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Income Tax Appellate Tribunal, BENGALURU BENCH B, BENGALURU
Before: SHRI SUNIL KUMAR YADAV & SHRI. S. JAYARAMAN
per cent export oriented unit under the STPI regulations and has its STP unit at Bangalore . It undertakes core software service activities for Trianz US and provides similar services to its independent customers. The services to Trianz US are being provided under a IT(TP)A.No.1568/Bang/2012 Page - 2 contract. Trianz US enters into contract with end-customers and sub- contracts a portion of the same to Trianz India. Trianz India's scope is restricted to carrying out the work based on requests and specifications provided by Trianz US. It filed its return on 30.9.2008 with a Nil income and a loss of Rs.14,11,62,551/-
On its international transactions, the assessee had adopted Transactional Net Margin Method (TNMM) to arrive at the Arm's Length Price with 14 comparables. Although, the TPO accepted Transactional Net Margin Method but rejected the assessee’s TP study, rejected 11 comparables out of 14 chosen by the assessee, introduced 17 new comparables, arrived an adjusted mean margin at 23.58% as against the assessee’s margin of 27.11% and made an addition at Rs.2,48,34,842/-. The AO made made various other additions/disallowances in respect of the domestic corporate tax front. On the assessee’s objections, the DRP but for remitting one issue, dismissed all other issues under consideration of this appeal. Aggrieved, the assessee filed a lengthy grounds of appeal and later on filed a concise grounds as under :
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The first issue argued is that the A O has erred in disallowing and the DRP in upholding the provision for mark-to-market loss on derivatives at Rs. 1,000,000 on the basis that such loss is notional, cannot be debited to the Profit and loss account and treated as an allowable expenditure. In this regard, the assessee submitted that the ICAI had issued AS 30 - Financial Instruments:
Recognition and Measurement, which contained guidance on accounting for derivatives. This Standard became recommendatory from April 1, 2009 and mandatory from April 1, 2011. However, vide an announcement dated March 29, 2008, the ICAI council had expressed their view that since the aforesaid standard contained appropriate accounting for derivatives, the same could be followed by entities from an earlier date, as the earlier adoption of a standard was always encouraged. Further, in case an entity did not follow AS- 30, keeping in view the principle of prudence as enunciated in AS-1:
Disclosure of Accounting Policies, entities were required to provide for losses in respect of all outstanding derivative contracts at the balance sheet date by marking them to market. Pursuant to the ICAI's above mentioned announcement , the assessee created a provision for IT(TP)A.No.1568/Bang/2012 Page - 6 mark-to -market loss on derivatives amounting to Rs. 1,000,000 based on the principles of prudence enunciated in AS-1 and placed reliance on the ratios in Mumbai Special Bench of the Income- tax Appellate Tribunal in the case of Bank of Bahrain & Kuwait [2010-TIOL-447-ITAT MUM-SB], the Apex Court decision in the case of Woodward Governor India (P) Ltd. [2009] 312 ITR 254 and Bharat Earth Movers [2000] 245 ITR 428, Para 11 of the Mumbai Tribunal decision in Reliance Industries Ltd in Mum/2011 for ay 2008- 09 dt 20.11.2013 etc.
We heard the rival contentions. It is seen from the DRP order that it has not considered the assessee’s submissions independently but held that that the view taken by the A O do not call for any interference. In view of that this issue is remitted back to the DRP for passing a reasoned order after giving due opportunity to the assessee.
The next issue argued is that the A O has erred in taking a view that customs duty paid on imports at Rs. 38,860 is to be added to the cost of such equipments/ items and disallowed the revenue expenditure and the DRP erred in upholding the same. In this regard, the assessee submitted that it had paid customs duty on imports pertaining to equipments / items procured for clients projects and it has been subsequently billed to the client. Hence , IT(TP)A.No.1568/Bang/2012 Page - 7 the assessee has taken deduction of custom duty paid in computation of total income for a y 2008-09. The amount subsequently billed to the client has also been offered as income in the computation of total income etc.
We heard the rival submissions and gone through the DRP order.
Para 11.4 of order mentions that “The Panel after taking into consideration of the facts deems it appropriate to direct the AO to revisit this issue and examine the claim that the impugned customs duty of Rs.38,860 on imports pertaining to equipments / items procured for clients projects and the same was subsequently billed to the client. This ground is disposed off with the directions as above”.
Since this issue is remitted back to the AO, we hold that the DRP’s decision does not require any interference.
The next issue argued is on the disallowance of rent equalization at Rs.18,82,944/-. The assessee provided this sum towards rent equalization in accordance with AS 19-Leases, as notified by the Ministry of Corporate affairs under the Companies (Accounting Standards) Rules 2006.
The AO held that since no such known liability exists, the claim is not allowable and hence added to the total income. The assessee pleaded that the rent equalization charges are debited to the P& L account , it is in accordance with AS-19 and hence it should be allowed.
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We heard the rival submissions. As pointed out by the DR, we find that the assessee has not raised any objection on this issue before the DRP. Since, this issue has attained finality, we don’t entertain this ground.
The next issue argued is that the assessee has objected to certain comparables selected by the TPO and upheld by the DRP. Out of the final set of 20 comparables sustained by the TPO, the assessee sought exclusion of 13 comparables , mainly on account of functional dissimilarity.
