M/S I2 TECHNOLGOIES SOFTWARE PVT LTD,BANGALORE vs. COMMISSIONER OF INCOME TAX (APPEALS)IV, BANGALORE

IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH ‘A’, BANGALORE

BEFORE SHRI A. K. GARODIA, ACCOUNTANT MEMBER AND SHRI LALIET KUMAR, JUDICIAL MEMBER

IT (TP) A No.1207 (Bang) 2014 (Assessment year : 2003-04)

M/s i2 Technologies Software Pvt. Ltd. No.132/133, Diyashree Technopolis, Yamlur Post, Off Airport Road, Bangalore -560 037 PAN: AAAC17334Q Appellant Vs The Commissioner of Income-Tax(A)-IV, Bangalore Respondent And (In IT(TP)A No.274(Bang)/2014 (Assessment year :2003-04)

Assessee by : Shri Arvind Sonde, Advocate Revenue by : Shri G.R.Reddy, CIT –I

Date of hearing : 03-04-2017 Date of pronouncement : -04-2017

O R D E R PER SHRI A.K.GARODIA, AM

These are cross appeals filed by the assessee and the revenue and

these are directed against the order of the ld. CIT(A)-IV, Bangalore dated 31-

01-2014.

“Transfer Pricing

2 IT(TP)A Nos.1207 & 274(B)2014

appellant’s international transactions with associated enterprises, with respect to the software development services rendered by the appellant u/s 92CA of the IT Act, 1961..

2a) the ld.CIT(A) and the ld., TPO have failed to appreciate that at the time of preparation of the TP documentation for March 2003, contemporaneous data for a financial year 2002-03 was not available in the data base (Prowess & Capitaline) for some of the companies.

2b) the ld.CIT(A) and the ld. TPO ought to have appreciated that the appellant in its transfer pricing (TP) documentation had screened 707 companies engaged in the provisions of software development services based on systematic criteria i.e. functional difference, absence of foreign exchange earnings, significant related party transactions etc. However, the ld CIT(A) has cherry picked certain comparables having huge margins with a sole intention of making adjustments.

2c) the ld. CIT(A) has disregarded the submission made with regard to the use of contemporaneous data for the following three comparables • ADCC Research and computing Centre ltd. • Bodhtree Consulting Ltd • Onward Technologies 2d) the ld. CIT(A) and the ld. TPO erred in not applying multiple year/prior year data for comparable companies while determining arm’s length price.

2e) the ld. CIT(A) and the ld. TPO erred in rejecting the set of filters applied by the appellant in the TP documentation and in introducing additional filters for selection/rejection of companies as comparable to the appellant. 2f) having accepted that the appellant is a limited risk contract service provider rendering software development, the ld. CIT(A) erred in not

3 IT(TP)A Nos.1207 & 274(B)2014

providing appropriate adjustment towards the risk differential, when the comparables selected are full fledged enterprenurial companies.

2g) the d. CIT(A) erred in not granting working capital adjustment for the comparable companies selected by the appellant. 2h) the appellant retains the right to have the benefit of applying the range of +/-5% in determination of the arm’s length price.

4 IT(TP)A Nos.1207 & 274(B)2014

adjudicate on this specific ground and has only commented on the rate of interest in his order. II Corporate Tax Denial of deduction under section 10A on interest and miscellaneous income.

1.1 The ld. CIT(A)-IV, Bangalore erred in confirming the denial of deduction u/s 10A of the IT Act on interest and miscellaneous income earned by the appellant. 1.2 The ld. CIT(A) failed to appreciate the fact that the interest income had arisen on account of short term investment of surplus funds lying with the appellant. The ld CIT(A) has erred in not appreciating the fact that the interest income has a direct nexus with the profits o the business and accordingly, is eligible for deduction under the provisions of sec.10A of the Act.

The Appellant craves leave to add, to alter or amend all or any of the afore-stated grounds of appeal.

For the above and any other grounds, which may be raised at the time of hearing, it is prayed that necessary relief may be provided”.

“1.The order of the CIT(A) is opposed to aw and the facts and circumstances of the case.

5 IT(TP)A Nos.1207 & 274(B)2014

by the AE and thus claiming that it is not to be taken into the operating cost base.

