DCIT, BANGALORE vs. M/S SONIC WALL INFO SECURITY PRIVATE LIMITED, BANGALORE

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ITA 340/BANG/2015Status: DisposedITAT Bangalore13 December 2018AY 2010-118 pages
AI SummaryRemanded

What did the Tribunal hold?

The Tribunal held that the DRP's order was cryptic and lacked proper reasoning regarding the inclusion/exclusion of comparables and the employee cost filter. The matter was remanded back to the DRP for a reasoned order.

What were the facts?

The Revenue and assessee filed cross-appeals against the DRP's order concerning transfer pricing adjustments for AY 2010-11. The assessee argued the DRP's order was cryptic and failed to address specific grounds, including the employee cost filter.

What were the issues?

Whether the DRP's order on comparable selection and employee cost filter was sufficiently reasoned. Whether expenses should be deducted from both export and total turnover under Section 10A.

Which sections of the Income-tax Act were involved?

Section 10A

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Cases cited in this judgment(2)Show list

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Income Tax Appellate Tribunal, BENGALURU BENCH A, BENGALURU

Before: SHRI. A. K. GARODIA & SHRI. LALIET KUMAR

For Appellant: Shri. Raghunathan, Advocate

O R D E R PER LALIET KUMAR, JUDICIAL MEMBER : These are cross appeals are filed by the Revenue and the assessee respectively, against the order of the ITO, Ward -6(1)(2), Bengaluru, dt.29.01.2015, for the assessment year 2010-11.

IT(TP)A.340 & 555/Bang/2015 Page - 2 The Revenue has raised the following grounds of appeal :

The Assessee has raised the following grounds of appeal :

IT(TP)A.340 & 555/Bang/2015 Page - 3 IT(TP)A.555/Bang/2015 – By the Assessee : 02. In this regard the Ld. AR for the assessee has drawn our attention to para 6.2.4 of the DRP order, as well as para 6.3.2 of the DRP order to the effect that the DRP without specifically dealing with the inclusion / exclusion of the comparables, has passed a consolidated order in cryptic manner and therefore the decision is required to be remanded back .Para 6.2.4 and 6.3.2 mentioned as under : 6.24 of the DRP order reads as under :

IT(TP)A.340 & 555/Bang/2015 Page - 4

6.24. I find that the TPO’s findings are in order to render the balance functionally similar. In view of the aforesaid, I see no reason to exclude any further comparables on the ground of functional dissimilarity. The above mentioned 05 comparables shall now form the final comparables on which the ALP adjustment needs to be carried out by the TPO. It is ordered accordingly. 6.32 of the DRP order reads as under : 6.32. In view of the aforesaid, we see no reason to exclude any further comparables on the ground of functional dissimilarity, as the business of the comparables vis-a-vis the assessee company falls within the same sector. Thus, the balance comparables mentioned above shall form the final comparables, excluding the ones that do not qualify the turnover filter, on which the ALP adjustment needs to be carried out by the TPO.

Our attention was further drawn to objection at Annexure 1.19, raised by the assessee before the DRP in respect of employee cost filter of 25%. This ground reads as under : Ground No.1 : The learned Transfer Pricing Officer (“TPO”) has not given any rationale, neither in show- cause notice nor in TP order, for not applying the employee cost filter in the benchmarking analysis.

Ground No.2 : The learned TPO ought to have applied employee cost filter wherein only companies having an employee cost greater than 25% of revenue should be accepted.

It was also submitted by the Ld. AR that the DRP despite raising the specific ground has failed not even to mention the grounds from the list of grounds reproduced by it in the body of the order and it had further failed to adjudicate this ground.

IT(TP)A.340 & 555/Bang/2015 Page - 5

3.

Per contra, the Ld. DR relies upon the order passed by the lower authorities.

4.

We have gone through the order passed by the DRP and the grounds raised before us.

5.

