JCIT vs. M/S DELL INTERNATIONAL SERVICES INDIA,

Per N.V. Vasudevan, Judicial Member

ITA No.85/Bang/2014 is an appeal filed by the assessee, while ITA 1838/B/13 is an appeal filed by the revenue. Both these appeals are directed against the order dated 20.9.2013 of the CIT(Appeals), LTU, Bangalore relating to AY 2005-06. The assessee has also filed Cross Objection in CO No.21/Bang/2016 against the very same order of the CIT(Appeals). All these appeals arise out of the orders passed u/s. 143(3) of the Income-tax Act, 1961 [“the Act”] for the AY 2005-06.

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“2. The Ld CIT(A) erred in directing the AO to deduct telecommunication expenses from total turnover and export turnover while computing the eligible deduction u/s l0A, as this is against the provisions of section 10A.”

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articles or things or computer software outside India, from the export

turnover. The Assessee argued that for an expense to be considered as

"attributable" to some activity, it should have been specifically and

exclusively incurred and identifiable with that activity. It was submitted that

the payment made by the Assessee towards telecommunication charges

was stated to be for obtaining specific bandwidth capacity for facilitating the

"connectivity" activities. This bandwidth was used by the company for

downloading of data/software for carrying out the primary business activity

of providing call centre support to the customers of various Dell overseas

entities worldwide. Thus, the telecommunication charges, in the instant

case, are not specifically attributable to the delivery of the articles or things

outside India and, hence, the telecommunication charges incurred in

providing these services from India, would form part of the 'export turnover'

for computing deduction under section 10A of the Act.

submitted that should a stand be taken that telecommunication charges be

excluded from export turnover, the same should be excluded from 'total

turnover' as well, while computing the deduction under section 10A of the

Act. The Assessee relied on the decision of the Bangalore Bench of ITAT in

Assessee's own case for the AYs 2002-03, 2003-04 & 2004- 05, wherein it

was held that telecommunications charges should be excluded both from

the export turnover and total turnover. The Assessee also placed reliance

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on the decision of the Special Bench of the Chennai ITAT in the case of Sak

Soft Limited v. ITO (ITA no. 691 & 1953/Mds/2007) wherein it was held that

if the telecommunication, freight and insurance expenses are reduced from

the export turnover then the same would also have to be reduced from the

total turnover in order to compute the deduction under section 10A. The

Assessee also placed reliance on the decision of the Hon'ble High Court of Karnataka in the appellant's owns case for AY 2002-03, 2003-04 & 2004-05

(ITA No. 450 of 2008, ITA no. 451 of 2008 & ITA no. l37 of 2010) wherein it

was held that telecommunication charges should be excluded both from

export turnover and total turnover while applying the formula for allowing

deduction u/s.10A(4) of the Act.

telecommunication charges only from the Export Turnover and did not

reduce it from the total turnover while applying the formula for allowing

deduction u/s.10A(4) of the Act. As a result, the deduction u/s.10A of the

Act was allowed at a much lower sum than what was claimed by the

Assessee.

and further placed reliance on the decision of the Hon’ble Karnataka High Court in the case of CIT v. Tata Elxsi Ltd [2012] 349 ITR 98 (Karn) wherein

it was held that telecommunication charges should be excluded both from

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the total turnover and export turnover while applying the formula u/s.10A(4) of the Act while allowing deduction u/s.10A of the Act. The CIT(A) accepted the alternative prayer of the Assessee. The revenue is aggrieved by the order of CIT(A) and has raised the aforesaid grounds before the Tribunal.

“3. The Ld. CIT(A) erred in allowing the excess provision towards warranty expenses created by the assessee without appreciating the fact that the AO has clearly brought out the fact that the provision was made in an unscientific way.”

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business, the Assessee had claimed as deduction a sum of

Rs.4,71,61,000/- towards 'warranty expenditure'. Out of this amount, a sum

of Rs.2,21,80,000/- was actually paid by the assessee on account of

warranty claims made by the customers. Thus the balance amount of

Rs.2,49,81,000/- was only a provision made for possible claims on account

of warranty liability. According to the AO, the expenditure being contingent

one, the same cannot be allowed as a deduction only computing income

from business.

liability on account of possible warranty claim was made on a scientific

basis with minimum margin of error. The Assessee claimed that the liability

to incur the expenditure on account of warranty liability was a certain liability

and that the quantification of such liability was based on sales made in each

year and the quantum of claims on account of warranty liability as a

percentage of sales in the past. The assessee also relied on the decision of

the Hon'ble ITAT in its own case for the assessment years 2003-04 and

2004-05, wherein similar claim was held to be a liability of the Assessee

and allowable as deduction while computing income from business of the

Assessee. The Assessee thus claimed that the liability in question was not

contingent liability and should be allowed as deduction.