3.The CIT(A) erred in deleting the adjustment made on cost free services rendered by the AE to the assessee without appreciating the fact that if the cost of these services is included in the cost base mark up it has to paid by the AE to the assessee as this cost forms part of eligible cost for mark up as per the R&D agreement.

4.The CIT(A) erred in directing to adopt LIBOR rate on the notional interest expenditure without appreciating that the TPO had judicially adopted 6% as against the prevailing market rates of 10.75% to 11.5%.

5.The CIT(A) 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 the telecommunication charges of Rs. 67,35,119/- from the total turnover also while computing the deduction u/s 1O A of the I.T. Act as the decision of the High Court is binding, without appreciating the fact that there is no provision in section 1OA that such expenses should be reduced from the total turnover also, as clause (iv) of the explanation to section 1OA provides that such expenses are to be reduced only from the export turnover.

6 IT(TP)A Nos.1207 & 274(B)2014

7.For these and such other grounds that may be urged at the time of hearing, it is humbly prayed that the order of the CIT(A) be reversed and that of the AOP be reversed.

8.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 f the appeal”.

appeal, there are seven grounds in respect of TP issue, out of which ground

no.3 is not pressed and accordingly, Ground no.3 of the assessee’s appeal is

rejected as not pressed.

of TP issues, ld. AR of the assessee submitted that as per page-9 of the

TPO’s order, it can be seen that from the list of 13 comparables selected by

him, comparable no.1 M/s ADCC Research & Computing Centre Ltd. is on

the basis of data for FY ended on 31, 2002 and similarly, for the comparable

company no.2 M/s Bodhtree Consulting Ltd., the data considered are for FY

ended on 30-06-2002 and similarly, for comparable company no.8 i.e. M/s

Onward Technologies Ltd., the data considered by the TPO is for FY ended

30-06-2002 and we are concerned with assessment year 2003-04 i.e. For FY

ended on 31-03-2003. Thereafter, he has drawn our attention to para-8 of

the same order of TPO on the same page, where it is stated by the TPO that

for M/s Cherry Soft Technologies Ltd., data is not available for FY: 2002-03

and therefore, not included in the list as comparable. He submitted that

having excluded one company i.e. M/s Cherry Soft Technologies Ltd. (Supra)

on this basis that the data for this company is not for FY: 2002-03, the TPO

7 IT(TP)A Nos.1207 & 274(B)2014

was not justified in including three companies on the basis of data for

different year ending and not for FY ended 2002-03. At this juncture, it was

pointed out by the Bench that it may be that data for FY: 2002-03 for these

three companies included by the TPO in the list of final comparables are

available or can be compiled and are not available for M/s Cherry Soft

Technologies Ltd. (Supra) and therefore, this matter has to be go back to the

file of AO/TPO for fresh decision on the basis of data for the FY ended

31.03.2003. In reply, the ld. AR of the assessee agreed to this preposition.

company i.e. sl no.10 of TPO’s order i.e. M/s Satyam Computers Ltd. has to

be excluded for this reason that the statement of accounts of this company

were falsified during period: 2002 to 08 and in support of his contention, he

placed reliance on the Tribunal order rendered in the case M/s SAP Labs

India (P). Ltd Vs ACIT as reported in 134 ITD 253(B’lore). He has drawn our

attention to para-7.2.1 of this Tribunal order. He also placed reliance on

the judgment of the Hon’ble Delhi High Court rendered in the case of CIT Vs

M/s Agnity India Technologies (P) Ltd. as reported in 262 CTR 291.

Reliance was also placed by him on the Tribunal order rendered in the case

of ITO Vs Net Devices India Pvt. Ltd. in IT(TP)A No.1099(Bang)/2011 dated

25-05-2016. He submitted a copy of this Tribunal order and drawn our

attention to page-41 of the same where the Tribunal has reproduced

relevant portion of another Tribunal order rendered in the case of M/s

Textron Global Tech. Pvt. Ltd. in IT(TP)A No.29(Bang)/2012. He further

8 IT(TP)A Nos.1207 & 274(B)2014

submitted that in the tribunal order rendered in the case of ITO Vs Net

Devices India Pvt. Ltd. (Supra), the Tribunal also noted three other Tribunal

orders rendered in the case of i) M/s McAfee Software (Ind.) Pvt. Ltd. in

IT(TP)A Nos.4/Bang/2012 & 1388(B)/2011. ii) M/s Citrix R & D India Pvt.

