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Income Tax Appellate Tribunal, “B” BENCH : BANGALORE
Before: SHRI ARUN KUMAR GARODIA & SHRI LALIET KUMAR
O R D E R Per Shri A.K. Garodia, Accountant Member These are cross appeals filed by the assessee and revenue and these are directed against the assessment order dated 29.12.2015 passed by the AO u/s. 143(3) r.w.s. 144C (13) of IT Act, 1961 for Assessment Year 2011-12 as per the directions of DRP.
The grounds raised
by the assessee in its appeal are as under. “1. The Assessment Order dated December 29, 2015, passed by the learned Income Tax Officer, Ward 5(1) (1), Bangalore ("the AO") under section 143(3) read with section 144C(13) of the Income-tax Act, 1961 ("the Act") is not in accordance with the law and is contrary to the facts and circumstances of the present case.
2. The Honorable Dispute Resolution Panel ("DRP") has erred in law IT(TP)A No. 294 & 236/Bang/2016 Page 2 of 7 and on facts in partially upholding the adjustment to the arm's length price determined by the learned Transfer Pricing Officer ("the TPO")/AO to the income of the Appellant, based on the order, purportedly under section 92CA of the Act, passed by the TPO.
3. Rejection of the transfer pricing documentation of the Appellant 3.1. The Honorable DRP has erred in law and on facts in rejecting the Transfer Pricing ("TP")documentation which has been prepared by the Appellant in the manner as contemplated under the relevant provisions of the Act and the Income-tax Rules,1962 ("the Rules"). 3.2. The Honorable DRP has erred in law and in facts in not appreciating that the Appellant hasalready applied the filters sought to be applied by the Honorable Panel in preparation of transfer pricing documentation and consequent selection of comparable companies.
4. Filters and quantitative criteria applied by the Appellant 4.1. The Honorable DRP has erred in law and on facts in arbitrarily selecting 3 companies ascomparable without providing adequate reasons to substantiate the rejection of comparable companies selected by the Appellant in the transfer pricing documentation. 4.2. Without prejudice to the above, the Honorable DRP has erred in law and on facts in rejectingcertain comparable companies selected by the Appellant in the TP study despite the fact that it does not fail the filters adopted by the learned TPO.
5. Computation of the Operating margins 5.1. The Honorable DRP has erred in law and on facts in including pre-operative expenses being non-operating in nature while computing the Profit Level Indicator ("PLI") of the Appellant. 5.2. The learned AO has erred in law and on facts in considering foreign exchange fluctuations to non-operating in nature in computing the results of the comparable companies despite the DRP's direction to consider the same to be operating in nature.
Comparability Adjustments 6.1. The learned AO has erred in law and on facts in not providing the benefit of working capital adjustment to the Appellant despite the DRP's direction directing AO to provide the working capital adjustment. 6.2. The Honorable DRP has erred in law and on facts in upholding the learned TPO's action of incorrect application of the principles of working capital formula prescribed by the Organization for Economic
IT(TP)A No. 294 & 236/Bang/2016 Page 3 of 7 Co-operation and Development ("OECD") and the United Nations Practice Manual for Developing Countries Model Convention to carry out working capital adjustment to the operating profit margins of the comparable companies. 6.3. The Honorable DRP has erred in law by not providing risk adjustment to the Appellant. The Appellant craves leave to add, alter, vary, omit, substitute or amend the above grounds, at any time before or at the time of hearing of the appeal. Each of the above grounds is independent and without prejudice to the other grounds preferred by the Appellant.”
The revised grounds raised
by the revenue in its appeal are as under. “1. The direction the Dispute Resolution panel are opposed to the law and not on the facts and circumstances of the case.
2. On the facts and circumstances of the case, whether the Hon'ble DRP is correct in holding that the forein exchange transactions are to be considered as operating in nature, when Rule 10 B(2)(d) stipulates that the net profit margin realized by the taxpayer in the international transaction shall alone be computed for comparability analysis under TNMM.
3. On the facts and circumstances of the case, whether the Hon'ble DRP is correct in holding that the taxpayer is mainly into software development services in absence of any document/evidence or details of software development activity undertaken by the assessee and also the taxpayer could not properly substantiate its claim with proper documentation or evidence that its design engineers perform any other functions and not engineering design?
4. On the facts and circumstances of the case, the Hon'ble DRP erred in directing the Assessing officer to reduce the expenditure incurred in foreign currency, both from the Export Turnover as well as total Turnover for the purpose of computation u/s 10A of the IT act without appreciating the fact that the statute allows exclusion of such expenditure only from ETO by way of specific definition of export turnover as envisaged by sub-clause(4) of explanation 2 below sub section 8 of section 10A. On the other hand, there is no specific provision in section 10A warranting exclusion of above expense from total turnover also.
5. For these and other grounds that may be urged upon, direction of the Dispute Resolution panel may be reversed and that assessment order be restored.
6. The appellant craves leave to add, alter, amend or delete any other
IT(TP)A No. 294 & 236/Bang/2016 Page 4 of 7 grounds on or beforehearing of the appeal.”