In support of it, it relied on 2 of this Tribunal decisions and one decision from the Mumbai Tribunal. They are dealt as under:
7.1. The assessee submitted that the comparables, Avani Cincom Technologies, Celestial Biolabs, Infosys Techologies Ltd, Kals information Systems Ltd(Seg) , Tata Elxsi ltd(Seg) & Wipro Ltd (Seg) are functionally different. Celestial Biolabs, apart from functionally different, does not satisfy employee cost filter and had abnormal profit. For excluding them, it relied on this Tribunal decision in M/s. Curam Software International P. Ltd v. ITO ITA.1280/Bang/2012, dt.31.07.2013 for ay 2008-09, which has characterized itself as a provider of software development services to its Associated Enterprises (AE). The relevant portion of the order is extracted as under:
“9.0 (1) Avani Cimcon Technologies Ltd. 9.1 This company was selected by the TPO as a comparable. The assessee objects to the inclusion of this company as a comparable on the ground that this company is not functionally comparable to the assessee as it is into software products whereas the assessee offers software development services to its AEs. The TPO had rejected the objections of the assessee on the ground that this comparable IT(TP)A.No.1568/Bang/2012 Page - 9 company has categorized itself as a pure software developer, just like the assessee, and hence selected this company as a comparable. For this purpose, the TPO had relied on information submitted by this company in response to enquiries carried out under section 133(6) of the Act for collecting information about the company directly. 9.2 Before us, the learned Authorised Representative reiterated the assessee's objections for the inclusion of this company from the list of comparable companies on the ground that this company is not functionally comparable to the assessee as it is into software products. It is also submitted that the segmental details of this company are not available and the Annual Report available in the public domain is not complete. It was further contended that the information obtained by the TPO under section 133(6) of the Act, on the basis of which the TPO included this company in the final list of comparable companies, has not been shared with the assessee. In support of this contention, the learned Authorised Representative placed reliance on the following judicial decisions : i) Trilogy E-Business Software India Pvt. Ltd. V DCIT (ITA No.1054/Bang/2011) ii) Telecordia Technologies India Pvt Ltd V ACIT (ITA No.7821/Mum/2011) 9.3 Per contra, the learned Departmental Representative supported the inclusion of the aforesaid company in the final list of comparables by the TPO. The learned Departmental Representative argued that the ruling of the co-ordinate bench in the case of Trilogy E- Business Software India Pvt. Ltd. (supra) relied on by the assessee was rendered in the factual context of the position that existed for Financial Year 2006-07 vis-à-vis this comparable company and Trilogy E-Business Software India Pvt. Ltd. and there cannot be an assumption that it would continue to be applicable for F.Y. 2007-08 that too vis-à-vis the assessee, in the case on hand, which is a different entity from Triology E-Business Software India Pvt. Ltd.. 9.4 The learned Authorised Representative, in rejoinder to the submissions of the learned Departmental Representative, contended that the functional profile of the comparable company continues to remain the same for this year also i.e. software products, whereas the assessee in the case on hand provided software development and support services to its AE and therefore it was clearly functionally different. The learned Authorised Representative also reiterated the submissions made earlier that the Annual Report of the comparable company in the public domain was not complete and that the information received by the TPO under section 133(6) of the Act has not been shared with the assessee. 9.5.1 We have heard both parties and perused and carefully considered the material on record. It is seen from the record that the TPO has included this company in the final set of comparables only on the basis of information obtained under section 133(6) of the Act. In these circumstances, it was the duty of the TPO to have necessarily IT(TP)A.No.1568/Bang/2012 Page - 10 furnished the information so gathered to the assessee and taken its submissions thereon into consideration before deciding to include this company in its final list of comparables. Non-furnishing the information obtained under section 133(6) of the Act to the assessee has vitiated the selection of this company as a comparable. 9.5.2 As regards the submission of the learned Authorised Representative, we are unable to agree that this company has to be deleted from the list of comparables only because it has been deleted from the set of comparables in the case of Triology E-Business Software India Pvt. Ltd. (supra). No doubt this company has been deleted as a comparable in the case of Triology E-Business Software India Pvt. Ltd. (supra) and this can be a good guidance to decide on the comparability in the case on hand also. This alone, however, will not suffice for the following reasons :- (i) The assessee needs to demonstrate that the FAR analysis and other relevant facts of the Triology case are equally applicable to the facts of the assessee's case also. Unless the facts and the FAR analysis of Triology case is comparable to that of the assessee in the case on hand, comparison between the two is not tenable. (ii) After demonstrating the similarity and the comparability between the assessee and the Triology case, the assessee also needs to demonstrate that the facts applicable to the Assessment Year 2007-08, the year for which the decision in case of Triology E-Business Software India Pvt. Ltd. (supra) was rendered are also applicable to the year under consideration i.e. Assessment Year 2008-09. 9.5.3 It is a well settled principle that the assessee is required to perform FAR analysis for each year and it is quite possible that the FAR analysis can be different for each of the years. That being so, the principle applicable to one particular year cannot be extrapolated automatically and made applicable to subsequent years. To do that, it is necessary to first establish that the facts and attendant factors have remained the same so that the factors of comparability are the same. Viewed in that context, the assessee has not discharged the onus upon it to establish that the decision rendered in the case of Triology E- Business Software India Pvt. Ltd. (supra) can be applied to the facts of the case and that too of an earlier year i.e. Assessment Year 2007-08. The assessee, in our view, has not demonstrated that the facts of Triology E-Business Software India Pvt. Ltd. (supra) are identical to the facts of the case on hand and that the profile of the assessee for the year under consideration is similar to that of the earlier Assessment Year 2007-08. In view of facts as discussed above, we deem it fit to remand the matter back to the file of the Assessing Officer / TPO to examine the comparability of this company afresh by considering the above observations. The TPO is directed to make available to the assessee information obtained under section 133(6) of the Act and to afford the assessee adequate opportunity of being heard and to make its submissions in the matter, which shall be duly considered before passing orders thereon. It is ordered accordingly.