Ltd. in IT(TP)A Nos.841/Bang/2013 & 172/Bang/2013 and M/s Symbol

Technologies India Pvt. Ltd. in IT(TP)A No.391/Bang/2012. He submitted

that in all these Tribunal orders, it was held that M/s Satyam Computers

Co. is not a good comparable because of falsification of accounts by that

company. In reply, it was submitted by the ld. DR of the revenue that in the

case of M/s NTT Data Global Delivery Services Ltd. in IT (TP) A

No.1487(Bang)/2013 dated 06-04-2016 for AY: 2005-06, (copy submitted by

him), in para-24.2 of this Tribunal order, it was observed by the Tribunal

that this company is alleged to have indulged in malpractice in the

subsequent periods. He submitted that if for assessment year 2005-06,

the Tribunal says that this company is engaged in malpractice in

subsequent period, then for assessment year 2003-04, this cannot be a

basis to conclude that this company is engaged in malpractice and exclude

on that basis.

Tribunal order rendered in the case of M/s Sap Labs India Pvt. Ltd (Supra)

is for the same year i.e. assessment year 2003-04 and therefore, this issue

should be decided in favour of the assessee by following various Tribunal

orders cited by him which are in favour of the assessee and regarding the

one Tribunal order cited by ld. DR of the revenue as per which after

9 IT(TP)A Nos.1207 & 274(B)2014

assessment year 2005-06, this company was engaged in malpractice, he

submitted that this Tribunal order is without considering various earlier

Tribunal orders and therefore, the same should be considered as per-

incurium

proper that the entire TP issue should go back to the file of AO/TPO for

fresh decision because in respect of three comparable companies i.e. M/s

ADCC Research & Computing Centre Ltd. ii) M/s Bodhtree Consulting Ltd

and iii) M/s Onward Technologies Ltd. the TPO has considered the data for

different accounting year and not for FY: 2002-03. This is by now a settled

position of law that the data for the same FY should be considered. This is

also true that even if a concerned comparable company is adopting a

different accounting period as its accounting year then also, the data for

relevant FY may be compiled on the basis of quarterly reports of the said

company. Hence, we feel it proper that the issue regarding these three

comparables has to go back to the file of AO/TPO for fresh decision. We

order accordingly. We restore this matter back to the file of AO/TPO for

fresh decision with the direction that the AO/TPO should ascertain the

availablility of data for FY: 2002-03 and if the same is not directly available

because the concerned company is adopting different accounting year, he

should find out the possibility of compilation of the data for AY: 2002-03 on

the basis of quarterly reports of the relevant company by obtaining the same

from the said company but only data for FY 2002-03 should be adopted

and if it is found that such data for FY: 2002-03 is not available or

10 IT(TP)A Nos.1207 & 274(B)2014

ascertainable on the basis of quarterly result of that company then such

comparable should be excluded from the list of final comparables.

that as per the Tribunal order rendered in the case of M/s SAP Labs India

Pvt. Ltd. in which the assessment year involved was 2003-04, it was held by

the Tribunal that it is an admitted position that Satyam Computer Services

Ltd., statement of affairs were falsified during the period 2003 – 2008 and it

became publicly known in January, 2009. But we also find that in para-

7.2.1 of this Tribunal order, it is mentioned by the Tribunal that Satyam

was already excluded in the lists of comparable companies by the TPO as

well as by the CIT(A) and therefore, neither ground nor the written

submissions could have been raised for its exclusion before the Tribunal.

After making this observation in the same Para i.e. 7.2.1., we do not know

the basis of this statement of the Tribunal in the same Para that it is

admitted position that Satyam company’s statement of affairs were falsified

during the period 2002-08 and it became publicly known in January, 2009.

In the absence of any ground regarding exclusion of Satyam Computer from

the list of final comparables and in the absence of any written submissions

in that regard before the Tribunal, we feel that this finding of the Tribunal

that Satyam Computers’ statement of affairs were falsified during the

period 2002-08 is without any valid basis. In addition to that, the finding

of the Tribunal in the case of NTT Data Global Delivery ‘Services Ltd.

