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Income Tax Appellate Tribunal, BANGALORE BENCH ‘B’, BANGALORE
Before: SHRI S.K.YADAV & SHRI A. K. GARODIA
This is an assessee’s appeal directed against the Order of CIT (A) – IV Bangalore dated 17.07.2012 for A. Y. 2004 – 05.
The Grounds raised by the assessee are as under:-
“The order passed by the learned Commissioner of Income-tax (Appeals)- IV, Bangalore ["CIT(A)"] under section 250 of the Income-tax Act, 1961 ("Act") is bad in law and on facts in more than one of the following grounds: Non-adjudication of grounds pertaining to the original assessment order ("Original Assessment") and denial of natural justice to the Appellant
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The learned CIT(A) erred in law and in fact in not adjudicating the grounds of appeal
preferred by the Appellant that pertained to the Original Assessment and were included in the revised assessment order ("Revised Assessment") pursuant to the order of the learned Commissioner of Income-tax ("CIT") under section 263 of the Act
2. The learned CIT(A) erred in law and in fact in not adjudicating the grounds preferred by the Appellant that pertained to the Original Assessment although the learned CIT(A) had in his order dated March 26, 2009 in respect of the appeal filed against the Original Assessment, dismissed these grounds holding them to be infructuous.
3. The learned CIT(A) erred in law in adopting a view of not adjudicating the grounds pertaining to the Original Assessment although the same were not adjudicated in appeal against the Original Assessment, thereby adopting a view that resulted in denial of natural justice to the Appellant. Holding Revised Assessment not to be in the nature of a 'fresh assessment'
4. The learned CIT (A) erred in law and in fact in holding the Revised Assessment not to be in the nature of a 'fresh assessment' pursuant to the directions of the CIT under section 263 of the Act.
5. The Learned CIT (A) erred in law and in fact in holding the Revised Assessment not to be in the nature of a 'fresh assessment' although the learned CIT (A) had in his order dated March 26, 2009 in respect of the appeal filed against the Original Assessment held the Original Assessment to have been set aside pursuant to the order of the CIT under section 263 of the Act.
6. The Learned CIT(A) erred in law and in fact in failing to appreciate that the learned CIT had in the order under section 263 of the Act specifically set aside the Original Assessment and directed the Assessing Officer ("AO") to carry out a 'fresh assessment' after making necessary verification in light of the observations made by the CIT.
7. The Learned CIT(A) erred in law and in fact in appreciating that the learned AO had in the Revised Assessment admitted that the CIT had set aside the Original Assessment and directed the learned AO to make a fresh assessment. Disregarding failure of the AO to pass a draft assessment order under section 144C of the Act
8. The Learned CIT(A) erred in law and in fact in holding that the learned AO need not have passed a draft assessment order under section 144C of the Act in respect of the Revised Assessment although the Revised
3 IT (TP) A No.1211/B/2012 Assessment entailed a Transfer Pricing ("TP") adjustment under section 92C of the Act.
The Learned CIT(A) erred in law and in fact in holding the provisions of section 144C of the Act not to be applicable on account of the Original Assessment having been passed prior to the provisions of section 144C coming into force; Incorrect reliance on the decisions 10. The Learned CIT(A) erred in law and in fact in placing reliance on the decision of the Supreme Court in the case of Shree Manjunathesware Packing Products and Comphor Works (231 ITR 53) and the decision of the Kolkata ITAT in the case of ITO vs Uma Kant Newatia (97 ITD 414) in the present case. Other grounds on the process in respect of the Revised Assessment 11. The learned CIT (A) erred in upholding the Revised Assessment, containing the TP and other adjustments that formed a part of the Original Assessment and did not survive pursuant to the directions of the CIT under section 263 of the Act. Specific grounds in respect of the each of the adjustments Exclusion of foreign currency expenses in the computation of relief under section 10A of the Act 12. The learned CIT(A) erred in law and in fact in upholding the adjustment of excluding foreign currency expenses from 'export turnover' in the computation of relief under section 10A of the Act as made by the learned AO in the Revised Assessment by holding that the learned CIT(A) was not empowered to decide issues which were decided by the CIT in the order passed under section 263 of the Act 13. The learned CIT(A) erred in law and in fact in upholding the subject adjustment in the computation of relief under section 10A holding without examining the arguments of the Appellant on the merits of the case 14. The learned CIT (A) erred in law and on facts in confirming the learned AO's computation of relief under section 10A of the Act at Rs 869,588,513 (as against the amount of Rs 1,396,336,628 claimed by the Appellant in its return of income).