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(2) Celestial Biolabs Ltd. 10.1 This comparable was selected by the TPO for inclusion in the final list of comparables. Before the TPO, the assessee had objected to the inclusion of this company in the list of comparables for the reasons that it is functionally different form the assessee and that it fails the employee cost filter. The TPO, however, brushed aside the objections raised by the assessee by stating that the objections of functional dissimilarity has been dealt with in detail in the T.P. order for Assessment Year 2007-08. As regards the objection raised in respect of the employee cost filter issue, the TPO rejected the objections by observing that the employee cost filter is only a trigger to know the functionality of the company. 10.2.1 Before us, the learned Authorised Representative contended that this company is not functionally comparable to the assessee as it is into bio-informatics, software product / services and the segmental break up is not provided. The assessee has extensively quoted from various parts of the Annual Report of the company, which states as under : i) “Mission Statement” on page 2 of the Annual Report states that the company is also into bio-informatics products, ITES, Etc., “ Celestial is committed to be a technology company respected globally for its software development, products, services in the area of Bio- informatics, Enterprise Resources Planning, Information Technology and Information Technology Enables Services” (emphasis supplied). ii) The “Future Outlook” in the Directors Report of the Annual Report indicates that the company is into large scale development of bio tech products. “ …. Your company is setting up a manufacturing facility to manufacture Industrial Enzymes, Active Pharmaceuticals Ingredients and Herbal Pharmaceuticals. ….” iii) “Public Issue” in the Directors Report on page 13 of the Annual Report states :- “…… The company has raised Rs.30 Crores for production of Enzymes, Bio Tech Products and Drug Molecule Development, etc., with an estimated project cost of Rs.50 Crores.” iv) “Financials” in Management Discussion & Analysis on page 16 of the Annual Report states :- “ ….. The company has achieved a turnover of Rs.2,021.12 lakhs from sales and services against the turnover of Rs.1,412.76 lakhs in the previous fiscal year. The sales are higher by 608.36%. The growth has been achieved through services made in Bio-technology, Implementations, Product Development, I T Enabled Services and also through rational spending in costs….” v) “Business Analysis” in the Management Discussion & Analysis on page 16 of the Annual Report states :-
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“ Products The company has developed Taxability Prediction tool “CLL-TOX” to predict the toxicity of a given molecule. Your company filed IPR by filing under the Copyright / Patent Act (Appraised and funded by Department of Scientific & Industrial Research.) The company has developed an ERP product “CELL VISION” using Microsoft Technologies. Cell Vision is a custom implemented product which caters to the needs of many industrial segments. The company is foreseeing good reserves during the years to come. Your company also developed a portal called Sanjeevani India.Com.” vi) Schedule 7 of the financial statements on page 25 of the Annual Report indicates that the company has significant product development expenditure pertaining to Drug Molecule and Celsuite. vii) “Turnover” under “Notes on Accounts” for financial statements on page 35 of the Annual Report states that the turnover from “bio informatics services, data warehousing and mixing, software development, products and services” for F.Y. 2007-08 is 2021.12 lakhs. 10.2.2 The assessee also placed reliance in support of its stand that this company be excluded from the list of comparable companies on the following decisions of the co-ordinate benches of this Tribunal :- i) Triology E-Business Software India Pvt. Ltd. V DCIT (ITA No.1054/Bang/2011) ii) Mercedes Benz Research & Development India Pvt. Ltd. (IT (T.P.)A No.1222/Bang/2011) 10.3 Per contra, the learned Departmental Representative contended that the ruling in the case of Triology E-Business Software India Pvt. Ltd. (supra) was rendered with respect to F.Y.2006-07 and there cannot be an assumption or presumption that it would continue to be applicable to F.Y. 2007-08 as well. 10.4 To this, the learned Authorised Representative countered that the functional profile of this company continues to remain the same for F.Y. 2007-08 as it was in F.Y. 2006-07 and the same is evident from the Annual Report quoted extensively above at para 10.2.1 (supra). 10.5.1 We have heard both parties and carefully perused and considered the material on record including the judicial decisions cited. As discussed earlier, there is merit in the contention of the learned Departmental Representative that the ruling of the co-ordinate bench of this Tribunal in the case of Triology E-Business Software India Pvt. Ltd. (supra), was with respect to the facts relevant to an earlier financial year and there cannot be an assumption that it would continue to be applicable to all other assessees for this year as well. At the same time, we find that the TPO also seems to have selected this company as a comparable, based on the reasoning given in the TPO’s order for the earlier year i.e. F.Y. 2006-07. Evidently, in this view of the matter, the TPO has not conducted any independent FAR analysis for this company IT(TP)A.No.1568/Bang/2012 Page - 13 for the year under consideration and therefore the selection process adopted by the TPO is defective. 10.5.2 Further, besides relying on the decision of the co-ordinate bench in the case of Triology E-Business Software India Pvt. Ltd. (supra), the assessee has demonstrated that the finding given therein for Assessment Year 2007-08 is applicable for this year also. Further, the assessee has also brought on record substantial evidence by quoting from various portions of the Annual Report that this company is functionally different from the assessee and hence is not comparable to the assessee in the case on hand. We agree with the submissions made by the assessee, that as per the details from the Annual Report of this company, it is functionally different from the assessee. In view of the fact that the financial profile and other parameters of this company have not changed during the year under consideration, which fact has been demonstrated by the assessee, following the decision of the co-ordinate bench of this Tribunal in the case of Triology E-Business Software India Pvt. Ltd. (supra), we hold that the company ought to be excluded from the list of comparables. It is ordered accordingly.
11.0 (3) KALS Information Systems Ltd. 11.1 This was a comparable selected by the TPO. Before the TPO, the assessee had objected to the inclusion of this company in the set of comparables on the grounds of functional differences and that the segmental details have not been provided in the Annual Report of the company with respect to software services revenue and software products revenue. The TPO, however, rejected the objections of the assessee observing that the software products and training constitutes only 4.24% of total revenues and the revenue from software development services constitutes more than 75% of the total operating revenues for the F.Y. 2007-08 and qualifies as a comparable by the service income filter. 11.2 Before us, the assessee contended that this company is not functionally comparable, as it is into software products. The assessee had also submitted that :- (i) this company has two segments namely ; Application Software Segment which includes software product revenues, while the ‘Training Segment’ does not have any product revenue. (ii) from the Annual Report of KALS for the year ended 31.3.2008; i.e. the year under consideration, it is observed that the company is into provision of software development services as well as sale of software products. “Inventories” under schedule to the financial statements on page 16 of the Annual Report discloses “Software Development” as inventory and work-in-progress. It is to be noted that a pure software development service provider would not be able to disclose such details as it does not carry any such inventory or work-in-progress.