(Supra), to the effect that this company is alleged to have involved

malpractice only in the subsequent period and this finding is given by the

11 IT(TP)A Nos.1207 & 274(B)2014

Tribunal while deciding the appeal of the assessee for assessment year

2005-06. In view of these facts, we feel it proper that this issue regarding

Satyam Computers should also be decided by AO/TPO afresh after finding

out the factual aspect as to whether the accounts for current year i.e. FY:

2002-03 were also falsified by that company i.e. Satyam Computers and if

the assessee can establish that the accounts of that company were falsified

in FY: 2002-03 then the same should be excluded.

should be decided afresh by the AO/TPO after providing adequate

opportunity of being heard to the assessee. Accordingly, ground no.1, 2 & 4

to 7 in respect of TP issues stands allowed for statistical purposes.

issue, it was submitted by the ld. AR of the assessee that deduction u/s 10A

of the IT Act, 1961 should be allowed in respect of interest and Misc. income

earned by the assessee. In this regard, he placed reliance on a judgment of

Hon’ble Karnataka High Court rendered in the case of CIT Vs Motorola India

Electronics (P) Ltd. as reported in 46 Taxmann.com 167(Kar.) He submitted

a copy of this judgment and he has drawn our attention to para-8 thereof.

After reading this Para of the judgment, it was pointed out by the Bench

that in that case, a categorical finding has been given by the Hon’ble

Karnataka High Court that there is direct nexus between interest income

and income of the business of the undertaking. The Bench wanted to know

the nature of interest income in the present case and whether it has been

examined by the authorities below and any finding has been recorded by

12 IT(TP)A Nos.1207 & 274(B)2014

these authorities in this regard. In reply, it was submitted by ld. AR of the

assessee that no such finding has been recorded by any of the lower

authorities and the details are also not readily available.

regarding interest inome, this matter may also be restored back to the file of

the AO for fresh decision.

para-8 of the judgment of the Hon’ble Karnataka High Court rendered in the

case of CIT Vs Motorola India Electronics (P) Ltd (Supra). The same is as

under;

“8. In the instant case, the assessee is a 100% EOU, which has exported software and earned the income. A portion of that income is included in EEFC account. Yet another portion of the amount is invested with the country by way of fixed deposits, another portion of the amount is invested by way of loan to the sister concern which is deriving interest or the consideration received from sale of the import entitlement, which is permissible in law. Now the question is whether the interest received and the consideration received by sale of import entitlement is to be construed as income of the business of the undertaking. There is a direct nexus between this income and the income of the business of the undertaking. Though, it does not par take the character of a profit and gains from the sale of an article, it is the income, which is derived from the consideration realized by export of article. In view of the definition of income from Profo9ts and gains incorporated in sub-section (4), the assessee is

13 IT(TP)A Nos.1207 & 274(B)2014

entitled to the benefit of exemption of the said amount as contemplated u/s 10B of the Act. Therefore, the Tribunal was justified in extending the benefit to the aforesaid amounts also. We do not find any merit in these appeals. Therefore, the first substantial question of law raised in ITA No.428/2007 is answered in favour of the revenue and against the assessee and the first substantial question of law in ITA No.447/2007 is answered in favour of the assessee and against the revenue.

In the light of the aforesaid findings, the second substantial question of law in both these appeals do not arise for consideration”.

Hon’ble High Court that the assessee earned income on export of software

and a portion of that income was invested by way of fixed deposits and

another portion of that amount is invested by way of loan to the sister

concern and on these investments, the assessee earned interest income

and under these facts, it is stated by the Hon’ble Karnataka High Court that

there is a direct nexus between the interest income and income of the

business of the undertaking. In the present case, neither any of the

authorities below have examined this aspect nor the relevant facts are

available on records before us and hence, we feel it proper to restore this

issue also to the file of the AO for fresh decision in the light of this judgment

of the Hon’ble Karnataka High Court rendered in the case of CIT Vs

Motorola India Electronics (P) Ltd.(Supra) and as per above discussion after

providing adequate opportunity of being heard to the assessee. We want to

make it clear that the burden is on the assessee to establish this aspect that

14 IT(TP)A Nos.1207 & 274(B)2014

there is direct nexus between interest income and the business income of

the assessee undertaking. Accordingly, these grounds regarding Corporate

Tax issues are also allowed for statistical purposes.

purposes in the terms indicated above.