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on account of warranty liability was made on scientific basis with minimum

margin of error. He was of the view that in making a provision on account of

warranty liability the Assessee merely adopts a formula and by doing so

claims that the liability was an ascertained liability. He was of the view that

the estimation made should be more or less equal to the actual expenditure

incurred. The AO examined the provision made for liability on account of

warranty claims by the Assessee in the past and the actual liability it

discharged on account of such claims, which was as follows:

Financial Opening Accrual Payments Movement Closing Year Balance during the made during the Balance year during the year year 2000-01 - (10,913,999) - (10,913,999) (10,913,999) 2001-02 (10,913,999) (59,251,209) 35,706,693 (23,544,516) (34,458,516) 2002-03 (34,458,516) (92,038,800) 42,668,862 (49,369,938) (83,828,454) 2003-04 (83,828,454) (3,273,145) 24,052,936 20,779,790 (63,048,663) 2004-05 (63,048,663) (47,161,000) 22,180,000 (24,981,000) (88,029,663)

the provisions made in each year (which is shown under the head, 'Accruals

during the year), are way off the mark, compared to the actual expenditure

(shown under the head 'payments made during the year). He therefore held

that when the estimation for the provision is nowhere near the actual

expenditure, it cannot be said that the provision is on a scientific basis. It

can only be called an ad hoc provision. The fact that the excess provision is

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written back in the next year does not alter the position in this year. The AO relied on the decision of the Hon’ble Madras High Court in the case of CIT

Vs Rotork Controls India Ltd and Others 293 ITR 311 Mad wherein it was

held that if the provision for warranty is made on an ad hoc basis, the same

cannot be allowed as a deduction. According to the AO, the provision made

by the assessee cannot be said to be on a scientific basis and as such,

cannot be allowed as a deduction.

account of warranty liability is a certain liability which had arisen during the

relevant previous year, the AO held there was a wide gap in the estimation

made by the assessee and the actual expenditure incurred by it later.

Therefore at least to the extent of excess provision made it cannot be said

that the liability to incur the expenditure has arisen during the year. As far

as the assessee's reliance on the decision in its own case for the earlier

years, the AO was of the view that the ITAT’s decision was not accepted by

the Department and the matter was agitated before the Hon'ble High Court

of Karnataka.

assessee in its books and debited in the profit and loss account, towards

warranty expenditure, in excess of the actual expenditure has to be treated

as a contingent liability. Accordingly, an amount of Rs.2,49,81,000/-, being

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the excess provision made, was disallowed and added back to the

assessee's total income.

submission of the assessee that similar disallowance made in assessee’s

own case for the AYs 2002-03 & 2003-04 was deleted by the Tribunal and

the CIT(A) found that the facts and circumstances under which the

disallowance was made in the present assessment year was identical to the

facts as it prevailed in AYs 2002-03 & 2003-04. The CIT(Appeals)

accordingly deleted the addition made by the AO. The CIT(A) was of the

view that provision for warranty as made by the assessee company was in

conformity with the ruling of the Hon’ble Supreme Court in the case of Rotork Controls India Pvt. Ltd. v. CIT, 223 CTR 425. Aggrieved by the order

of CIT(Appeals), the revenue has raised ground No.3 before the Tribunal.

order of assessment that provision made by the assessee on account of

liability towards warranty claim was not made by the assessee on a

scientific basis and this finding has not been countered by the assessee

before the CIT(Appeals) nor has the CIT(A) given a finding that the

provision made by the assessee was scientific.

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notice that in AYs 2002-03 & 2003-04 in ITA Nos.362 & 363/Bang/2007,

order dated 18.03.2016, the Tribunal held that provision for warranty made

by the assessee was scientific and based on the claim of warranty

expenses made in the case of assessee in the past.