In course of hearing, both sides agreed that only one corporate tax issue is raised in the appeal of the revenue as per ground no. 4 and this issue is covered in favour of the assessee by the judgment of Hon'ble Karnataka High Court rendered in the case of CIT Vs. Tata Elxsi Ltd. as reported in 349 ITR 98 and also by the judgment of Hon’ble Apex Court rendered in the case of CIT vs. HCL Technologies Ltd. as reported in 302 CTR 191. As per these judgments, it was held that total turnover is sum total of export turnover and domestic turnover and if an amount is reduced from export turnover then the total turnover also goes down by the same amount automatically. As per ground no. 4 raised by revenue in its appeal, this is the only grievance of the revenue that the expenditure incurred in foreign currency and reduced from the export turnover by AO should not be reduced from total turnover. In view of these two judgements, we find no infirmity in the direction of DRP on this issue and hence, we decline to interfere. Ground no. 4 of revenue’s appeal is rejected.
In respect of the remaining grounds of appeal of revenue and in respect of all the grounds of appeal of the assessee, it is noted that the issue involved is regarding TP adjustment. It was pointed out by ld. DR of revenue that this is the grievance of revenue in ground no. 3 of its appeal that whether the DRP is correct in holding that the taxpayer is mainly into software development services whereas it is held by the TPO in Para no. 6 of his order that the functional profile of taxpayer was recharacterized as “Design & Engineering Service” as against the assessee’s claim that the functional profile of assessee is of Software Developer. The ld. AR of assessee submitted that in earlier years, the TPO has accepted that the assessee is a Software Developer. At this juncture, it was submitted by ld. DR of revenue that there is no such discussion on various factual aspects in those orders of TPO for earlier years and in the present year also, there is no comment of TPO about comparison of facts of earlier years. Both sides agreed that under these facts, the entire TP issue may be restored back to the file of IT(TP)A No. 294 & 236/Bang/2016 Page 5 of 7 DRP for fresh decision because on this aspect of the matter, the order of DRP is very cryptic.
6. We have considered the rival submissions and first of all, we reproduce Para 3.2 from the order of DRP on pages 3 and 4 of the order of DRP. “3.2 OBJECTION NO. II - On Transfer Pricing Issues (1) Ground of objection - General The AR submitted that the AO has erred in law and on facts, in upholding the adjustment to the arm's length price made by the learned TPO. The AR submitted that the AO/ TPO has erred, in law and on facts in making an adjustment of Rs 35,922,991 to the taxable income of the Assessee and in holding that the international transactions between the Assessee and its Associated Enterprise ("AE") were not at arm's length. Having considered the submission, In our view, the order passed by the TPO is a subject matter of the proceedings u/s 144(c) before us. Specific Objections raised by the assessee before us are being considered in subsequent paragraphs and therefore, no directions can be issued on the above general grounds' , further, we are also of the view that as per section 144C, the DRP is required to issue directions in respect to the objections relating to the variations in the income or loss returned and therefore, no directions can be issued to the Assessing Officer on the grounds not dealing with the variation of the income. Accordingly, no direction is issued on the above ground of objection. (2) Re-characterization of the functions carried out by the Assessee The AR submitted that the AO/ TPO has erred in law and on facts in stating that the assessee is not a software development services company which has been accepted by the learned AO/ TPO in the earlier years. The AR submitted that the AO/ TPO has erred in law and on facts by re-characterizing the functions of the Assessee as Design and Engineering services on mere presumptions as against the software development services functions actually rendered by the Assessee. The AR submitted that the AO/ TPO has erred in law and on facts by placing reliance on the designation of the employees and the institutes from which they have graduated in re- characterizing the functions of the assessee as against the actual functions carried out by the assessee. The approach adopted by the learned TPO is based on mere surmise, subjective
IT(TP)A No. 294 & 236/Bang/2016 Page 6 of 7 assumptions of the semiconductor industry and without any basis. Having considered the submissions, we examined the research and development agreement entered in the AE on 01.04.2005, it is noticed by us from paragraph 4.3 of the agreement that the assessee company is required to perform the services, including, without limitation, software programming, software testing, module integration testing, software documentation, software quality assurance, integrated circuit design, modules, layout, in connection with the developed product which clearly indicates that the services provided by the assessee are in the nature of software development services. It is also noticed by us that in the A.Y. 2010-11, the functions were considered to be a software development services by the TPO and also the comparability analysis was made by the TPO based on the software development comparables. Further, it is undisputed fact that the company is approved Software Technology Park of India, (STPI), and the A.O. himself allowed the deduction u/s 10A in respect of Software Development Park and therefore, in our view, the TPO was not justified in re-categorizing of the services, the objection is accordingly found acceptable.”
From the above Para reproduced from the order of DRP, it is seen that the order is very cryptic and it is simply stated that in Assessment Year 2010- 11, the functions were considered to be a software development services by the TPO and also the comparability analysis was made by the TPO based on the software development comparables. But there is no comment in respect of factual aspects discussed by the TPO in the order of present year and there is no comment on this aspect also as to whether such analysis was done by the TPO in the earlier years. Hence we feel it proper that the entire TP issue should go back to the file of DRP for fresh decision by way of a speaking and reasoned order on all relevant aspects after providing reasonable opportunity of being heard to both sides.
In view of this decision, no adjudication on merit is called for at the present stage in respect of TP issue involved in the appeal of the assessee as well as of the revenue.
IT(TP)A No. 294 & 236/Bang/2016 Page 7 of 7 9. In the result, the assessee’s appeal is allowed for statistical purposes whereas the revenue’s appeal is partly allowed for statistical purposes. Order pronounced in the open court on the date mentioned on the caption page.