ld. DR of the revenue that ground no.1 is general. Thereafter, he submitted

that ground no.2 & 3 are inter-connected and in this regard, he has drawn

our attention to pages 28 to 30 of the order of the ld.CIT(A) and it was

submitted by the ld. DR of the revenue that the ld. CIT(A) has disregarded

the finding of AO/TPO that assessee has not made payment for

administrative and management support services received by it from its AE

and in this manner, the assessee has suppressed its cost and consequently

suppressed its income also because, the assessee is getting remuneration

on cost plus basis from its AE. In this regard, he has drawn our attention

to page-6 & 7 of TPO’s order.

by the assessee in respect of a ESOP and fixed assets supplied by the AE at

free of cost and also for the alleged administrative and management support

services said to have been provided by the AE to the assessee company and

therefore, no addition is justified in respect of this notional adjustment

made by the AO. In this regard, he placed reliance on the following judicial

pronouncements:-

15 IT(TP)A Nos.1207 & 274(B)2014

a) Haworth India Pvt. Ltd Vs DCIT 11 ITR(T) 757(Del.)

b) Mitsubishi Corpn.India Pvt. Ltd. Vs DCIT 44 ITR 416

c) Marubeni Itochu Steel India Pvt. Ltd. Vs DCIT 156 ITD 62- (Del.Trib.)

d) Li and Fung India Pvt. Ltd. Vs DCIT 361 ITR (Del.).

called for on this account then also ESOP cannot be included in the

operating cost and in support of his contention; he placed reliance on the

following judicial pronouncements;

a) HOV Services Ltd Vs JCIT 73 Taxmann.com 311(Pune Trib.)

b) ICC India Pvt.Ltd.V DCIT 71 Taxmann.com 64 (Del.Tib.)

c) Capegemini India Pvt. Ltd. Vs ACIT 27 ITR 74 (Mum.)

“12.7.1 The assessee aggrieved over an adjustment of Rs.2 Crores made to costs by the TPO on account of employees stock option plan expenditure. The AE provided certain fixed assets on free of cost basis and did not charge the assessee company for stock option granted to the employees of the company. The TPO proposed that the mount representing this expenditure should be included in the value of total cost for determining ALP. The assessee argued that this was notional expenditure which would not qualify for costs. The TPO issued a query to the assessee as under;

“ 12. i2 Technologies Inc(i2 Inc) has provided certain fixed assets on a free of cost basis and has not charged the

16 IT(TP)A Nos.1207 & 274(B)2014

company for stock options granted to the employees of the company and the administrative and management support generally made available to the companies in i2 Group. The management has considered the above services as closely linked to the provision of software development and marketing services for which it has determined the arms length price on a TNMM basis, as indicated in Note 5 above.

In view of the above why should your total cost not be enhanced by the notional price which would have been payable on the aforesaid assets, and for employee stock options and for administrative and management support generally made available to you. You may if you chose, without prejudice to your stand, submit your working”.

12.7.2. The assessee did not quantify the amount payable for using assets as well as receiving administrative and management support for the stock options granted to the employees. Thus, the TPO estimated an amount of Rs.2 Crores and included it in the total cost on the ground that it would be the value of benefits received from AE without paying anything. The TPO moved on the line of reasoning that since the assessee received its remuneration on cost plus basis from its AE then once assessee’s costs are suppressed it would receive lesser remuneration. Since it is not paying for the support services and the assets utilized by it, it is suppressing its cost and consequently its revenue.

12.7.3. The action of the TPO, in my considered view, cannot be sustained. It is now well settled under transfer pricing law in India that only operating revenue and operating costs have to be taken in to consideration for mark-ups for the purpose of computation of ALP. The term operational expenses’ relating to transfer pricing

17 IT(TP)A Nos.1207 & 274(B)2014

was examined by the Delhi Bench of the Hon’ble Tribunal in Haworth (India)_ Pvt. Ltd. Vs DCIT (11 ITR (Tri.) 757). The Bench observed as under;

“We have carefully considered the rival submissions on this issue. We find no force in the contention of the ld. AR that such expenses were required to be excluded. The reason for not accepting such argument s that what are operational expenses are the expenses which are incurred to earn that income. It is not even the case of the assessee that those expenses did not relate to manufacturing segment of the assessee out of which the revenue earned by the assessee. If the expenses have nexus with the revenue then they are to be considered as operational expenses and they cannot be excluded simply for the reason that the date of occurrence of the revenue is later and expenses have been incurred prior to that. Therefore, ground no.5 of the assessee is rejected”.