The basis on which provision for warranty was made by the assessee was

that the Assessee has arrived at a model for ascertaining the warranty cost,

based on the type of equipment, periodicity of warranty and nature of

commitment. The Assessee has a specialized warranty accounting team

which tracks the incidents reported for each product country-wise and

associated cost of providing warranty services. The total sales are divided

into various categories of IT hardware products based on the warranty

periods attached to each such product. The faults are tracked on the basis

of a unique identification number attached to each IT hardware so as to

identify cases of faults. The warrant cost is a product of the Field Incident

Rate i.e., the number of repairs and the Cost per Incident. Field Incident

Rate is determined based on the actual faults reported over the earlier

years, the Cost per Incident is determined a scientific basis based on the

past experience, which is the sum of the following:

- Cost of Spare Parts; - Cost of logistics; and - Labour cost

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The Assessee writes back the difference between the warrant provision

made for a particular year and actual expenditure incurred in the

subsequent year, in the subsequent year.

warranty was made was identical in AYs 2002-03 & 2003-04 as well as in

AY 2005-06. The Tribunal has in the appeal for the AYs 2002-03 & 2003-

04 after considering the method of providing for warranty liability by way of

a provision, specified that the provision made was based on past history

and was on scientific method of estimating liability on account of warranty

claims. It is clear from the chart which has been extracted in the order of

assessment that as and when the period of warranty expires, the assessee

writes back the provision made in the books of account to the extent it

relates to the warranty liability which the assessee does not incur and which

was already provided by way of a provision and allowed as deduction in the

past. It appears to us that the provision made by the assessee is scientific

and is based on past history. We are also of the view that in view of the

parity of basis of provision of warranty in AYs 2002-03 & 2003-04 and AY

2005-06, the ruling of the Tribunal in AYs 2002-03 & 2003-04 is squarely

applicable to AY 2005-06 also. For the reasons stated above, we do not

find any merit in ground No.3 raised by the revenue and accordingly the

same is dismissed.

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“Revenue’s grounds (4 to 8) 4. Whether the Ld. CIT(A) was justified in fixing the RPT filter at 0% of total revenue and deleting comparab1es selected by the TPO, by superimposing the decisions of ITAT in other cases, without going into specific facts in the case of the taxpayer and without adducing the basis for arriving at the 0% cut off for RPT filter, in the case of the taxpayer. 5. The learned CIT(A) erred in holding that the turnover of the company are deciding factors for treating a company as a comparable, and accordingly erred in excluding iGate Global Solutions Ltd, F1extronics. L&T Infotech Ltd, Satyam Computers Ltd, M/s Infosys Technology Ltd. M/s F1extronics Software Systems Ltd(seg), as a comparable in the segment. 6. Whether the Ld CIT(A) was justified in imposing the decision of different case without appreciating the findings of the TPO. 7. In the facts and circumstances of the case, the Ld. CIT(A) erred in holding that M/s Sankhya Infotech Ltd, cannot be taken as comparable. when the company qualifies all the qualitative and quantitative filters applied by the TPO in selection of this company as a comparable. 8. Whether the Ld.CIT(A) was justified in treating the comparable company M/s Sankhya Infotech Ltd, as a product company on the basis of the Director's Report in the absence of any entry to that effect in the P&L account and Balance sheet.”

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Assessee’s grounds in CO I. The Ld. CIT(A) while rejecting Four Soft Ltd., on RPT being more than 0%, has grossly erred in not adjudicating on the following grounds: • Functional dissimilarity 2. The Ld. CIT(A) while rejecting Thirdware Solutions Ltd., on RPT being more than 0%, has grossly erred in not adjudicating on the following grounds: • Functional dissimilarity 3. The Ld. CIT(A) while rejecting Geometric Software Solutions Ltd., on RPT being more than 0%, has grossly erred in not adjudicating on the following grounds: • Functional dissimilarity 4. The Ld. CIT(A) while rejecting Tata Elxsi Ltd., on RPT being more than 0%, has grossly erred in not adjudicating on the following grounds: • Functional dissimilarity 5. The Ld. CIT(A) while rejecting Sasken Communication Technologies Ltd., on RPT being more than 0%, has grossly erred in not adjudicating on the following grounds: • Functional dissimilarity • Presence of Intangibles • High Turnover 6. The Ld. CIT(A) while rejecting Flextronics Software Ltd., on turnover filter has grossly erred in not adjudicating on the following grounds: • Functional dissimilarity 7. The Ld. CIT(A) while rejecting Satyam Computer Services Ltd., on turnover filter has grossly erred in not adjudicating on the following grounds:

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• Unreliable financial statements • Presence of Brand 8. The Ld. CIT(A) while rejecting Infosys Technologies Ltd., on turnover filter has grossly erred in not adjudicating on the following grounds: • Presence of Brand • Economies of scale • Functionally Dissimilar 9. The Ld. CIT(A) while rejecting Sankhya Infotech Ltd., on the ground of functional dissimilarity has erred in not adjudicating on the following ground: • Fails employee cost filter The respondent craves leave to add, alter, amend and/or delete any of the ground mentioned above.”