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“Background” under the Schedules to the financial statements on page 18 of the Annual Report states :-
“ The company is engaged in development of software and software products since its inception. This company consisting of STPI unit engaged in Development of Software and Software Products and a Training Centre engaged in training of software professionals on online projects” (emphasis provided). “ Revenue Recognition” under Notes to the financial statements on page 18 of the Annual Report states :- “The company derives its revenues primarily from software services and software products.” (iii) As per the Website of KALS, the company has developed two products, namely; ‘Virtual Insure’ and ‘La-Vision’ establishing the fact that KALS earns revenues from the development of software products. (iv) The segmental information provided under ‘Notes on Accounts’ of the Annual Report provides the break-up of revenues from two segments, namely ‘Application Software’ and ‘Training’ which shows that revenue from software products forms part of Application Software and there are no segmental details. (v) The assessee also placed reliance on the judicial decisions rendered in the following cases : a) Triology E-Business Software India Pvt. Ltd. (ITA No.1054/Bang/2011) b) Mercedes Benz Research & Development India Pvt. Ltd. (IT(TP)A No.1222/Bang/2011). 11.3 Per contra, the learned Departmental Representative contended that the decision of the co-ordinate bench of the Tribunal in the case of Triology E-Business Software India Pvt. Ltd. (supra) was rendered with respect to F.Y.2006-07 and therefore there cannot be an assumption that it would continue to be applicable to the year under consideration i.e. A.Y. 2008-09. To this, the counter argument of the learned Authorised Representative is that the functional profile of this company continues to remain the same for the year under consideration also and the same is evident from the details called out from the Annual Report and quoted above (supra). 11.4 We have heard both parties and perused and carefully considered the material on record including the judicial decisions cited. As discussed earlier in this order, there is merit in the contention of the learned Departmental Representative that the ruling rendered in the case of Triology E-Business India Pvt. Ltd. (supra) was with respect to an earlier period i.e. F.Y. 2006-07 and there cannot be an assumption or presumption that it is applicable for the year under consideration as well. At the same time, we find that the TPO has drawn conclusions on the basis of information obtained under section 133(6) of the Act, which was not in the public domain and could not have been used by the TPO, IT(TP)A.No.1568/Bang/2012 Page - 15 when the same is contrary to the Annual Report of the company as has been highlighted by the assessee in its submissions. We also find that the co-ordinate bench of this Tribunal in the case of Trilogy E-Business Software India Pvt. Ltd. (supra) has held that this company was developing software products and was not purely or mainly a software development service provider. Further, apart from relying on the decision of Trilogy E-Business Software India Pvt. Ltd. (supra), the assessee has brought on record substantial evidence quoting from various portions of the Annual Report of that this company is functionally dis-similar and different from the assessee and hence is not comparable and therefore the finding rendered in respect of this company in the case of Trilogy E-Business Software India Pvt. Ltd. for Assessment Year 2007-08 is applicable for this year i.e. Assessment Year 2008-09 also. In view of the facts and circumstances of the case as discussed above, we hold that this company i.e. KALS Information Systems Ltd., is to be omitted from the set of comparable companies.
(4) Infosys Technologies Ltd. 12.1 This was a comparable selected by the TPO. Before the TPO, the assessee objected to the inclusion of the company in the set of comparables, on the grounds of turnover and brand attributable profit margin. The TPO, however, rejected these objections raised by the assessee on the grounds that turnover and brand aspects were not materially relevant in the software development segment. 12.2 Before us, the assessee contended that this company is not functionally comparable to the assessee and in this context has cited various portions of the Annual Report of this company to this effect which is as under :- (i) The company has an Intellectual Property (IP) Cell to guide its employees to leverage the power of IP for their growth. In 2008, this company generated over 102 invention disclosures and filed an aggregate 10 patents in India and the USA. Till date this company has filed an aggregate of 119 patent applications (pending) in India and USA out of which 2 have been granted in the US. (ii) This company has substantial revenues from software products and the break-up of the software product revenues is not available. (iii) This company has incurred huge research and development expenditure to the tune of approximately Rs.200 Crores. (iv) This company has a revenue sharing agreement towards acquisition of IPR in AUTOLAY, a commercial software product used in designing high performance structural systems. (v) The assessee also placed reliance on the following judicial decisions:- (a) ITAT, Delhi Bench decision in the case of Agnity India Technologies India Pvt. Ltd. - (ITA No.3856/Del/2010) and IT(TP)A.No.1568/Bang/2012 Page - 16
(b) Trilogy E-Business Software India Pvt. Ltd. (ITA No.1054/Bang/2011) 12.3 Per contra, opposing the contentions of the assessee, the learned Departmental Representative submitted that comparability cannot be decided merely on the basis of scale of operations and the operating margins of this company have not been extraordinary. In view of this, the learned Departmental Representative supported the decision of the TPO to include this company in the list of comparable companies. 12.4 We have heard the rival submissions and perused and carefully considered the material on record. We find that the assessee has brought on record sufficient evidence to establish that this company is functionally dis-similar and different from the assessee and hence is not comparable and the finding rendered in the case of Trilogy E- Business Software India Pvt. Ltd. (supra) for Assessment Year 2007-08 is applicable to this year also. The argument put forth by assessee's is that Infosys Technologies Ltd is not functionally comparable since it owns significant intangible and has huge revenues from software products. It is also seen that the break up of revenue from software services and software products is not available. In this view of the matter, we hold that this company ought to be omitted from the set of comparable companies. It is ordered accordingly. 13.0 (5) Wipro Limited 13.1 This company was selected as a comparable by the TPO. Before the TPO, the assessee had objected to the inclusion of this company in the list of comparables or several grounds like functional dis-similarity, brand value, size, etc. The TPO, however, brushed aside the objections of the assessee and included this company in the set of comparables. 13.2 Before us, the assessee contended that this company is functionally not comparable to the assessee for several reasons, which are as under : (i) This company owns significant intangibles in the nature of customer related intangibles and technology related intangibles and quoted extracts from the Annual Report of this company in the submissions made. (ii) The TPO had adopted the consolidated financial statements for comparability purposes and for computing the margins, which contradicts the TPO’s own filter of rejecting companies with consolidated financial statements. 13.3. Per contra, the learned Departmental Representative supported the action of the TPO in including this company in the set of comparables. 13.4.1 We have heard both parties and carefully perused and considered the material on record. We find merit in the contentions of the assessee for exclusion of this company from the set of comparables. It is seen that this company is engaged both in software development IT(TP)A.No.1568/Bang/2012 Page - 17 and product development services. There is no information on the segmental bifurcation of revenue from sale of product and software services. The TPO appears to have adopted this company as a comparable without demonstrating how the company satisfies the software development sales 75% of the total revenue filter adopted by him. Another major flaw in the comparability analysis carried out by the TPO is that he adopted comparison of the consolidated financial statements of Wipro with the stand alone financials of the assessee; which is not an appropriate comparison. 