12.7.4 In the instant case, I see no justification for the TPO to include a sum that has not been charged/claimed/paid to the value of operating cost. The arrangement between the AE and the assessee company is very clear in as much as the AE provided certain assets as well as service free of cost to the assessee company. The assessee company I turn did not incur any kind of expenditure for his transaction. Then, how can it be said that the imaginative/fictional value of assets/ services provided by the AE can have any kind of nexus with the revenues of the assessee company. The action of the TPO is truck down as the same cannot be sustained in first appeal”.

18 IT(TP)A Nos.1207 & 274(B)2014

seen is that the ld. CIT(A) has not decided about the assertion of the TPO in

pages 6 & 7 of his order that the assessee company has suppressed its cost

and consequently its revenue. When an assessee is receiving remuneration

on cost plus basis from its AE then by reducing the cost the assessee, in

fact, it reduces its income also and therefore, this aspect has to be

examined and decided as to whether the allegation of the TPO is correct or

not that the assessee has suppressed its cost by not including the cost to its

AE on account of administrative and management support services and for

user of various fixed assets received from its AE free of cost. The TPO had

also alleged that the assessee had not accounted for its cost regarding stock

option granted to the employees of the assessee company by its AE and no

doubt, the amount of Rs. 2.00 Crores added by the A. O. also includes the

value in respect of such ESOP as well as cost of administrative and

management support services received by its AE and the amount payable

for using assets of AE. Regarding the value of ESOP, it is held in various

Tribunal orders that it is not a part of operating cost and therefore, the

value of ESOP has to be excluded from the amount of Rs.2.00 Crores

worked out by the TPO as cost of these benefits received by the assessee

from its AE without paying anything. Since its working is not available on

record, this matter has to go back to the file of AO/TPO for fresh decision in

the light of above discussion after providing adequate opportunity of being

heard to the assessee. We order accordingly.

judicial pronouncements on which reliance has been placed by the learned

19 IT(TP)A Nos.1207 & 274(B)2014

AR of the assessee in support of his contention that notional adjustment

cannot be the basis for making addition. Regarding reliance on other

Tribunal orders in respect of ESOP, we have already held that the same

cannot be included in the operating cost. Hence, we have to consider only

the first set of judgments noted above. The first judgment is the Tribunal

order rendered in the case of Haworth India Pvt. Ltd (Supra). In this case,

the facts and dispute were different. In that case, the commission expenses

were suo motu disallowed by the assessee in the revised return and the

assessee also had paid the due taxes on that. Under these facts, it was held

that the same cannot be considered as part of operating cost. These facts of

that case also very important that the major component of receipt of

international transactions of the assessee was commission income which

amounts to Rs.1539.33 lakhs out of total operating income of Rs.1773.98

lakhs and it is observed by the Tribunal that it cannot be said that

commission expenses which had been suo moto disallowed by the assesee

were not claimed as operating expenses while computing the ALP.

Therefore, it was held that if they are subsequently, disallowed suo moto by

the assessee in the revised return, they are required to be excluded from the

operating cost. In view of these facts of that case, this Tribunal order is not

relevant in the present case because in the present case, the facts are

entirely different.

Tribunal order rendered in the case of M/s Mitsubishi Corpn. India Pvt. Ltd.

(Supra). In that case, the most appropriate method selected was TNMM as

20 IT(TP)A Nos.1207 & 274(B)2014

against the cost plus method in the present case and this was not the

allegation in that case that the assessee has suppressed its cost and

consequently its revenue and therefore, this Tribunal order is also not

applicable in the present case because in TNMM, ALP is worked out as a

percentage of Total Cost on the basis of comparables’ mean margin and if

that rate is in excess of the margin rate of the assessee and such excess is

more than 5% then that rate is applied to the total operating cost of the

tested party to work out the amount of T P adjustment. In that scenario, if

the operating cost is increased by making notional adjustment, it is not

justified as per this tribunal order. We find that in such a case, it cannot be

an allegation that lesser price was realized by the assessee by suppressing

its cost because charging of price is not on the basis of cost of the assessee

but in a case where cost plus method is used as in the present case,

reducing the cost directly reduces the margin of the tested party as in the

present case, the margin to be charged by the assessee itself is dependent

on its operating cost and hence, this judgment is also not applicable.