The learned CIT(A) erred in law and on facts in confirming that the amount in respect of communication expenses (Rs 74,335,818) and foreign currency expenses (Rs 2,201,568,748) incurred by the Appellant should be 4 IT (TP) A No.1211/B/2012 excluded from the amount of 'export turnover' for the purpose of computation of relief under section 10A of the Act.
The learned CIT(A) erred in law and on facts in disregarding the contention of the Appellant that the company is engaged only in development of computer software and not involved in rendering technical services outside India.
The learned CIT(A) erred in law and in fact in disregarding the principles upheld by the jurisdictional Karnataka High Court in the case of Tata Elxsi (ITA 70 of 2009) 18. The learned AO erred in law and on facts in confirming that the expenses of Rs 2,201,568,748 incurred in foreign currency has not been incurred for the purpose of rendering technical services outside India and consequently reducing the same from the 'export turnover'.
The learned CIT(A) erred in law in disregarding the without prejudice contention of the Appellant that in case the foreign currency expenditure and telecommunication expenditure is reduced from the 'export turnover', the same should also be reduced form the amount of 'total turnover' for the purpose of computation of relief under section 10A of the Act. Set off of losses pertaining to one of the 10A unit of the Appellant 20. The learned CIT(A) erred in law and in fact in dismissing the grounds regarding set off of losses raised by the Appellant without providing any specific reasons for the same.
The learned CIT(A) erred in law in dismissing the ground on set off of losses based on an incorrect observation that the relief under section 10A of the Act was computed undertaking wise by the learned AO in the Revised Assessment.
The learned CIT(A) erred in law in disregarding the grounds raised
by the Appellant that the learned AO had computed relief in respect of all the 10A units of the Appellant on a consolidated basis without cognizance of the unit wise computation.
23. The learned CIT(A) erred in law in disregarding the principles upheld by the jurisdictional Karnataka High Court in the case of ACIT vs Yokogawa India Ltd (ITA No 78 of 2011) and various other judgments cited by the Appellant on the matter regarding set off of losses in respect of 10A units
5 IT (TP) A No.1211/B/2012 Deduction under section 80HHE of the Act 24. The learned CIT(A) erred in law and on facts in dismissing the ground and thereby confirming the amount of deduction under section 80HHE of the Act at Rs 2,488,343, by disregarding the computation of deduction under section 80HHE of the Act as provided in the revised return of income, as per which the amount of deduction is Rs 3,922,804.
Without prejudice to the above, the learned CIT (A) has erred on facts by not adjudicating on the ground raised
by the Appellant against the factual error made by the learned AO by not giving due effect to the adjustments made in his own assessment order and thereby not arriving at the deduction under section 80HHE of the Act at Rs 3,572,753. TP adjustment
26. The learned AO erred in not reviewing the TP documentation already maintained by the Appellant, before deeming it necessary and expedient to refer the transaction to the learned Transfer Pricing Officer ("TPO").
27. The learned AO erred in law in making a reference in a mechanical, routine and casual manner to the learned TPO under section 92CA of the Act without recording detailed reasons for such a reference. The learned AO erred in merely making an entity-wise reference to the learned TPO rather than transaction-wise reference. Based on the facts narrated in the Original Assessment, the CIT has erred in law and on facts in according approval to the action of the learned AO to make a reference to the learned TPO under section 92CA of the Act and the learned AO erred in making a reference to the learned TPO on that basis.
28. The learned AO and the learned TPO have erred in law and on facts in making an adjustment of Rs 175,348,548 to the income of the Appellant consequent to determining the Arm's Length Price ("ALP").
29. The learned AO erred in law in relying on the order passed by the learned TPO under section 92CA of the Act, which in itself is bad in law and on facts and is therefore liable to be quashed.
30. The learned AO erred in law in not carrying out a reasoned examination independently as to whether the TP adjustment proposed by the learned TPO was maintainable as required by section 92C of the Act.