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the nature of inter alia purchase, sale or lease of intangible property or

provision of services, or lending or borrowing money, or any other

transaction having a bearing on the profits, income, losses or assets of

such enterprises. Section 92A of the Act defines the term "associated

enterprise" in relation to another enterprise, in a manner where the

enterprise directly or indirectly participates in the Management, control

or capital of the other enterprise. The term "arm's length price" has

been defined in clause (ii) of section 92F of the Act, to mean a price

which is applied or proposed to be applied in a transaction between

persons other than associated enterprises in uncontrolled conditions.

Section 92C(1) of the Act provides that the arm's length price in relation

to an international transaction shall be determined by any of the

several methods, specified therein, having regard to the nature of the

transaction or class of transaction or class of associated person or

functions performed by such persons or such other relevant factors as

the Central Hoard of Direct Taxes (hereinafter referred to as "Board")

may prescribe. The Assessee has therefore to justify that the price it

received from its AE for rendering software development services was

at Arm’s Length.

Transactional Net Margin Method (TNMM) is the most appropriate method

for determining the arms’ length price (ALP). The consideration received by

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the assessee from its AE for rendering software development services was a sum of Rs.109,98,69,000. Profit Level Indicator (PLI) adopted by the assessee and the revenue was Operating Profits to Total Cost (OP to TC) for the purpose of comparing the profit margins of comparable companies in similar transactions. The assessee in its TP report filed to justify the price received from the AE was at Arm’s Length, selected the comparable companies and the average PLI of those comparable companies was compared with OP to TC of the assessee and it was claimed that the price received by the assessee was at arms’ length. The TPO after rejecting the methodology applied by the assessee came to the conclusion that the companies as per list enclosed as Annexure-I to this order alone were comparable and arrived at the average arithmetic mean of profits of the those comparable companies at 26.59%.

“13.6 Computation of Arms Length Price: The arithmetic mean of the Profit Level indicators is taken as the arms length margin. (Please see Annexure B for details of computation of PLI of the comparables). Based on this, the arms length price of the software development services rendered by you is computed as: Arithmetic mean PLI : 26.59% Less Working capital adj. as per Ann.-C : 2.90% Adj.Arithmetic mean PLI : 23.69%

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Arm’s Length Price:

Operating Cost Rs.99,98,80,000/-* Arms Length Margin 22.69% of the Operating cost Arms Length Price (ALP) @ Rs.123,67,51,572/- 123.69% of operating cost * as shown in the segmental break up in TP report vide pg 142. 13.7 Price received vis-à-vis the Arms Length Price: The price charged by the tax payer to its Associated Enterprises is compared to the Arms Length Price as under:

Arms Length Price (ALP) @ Rs.123,67,51,572/- 123.69% of operating cost Price received Rs.109,98,69,000/- * Shortfall being adjustment Rs. 13,68,82,572/- u/s.92CA * as shown in segmental break up in TP report vide pg 142.

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list of comparable companies. Thus the CIT(A) applied 0% RPT as a filter to exclude companies for the purpose of comparison. As a result of this ruling by the CIT(Appeals), 12 out of 17 comparable companies finally chosen by the TPO stood excluded. Out of 12 companies excluded by applying 0% RPT filter, 5 companies were also rejected as not comparable for the reason that their turnover was very high compared to the turnover of the assessee.

