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Income Tax Appellate Tribunal, “C” BENCH : BANGALORE
Before: SHRI ARUN KUMAR GARODIA & SHRI VIJAY PAL RAO
Date of hearing : 23.10.2017 Date of Pronouncement : 26.10.2017 O R D E R Per Shri A.K. Garodia, Accountant Member These are cross appeals filed by the assessee and revenue. These are directed against the assessment order dated 23.11.2015 passed by the AO u/s. 143(3) r.w.s. 144C of the IT Act for Assessment Year 2011-12. 2. The grounds raised by the assessee in its appeal are as under.
1. The orders of the TPO / DRP / Assessing Officer in so far as they are against the appellant, are opposed to law, weight of evidence, natural justice, probabilities, factsand circumstances of the appellant's case.
IT(TP)A Nos. 01 & 49/Bang/2016 Page 2 of 6
The appellant denies itself to be assessed on a total income of Rs. 3,81,94,230/- as against income of Rs. 23,17,877/- declared by the appellant.
3. a) The order of the assessment is bad in law as the mandatory conditions to invoke the jurisdiction under section 92CA of the Act did not exist, or having not been complied with and consequently the order of the assessing officer is bad in law for want of requisite jurisdiction. b) The assessing officer erred in not providing the copy of the approval granted by the Commissioner which is in violation of the settled principles of natural justice and thus the order of assessment needs to be set aside.
4. The addition of Rs. 3,58,76,350/- being adjustment under section 92CA of the Act made by the assessing officer is bad in law and thus the addition made needs to be deleted on the facts and circumstances of the case.
5. The TPO, DRP and the AO erred in rejecting the comparables selected by the appellant without giving any cogent reasons.
6. a) The TPO and the AO erred in selecting comparable companies with turnover more than 10 times that of the appellant resulting in an illogical comparison of financialdata. b) Without prejudice, the TPO and AO ought to have applied the turnover filter of Rs. 1 crore to Rs.200 crore under the facts of the case. Reliance is placed on the decision of the Hon'ble Bangalore Tribunal in appellant's own case for the assessment year 2009-10 reported in 52 taxmann.com 407.
a) The authorities below erred in considering Persistent Systems and Solutions Ltd. as comparable on the facts of the case. Without prejudice hold that the comparable needs to be rejected even based on the principles of consistency. b) Without prejudice the authorities below erred in considering E zest Solutions Ltd.as comparable on the facts of the case. c) The DRP and the AO erred in rejecting Evoke Technologies as a comparable on the facts of the case.
a) The TPO, DRP and the AO failed to appreciate that the appellant being a captive service provider runs a 'single customer risk'. b) The TPO, DRP and the AO further erred in not appreciating that IT(TP)A Nos. 01 & 49/Bang/2016 Page 3 of 6 the appellant renders services only to their parent company and thus suitable risk adjustment needs to be made in case of the appellant under the facts and circumstances of the case.
The TPO, DRP and the Assessing Officer erred in not granting the benefit of the proviso to section 92C(2) of the Act which is mandatory under the scheme of the Act. 10: The TPO, DRP and the AO failed to understand the spirit and intent of Rule 10B(1)(e)(ii) as per which even if one of the comparables selected by the appellant satisfies the computation mechanism for determination of the ALP, the determination of ALP by using arithmetic mean of different comparables is not warranted under the facts and circumstances of the case.
The appellant denies itself liable to be levied to interest under sections 234B and 234C of the Act and further the computation of interest under sections 234B and 234C was not provided to the appellant as regard to the rate, period and method of calculation of interest under the facts and circumstances of the case.
The appellant craves leave to add, alter, delete, and modify any of the grounds which are urged above.
For the above and such other grounds as may be urged at the time of hearing, the appellant prays your Honour to consider the facts and circumstances of the case andjustice be rendered.”
The grounds raised
by the revenue in its appeal are as under. “1. The orders of the Dispute Resolution Panel is opposed to law and the facts and circumstances of the case.
2. The DRP erred in directing the AO/TPO to exclude M/s. Acropetal Technologies Ltd., M/s. R.S. Software (India) Ltd., from the list of comparables, holding them to be functionally dissimilar as they are having significant onsite revenues, thereby seeking exact comparability while searching for comparable companies of the assessee under TNMM method, whereas requirement of law and international jurisprudence require seeking similar comparable companies. Also, the nature of activity, i.e., software development remains the same, irrespective of the company engaged in providing onsite or offshore services.
3. The DRP erred in directing the AO to exclude M/s. Acropetal Technologies Ltd., from the list of final comparables also for the reason that clear segmental information of the employee cost and export earning filter was not available.