Marubeni Itochu Steel India Pvt. Ltd (Supra). In that case, the MAM adopted

was TNMM against cost plus method in the present case and therefore, for

the same reason as has been given by us in respect of Tribunal order

rendered in the case of M/s Mitsubishi Corpn. India Pvt. Ltd. (Supra), this

Tribunal order is also not applicable in the present case.

judgment of the Hon’ble Delhi High Court rendered in the case of Li Fung

21 IT(TP)A Nos.1207 & 274(B)2014

India Pvt. Ltd. (Supra). In that case, the TPO enhanced the assessee’s cost

base for applying the operating profit margin over total cost. The assessee’s

compensation model in that case was based on functions performed by it

and the operating costs incurred by it and not on the cost of goods sourced

from third party vendors in India. Under these facts, it was held that

allotting margin on the value of goods sourced by third party customers

from Indian exporters/vendors to compute the assessee’s profit is

unjustified. In the present case, this is not an allegation of the TPO that

cost of goods sourced from third party vendors is to be included in total cost

and profit margin should be applied to such enhanced cost. In the present

case, the allegation is this that the assessee had suppressed its operating

cost by availing various services from its AE free of cost. Unless this

allegation of the TPO is proved to be wrong, the assessee has no case

because if the assessee has suppressed its cost by obtaining certain services

from its AE free of cost then, the cost of such services has to be included in

the cost base of the assessee to work out the cost plus margin of the

assessee. In view of this difference in facts of that case and the facts of the

present case, this judgment of Hon’ble Delhi High Court is also not

applicable in the present case.

relied by the ld. AR of the assessee is applicable in the present case because

of difference in facts. Accordingly, ground no.2 & 3 of the revenue’s appeal

are allowed for statistical purposes and the matter is restored back to the

file of the AO/TPO for fresh decision by adopting only cost of various

22 IT(TP)A Nos.1207 & 274(B)2014

services not accounted for by the assessee but after excluding the value of

ESOP.

connected with ground no.7 of the assesee’s appeal and therefore, if the

issue involved in ground no.7 of the assessee’s appeal is restored back to

the file of the AO/TPO then the issue involved in this ground of revenue’s

appeal may also be restored back. while deciding ground no.7 of the

assessee’s appeal, we have restored the matter to the file of the AO/TPO for

fresh decision and therefore, the issue involved in ground no.4 of the

revenue’s appeal is also restored back to the file of the AO/TPO for fresh

decision.

revenue that he supports the order of the AO whereas for ground no.7 & 8,

he submitted that these grounds are general. As against this, the ld AR of

the assessee submitted that this issue is covered in favour of the assessee

by the judgment of the Hon’ble Karnataka High Court rendered in the case

of M/s Tata Elxsi Ltd. as reported in349 ITR 98.

by the Hon’ble Karnataka High Court that the total turnover is sum total of

export turnover and domestic turnover and therefore, if an amount is

reduced from the export turnover then the total turnover also goes down by

the same amount automatically. In the present case, ld. CIT (A) has

directed the AO to reduce the communication charges of Rs.6735119/- from

the total turnover also because the same was reduced by him from the

23 IT(TP)A Nos.1207 & 274(B)2014

export turnover. In view of this judgment of the Hon’ble Karnataka High

Court rendered in the case of M/s Tata Elxsi Ltd. (Supra), we find no

infirmity in the order of the ld. CIT (A) on this issue and therefore, we

decline to interfere with the same. These grounds of the revenue are

rejected.

purposes.

revenue are partly allowed for statistical purposes

Order pronounced in the open court on the date mentioned on the caption

page.

(LALIET KUMAR) (A.K. GARODIA) JUDICAL MEMBER ACCOUNTANT MEMBER Place: Bangalore: D a t e d : .04.2017 am* Copy to : 1 Appellant 2 Respondent 3 CIT(A)-II Bangalore 4 CIT 5 DR, ITAT, Bangalore. 6 Guard file By order, AR, ITAT, Bangalore

24 IT(TP)A Nos.1207 & 274(B)2014