these provisions is one and the same". 16.2 The Hon'ble Mumbai High Court in the case of Gem Plus Jewellery India Ltd. (supra), in identical circumstances, held that since the export turnover forms part of the total turnover, if an item is excluded from the export turnover, the same should also be reduced from the total turnover to maintain parity between numerator and denominator while calculating deduction u/s 10A of the Act. The relevant finding of the Hon'ble Mumbai High Court reads as follows:- "The total turnover of the business carried on by the undertaking would consist of the turnover from export and the turnover from local sales. The export turnover constitutes the numerator in the formula prescribed by sub-section (4). Export turnover also forms a constituent element of the denominator in as much as the export turnover is a part of the total turnover. The export turnover, in the numerator must have the same meaning as the export turnover which is constituent element of the total turnover in the denominator. The legislature has provided a definition of the expression "ex ..... 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