Integrating Systems (India) Pvt. Ltd. v. DCIT, ITA

No.1231/Bang/2010, was of the view that for the purpose of comparison

of turnover, companies will have to be categorized as companies having turnover of < 200 crores as small, companies having turnover of 200 & 2000 crores as medium and companies having turnover > 2000 crores as large. By doing so, the CIT(Appeals) found that the assessee’s turnover was only 109.86 crores and thereafter comparable companies chosen by the TPO which had turnover beyond 200 crores had to be excluded from the list of comparable companies, as they were medium sized companies and assessee was a small sized company and therefore it cannot be compared. By this process, 5 companies were excluded from the list of comparable

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companies. These 5 companies, as we have already mentioned, also got excluded by application of RPT filter. These companies are:- (1) iGate Solutions Ltd. (2) Infosys Technologies Ltd. (3) Satyam Computer Services Ltd. (4) L&T Infotech Ltd. and (5) Flextronics Software Systems Ltd. 30. Companies which got excluded by application of RPT filter alone are:- (1) Sasken Network Systems Ltd. (2) Four Soft Ltd. (3) Thirdware Solutions Ltd. (4) R S Software (India) Ltd. (5) Geometric Software Solutions Ltd. (6) Tata Elxsi Ltd. (7) Sasken Communication Technologies Ltd.

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only on the report of Director and has not pointed out any financial details from the Profit & Loss account and Balance Sheet, which would show that this company was a software product company.

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rejected on the ground of presence of brand, economies of scale and

functional dissimilarity.

Infotech Ltd. besides being functionally dissimilar also fails employee cost

filter.

Bodhtree Consulting Ltd. ought to have been rejected as not comparable

because it was functionally dissimilar and had abnormal growth and fails the

RPT filter of more than 15%. Though the CO has been filed, the above

objection has been orally raised as the decision of CIT(Appeals) on this

aspect is against the assessee and therefore in terms of Rule 27 of the

ITAT Rules, the assessee is entitled to raise any issue decided against the

assessee, even without filing a CO. Reliance is placed on the decision of Hon’ble Gauhati High Court in the case of Assam Company (India) Ltd. Vs.

CIT 256 ITR 453 (Gau) wherein it was held that it is permissible on part of

Tribunal to entertain a ground beyond those incorporated in memorandum

of appeal though party urging said ground had neither appealed before it

nor had filed a cross-objection in appeal filed by other party provided

relevant facts on which such ground are to be founded are available on

record.

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by the revenue is concerned, the submission of the learned DR was that

only where the related party transaction (RPT) is more than 15% to 25%,

can a company be excluded from the list of comparable companies. Our

attention was drawn to the decision of the Hon’ble ITAT Bangalore “B” Bench in the case of Robert Bosch Engineering and Business Solutions Ltd.

Vs. DCIT IT (TP) A.No.1519/Bang/2013 and 1687/Bang/2013 order dated

13.9.2017 wherein the Tribunal in paragraph 8 has observed 25% to 15%

RPT filter has to be applied depending on availability of comparables. His

submission was therefore that companies with RPT of 25% or more alone

should be excluded from the list of comparable companies chosen by the

TPO and the action of the CIT(A) in excluding comparable companies even

in a case where there are single and insignificant RPT was not correct. The

learned counsel for the Assessee, on the other hand, pointed out that this Tribunal, in the cases of 24/7 Customer Pvt. Ltd. (ITA No.227/Bang/2010),

Sony India Private Ltd. reported in (2009) 315 ITR (80) 150 (Del.) and

various other cases, has taken a view that comparables having RPT of upto

15% of total revenues can be considered as comparable company. It was

further submitted by him that by virtue of 0% RPT filter adopted by the

CIT(A), 12 comparable companies gets excluded from the list of 17

comparable companies chosen by the TPO. He pointed out that out of the

12 companies that will get excluded, if 15% threshold limit of RPT is

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applied, one company viz., Four Soft Limited which is a comparable

company chosen by the TPO will get excluded as the RPT in the case of

this company is 19.89%. His submission was that 5 out of the remaining 11

companies were excluded by the CIT(A) for the reason that the turnover of

these companies were very high compared to the turnover of the Assessee.

His further submission was that four out of the remaining 6 comparable

companies deserve to be rejected by application of other filters as projected

by the Assessee in the grounds of cross-objection. These four companies

pointed out by the learned counsel for the Assessee are:- (1) Thirdware

Solutions Ltd., (2) M/S. Tata Elxsi Ltd. (3) M/S.Sasken Communication

Technologies Ltd., which according to the learned counsel for the

Assessee, are liable to be excluded as functionally not comparable with a

software development service provider such as the Assessee as held by this Tribunal in the case of Electronics for Imaging India Pvt. Ltd. IT (TP)

A.No. 464/Bang/2013 and M/S. Net Devices India Pvt. Ltd. IT(TP) No.