13.4.2 We also find that this company owns intellectual property in the form of registered patents and several pending applications for grant of patents. In this regard, the co-ordinate bench of this Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. (ITA No.227/Bang/2010) has held that a company owning intangibles cannot be compared to a low risk captive service provider who does not own any such intangible and hence does not have an additional advantage in the market. As the assessee in the case on hand does not own any intangibles, following the aforesaid decision of the co-ordinate bench of the Tribunal i.e. 24/7 Customer.Com Pvt. Ltd. (supra), we hold that this company cannot be considered as a comparable to the assessee. We, therefore, direct the Assessing Officer/TPO to omit this company from the set of comparable companies in the case on hand for the year under consideration. 14.0 (6) Tata Elxsi Ltd. 14.1 This company was a comparable selected by the TPO. Before the TPO, the assessee had objected to the inclusion of this company in the set of comparables on several counts like, functional dis-similarity, significant R&D activity, brand value, size, etc. The TPO, however, rejected the contention put forth by the assessee and included this company in the set of comparables. 14.2 Before us, it was reiterated that this company is not functionally comparable to the assessee as it performs a variety of functions under the software development and services segment namely (a) Product design services (b) Innovation design engineering and ( c ) visual computing labs. In the submissions made the assessee had quoted relevant portions from the Annual Report of the company to this effect. In view of this, the learned Authorised Representative pleaded that this company be excluded from the list of comparables. 14.3 Per contra, the learned Departmental Representative supported the stand o the TPO in including this company in the list of comparables. 14.4.1 We have heard both parties and carefully perused and considered the material on record. From the details on record, we find IT(TP)A.No.1568/Bang/2012 Page - 18 that this company is predominantly engaged in product designing services and not purely software development services. The details in the Annual Report show that the segment “software development services” relates to design services and are not similar to software development services performed by the assessee. 14.4.2 The Hon'ble Mumbai Tribunal in the case of Telecordia Technologies India Pvt. Ltd. V ACIT (ITA No.7821/Mum/2011) has held that Tata Elxsi Ltd. is not a software development service provider and therefore it is not functionally comparable. In this context the relevant portion of this order is extracted and reproduced below :- “ …. Tata Elxsi is engaged in development of niche product and development services which is entirely different from the assessee company. We agree with the contention of the learned Authorised Representative that the nature of product developed and services provided by this company are different from the assessee as have been narrated in para 6.6 above. Even the segmental details for revenue sales have not been provided by the TPO so as to consider it as a comparable party for comparing the profit ratio from product and services. Thus, on these facts, we are unable to treat this company as fit for comparability analysis for determining the arm’s length price for the assessee, hence, should be excluded from the list of comparable portion.” As can be seen from the extracts of the Annual Report of this company produced before us, the facts pertaining to Tata Elxsi have not changed from Assessment Year 2007-08 to Assessment Year 2008-09. We, therefore, hold that this company is not to be considered for inclusion in the set of comparables in the case on hand. It is ordered accordingly. ”
Since this Tribunal has found that the comparables, Celestial Biolabs, Infosys Techologies Ltd, Kals information Systems Ltd (Seg) , Tata Elxsi Ltd (Seg) & Wipro Ltd (Seg) are functionally different, following it , the TPO/AO is directed to exclude them from the list of comparables. However, the issue related to the comparable , Avani Cincom Technologies , which was included on the basis of information obtained u/s 133(6) by the TPO is remitted back to him for re-adjudication in the similar manner, this Tribunal has done in the above case.
IT(TP)A.No.1568/Bang/2012 Page - 19 7.2. The assessee submitted that the comparables, E-Zest Solution ltd, Persistent Systems Ltd, Quintegra Solution Ltd, Thirdware Solution Ltd and Lucid Software Ltd are functionally different. For excluding them, it relied on this Tribunal decision in M/s. 3DPLM Software Solutions Ltd v. DCIT IT(TP)A.1303/Bang/2012, dt.28.11.2013- ay 2008-09, which is established as a 100% export oriented unit under STPI scheme and was a provider of software development and other related services to its group companies.
The relevant portion of the order is extracted as under :
“14. E-Zest Solutions Ltd. 14.1 This company was selected by the TPO as a comparable. Before the TPO, the assessee had objected to the inclusion of this company as a comparable on the ground that it was functionally different from the assessee. The TPO had rejected the objections raised by the assessee on the ground that as per the information received in response to notice under section 133(6) of the Act, this company is engaged in software development services and satisfies all the filters. 14.2 Before us, the learned Authorised Representative contended that this company ought to be excluded from the list of comparables on the ground that it is functionally different to the assessee. It is submitted by the learned Authorised Representative that this company is engaged in ‘e-Business Consulting Services’, consisting of Web Strategy Services, I T design services and in Technology Consulting Services including product development consulting services. These services, the learned Authorised Representative contends, are high end ITES normally categorised as knowledge process Outsourcing (‘KPO’) services. It is further submitted that this company has not provided segmental data in its Annual Report. The learned Authorised Representative submits that since the Annual Report of the company does not contain detailed descriptive information on the business of the company, the assessee places reliance on the details available on the company’s website which should be considered while evaluating the company’s functional profile. It is also submitted by the learned Authorised Representative that KPO services are not comparable to software development services and therefore companies rendering KPO services ought not to be considered as comparable to software development companies and relied on the decision of the co-ordinate bench in the case of Capital IQ Information Systems (India) (P) Ltd. in dt.23.11.2012 and prayed that in view of the IT(TP)A.No.1568/Bang/2012 Page - 20 above reasons, this company i.e. e-Zest Solutions Ltd., ought to be omitted from the list of comparables. 14.3 Per contra, the learned Departmental Representative supported the inclusion of this company in the list of comparables by the TPO. 14.4 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the record that the TPO has included this company in the list of comparbales only on the basis of the statement made by the company in its reply to the notice under section 133(6) of the Act. It appears that the TPO has not examined the services rendered by the company to give a finding whether the services performed by this company are similar to the software development services performed by the assessee. From the details on record, we find that while the assessee is into software development services, this company i.e. e-Zest Solutions Ltd., is rendering product development services and high end technical services which come under the category of KPO services. It has been held by the co-ordinate bench of this Tribunal in the case of Capital I-Q InformationSystems (India) (P) Ltd. Supra) that KPO services are not comparable to software development services and are therefore not comparable. Following the aforesaid decision of the co-ordinate bench of the Hyderabad Tribunal in the aforesaid case, we hold that this company, i.e. e-Zest Solutions Ltd. be omitted from the set of comparables for the period under consideration in the case on hand. The A.O. / TPO is accordingly directed.
Thirdware Solutions Ltd. (Segment) 15.1 This company was proposed for inclusion in the list of comparables by the TPO. Before the TPO, the assessee objected to the inclusion of this company in the list of comparables on the ground that its turnover was in excess of Rs.500 Crores. Before us, the assessee has objected to the inclusion of this company as a comparable for the reason that apart from software development services, it is in the business of product development and trading in software and giving licenses for use of software. In this regard, the learned Authorised Representative submitted that :- (i) This company is engaged in product development and earns revenue from sale of licences and subscription. It has been pointed out from the Annual Report that the company has not provided any separate segmental profit and loss account for software development services and product development services. (ii) In the case of E-Gain communications Pvt. Ltd. (2008-TII-04-ITAT- PUNE-TP), the Tribunal has directed that this company be omitted as a comparable for software service providers, as its income includes income from sale of licences which has increased the margins of the company. The learned A.R. prayed that in the light of the above facts and in view of the afore cited decision of the Tribunal (supra), this company ought to be omitted from the list of comparables.
IT(TP)A.No.1568/Bang/2012 Page - 21 15.2 Per contra, the learned Departmental Representative supported the action of the TPO in including this company in the list of comparables. 15.3 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the material on record that the company is engaged in product development and earns revenue from sale of licenses and subscription. However, the segmental profit and loss accounts for software development services and product development are not given separately. Further, as pointed out by the learned Authorised Representative, the Pune Bench of the Tribunal in the case of E-Gain Communications Pvt. Ltd. (supra) has directed that since the income of this company includes income from sale of licenses, it ought to be rejected as a comparable for software development services. In the case on hand, the assessee is rendering software development services. In this factual view of the matter and following the afore cited decision of the Pune Tribunal (supra), we direct that this company be omitted from the list of comparables for the period under consideration in the case on hand.
Lucid Software Ltd. 16.1 This company was selected as a comparable by the TPO. Before us, the assessee has objected to the inclusion of this company as a comparable on the grounds that it is into software product development and therefore functionally different from the assessee. In this regard, the learned Authorised Representative submitted that – (i) This company is engaged in the development of software products. (ii) This company has been held to be functionally different and therefore not comparable to software service providers by the order of a co-ordinate bench of the Tribunal in the assessee's own case for Assessment Year 2007-08 (IT(TP)A No.845/Bang/2011), following the decision of Mumbai Tribunal in the case of Telecordia Technologies India Pvt. Ltd. (ITA No.7821/Mum/2011). (iii) The rejection of this company as a comparable to software service providers has been upheld by the co-ordinate benches of this Tribunal in the cases of LG Soft India Pvt. Ltd. (ITA No.1121/Bang/2011) and CSR India Pvt. Ltd. [ IT(TP)A No.1119/Bang/2011 ] and by the Delhi Bench of the Tribunal in the case of Transwitch India Pvt. Ltd. (ITA No.6083/Del/2010). (iv) The factual position and circumstances pertaining to this company has not changed from the earlier Assessment Year 2007-08 to the period under consideration i.e. Assessment Year 2008-09 and therefore on this basis, this company cannot be considered as a comparable in the case on hand. (v) The relevant portion of the Annual Report of this company evidences that it is in the business of product development. The learned Authorised Representative prays that in view of the factual position as laid out above and the decisions of the co-ordinate benches of the Tribunal in the assessee's own case for Assessment Year 2007-08 IT(TP)A.No.1568/Bang/2012 Page - 22
and other cases cited above, it is clear that this company being into product development cannot be considered as a comparable to the assessee in the case on hand who is a software service provider and therefore this company i.e. Lucid Software Ltd., ought to be omitted from the list of comparables. 16.2 per contra, the learned Departmental Representative supported the action and finding of the TPO in including this company in the list of comparables. 16.3 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the details on record that the company i.e. Lucid Software Ltd., is engaged in the development of software products whereas the assessee, in the case on hand, is in the business of providing software development services. We also find that, co-ordinate benches of the Tribunal in the assessee's own case for Assessment Year 2007-08 (IT(TP)A No.845/Bang/2011), LG Soft India Pvt. Ltd. (supra), CSR India Pvt. Ltd. (supra); the ITAT, Mumbai Bench in the case of Telecordia Technologies India Pvt. Ltd. (supra) and the Delhi ITAT in the case of Transwitch India Pvt. Ltd. (supra) have held, that since this company, is engaged in the software product development and not software development services, it is functionally different and dis-similar and is therefore to be omitted from the list of comparables for software development service providers. The assessee has also brought on record details to demonstrate that the factual and other circumstances pertaining to this company have not changed materially from the earlier year i.e. Assessment Year 2007-08 to the period under consideration i.e. Assessment Year 2008-09. In this factual matrix and following the afore cited decisions of the co-ordinate benches of this Tribunal and of the ITAT, Mumbai and Delhi Benches (supra), we direct that this company be omitted from the list of comparables for the period under consideration in the case on hand.
Persistent Systems Ltd. 17.1.1 This company was selected by the TPO as a comparable. The assessee objected to the inclusion of this company as a comparable for the reasons that this company being engaged in software product designing and analytic services, it is functionally different and further that segmental results are not available. The TPO rejected the assessee's objections on the ground that as per the Annual Report for the company for Financial Year 2007-08, it is mainly a software development company and as per the details furnished in reply to the notice under section 133(6) of the Act, software development constitutes 96% of its revenues. In this view of the matter, the Assessing Officer included this company i.e. Persistent Systems Ltd., in the list of comparables as it qualified the functionality criterion. 17.1.2 Before us, the assessee objected to the inclusion of this company as a comparable submitting that this company is functionally different and also that there are several other factors on which this IT(TP)A.No.1568/Bang/2012 Page - 23
company cannot be taken as a comparable. In this regard, the learned Authorised Representative submitted that : (i) This company is engaged in software designing services and analytic services and therefore it is not purely a software development service provider as is the assessee in the case on hand. (ii) Page 60 of the Annual Report of the company for F.Y. 2007-08 indicates that this company, is predominantly engaged in ‘Outsourced Software Product Development Services’ for independent software vendors and enterprises. (iii) Website extracts indicate that this company is in the business of product design services. (iv) The ITAT, Mumbai Bench in the case of Telecordia Technologies India Pvt. Ltd. (supra) while discussing the comparability of another company, namely Lucid Software Ltd. had rendered a finding that in the absence of segmental information, a company be taken into account for comparability analysis. This principle is squarely applicable to the company presently under consideration, which is into product development and product design services and for which the segmental data is not available. The learned Authorised Representative prays that in view of the above, this company i.e. Persistent Systems Ltd. be omitted from the list of comparables. 17.2 Per contra, the learned Departmental Representative support the action of the TPO in including this company in the list of comparables. 17.3 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the details on record that this company i.e. Persistent Systems Ltd., is engaged in product development and product design services while the assessee is a software development services provider. We find that, as submitted by the assessee, the segmental details are not given separately. Therefore, following the principle enunciated in the decision of the Mumbai Tribunal in the case of Telecordia Technologies India Pvt. Ltd. (supra) that in the absence of segmental details / information a company cannot be taken into account for comparability analysis, we hold that this company i.e. Persistent Systems Ltd. ought to be omitted from the set of comparables for the year under consideration. It is ordered accordingly.
Quintegra Solutions Ltd. 18.1 This case was selected by the TPO as a comparable. Before the TPO, the assessee objected to the inclusion of this company in the set of comparables on the ground that this company is functionally different and also that there were peculiar economic circumstances in the form of acquisitions made during the year. The TPO rejected the assessee's objections holding that this company qualifies all the filters applied by IT(TP)A.No.1568/Bang/2012 Page - 24
the TPO. On the issue of acquisitions, the TPO rejected the assessee's objections observing that the assessee has not adduced any evidence as to how this event had an any influence on the pricing or the margin earned. 18.1.2 Before us, the assessee objected to the inclusion of this company for the reason that it is functionally different and also that there are other factors for which this company cannot be considered as a comparable. It was submitted that, (i) Quintegra solutions Ltd., the company under consideration, is engaged in product engineering services and not in purely software development services. The Annual Report of this company also states that it is engaged in preparatory software products and is therefore not similar to the assessee in the case on hand. (ii) In its Annual Report, the services rendered by the company are described as under : “ Leveraging its proven global model, Quintegra provides a full range of custom IT solutions (such as development, testing, maintenance, SAP, product engineering and infrastructure management services), proprietary software products and consultancy services in IT on various platforms and technologies.”
(iii) This company is also engaged in research and development activities which resulted in the creation of Intellectual Proprietary Rights (IPRs) as can be evidenced from the statements made in the Annual Report of the company for the period under consideration, which is as under : “ Quintegra has taken various measures to preserve its intellectual property. Accordingly, some of the products developed by the company …………… have been covered by the patent rights. The company has also applied for trade mark registration for one of its products, viz. Investor Protection Index Fund (IPIF). These measures will help the company enhance its products value and also mitigate risks.”
(iv) The TPO has applied the filter of excluding companies having peculiar economic circumstances. Quintegra fails the TPO’s own filter since there have been acquisitions in this case, as is evidenced from the company’s Annual Report for F.Y. 2007-08, the period under consideration. The learned Authorised Representative prays that in view of the submissions made above, it is clear that inter alia, this company i.e. Quintegra Solutions Ltd. being functionally different and possessing its own intangibles / IPRs, it cannot be considered as a comparable to the assessee in the case on hand and therefore ought to be excluded from the list of comparables for the period under consideration.
IT(TP)A.No.1568/Bang/2012 Page - 25
18.2 Per contra, the learned Departmental Representative supported the action of the TPO in including this company in the set of comparables to the assessee for the period under consideration. 18.3.1 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the details brought on record that this company i.e. Quintegra Solutions Ltd. is engaged in product engineering services and is not purely a software development service provider as is the assessee in the case on hand. It is also seen that this company is also engaged in proprietary software products and has substantial R&D activity which has resulted in creation of its IPRs. Having applied for trade mark registration of its products, it evidences the fact that this company owns intangible assets. The co- ordinate bench of this Tribunal in thecase of 24/7 Customer.Com Pvt. Ltd. (ITA No.227/Bang/2010 dt.9.11.2012) has held that if a company possesses or owns intangibles or IPRs, then it cannot be considered as a comparable company to one that does not own intangibles and requires to be omitted form the list of comparables, as in the case on hand. 18.3.2 We also find from the Annual Report of Quintegra Solutions Ltd. that there have been acquisitions made by it in the period under consideration. It is settled principle that where extraordinary events have taken place, which has an effect on the performance of the company, then that company shall be removed from the list of comparables. 18.3.3 Respectfully following the decision of the co-ordinate bench of the Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. (supra), we direct that this company i.e. Quintegra Solutions Ltd. be excluded from the list of comparables in the case on hand since it is engaged in proprietary software products and owns its own intangibles unlike the assessee in the case on hand who is a software service provider.”
Since this Tribunal has found that the comparables, E-Zest Solution ltd, Persistent Systems Ltd, Quintegra Solution Ltd, Thirdware Solution Ltd and Lucid Software Ltd are functionally different, following it, the TPO/AO is directed to exclude them from the list of comparables.
7.3. Although the assessee objected the inclusion of LGS Global Ltd, it could not furnish any evidence and hence its plea is rejected.
7.4. In respect of the comparable, Bodhtree Consulting Ltd, the assessee pleaded that it is functionally different and relied on the decision of the IT(TP)A.No.1568/Bang/2012 Page - 26 Mumbai Tribunal in the case of M/s Nethawk Networks India P Ltd in for ay 2008-09 dt 06.11.2013, which engaged in the business of software development services required for telecommunication related parts manufactured by its parent company i.e., M/s. Nethawk Oyj Finland and is a 100% captive unit for its parent as a solitary customer. The relevant portion of the order is extracted as under : “ C. Bodhtree Consulting Ltd : 21. On this comparable, case of the assessee is that the company is not a good comparable in view of the software products produced by the company. As such, no segmental data is adequately available too.
On the other hand, Ld DR filed a copy of the financial statement and argued vehemently stating that this company is not engaged in the software products. In this regard, Ld DR relied on the note no.3, relating to the relating to the revenue recommendation in Schedule 12, note no.5 relating to the segmental information etc to mention that the company is engaged in the software development only. However, the assessee argued vehemently stating that this company is engaged in the software based products. Further, Ld Counsel mentioned that the said company was already examined and was held as product based company by the TPO in the TP study of other case and the TPO cannot take different stand in this case. In this regard, we have perused the para 29 of the order of the Tribunal in the case of M/s. Wilts Processing Services (I) P Ltd (supra) wherein it was mentioned that the TPO described this company is engaged in the business of software products, not the software development services. Relevant portions from the said para 29 of the order of the Tribunal is reproduced here under: 29.1 The Ld Sr Counsel for the assessee has submitted that this company is engaged in the software products. He has referred the TPO order and submitted that in the profile of the comparables selected by the TPO itself has mentioned the business of the assessee is in software products. The Id AR has referred the objections raised by the assessee before the TPO at page 286 of the paper book and submitted that the assessee brought this fact that this company is engaged in providing open and end to end web solutions, software consultancy, design and IT(TP)A.No.1568/Bang/2012 Page - 27
development of software, using the latest technologies. Further, the company has identified only one segment i.e software development. Therefore, the Id AR has submitted that this company is functionally not comparable with the assessee and consequently should be excluded from the comparables. 29.2 On the other hand, the Id DR has filed the information collected u/s 133(6) of the I T Act and submitted that as per this information, this company has revenue from ITES activity to the extent of Rs. 2194,8515281-. Therefore, this company is a good comparable having functional similarity.
