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Income Tax Appellate Tribunal, BANGALORE BENCH ‘C’, BANGALORE
Before: SHRI S.K.YADAV & SHRI A. K. GARODIA
combined order of the ld. CIT(A)-IV, Bangalore dated 27-10-2010. Both
2 IT(TP)A Nos.36 & 37(B)/2011 & C.O. No.219(B)/2015 these appeals and the CO were heard together and are being disposed of by this common order for the sake of convenience.
First we take up, appeal of the revenue in for AY: 2004-05 and the grounds raised by the revenue are as under:
“1. The order of the ld. CIT(A) I opposed to law and facts of the case.
2. The CIT(A) erred in including foreign exchange gains as part of operating revenues even though foreign exchange gain has nothing to do with the business operations of the assessee company and is dependent on external factors like money, supply, inflation, Govt. policy etc.
3. The CIT(A) erred in equating business income/sales with operating revenues and thus concluding that foreign exchange gain forms part of operating revenues.
4. The CIT(A) erred in concluding that the assessee company is a risk mitigated entity without appreciating the fact the assessee company is a full fledged entrepreneur like any other comparable company selected by the TPO/AO.
5. The CIT(A) erred in rejecting Sat Investeck Ltd by stating that this company earned abnormal profits without mentioning the bench mark for profitability above which accompany can be considered as earning super profits in the software service industry in which the assessee is operating.
6. The CIT(A) erred in holding that Sat Investeck Ltd. cannot be considered as a comparable stating that this company earned abnormal profits without mentioning any peculiar economic circumstances which resulted in so called high/abnormal profits.
7. The CIT(A) erred in holding that arm’s length price adjustment is to be made only after allowing +/-5% from the 3 IT(TP)A Nos.36 & 37(B)/2011 & C.O. No.219(B)/2015 arithmetic mean price as per the proviso to sec.92C(2) even when the price charged by the assessee falls beyond +/- 5%from the arithmetical mean price. 8.The CIT(A) erred in holding that arm’s length price adjustment is to be made only after allowing+/-5% from the arithmetic mean price as per the proviso to sec.92C(2) even when said proviso is amended to clarify the position as it was.
9. The CIT(A) erred in holding that the amended proviso to sec.92C(2) is not applicable to the AY: 2004-05 as the amendment is made effective from 01-101-2009 even though it is clarificatory amendment as evidenced by Memorandum to the Finance Bill (2) of 2009.
10. For these and other grounds that may be urged at the time of hearing, it is prayed that the order of the CIT(A) insofar as it relates to the above grounds may be reversed and that of the AO may be restored.
11. The appellant craves leave to add, alter, amend, and/or delete any of the grounds mentioned above”.
It was submitted by the learned DR of the revenue that ground no.1 is general. Regarding remaining grounds, he supported the assessment order.
As against this, the ld. AR of the assessee supported the order of the ld. CIT(A).
Regarding the issue involved in ground no.2,3 & 4 in respect of foreign exchange gain as part of operating revenue, a query was raised by the Bench as to whether such foreign exchange gain is in respect of the turnover of the present year or for turnover of an earlier year because the bench felt that if the said gain is not on account of turnover of the present
4 IT(TP)A Nos.36 & 37(B)/2011 & C.O. No.219(B)/2015 year then, such gain cannot be part of operating profit of the present year to work out the operating profit margin percentage because the turnover considered for that purpose does not include the turnover of the preceding year on which the exchange fluctuation gain has arisen. In reply, the ld. AR of the assessee submitted that this is not the objection of the revenue that this gain is not to be included in operating profit because, such gain is not on account of current year turnover but the objection of the revenue is this that such gain is not in the nature of operating profit because said gain arises on account of treasury transactions. He placed reliance on the Tribunal order rendered in the case of M/s Saplabs India Pvt.Ltd.44 SOT 156(B’lore) and he has drawn our attention to para-42 of the Tribunal order as per which it was held by the Tribunal that the foreign exchange fluctuation income cannot be excluded from the computation of operating margin of the assessee company. Still the Bench wanted to know as to whether the said gain in that case was of the same year or in the preceding year and what is the finding of the Tribunal regarding this factual aspect and in reply, the ld. AR of the assessee submitted that these facts are not coming out from this Tribunal order.
Regarding ground no.5 & 6 in respect of exclusion of one comparable company i.e. Sat Investeck Ltd, he submitted that the percentage of RPT in this case is much higher because as against the total turnover of this company of Rs.766 Crores, the turnover with related party was about Rs.332 lacs but since there is no finding on this aspect by any of the authorities below, the matter may be restored back to the file of the AO/TPO for fresh decision after examining this aspect and if it is found that 5 IT(TP)A Nos.36 & 37(B)/2011 & C.O. No.219(B)/2015 RPT percentage of this company is more than 15%, then this comparable company has to be excluded by applying RPT filter and in that situation, no other aspect needs to be examined.