We have considered the contentions of the parties and perused the record. From the perusal of the paragraph reproduced hereinabove, it is clear that the DRP had passed a cryptic and stereotyped order without giving any reasoning for including / excluding the comparables in respect to ITES and SWDS. We expect the DRP to give a reasoned and cogent finding while dealing with the contention of the assessee for allowing or disallowing the plea of the assessee. Hence we remand the entire matter back pertain to inclusion / exclusion of comparables to the file of the DRP to pass a reasoned speaking order, after dealing with the contention of the assessee. Needless to say while doing so the DRP shall give adequate opportunity of hearing to the assessee and pass a detailed order.

6.

With respect to the other aspect, i.e., employee cost filter, as pointed out by the Ld. AR that the assessee has raised the ground no.1.19 before the DRP and the supporting documents in this regard were also filed. However, the DRP had failed to adjudicate this ground. In view of the above, we deem it appropriate to remand the matter to the DRP with a direction to adjudicate the ground of employee cost filter after considering the submission of the assessee IT(TP)A.340 & 555/Bang/2015 Page - 6 and if required, call for a report from the AO / TPO in this regard, a fresh .

7.

In the result, appeal filed by the assessee is allowed for statistical purpose.

IT(TP)A.340/Bang/2015 – By the Revenue :

8.

In respect of ground no.2 and 3, we may mention that just like the assessee, the Revenue is also aggrieved by the cryptic and stereotyped order passed by the DRP, especially paras 6.2.4 and 6.3.2 which are reproduced elsewhere in this order. As we are remanding the matter back to the file of the DRP for deciding the issue afresh after giving the assessee a hearing, therefore we deem it appropriate to remand even the grounds raised by the Revenue also to the file of the DRP for passing a detailed and speaking order with regard to inclusion / exclusion of the comparables. We may like to add that while adjudicating these grounds, the DRP may also consider the decisions passed by the Tribunal as also the judgment of Hon’ble Delhi High Court in the matter of Chryscapital Investment Advisors (India) (P.)Ltd. V. DCIT [(2015) 376 ITR 183. In view of the above, ground nos.2 & 3 by the Revenue are allowed for statistical purpose.

9.

Ground no.4, raised by the Revenue, pertains to export turnover / total turnover. In this regard the parties before us have submitted that this issue has been concluded by the Hon’ble Supreme Court in the matter of H C L Technologies Ltd [(2018) 93 taxmann.com 33], IT(TP)A.340 & 555/Bang/2015 Page - 7

10.

On the other hand the Ld. AR for the assessee supported the order of the lower authorities.

11.

We have heard the rival contentions and perused the material on record. We find that this issue is put to rest by the judgment of the Hon’ble Supreme Court in the matter of CIT v. HCL Technologies Ltd [(2018) 93 taxmann.com 33], wherein the Hon’ble Supreme Court has decided the issue in favour of the assessee holding that the expenses be reduced both from the export turnover as well as from the total turnover. The Hon’ble Supreme Court in paras 20 and 21, held as under : 20. Even in common parlance, when the object of the formula is to arrive at the profit from export business, expenses excluded from export turnover have to be excluded from total turnover also. Otherwise, any other interpretation makes the formula unworkable and absurd. Hence, we are satisfied that such deduction shall be allowed from the total turnover in same proportion as well. 21. On the issue of expenses on technical services provided outside, we have to follow the same principle of interpretation as followed in the case of expenses of freight, telecommunication etc., otherwise the formula of calculation would be futile. Hence, in the same way, expenses incurred in foreign exchange for providing the technical services outside shall be allowed to exclude from the total turnover. Respectfully following the above order of the Hon’ble Supreme Court, we direct that the expenses incurred shall be deducted both from the export turnover as well as the total turnover for arriving at the deduction u/s.10A of the Act.

12.

In the result, Revenue’s appeal is partly allowed.

IT(TP)A.340 & 555/Bang/2015 Page - 8

13.

To summarise, appeal of the Assessee is allowed for statistical purpose and the appeal of the Revenue is partly allowed.

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