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TMI Blog2020 (4) TMI 776X X X X Extracts X X X X X X X X Extracts X X X X ..... that as of today, law declared by the Hon'ble High Court of Karnataka which is the jurisdictional High Court is binding on us. Moreover, the order of the Hon ble Karnataka High Court has been upheld by the Hon ble Supreme Court in the case of CIT v. HCL Technologies Ltd. [ 2018 (5) TMI 357 - SUPREME COURT]. The grounds are decided accordingly. - IT(TP) A Nos.481/Bang/2016, CO No.59/Bang/2017 - - - Dated:- 19-2-2020 - Shri N.V Vasudevan, Vice-President And Shri B.R. Baskaran, Accountant Member For the Assessee : Shri T.Suryanarayana And Ms.Manasa Ananthan, Advocates For the Revenue : Mr.Muzaffar Hussain, CIT (DR) ORDER PER SHRI N.V VASUDEVAN, VICE-PRESIDENT: This is an appeal by the Revenue against the final order dated 19/01/2016 of Dy. Commissioner of Income-tax, Circle-1(1)(2), Bangalore relating to assessment year 2011-12 in respect of an order passed u/s 143(3) r.w.s 144C(13) of the Income Tax Act, 1961 (Act). The Assessee has also filed a Cross Objection against the very same order. 2. The Assessee is a subsidiary of Brocade Communications, Switzerland SARL, Switzerland with the latter holding 99.99% of equity shares of the As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the international transaction was higher than the arithmetic mean of profit margin of comparable companies and therefore the price received is at Arm s Length. 7. The TPO rejected the Transfer Pricing Study of the Assessee and chose only three of the 12 companies selected as comparable companies by the Assessee viz., Acropetal Technologies Ltd., Persistent Systems Solutions Ltd., and R.S.Software (India) Ltd. The TPO identified 10 other companies as comparable companies and arrived at a set of 13 comparable companies with that of the Assessee and arrived at arithmetic mean of the profit margin of those 13 companies at 24.82% before working capital adjustment and 22.04% after working capital adjustment. The following chart will show the list of 13 comparable companies ultimately chose by the TPO and the arithmetic mean of the profit margin of those companies and determination of ALP by the TPO. Sl. No. Name of the Company Mark-up Total Costs (in ( (WC-adj) 1 Acropetal Technologies Ltd. (seg) 31.98 27.32 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sued by the DRP are as follows: Functionality Filter: The following companies were directed to be excluded by accepting the contentions of the Assessee: i) E-Infochips Limited ii) CRA Techno Analytics Ltd. iii) Infosys Ltd. iv) Larsen Toubro Infotech Ltd. v) Infosys Ltd. vi) Tata Elxsi Ltd. The DRP, however, rejected the contentions of the Assessee that Persistent Systems Ltd. and Sasken Communication Technologies Ltd. were not functionally comparable to it and consequently upheld their inclusion in the final list of comparables. The DRP also suo moto directed R S Software (India) Ltd., Mindtree Ltd., and Evoke Technologies Pvt. Ltd. Onsite Software Development activities: In addition to the above, the DRP rejected the following companies selected by the TPO on the basis that they were predominantly engaged in onsite activities, although no onsite revenues filter had not been applied by the TPO: (a) L T Infotech Ltd. (rejected by DRPsuo moto on other grounds also); (b) RS Software (India) Ltd. (rejected by DRP suo moto only on this ground); List of Comparables post the DRP s Directions: On giving e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .2 3 in Revenue s appeal is concerned, the sum and substance of the ground of appeal is that the DRP ought not to have excluded 2 comparable companies from the list of final comparable companies chosen by the TPO for comparison of profit margin of the Assessee with comparable companies. The two companies that were excluded by the DRP which is in challenge by the Revenue before the Tribunal are (i) Larsen Toubro Infotech Ltd., and (ii) RS Software (India) Ltd. 14. As far as Larsen Toubro Infotech Ltd., is concerned it was the plea of the learned DR that the onsite revenue filter was not applied by the AO nor pleaded for application by the Assessee before DRP and in such circumstances, the DRP ought not to have applied the aforesaid filter without notice to the AO/TPO. On this objection, the learned counsel for the Assessee has rightly pointed out that the DRP in Page-8 Paragraph 2.9 of its order excluded this company by holding that this company is functionally not comparable because it has variety of sources of revenue and there were no segmental details available to know the income from SWD services. Hence, the plea of the revenue in this regard does not require to be c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e they should be regarded as not comparable. According to the Revenue, the DRP failed to notice this legal position in its order. This ground is vague and does not set out any particular instance of such violation and are therefore held to be without any merit. 17. Gr.No.8 raised by the revenue with regard to the directions of the DRP directing considering foreign exchange fluctuation gain as part of the operating profit of the Assessee is without merit as the law by now is well settled that foreign exchange gain has to be regarded as part of operating profit as held by the ITAT Bangalore Bench in the case of Electronics for imaging India Pvt.Ltd. Vs. DCIT (2017) 85 taxmann.com 124 (Bangalore). 18. As far as Ground No.8 to 10 on Corporate tax issues raised rised by the revenue in its appeal are concerned, it is not in dispute that the Assessee was entitled to claim deduction u/s.10A of the Act on the profits derived from its Software Technology Parks of India (STPI) registered unit. Sec.10A(4) provides the methodology of computation of deduction u/s.10A of the Act and it lays down that the profits derived from export of articles or things or computer software shall be the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... turnover should also be reduced from the total turnover. The CIT(A) however upheld the alternative prayer of the Assessee. 20. Aggrieved by the order of CIT(A), the Revenue has raised Gr.No.8 9 before the Tribunal. 21. We have considered the rival submissions. Taking into consideration the decision rendered by the Hon ble High Court of Karnataka in the case of CIT v. Tata Elxsi Ltd [2012] 349 ITR 98 (Karn), we are of the view that the CIT(A) was justified in excluding expenses both from export turnover and total turnover. We are of the view that as of today, law declared by the Hon'ble High Court of Karnataka which is the jurisdictional High Court is binding on us. Moreover, the order of the Hon ble Karnataka High Court has been upheld by the Hon ble Supreme Court in the case of CIT v. HCL Technologies Ltd. in Civil Appeal No.8489-98490 of 2013 Ors. dated 24.04.2018. The grounds are decided accordingly. 22. In the result, the revenue s appeal is partly allowed to the extent of its prayer for inclusion of R.S.Software Pvt.Ltd., as a comparable company and in all other respects grounds raised by the Revenue are dismissed. 23. As far as the Cross Objection ..... X X X X Extracts X X X X X X X X Extracts X X X X
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