1099/Bang/2011 and M.P.100/Bng.2016. It was also submitted that Sasken

Communication Technologies Ltd., has high turnover and owns intangibles

which will render its comparability with the Assessee as inappropriate.

(4) M/s. Geometric Software Solutions Ltd., which according to the learned

counsel for the Assessee, fails RPT test as the percentage of RPT in the

case of this company is 18.19% and not 11.49% as wrongly computed by

the revenue authorities. In this regard our attention was drawn to the

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decision of the Hon’ble ITAT in the case of Net Devices India Pvt.Ltd.,

wherein at paragraph 7.3 the Tribunal has referred to the RPT of M/s. Geometric Software solutions Ltd., as computed by the TPO himself as 19.34% for the very same AY 05-06. Hence according to him this company has to be regarded as not comparable by applying RPT filter. Besides the above, the learned counsel for the Assessee also pointed out that this company is not functionally comparable as stated by the Assessee in the various submissions filed before the CIT(A) and since the CIT(A) excluded this company by applying 0% RPT filter, the functional comparability of this company was not considered by the CIT(A) and the issue should be examined by the CIT(A) on the functional comparability of this company.

the range of 25% to 15% of the total receipts from software development services, depending on availability of comparable companies. It is no body’s case that there is dearth of comparable companies in software development services industry. Therefore it would be safe to follow the ruling of this Tribunal in the cases of 24/7 Customer Pvt. Ltd. (ITA No.227/Bang/2010), Sony India Private Ltd. reported in (2009) 315 ITR (80) 150 (Del.) wherein a view has been taken that comparable companies

having RPT of upto 15% of total revenues can be considered as comparable companies. In view thereof, the Revenue’s grievance on this

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issue as projected in ground No.4 requires to be accepted. The TPO/AO

are directed to adopt a threshold limit of 15% of the total revenue

attributable to related party transaction as ground for rejecting comparable

companies. Consequently it is held that comparable companies having

RPT upto 15% of the total revenues can be included.

than 15% of its revenues viz., (1) Thirdware Solutions Ltd., (2) M/S. Tata

Elxsi (3) M/S.Sasken Communication Technologies Ltd.,(4) M/S.Geometric

Software Solutions Ltd., the same will not get excluded by application of

RPT filter. Nevertheless, the comparability of these four companies on the

ground of wrong determination of RPT in the case of Geometric Software

Solutions Ltd., as well as functional and other comparability factors of these

four companies were specifically pleaded before CIT(A) but were not

considered by the CIT(A). The parties agreed that it would be appropriate

to direct the CIT(A) to consider these aspects by setting aside the order of

the CIT(A) on the comparability of these four companies and remanding the

question of comparability of these companies on the basis of other factors

pointed out by the learned counsel for the Assessee including wrong

determination of RPT in the case of Geometric Software Solutions Ltd., to

the CIT(A) for determination in accordance with law, after affording

Assessee opportunity of being heard to the Assessee.

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Engineering and Business Solutions Ltd., (supra) has taken the view, after

considering the decision rendered by the Hon’ble Delhi High Court in the case of Chryscapital Investment Advisors India Pvt.Ltd Vs. DCIT 82

Taxmann.com 167(Del), that high turnover ipso facto does not lead to the

conclusion that a company which is otherwise comparable on FAR analysis

can be excluded and that the effect of such high turnover on the margin

should be seen. According to him, therefore, the order of CIT(A) excluding

companies with huge turnover was not proper.

Pvt.Ltd. Vs. DCIT (2016) 67 Taxmann.com 243 (Banglore-Trib) wherein the

Tribunal after noticing the decision of the Hon’ble Delhi High Court in the case of Chryscapital (supra) and the decision to the contrary in the case of

CIT Vs. Pentair Water India Pvt.Ltd., Tax Appeal No.18 of 2015 dated

16.9.2015 wherein it was held that high turnover is a ground to exclude a

company from the list of comparable companies in determining ALP, held

that there were contrary views on the issue and hence the view favourable to the Assessee laid down in the case of Pentair Water (supra) should be

adopted.