Regarding the remaining grounds of the revenue i.e.….ground no.6 to 9, he fairly conceded that these grounds of the revenue should be allowed in view of subsequent retrospective amendment in Sec.92C of the IT Act, 1961.
We have considered the rival submissions. Regarding the first issue raised by the revenue as per ground no.2,3 & 4 i.e. Direction of the ld. CIT(A) to include foreign exchange gain as part of operating revenue, we feel it proper that this matter should go back to the file of the ld. CIT(A) for a fresh decision after examining this aspect as to whether such foreign exchange gain is in respect of turnover of the present year or of an earlier year because in our considered opinion, the foreign exchange gain is no doubt an operating profit of the assessee company if the same is on account of collection of sale proceeds of the assessee company but for the purpose of computing the ALP, such foreign exchange gain cannot be added in operating profit of the assessee company if such gain is arising on account of turnover of an earlier year because for the purpose of computing the ALP, operating profit margin over the turnover has to be worked out and since the turnover of the present year is not inclusive of turnover of earlier year for which the exchange fluctuation gain is arising, such gain also cannot be taken into account for computing the operating profit percentage of the present year in order to finalise ALP and since these details are not available on record as to whether the foreign exchange fluctuation gain in the present
6 IT(TP)A Nos.36 & 37(B)/2011 & C.O. No.219(B)/2015 case is in respect of turnover of the present year or of an earlier year, we restore the matter back to the file of the AO/TPO for fresh decision after examining these aspects. The ld.CIT (A) should pass necessary order as per aw on this issue in the light of the above discussion after providing adequate opportunity of being heard to both sides. Ground no.2, 3 & 4 are allowed for statistical purposes.
Regarding ground no.5 & 6, we find force in the submissions of the ld.AR of the assessee that this issue should be restored back to the file of TPO for fresh decision after examining the RPT percentage of this company because, as per the annual report of this company available in the paper book, the RPT percentage of this company is much higher than the RPT percentage being accepted by the Tribunal i.e. 15% but there is no finding of any of the authorities below on this aspect. Hence, on his aspect, we set aside the order of ld. CT(A) and restore the matter back to the file of the AO/TPO to decide the issue afresh after examining the factual aspect as to what is the RPT percentage of this company. If the same is found in excess of 15% than this comparable gas to be rejected by applying RPT filter but if it is found that the RPT percentage of this company is below the acceptable limit than the said comparable should be examined afresh on other aspects.
The AO/TPO should pass necessary order as per law on this issue as per above discussion after providing adequate opportunity of being heard to the assessee. Accordingly, ground no.5 & 6 of the revenue are also allowed for statistical purposes.
7 IT(TP)A Nos.36 & 37(B)/2011 & C.O. No.219(B)/2015
10. Regarding third issue i.e. 5% standard deduction allowed by ld.
CIT(A), it was fairly conceded by the ld. AR of the assessee that this issue has to be decided in favour of the revenue and against the assessee in view of subsequent amendment in the provisions of sec.92C of the IT Act, 1961.
Accordingly, we decide this issue in favour of the revenue and against the assessee and accordingly, ground no.7 to 9 of the revenue’s appeal are allowed.
In the result, the appeal of the revenue stands allowed in the terms indicated above.
Now, we take up the C.O of the assessee for AY: 2004-05.
The grounds raised by the assessee in its C.O. are as under;
“1. The order of the Commissioner of Income-tax (Appeals) [UCIT(A)'] in so far as it relates to the following ground is opposed to law and facts of the case.
2. The learned CIT(A) and the learned AO has erred in law in relying on the order under section 92CA of the Act passed by the learned TPO, which in itself is bad in law and on facts as the same was passed on incorrect understanding of the business model of the Cross-objector and is therefore liable to be quashed.
3. The learned CIT(A) and the learned TPO have erred in law and facts in not considering the submissions made by the Appellant on the description of the functions performed, the risks assumed and assets employed by the Cross- objector and its AE.
4. The learned CIT(A), having considered the detailed submission filed by the Cross-objector, has erred in law in not adjudicating on the following grounds raised by the Cross-objector:
• That the learned TPO has erred in benchmarking the 'international transactions' of the 8 IT(TP)A Nos.36 & 37(B)/2011 & C.O. No.219(B)/2015
Cross-objector with companies providing software services on the basis that the Cross- objector was engaged in providing software services to the Associated Enterprise (UAEU) whereas majority of the international transactions of the Cross-objector pertain to services received by the appellant from the AE.
• That the learned TPO and the learned AO has erred in law and on facts by passing the assessment order contrary to the facts on a mistaken belief that the appellant is engaged in providing software services to the AE.