31. The learned TPO and the learned AO erred in law and on facts in concluding that in respect of the call centre services, the Appellant was 6 IT (TP) A No.1211/B/2012 operating on a cost plus 10 per cent model whereas the Appellant was actually remunerated on the basis of number of e-mails and calls attended. Hence, the learned TPO and the learned AO have erred in law and on facts in determining the ALP on cost plus basis.
The learned TPO and the learned AO have erred in rejecting the Appellant's submissions that the call centre activities were in the nascent stage and that the subject year was the first full-fledged year of operations.
Given the above, the learned TPO and the learned AO have erred in comparing the Appellant with a fresh set of comparable companies that were at a mature phase of the business cycle, by rejecting the comparable companies selected by the Appellant.
The learned TPO and the learned AO have erred in rejecting the capacity utilization approach adopted by the Appellant in justifying the arm's length nature of the revenues earned from rendering of call centre services.
The learned TPO and the learned AO have erred in adopting an adhoc approach of computing the arm's length margin by providing a 30 per cent downward adjustment on the arithmetic mean (ie approximately 10 percent) for under utilisation of capacity of the call centre activities.
The learned TPO and the learned AO have also erred in law and on facts in holding that the training costs and the costs relating to preparatory activities did not accrue any enduring benefits to the Appellant and thereby attributing such costs to the subject year, entirely.
The learned TPO and the learned AO have erred in law and on facts in not accepting the margins of the comparable companies as computed in the TP documentation maintained by the Appellant.
Without prejudice, the learned TPO and the learned AO have erred in law and on facts in arriving at the margin of 21 per cent as the arm's length margin.
The learned TPO and the learned AO have erred in using data pertaining to the Financial Year ("FY") 2003-04, by disregarding the fact that the same was not available to the Appellant at the time of compilation of the TP documentation. The learned TPO and the learned AO have erred in not appreciating that only the financial information available on or before October 31, 2004 [as specified by section 92F (iv)] can be used in compiling the TP documentation and not information that may be available after that date.
7 IT (TP) A No.1211/B/2012
Without prejudice, the learned TPO and the learned AO erred in using the data pertaining to FY 2003-04 without using the data pertaining to the previous two FYs, ie FYs 2002-03 and 2001-02.
Without prejudice, the learned TPO and the learned AO erred in law and on facts in rejecting the submissions of the Appellant that the data pertaining to the previous two FYs had to be used as the previous two years' data demonstrated facts that influenced the determination of the transfer prices in the subject year. Further, the learned TPO erred in not discharging the onus to prove that such facts did not exist. 42. The learned TPO and the learned AO have erred in relying on external reports and data bases as a basis for determining the ALP and in adopting methodologies beyond the methodologies and procedure prescribed in the Income-tax Rules, 1962 ("Rules"). 43. The learned TPO and the learned AO have erred in concluding that the margins obtained by comparable companies engaged in domestic transactions cannot be used in determining the ALP of the 'international transactions' of the Appellant. 44. The learned TPO and the learned AO have erred in concluding that catering to the overseas market and the domestic market is to be regarded as a part of the functions performed, by disregarding the Appellant's submissions and prescribed rules for analyzing comparability, ie, functions performed, risks assumed and assets employed by a particular company in order to judge its comparability. The learned TPO has erred in not appreciating that the aforesaid factors do not change depending upon whether the services are provided locally or to overseas customers. 45. Further the learned TPO erred in not providing any evidence to demonstrate as to how, the markets to which the Appellant (overseas) and the comparable company (domestic) caters to, have an influence on the comparability factors provided for in the Rules and even if they need to be considered, how this difference has a material effect on the pricing or profits. 46. The learned TPO erred in applying the additional filter of rejecting the companies whose revenue to assets ratio is less than 50 per cent. 47. Without prejudice to the above, the learned TPO and the learned AO have erred in law and on facts in rejecting the objections raised by the Appellant in relation to the selection / rejection of comparable companies in passing the order under section 92CA of the Act- • The learned TPO erred in rejecting Ace Software Limited ("ASL") as a comparable company merely on the basis that the entire revenues of ASL are derived from one customer only (ie Apex Data Services Inc,
8 IT (TP) A No.1211/B/2012
