DCIT, BANGALORE vs. M/S ABB INDUSTRIAL IT DEVELOPMENT CENTRE LTD., BANGALORE

Per Laliet Kumar, Judicial Member

These are the two appeals filed by the revenue as well as the assessee

against the order of the CIT(A) dated 01.03.2011 passed on section 143(3) of the I.T. Act, 1961 for the assessment year 2004-05. The grounds raised by the revenue and the assessee are as under.

“1. The order of the Learned CIT(Appeals), in so far as it is prejudicial to the interest of revenue, is opposed to law and the facts and circumstances of the case.

u/s. 10A of the Act. It was submitted on behalf of the ld. AR for the assessee that the issue is covered in favour of the assessee by the judgment of Hon’ble High Court of Karnataka in the case of Tata Elexsi Ltd. (349 ITR 98).

incurred in foreign currency by the Assessee on telecommunication charges. The CIT(A) has held that the action of the AO in re-computing the deduction u/s. 10A by reducing the telecommunication expenses has been in foreign currency only

from export turnover and not from the total turnover is not sustainable.

Therefore if the amount is reduced from the Export turnover it is bound to be reduced from the total turnover of the undertaking. As the order of the CIT(A) is in conformity with the order of juri ictional High Court therefore this ground of the revenue is dismissed.

the SAP Labs Ltd. judgment, in our view these issues are required

to be allowed as the amendment was brought into force in the Act

with retrospective effect in section 92C(A)(2) of the Act. Further

this issue is also covered by the judgment of coordinate bench in the matter of Acusis Software India (P.) Ltd. [2016] 76

taxmann.com 121 (Bangalore - Trib.) “23. Ground Nos 5 to 7 challenges the direction of CIT (A) to grant the benefit of the proviso to sub-section (2) of section 92C of IT Act as a standard deduction. This issue is covered against the assessee by the decision of Bombay Bench in the case of Bayer Crop Science Ltd. v. Addl. CIT [2012] 25 taxmann.com 575/[2014] 62 SOT 109 (Mum. - Trib.) wherein it has been held as follows: "Last ground of the assessee's appeal is against the rejection of benefit of 5% % margin as prescribed in proviso to section 92C(2) in determining the Arm's Length Price (ALP) of its export transactions. Filtering out unnecessary details it is observed that the assessee's international transactions were referred to the TPO for determination of ALP. The TPO proposed adjustment of Rs. 19,23,948, for which addition was made by the A.O. It was argued before the ld. first appellate authority that the TPO ought to have allowed standard adjustment of 5% before making addition as per proviso to section 92C(2). The learned CIT (A) rejected this contention by holding that since the ALP exceeded the price declared by the assessee by more than 5%, the entire excess was liable to be added. It is this direction of the learned CIT (A) against which the assessee has come up in appeal before us. After considering the rival submissions and perusing the relevant material on record, we find that the dispute about the question as to whether plus minus 5% standard adjustment should be allowed while determining the ALP or the entire amount representing difference between ALP and the declared price should be added where the difference exceeds 5%, has been set to rest by the Finance Act, 2012 with the insertion of sub-section (2A) to section 92C with retrospective effect. With this amendment it has been made clear that where the variation between arithmetical mean and price at which the transaction has actually been undertaken exceeds 5% of arithmetical mean, the assessee shall not be entitled to exercise the option. The learned AR was fair enough to concede that the retrospective amendment by the Finance Act, 2012 has the effect of upholding the opinion taken by the learned CIT (A). In view of this amendment to section 92C, we hold that the learned CIT (A) was justified in not granting standard adjustment of 5%. This ground is not allowed."

In view thereof these grounds 4, 5, 6 & 7 of the revenue are allowed.

T P Issue

DR has brought to our notice the findings recorded by the CIT(A)

for excluding 7 comparables out of the 11 comparables finally

selected by the TPO. We would like to reproduce paragraph no 4.4(i) of CIT(A) order which is as under “4.4(i) Is comparison of the appellant company with companies involved in software development and service providing companies – correct. Before zeroing on only 11 companies the TPO has done exhaustive search. She picked up 24 companies from “Capital Line”, “Prowess” and NASSCOM website. Out of the 24 companies selected, applied filters and rejected 13 companies to short list only 11 companies. More or less, they are almost in the same line of business but the most similar companies to the appellent’s business were selected. Accordingly, it is held that the AO is correct in zeroing in on only 11 companies out of 24 selected. However, based on the judgment of SAP Labs, the super profit companies or the companies having abnormal results are excluded for the purpose of re-determining the average. Since the average margin is determined at 27.92% by the TPO, the super profits companies like I-power Solutions India Ltd., which had made 80.87% OP to total cost and VMF Softech which had made 72.38% OP to total cost are to be excluded. Also for the reason that Gold Stone Tech Ltd. which had an OP to total cost of only 12.18%, Lanco Global Systems Ltd which had an OP to total cost of only 10.93% L & T Infotech Ltd., which had an OP to total cost of only 9.2%, VJIL Consulting Ltd which had an OP to total cost of only 10.65% and Xcel Vision Tech Ltd which had an OP to total cost of only 8.72% and these margins are far wider from the average determined by the TPO, these companies are also to be excluded while working out the PLI. Also for the reason that Satyam results are not reliable AO is directed to delete it from the list of comparables.”

the TNMM being the most appropriate method for the purposes of determining the ALP. The TPO for the purposes of determining the ALP had applied various filter namely functional

comparability, related party transaction (RPT) etc . Further TPO had also compared the financials of the selected companies based on their profile. TPO had also examined the PLI of those companies on the basis of the operating profit / operating cost.