5. Having accepted the alternate contention of the Cross objector that the exercise of selecting comparables done y the TPO in the TP proceedings for AY: 2005-06 was a more scientific exercise as compared to AY: 2004- 05, merely on the basis that the same would require a massive exercise, which is against the principle of equity and natural justice, the ld. CIT(A) erred in law in not directing that the same methodology be followed for the transfer pricing analysis of AY: 2004-05 as well.
6. The ld. CIT(A) has erred in law and facts in determining the arms length margin at 1396%.
7. The ld. CIT(A) has erred in facts and in law in re- computing and directing the TPO to consider the margin of the cross objector of 3.05% as against the margin of 4.65% computed by the cross objector”.
The cross objection has been filed by the assessee after a day of 1760 days. The assessee has filed an application for condonation of delay along with an affidavit in which the assessee has made the following submissions in support of his request for condonation of delay as per para-9 & 10 of the affidavit, as reproduced below;
“9. In this regard, your cross objector wishes to submit that the Finance Act 2012, has amended provisions of sec.92C of the Act, by inserting sub-sections 2A and 2B.
9 IT(TP)A Nos.36 & 37(B)/2011 & C.O. No.219(B)/2015
Newly inserted section 92C(2A) has explained that when the variation between the arithmetical mean referred to in the proviso to sec.92C(2) and the price at which international transaction has actually been undertaken exceeds five percent of the arithmetical mean, then, the assessee shall not be entitled to exercise the option as referred to in the proviso, which amendment has been made with retrospective effect from April 1, 2002. Further, newly added section 92C(B) has limited the powers of the AO to assess or reassess or pass an order enhancing the assessment or reducing a refund already made for any assessment year the proceedings of which have been completed before the 1st day of October, 2009.
Pursuant to the amendment in the provisions of section 92C by inserting the new subsections 2A and 2B. Your cross objector was under the mistaken belief that the newly inserted subsection 2B of section 92C shall grandfather the subject case for AY: 2004-05 and hence by virtue of subsections 2B, the newly inserted subsection 2A of section 92C shall not be applicable in the subject case of your cross objector. However, upon discussion with the Counsel representing the merit mater before your honours. Your cross objector was advised that subsection 2B of section92C shall not be applicable in the case of your cross objector as the benefit 5% standard deduction was originally not granted by the AO during the assessment proceedings”.
In course of hearing before us, ld. AR of the assessee submitted a chart in which it is submitted that the Finance Act, 2012 received the assent of the Hon’ble President on 28-05-2012, whereas the assessee was required to file
10 IT(TP)A Nos.36 & 37(B)/2011 & C.O. No.219(B)/2015 the cross objection on or before 11-02-2011 and therefore, the delay of 472 days up to 28-05-2012 is on account of this period because the provisions of sec. 92C has been amended by the Finance Act 2012 as per which earlier provisions regarding standard deduction of 5% were withdrawn or amended.
Thereafter, he submitted that the Special Bench decision of the Tribunal in the case of IHG IT Services (Ind.) Pvt. Ltd., Vs ITO (ITAT Del. Spl. Bench) was pronounced on 30-04-2013 and therefore, the delay of 337 days from 29-05-2012 to 30-04-2013 was on this account because before this decision of the Special Bench of the Tribunal, the provisions were not clear to the assessee. In respect of remaining delay of 951 days from 01-05-2013 to 07- 12-2015, it is submitted that the delay is attributable to the inference of provisions of Finance Act 2012 and therefore, the delay should be condoned.
The ld. DR of the revenue submitted that the delay should not be condoned because there is no reasonable explanation for this huge delay.
We have considered the rival submissions. We find that as per the grounds raised by the assessee in cross objection, there is no such dispute that standard deduction of 5% should be allowed to the assessee. Moreover, even if the explanations of the assessee are accepted that the delay is on account of amendment in the provisions of sec.92C in respect of allowability of standard deduction of 5%, the same may be accepted up to 30-04-2013 when the Special Bench of this Tribunal pronounced the judgment in the case of IHT IT Services Id.Pvt.Ltd.(Supra) but for the remaining delay of 951
11 IT(TP)A Nos.36 & 37(B)/2011 & C.O. No.219(B)/2015 days from 01-05-2013, there is no valid explanation and this explanation of the assessee that this delay is attributable to the inference of provisions of Finance Act 2012 is having no merit because, when the Special Bench of this Tribunal has explained the provisions and amendments in Finance Act 2012, it cannot be said that the assessee was not aware of the provisions of its implications and hence, in our considered opinion, the delay in filing the cross objection by the assessee cannot be condoned because there is no reasonable explanation of the assessee regarding such huge delay particularly, the delay of 951 days after pronouncement of the Special Bench order of the Tribunal on 30-04-2013. Hence, we do not condone the delay and therefore, the cross objection of the assessee is liable to be dismissed as un-admitted. We order accordingly.