29.3 .........
We have considered the rival submissions as well as the relevant material on record. The details filed by the Id DR before us has been obtained by the TPO at Hyderabad and not by the TPO of the assessee in the present case. It is stated in the letter dated 5.2.2010 written by the Chartered Accountant of Bodhtree Consulting Ltd to the TPO Hyderabad that the company is providing data cleaning services to clients for whom it had developed the software application.........
23.Considering the above, we are of the opinion that Bodhtree Consulting Limited is not engaged in the software development services and there is no segmental data comparable. Therefore, the FAR analysis goes against the TPO/AO. Accordingly, we dismiss the argument of the Ld. DR in this regard. Ex consequenti, the AO / TPO is directed to exclude the same from the list of final comparables for working out the arithmetic mean.”
Since the Mumbai Tribunal has found that the comparables, Bodhtree Consulting Limited is not engaged in the software development services and there is no segmental data comparable.
Therefore, the FAR analysis goes against the TPO/AO Ex consequenti, directed the AO / TPO is directed to exclude it , following it , we direct the AO / TPO is directed to exclude it from the list of final comparables for working out the arithmetic mean IT(TP)A.No.1568/Bang/2012 Page - 28
The next issue argued is that the idle costs incurred by the assessee on account of excess capacity was wrongly considered by the TPO as operating costs for arriving the ALP.
In this regard, the assessee submitted that the idle costs incurred by it on account of excess capacity was wrongly considered by the TPO as part of operating costs for arriving at the Arm's length price without giving any opportunity to the assessee to file its objections . The TPO has apportioned unallocable expenses to the extent of Rs.10,68,65,255/- based on the proportion of sales to Associated Enterprises and Non- Associated Enterprises. These expenses were in the nature of costs relating to idle capacity during the year arising from underutilizing the premises / employees. Hence, allocation of the same to the AE or non AE segments is not correct since it does not relate directly or indirectly to those transactions. These costs represent costs on excess / idle capacity in respect of infrastructure and bench costs which were not used for these transactions at all.
It was venturing into the newer markets and had set up branches/sales offices outside India in order to expand its business. In the IT services business, the people form the backbone and as an operating model, the plan was to create the pool of resources in the technology spaces where the appellant company was expecting the potential in respective markets. From a marketing and sales point of view, it is important that it has skilled resources pool available to take on IT(TP)A.No.1568/Bang/2012 Page - 29 new projects. These idle costs are an essential part of acquiring new clients and entering into business and certainly not attributable to existing clients, whether AE or non AE. Given the slow-down in the economy, the first to be effected were smaller companies and hence the idle costs. During the end of 2007, it had moved into the new premises at Infantry Road, Bangalore with an area of 78,456 sq.ft keeping in mind both the organic and inorganic growth to increase the scale and size of its capabilities. The capacity of this new premises in terms of head count is 785 employees (approx.). However, the strength of Trianz India was around 300 employees at that time. Unfortunately, the growth plans did not take off as desired with the market slowdown. The rental contract for the building hired by the assesse for carrying out the operations could not be terminated on account of the lock in period and such costs were incurred by the appellant and were not recoverable from the clients. This excess capacity was subsequently sublet from FY 2010-11 (w.e.f 19-07-2010) onwards. Accordingly, the rent paid towards vacant spaces have been considered as idle resources and costs thereof have been excluded for the purpose of arriving at PLI of transactions with AE. Thus , 50% of the rent expenses of the Bangalore Office considered as rent towards unutilized space (50% of Rs.7,76,40,996/- = Rs.3,88,20,498/-). Rent expenses debited to P/L account in respect of this premises was Rs.7,76,40,996/-. Similarly, there were several employees who were not working on any billable projects during certain periods of the year. The assessee had hired new IT(TP)A.No.1568/Bang/2012 Page - 30 employees during this time to ramp up its capability and capacity.
However, the projects did not materialize as planned. These employees were on bench during this time. Hence the salary and other welfare expenses relating to these employees have been treated as bench cost and have been excluded for the purpose of arriving at PLI. In any business organization, some costs are fixed and others vary with output.
For example, depreciation and maintenance costs associated with plant and equipment or facility continue to be incurred regardless of the volume of revenue generating activities. Employee costs are also fixed costs. It was held in the case of Genisys Integrating Systems (India) Pvt. Ltd. Vs DCIT AY 2006-07 (15 (ITR-Trib)475) that adjustments are to be made for underutilization of infrastructure and idle bench strength. (as
per annexure M of Paper book I Page no 14). Reliance was also placed on the following decisions:
Global Vantedge Private Limited 2010-TIOL-24-ITAT Delhi a) Fiat India Private Limited Vs ACIT 2010-TII-30 ITAT Mum TP b)
Google India (P) Ltd. v DCIT v (2013) 29 taxmann.com 412 c) (Bang.)- (Annexure U of Paper book II)
Hence, adjustments have been made for the expenses on idle infrastructure and manpower incurred by the assessee which was not the case with the companies adopted as comparables by the assessee.
Hence, margins of transactions with AEs excluding idle costs have been considered. The margin on cost calculated by the TPO after apportionment of idle cost was - 8.95% as against the margin of 27.11% IT(TP)A.No.1568/Bang/2012 Page - 31 computed by the appellant. In view of that the assessee sought suitable adjustment for idle costs for excess capacity.
We have heard the rival submissions. We find that this issue is a purely factual one and minute details are required to be verified and examined. Therefore, this issue requires proper verification and examination. Accordingly, we set aside this issue to the record of the TPO/AO to verify all the facts and then decide this issue as per law.
In the result, the assessee’s appeal is partly allowed.
Order pronounced in the open court on 21st day of March, 2017.