Assessee Company is into software development and therefore the TPO has used the functional similarity / comparable filter to find out the comparables. We found that the ld. CIT(A) has rejected the 7 companies selected by the TPO on the basis of margins being wider from the range determined by the TPO. In our view, the inclusion / exclusion of the comparables is required to be based on the basis of parameters laid down under rule

10B(2) of the Income-tax rules for the purposes of determining the functional comparability. If we examine the order passed by the CIT(A) , we will reach to the inescapable conclusion that the order of ld CIT is a cryptic / non-speaking order and the ld. CIT(A) has not examined profile of each company on the touch stone of functional similarity, relating party filters, turn over filter

etc. In our view these aspects of the comparable companies are required to be considered in view of rule 10B(2) of the IT rules.

Consulting Ltd., M/s. iPower Solutions India Limited, M/s. Infosys Technologies Limited, M/s. Larsen & Toubro Infotech and M/s. Satyam Computers Services Limited are required to be excluded being functionally different than that of the assessee .

Furher Ld AR had also pointed out that these companies are liable to be excluded if turnover filter is applied, as these companies turnover are either below of 10% or more than 10 times of the turnover of the assessee company.

study is to determine the ALP of the assessee on the basis of the profit margin of unrelated party in an uncontrolled transaction, therefore ld. CIT(A) while re-examining the TP issue in terms of our directions under Para 9 above ,shall also consider the turnover

filter of the comparables in respect of the comparable transactions only.

Assessee Appeal

Soft Sell Limited, M/s. Essar Information Technology Limited

and M/s. Future Software Limited. In this regard, the ld. AR has drawn our attention to para 4.4(2) which we deem it appropriate to reproduce below which provides as under.

out that the reasoning given by the ld. CIT(A) do not fit in the scheme of the Act and the comparables were only rejected by the CIT on pretext that operating profit is less than appellant’s OP.

part of the business income and the claim of the assessee for deduction falls under section 10A of the Act has been adjudicated by the tribunal in the case of the assessee in ITA No.

1353/Bang/2011 vide order dated 31.10.2013. The Para 14 at Page 565 of the Paper Book provides as under.

“14. The ld. Counsel for the assessee drew our attention to page 16 of the paperbook (PB) which contains the details of the interest income. He pointed out that surplus business funds not immediately required had been temporarily parked in FDs. In this regard, he drew our attention to the fact that the FDs were made for periods ranging from 6 days to 53 days, which itself would go to show that business funds temporarily not required were parked temporarily in FDs. It was his submission that the conclusions of the CIT(A) that surplus profits of the assessee were parked in FDs resulting in interest income cannot be considered as business income are not correct.”

filed by the assessee. At page 158 of the Paper Book, assessee has submitted as under.

“ Ground No. 5- Interest on deposit amounting to Rs. 434,000/- to be excluded while computing 10A deduction:- The Interest earned on deposit is part of the business activities as it is relating to remittance received from abroad and kept temporarily as deposit in the Bank. As the remittances received from abroad forms part of the Business Income and gets accumulated as part of working capital, this working capital cannot be kept idle and needs to be put to revenue earning use. Since bank deposits facility are available for a flexible period of time, the same has been utilized and the remittance received from abroad, which forms part of working capital has been parked as deposits with bank till the need for working capital for business purpose arises. In short as the money parked in deposits are out of remittances received from abroad, the interest earned from the bank deposits forms part of the Business Income. Hence the same needs not be excluded while computing the deduction u/s 10A of the Act. The Copy of the TDS Certificate wherein the interest of Rs. 434,000 is paid to the assessee is enclosed as Annexure- 1. “

deposit as on 31.03.2003 was Rs. 70 Lakhs and the opening

deposit as on 31.03.2004 as Rs. 75 Lakhs. If we see the reasoning

given by the tribunal in its earlier order in ITA No.

1353/Bang/2011 we found the order was passed merely because

funds were temporarily not required and therefore the interest

accrued in temporary parking amount in temporary FDRs

therefore it was held to Business Income u/s. 10A of the Act. We

found that in the present case neither the temporarily availability

of fund was proved nor temporarily non requirement of funds was proved nor it was set up by the assessee when the funds were temporarily available and when the FDRs were made on temporary basis.

Pronounced in the open court on this 28th day of April, 2017. ( A.K. GARODIA ) Judicial Member Bangalore, Dated, the 28th April, 2017. / MS/ Copy to: