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Income Tax Appellate Tribunal, BANGALORE BENCH ‘C’, BANGALORE
Before: SHRI A. K. GARODIA & SHRI VIJAY PAL RAO
This is assessee’s appeal which directed against the assessment order passed by the AO on 27-10-2011 u/s 143(3) r.w.s. 144C of the IT Act, 1961 for the assessment year : 2007-08.
The grounds raised by the assessee in its appeal are as under;
“Based on the facts and circumstances of the case and in law, Xchanging Solutions Ltd.(formerly known as Cambridge Solutions Ltd. (appellant) respectfully craves to leave to prefer an appeal u/s 253 of the I T Act, 1961(Act) against the order passed by the DCIT, in pursuance of the directions issued by DRP, Bangalore dated 29-09-
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2011 on the following grounds ; General 1.The order of the ld. AO and directions of the Hon’ble DRP are based on incorrect interpretation of law and therefore, are bad in law.
2. On the facts and circumstances of the case and in law and based on directions of DRP, the ld. AO erred in assessing the total income atRs.14,774,120 as against returned income of NIL computed by the appellant. Corporate Tax grounds 3. The ld. AO has erred in la and on facts by not considering the plea that since the appellant is not rendering any technical services outside India, foreign currency expenditure incurred by the appellant should not be reduced from export turnover for the purpose of computing the deduction u/s 10a of the Act.
4. The ld.AO has erred in law by not considering the plea of the appellant that if communication expenses attributable to rendering business process outsourcing/IT enabled services are excluded from export turnover, the same should also be reduced from TTO in computing the deduction u/s 10A of the Act.
5. The ld. AO has erred in law and on facts by considering travel expenditure incurred in foreign currency amounting to Rs.24,261,123 on an ad hoc basis as being attributable to the services rendered by the appellant outside India.
6. The ld. AO as erred in law and on facts by not considering the alternative plea of the appellant that, if the travel expenses inured in foreign currency attributable to rendering of services are excluded from export turnover, the same should also be reduced from the TTO in computing the deduction u/s 10A of the Act.
7. The ld. AO has erred in law in not applying the prevailing judicial precedents of the Hon’ble Tribunal and Hon’ble Karnataka High Court on the principle of parity between ETO and TTO while computing the deduction u/s 10A.
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8. The ld. AO has erred in law and on facts by restricting the quantum of set off of b/f business loss of Rs.5,959,754 without giving effect to the quantum of b/f loss available for set off and considering the total income not so set off as taxable.
Without prejudice to the rectification filed, the ld. AO has erred in not granting credit in respect of TDS of Rs.2,984,285 claimed by the appellant. Transfer Pricing grounds 10.The ld. AO/TPO have erred in law and on facts, by ignoring/disregarding the economic analysis undertaken by the appellant (using internal TNMM/CPM) in accordance with the provisions of the Act read with Rules, conducting a fresh economic analysis for the determination of the ALP in connection with the impugned international transaction (using external TNMM) and holding that the appellant’s international transactions are not at arm’s length. 11. The ld. AO/TPO have erred in law and on facts by ignoring the fact that since the appellant is availing tax holiday u/s 10A of the Act, there is no motive or reason to shift profits out of India, curbing which, is the basic intention of introducing the TP provisions. 12. The ld. AO/TPO have erred in law and on facts, by failing to appreciate that total transfer pricing adjustment made, along with the ALP already reported by the appellant. Cannot exceed third party end customer revenues. 13.The ld. AO/TPO have erred in law and on facts, by applying the turnover of Rs.1 Crore as a comparability criterion. 14. The ld. AO/TPO have erred in law and on facts, by applying the diminishing revenue trend as a comparability criterion. 15. The ld. AO/TPO have erred in law and on facts, by rejecting companies having a different accounting year (i.e. companies having accounting year other than March 31 or companies whose financial statements were for a period other than 12 months).
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The ld. TPO has erred in law by exercising this powers u/s 133(6) of the Act to obtain information which was not available in public domain and relying on the same for comparability purposes.