IT(TP)A Nos. 85 & 1026/B/14, 1838/B/13 & CO No.21/B/16 Page 28 of 36

“9. Having heard both the parties and having considered the rival contentions and also the judicial precedents on the issue, we find that the TPO himself has rejected the companies which .ire (sic) making losses as comparables. This shows that there is a limit for the lower end for identifying the comparables. In such a situation, we are unable to understand as to why there should not be an upper limit also. What should be upper limit is another factor to be considered. We agree with the contention of the learned counsel for the assessee that the size matters in business. A big company would be in a position to bargain the price and also attract more customers. It would also have a broad base of skilled employees who are able to give better output. A small company may not have these benefits and therefore, the turnover also would come down reducing profit margin. Thus, as held by the various benches of the Tribunal, when companies which arc loss making are excluded from comparables, then the super profit making companies should also be excluded. For the purpose of classification of companies on the basis of net sales or turnover, we find that a reasonable classification has to be made. Dun & Bradstreet & Bradstreet and NASSCOM have given different ranges. Taking the Indian scenario into consideration, we feel that the classification made by Dun & Bradstreet is more suitable and reasonable. In view of the same, we hold that the turnover filter is very important and the companies having a turnover of Rs.1.00 crore to 200 crores have to be taken as a particular range and the assessee being in that range having turnover of 8.15 crores, the companies which also have turnover of 1.00 to 200.00 crores only should be taken into consideration for the purpose of making TP study.”

IT(TP)A Nos. 85 & 1026/B/14, 1838/B/13 & CO No.21/B/16 Page 29 of 36

action of the CIT(A) in directing TPO to exclude companies having turnover of more than Rs.200 crores as not comparable with the Assessee was

justified. As rightly pointed out by the learned counsel for the Assessee,

there are two views expressed by two Hon’ble High Courts of Bombay and

Delhi and both are non-jurisdictional High Courts. The view expressed by

the Bombay High Court is in favour of the Assessee and therefore following

the said view, the action of the CIT(A) excluding companies with turnover of

above Rs.200 crores from the list of comparable companies is held to

correct and such action does not call for any interference.

excluding Flextronics Software Ltd., Satyam Computer Services Ltd. and

Infosys Technologies Ltd., from the list of comparable companies on the

ground of functional and other dissimilarities has become academic and

hence is not being adjudicated and left open.

M/s. Sankhya Infotech Ltd. as comparable company is concerned, the

learned DR reiterated the stand as taken by the revenue in the grounds of

appeal. The learned counsel for the Assessee placed reliance on the decision rendered in the case of Electronics for Imaging India Pvt. Ltd.

(supra) and M/S. Net Devices India Pvt.Ltd. (supra) wherein M/s. Sankhya

IT(TP)A Nos. 85 & 1026/B/14, 1838/B/13 & CO No.21/B/16 Page 30 of 36

Infotech Ltd. was regarded as a company in software products also and not

pure software development service provider such as the Assessee and

hence cannot be regarded as comparable in cases of companies rendering

pure software development services.

contended in Ground No.8 by the revenue that the basis of concluding that

M/s. Sankhya Infotech Ltd. is a software product company also and hence

cannot be compared with a company providing software development

service alone is based on the observations in a Annual/ Directors report but in paragraph 18.1.3 of the Tribunal’s order in the case of M/s. Net Devices

India Pvt.Ltd. (supra), the Tribunal has observed that there is no segmental

data available between software products, services, software training etc.

Thus it is amply clear that this company is not a pure software development

service provider such as the Assessee. In such circumstances, we find no

grounds to interfere with the order of the CIT(A). In view of the above

conclusion, the grounds raised in CO to exclude this company from the list

of comparable companies by applying employees cost filter has become

academic and hence is not being adjudicated and left open.

comparability of Bodhtree Consulting Limited can be considered in these

proceedings when no specific ground in the CO is raised by the Assessee.

IT(TP)A Nos. 85 & 1026/B/14, 1838/B/13 & CO No.21/B/16 Page 31 of 36

On this aspect, we find that the Hon’ble Gauhati High Court in the case of Assam Company (India) Ltd., (supra) taken the view that it is permissible on part of Tribunal to entertain a ground beyond those incorporated in memorandum of appeal though party urging said ground had neither appealed before it nor had filed a cross-objection in appeal filed by other party provided relevant facts on which such ground are to be founded are available on record.

IT(TP)A Nos. 85 & 1026/B/14, 1838/B/13 & CO No.21/B/16 Page 32 of 36

464/Bang/2013 and M/S. Net Devices India Pvt. Ltd. IT(TP) No. 1099/Bang/2011 and M.P.100/Bang/2016.

to be founded are available on record. We are of the view that there is no

application of the principle of estoppel in the matter determination of ALP.