4. The DRP erred in directing to exclude E-infochips Ltd., from the IT(TP)A Nos. 01 & 49/Bang/2016 Page 4 of 6 list of comparables holding that no segmental information is available and that it fails 75% service revenue filter, by not acknowledging the fact that the determination of ALP by carrying out comparability analysis of the comparable companies is an art and not exact science as no two companies are exactly same and also the DRP erred in applying the service revenue income filter by taking 'software service income' to turnover ratio rather than 'service income' to turnover ratio.
5. The DRP erred in directing to exclude M/s.ICRA Techno Analytics Ltd. and Tata Elxsi Ltd., from the list of comparables holding them to be functionally uncomparable, thereby seeking exact comparability by imposing condition beyond law whereas requirement of law is to acknowledge only those differences that are likely to materially affect the margin. The DRP ought to have appreciated that both the comparables qualified all the qualitative and quantitative filters applied by the TPO.
6. The DRP erred in directing the AO/TPO to exclude M/s. Evoke Technologies Ltd., from the list of comparables, holding it to be functionally uncomparable due to the peculiar economic circumstances without appreciating that the expenditure incurred is a normal phenomena and a company cannot be excluded merely on abnormal profit margins. Corporate Issue: 7. The DRP erred in directing the AO to follow the ratio laid down by the Hon'ble Court in the case of Tata Elxsi Limited 349 ITR 98 and exclude communication expenses and travel expenses from the total turnover also, while computing the deduction u/s 10A of the I.T. Act, without appreciating the fact that there is no provision in section 10A that such expenses should be reduced from the total turnover also, as clause (iv) of the explanation to section 10A provides that such expenses are to be reduced only from the export turnover.
8. The DRP erred in not appreciating the fact that the jurisdictional High Court's decision in the case of Tata Elxsi Limited 349 ITR 98 has not been accepted by the department and an appeal has been filed before the Hon'ble Supreme Court.
9. For these and such other grounds that may be urged at the time of hearing, it is humbly prayed that the order of the DRP be reversed and that of the Assessing Officer be restored. 10.The appellate craves leave to add, to alter, to amend or delete any of the grounds that may be urged at the time of hearing of the appeal.”
At the very outset, the ld. AR of assessee drawn our attention to page no. 15 of order of DRP and pointed out that at this page, it has been held by DRP that IT(TP)A Nos. 01 & 49/Bang/2016 Page 5 of 6 the AO is directed to determine the ALP based on two comparables i.e. Persistent Systems& Solutions Ltd. and Sasken Communication Technology Ltd. and due to these findings, the discussion made in regard to comparability of other comparables becomes academic in nature. He than drawn our attention to the final assessment order passed by the AO after the directions of the DRP and pointed out that it is noted by the AO in para no. 5 of the final assessment order that as per letter dated 28.10.2015, the TPO was requested to re-work the amount of TP adjustment as per the directions of DRP and to communicate the correct amount of adjustment to be adopted while passing the assessment order and thereafter, he noted in para no. 6 of the assessment order that the TPO vide letter 04.11.2015 has communicated the correct amount of adjustments to be adopted as Rs. 3,58,76,350/- as against the earlier adjustment amount of Rs. 3,98,65,935/-. He submitted that from these orders of DRP and AO, it is not clear as to of which the comparables were finally adopted and how the ALP was determined and TP adjustment was quantified and therefore, the entire TP matter should be restored back to the file of DRP for fresh decision by way of a speaking and reasoned order. The ld. DR of revenue also agreed to this proposition and accordingly, we set aside the assessment order on TP issue and restore the entire TP issue back to the file of DRP for fresh decision by way of a speaking and reasoned order after providing adequate opportunity of being heard to both sides. Hence, individual grounds raised on TP issue in both appeals are not required to be adjudicated upon separately.
There is no corporate tax issue raised in the appeal of the assessee but in the appeal of the revenue, one corporate tax issue is also raised as per ground nos. 7 and 8 regarding the quantum of deduction allowable to assessee u/s. 10A of the IT Act. The grievance of the revenue is that DRP has erred in directing the AO to reduce communication expenses and travel expenses from export turnover and total turnover both. This issue is now covered 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 wherein it was held that total turnover is sum total of export turnover and domestic turnover and therefore, if an amount
IT(TP)A Nos. 01 & 49/Bang/2016 Page 6 of 6 is reduced from export turnover then total turnover also goes down automatically by the same amount. Respectfully following this judgment of Hon'ble Karnataka High Court, we decline to interfere in the assessment order on this issue.Accordingly ground nos. 7 and 8 of revenue’s appeal are rejected.
In the result, the appeal filed by the assessee is allowed for statistical purposes whereas the appeal filed by the revenue is partly allowed for statistical purposes.
Order pronounced in the open court on the date mentioned on the caption page.