The ld. AO/TPO have erred in law on facts, by not providing the appellant any opportunity of being heard in certain cases and including some companies as comparable without communicating the reasons thereof. 18. The ld.AO/TPO have erred in law, and on facts, by including certain companies based on unreasonable comparability criteria. 19. The ld. AO/TPO have erred in law and on facts, by not taking into consideration, foreign exchange fluctuation gain/loss in computing the operating margin of the appellant as well as the comparable companies. 20. The ld. AO/TPO erred, in law and on facts, while computing the working capital adjustment. 21. The ld. AO/TPO have erred in law and on facts, by not making suitable adjustments to account for differences in the risk profile of the appellant (in the projects where it acts as a contract service provider) vis-à-vis the comparables. 22. The ld.AO/TPO have erred in law and facts, in computing the ALP without giving benefit +/- 5% under the proviso to sec.92C of the Act. 2. The memorandum of appeal by an assessee under section 253(1) of the IT Act, must be accompanied by a fee specified below:- a) where the total income of the assessee as computed by the AO, in the case to which he appeal relates, is one hundred thousand rupees or less, five hundred rupees. b) where the total income of the assessee computed as aforesaid in the case to which the appeal relates is more than one hundred thousand rupees but not more than two hundred thousand rupees, one thousand five hundred rupees, c) where the total income of the assessee computed as aforesaid in the case to which the appeal relates is more than two hundred
5 IT(TP)A No.1385(B)2011 thousand rupees, one percent of the assessed income, subject to a maximum of ten thousand rupees. d) no fees shall be payable in the case of a memorandum of cross objections. e) an application for stay of demand shall be accompanied by a fee of five hundred rupees. It is suggested that the fee should be credited in a branch of authorized bank or branch of the State Bank of India or a branch of the RBI after obtaining a challan and the triplicate challan sent to the appellate tribunal with a memorandum of appeal. The appellate Tribunal will not accept cheques, drafts, hundies or other negotiable instruments.
The memorandum of appeal should be written in English or, if the appeal is filed in a Bench located in any such State as is for the time being notified by the President of the Appellate Tribunal for the purpose of Rule 5A of the IT Rules, 1963, then, at the option of appellant, in Hindi and should set forth, concisely and under distinct heads the grounds of appeal
without any argument or narrative and such grounds should be numbered consecutively.
4. The number and year of appeal will be filed in the office of the Appellate Tribunal.
5. If the space provides is found insufficient, separate enclosures may be used for the purpose”.
It was submitted by the ld.AR of the assessee that ground 1 to 2 are general and ground no.3,5,7 & 9 are not pressed. Accordingly, these grounds are rejected.
3. Regarding the Corporate tax issue involved in ground no.4 & 6, he 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 in 349 ITR 98.
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Regarding the TP issue, he submitted that ground no.11,13 to 17 are not pressed. Accordingly, these grounds are rejected. Regarding the remaining grounds for TP issue, he submitted that the matter should go back to the file of the TPO for fresh decision because this was the claim of the assessee before the TPO as well as before the DRP that the assessee is having substantial transaction with unrelated parties to the extent of Rs.2515.56 lakhs as against similar transactions with related parties of Rs.1234.44 lakh as contract service provider and Rs.254.18 lakhs as an entrepreneur and therefore, the assessee’s internal TNMM should also be considered for deciding the ALP and if this is done, no TP adjustment is called for because operating profit/operating post percentage in respect of unrelated parties is 9.76% whereas the same for transaction with AE is in the range of 17.93% and 20.35%. He submitted that no finding has been given by the TPO/DRP on this aspect and therefore, the entire matter of TP should be restored back to the file of the TPO for fresh decision.
The ld. DR of the revenue supported the order of DRP.
We have considered the rival submissions. Regarding the Corporate Tax issue as per ground no.4 & 6 of assessee’s appeal, we find 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. (Supra) wherein it was held that the total turnover is the sum total of export turnover and domestic turnover and therefore, if an amount is reduced from the export turnover then the total turnover also automatically goes down by the same amount. Hence, by respectfully following this judgment of the Hon’ble Karnataka High Court, we decide this issue in favour of the assessee and the A.O. is directed to recomputed the amount of 7 IT(TP)A No.1385(B)2011 deduction allowable u/s 10A in the light of this judgment of the Hon’ble Karnataka High Court.
Regarding the TP issue, we find force in the submission of the ld. AR of the assessee that this issue should go back to the file of the TPO for fresh decision because this was the claim of the assessee before the authorities below that internal TNMM of the assessee for its substantial transaction with unrelated parties should also be considered to decide the ALP but this aspect of the matter has been brushed aside by the TPO and DRP. Hence, we set aside the order of the AO on TP issue and restore the matter to the file of the AO/TPO for a fresh decision, after examining the claim of the assessee for consideration of internal TNMM. We want to make it clear that the entire TP issue is open and we express no opinion on acceptability of assessee’s claim for adopting internal TNMM. The assessee can raise all arguments regarding the TP issue before the AO/TPO and he should decide the issue as per law after providing adequate opportunity of being heard to the assessee.
In the result, the appeal of the assessee is partly allowed for statistical purposes.
Order pronounced in the open court on the date mentioned on the caption page.