The comparability or otherwise of a company for the purpose of determination of ALP under the Transfer Pricing provisions of the Act cannot be on the basis of admission of a party that a particular company is comparable or not. If on facts it is shown that a company chosen by the Assessee as comparable in its TP study is later found to be not comparable, such company should be excluded for the purpose of comparability. The Special Bench of the ITAT Chandigarh Bench in the case of DCIT v. Quark Systems Pvt. Ltd. 38 SOT 207(SB)(Chd.) has taken

the view that it is open to the parties in Transfer Pricing cases to take a stand contrary to their TP study, if they contend that the stand taken in the TP study is contrary to facts or was erroneous. Such a claim cannot be

IT(TP)A Nos. 85 & 1026/B/14, 1838/B/13 & CO No.21/B/16 Page 33 of 36

disregarded only on the basis that it is contrary to Assessee’s own stand in

the TP study. We therefore hold that the comparability of Bodhtree

Consulting Ltd., ought to have been analysed by the CIT(A) in the light of

the stand taken by the Assessee that the said company is not comparable

for the reason that it is functionally dissimilar to the functions performed by

the Assessee and was, otherwise, not comparable by application of other

known filters in transfer pricing analysis. We therefore direct the CIT(A) to

consider the comparability of this company afresh after affording opportunity

of being heard to the Assessee.

purpose and the CO filed by the Assessee is partly allowed for statistical

purpose.

IT(TP)A 85/Bang/2014

20.09.2013 of CIT(A), LTU, Bangalore, relating to AY 2005-06.

delay in filing the appeal has been explained in an affidavit filed by one Mr.

Alok Ohrie, authorized signatory on behalf of the Assessee. In paragraph 4

of the affidavit it has been stated that the delay in filing in appeal was due to

the delay in taking a decision whether the file an appeal or not before the

tribunal keeping in mind the time and efforts involved in litigation. We are of

IT(TP)A Nos. 85 & 1026/B/14, 1838/B/13 & CO No.21/B/16 Page 34 of 36

the view that decision to file appeal has to be taken within the time limit provided by the relevant statutory provision. The period of limitation for filing appeal cannot be extended on the ground that a decision could not be taken within the time permitted in law. There are no other facts or circumstances which will warrant taking a liberal view as the grievance of the Assessee has already been addressed in the CO filed by the Assessee against the very same order of the CIT(A) against which the present appeal has been filed. We therefore refuse to condone the delay in filing the appeal as there is no reasonable or sufficient cause made out for filing the appeal belatedly.

ITA No. 1026/Bang/2014

IT(TP)A Nos. 85 & 1026/B/14, 1838/B/13 & CO No.21/B/16 Page 35 of 36

reason that the Assessee did not produce the relevant evidence to show

that the software in question was non exclusive non transferable licensed

software. Without dislodging this finding of the AO, the CIT(A) has come to

a conclusion that the software expenditure was revenue in nature.

merit in the contention of the learned DR because in paragraph 10.2 the

CIT(A) has not dislodged the factual finding of the AO and has merely

proceeded to rely on judicial pronouncements. Though there is a finding

that software in question was operating software, there is no reference to

the basis on which such a finding was given. Therefore, it would be just

and proper to set aside the order of CIT(A) on this issue and remand for

fresh consideration of the issue, as to whether the software expenditure

which was claimed as deduction was capital or revenue in nature. The

Assessee is directed to place all the relevant evidence before the AO to

show the expenditure was revenue expenditure. The AO will consider the

same and decide the issue in the light of the various judicial

pronouncements on the issue including the decision of the Hon’ble Karnataka High Court in the case of IBM India Ltd. 290 ITR 183 (Karn). The

appeal of the revenue is allowed for statistical purpose.

IT(TP)A 1838/Bang/13] are treated as partly allowed for statistical purpose.

IT(TP)A Nos. 85 & 1026/B/14, 1838/B/13 & CO No.21/B/16 Page 36 of 36

IT(TP)A No. 85/Bang/14 is dismissed. ITA No.1026/Bang/14 is treated as allowed for statistical purposes. Pronounced in the open court on this 13th day of October, 2017.

Sd/- Sd/-

( JASON P. BOAZ ) ( N V VASUDEVAN ) Accountant Member Judicial Member

Encl: Annexure-I

Bangalore, Dated, the 13th October, 2017.

/ Desai Smurthy /

Copy to:

By order

Senior Private Secretary ITAT, Bangalore.