In the result, the cross objection filed by the assessee is dismissed.
Now, we take up the appeal of the revenue for the assessment year 2005-06 in and the grounds raised by the revenue in this appeal are as under;
“1. The order of the ld. CIT(A) is opposed to law and facts of the case.
2. The ld. CIT(A) erred in law in directing the AO to exclude telecommunication 3xpenses of Rs.13,15,981/- and travel expenses o Rs.11,97,247/- incurred in foreign currency for delivery of software from total turnover also while such exclusion is necessary only to arrive at export turnover also 12 IT(TP)A Nos.36 & 37(B)/2011 & C.O. No.219(B)/2015
while such exclusion is necessary only to arrive at export turnover as per the provisions of sec.10A of the IT Act, 1961.
3. The CIT(A) erred in including foreign exchange gain as part of operating revenues even though foreign exchange gain has nothing to do with the business operations of the company and is dependent on external factors like money supply, inflation, Govt. Policy etc.
4. The CIT(A) erred in equating business income/sales with operating revenues and thus concluding that foreign exchange gains from part of operating revenues.
5. The CIT(A) erred in concluding that the assessee company is a risk mitigated entity without appreciating the fact that the assessee company is a full fledged entrepreneur like any other comparable company selected by the TPO/AO.
6. The CIT(A) erred in holding that arm’s length price adjustment is to be made only after allowing +/- 5% from the arithmetical mean price as per the proviso to sec.92C(2) even when the price charged by the assessee falls beyond +/-5% from the arithmetical mean price.
7. The CIT(A) erred in holding that arm’s length price adjustment is to be made only after allowing +/- 5% from the arithmetical mean price as per the proviso to sec.92C(2) even when the said proviso is amended to clarify the position as it was.
8. The CIT(A) erred in holding that the amended proviso to section 92C(2) is not applicable to the AY: 2005-06 as the 13 IT(TP)A Nos.36 & 37(B)/2011 & C.O. No.219(B)/2015
amendment is made effective from 01-10-2009 even though it is clarificatory amendment as evidenced by Memorandum to the Finance Bill (2) of 2009.
Both sides agreed that ground no.1 is general and ground no.2 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. Regarding ground no. 3 to 5 both sides agreed that this issue is identical as raised by the revenue in AY: 2004-05 as per ground no. 2 to 4 and may be decided on similar lines.
Regarding ground no.6 to 8 also, both sides agreed that this issue is identical to ground no.7 to 9 in the revenue’s appeal for AY: 2004-05 and may be decided on similar lines.
We have considered the rival submissions. Regarding ground no.2 of the revenue’s appeal, we find that this issue is covered in favour of the assessee by the judgment rendered in the case of M/s Tata Elxsi Ltd., (Supra) wherein it was held that the total turnover is sum total of domestic turnover and export turnover and therefore, if an amount is reduced from export turnover then the total turnover also goes down automatically by the same amount. Respectfully following this judgment, we decline to interfere with the order of the ld. CITA) on this aspect. Accordingly, ground no.2 of the revenue is rejected.
Regarding ground no. 3 to 5, we find that this issue was restored back by us to the file of the A.O./ T.P.O. for fresh decision as per para-8
14 IT(TP)A Nos.36 & 37(B)/2011 & C.O. No.219(B)/2015 above as per which Grounds 2 to 4 in that were decided. On the same line, in the present year also, we set aside the order of the ld. CIT (A) on this issue and restore the matter back to the file of the A.O./ TPO for fresh decision with direction as given by us in assessment year : 2004-05.
Accordingly ground no.3 to 5 of the revenue’s appeal for AY: 2005-06 are allowed for statistical purposes.
Regarding ground no.6 to 8 in the present year, we find that in assessment year 2004-05, we have decided this issue in favour of revenue and against the assessee as per para-10 and accordingly, in the present year also, this issue is decided in favour of the revenue and against the assessee and accordingly ground no.6 to 8 of the revenue’s appeal are allowed.
In the result, the appeal of the revenue stands partly allowed in the terms indicated above.
In the combined result, the appeal of the revenue for assessment year 2004-05 and 2005-06 are partly allowed in the terms indicated above and the cross objection of the assessee is dismissed.
Order pronounced in the open court on the date mentioned on the caption page.
(SUNIL KUMAR YADAV) (A.K. GARODIA) JUDICAL MEMBER ACCOUNTANT MEMBER Place: Bangalore: D a t e d : .12.2016 am*
15 IT(TP)A Nos.36 & 37(B)/2011 & C.O. No.219(B)/2015