USA) and accordingly, the revenues are derived from an 'associated enterprise' as defined in the Act. Further, the learned TPO erred in not substantiating as to how such relationship influenced the prices charged by ASL to its customer. Hence, the learned TPO erred in rejecting ASL as a comparable company merely on surmises and conjectures. • The learned TPO erred in rejecting CMC Limited and CS Software Limited as comparable companies on the basis that these companies have not derived any export revenues. Further, the learned TPO also erred in concluding that these companies cannot be used as comparable companies as they operate in the domestic market and were functionally different from the Appellant. • The learned TPO erred in rejecting Compudyne Winfosystems Limited (UCWLU) as a comparable company merely because CWL has incurred losses, which as per the learned TPO are not on account of normal business factors. However, it can be noted clearly from the nature of such loss that CWL has suffered such loss in the ordinary course of business. • The learned TPO erred in rejecting Mapro Industries Limited C'MIL") as a comparable company on account of low capacity utilization. Further, in arriving at such a conclusion, the learned TPO erred in comparing the revenues generated by MIL as a percentage of the assets employed. The learned TPO also erred in observing that this criterion has been used in arriving at all the comparable companies, without adducing evidence for such an observation. • The learned TPO erred in rejecting Spanco Telesystems & Solutions Limited (USTSL") as a comparable company on the basis that STSL did not derived any export revenues. Further, the learned TPO erred in concluding that STSL cannot be used as comparable company as it operates in the domestic market and is functionally different from the Appellant. • The learned TPO erred in rejecting Cosmic Global Limited (“CGL") as a comparable company on the basis that the annual reports of CGL is not available and by disregarding the information produced by the Appellant from the public data bases merely on the ground that the name is different, without appreciating that there was a change in the name of CGL. • The learned TPO erred in including Wipro BPO Limited and Tricom India Limited as comparable companies by rejecting the submissions of the Appellant that the financials of these companies were not available at the time of compiling the TP documentation for the subject year. Further, the learned TPO erred in not appreciating that the TP
9 IT (TP) A No.1211/B/2012 documentation had to be complied before the due date (ie October 31, 2004) prescribed for the subject year and the financial information was not available till then. • The learned TPO erred in including Ultramarine Pigments limited (“UPL") as a comparable company even though UPL did not feature in the search process based on the qualitative filters applied. Hence, the learned TPO erred in 'cherry-picking' UGL for comparison purposes. • The learned TPO erred in re-computing the margins of Allsec Technologies Limited (“ATL") for the subject year by normalising certain expenses, ie, connectivity costs and employee costs, and by completely eliminating database costs in arriving at the margin. Further, the learned TPO erred in rejecting the submissions of the Appellant that the percentage of the expenses (normalized) to total expenses of ATl for the subject year vis-a-vis the percentage of these expenses in other years presented for comparison was normal. The learned TPO also erred in considering the said expenses as being abnormal merely on comparing these expenses with the revenues of the company, without demonstrating how these expenses had a correlation with the revenues.
The learned TPO and the learned AO erred in considering only 'connectivity costs' and 'database costs' as abnormal in the show-cause notice and actually considering even 'employee costs' as abnormal, without giving an opportunity to the Appellant in this regard.
In arriving at the margins of the comparable companies, the learned TPO and the learned AO have erred in not considering exchange gain / loss as being operating in nature.
The learned TPO and the learned AO have erred in making a lower working capital adjustment. The learned TPO has erred in making the downward margin adjustment of only 2 percent without giving any basis / working supporting such computation.
The learned TPO and the learned AO have erred in rejecting the workings provided by the Appellant in relation to the working capital adjustment by holding that the same as inaccurate though it was submitted that the workings were arrived at on the basis of the financial information available in the financial reports.
The learned TPO and the learned AO have erred in not making a further downward margin adjustment to consider the risk differentials between the Appellant and the comparable companies.
The learned TPO and the learned AO erred on facts in rejecting the submission that the Appellant is a risk mitigated service provider and 10 IT (TP) A No.1211/B/2012 therefore, given that the comparable companies bear entrepreneurial risks, the margins of the comparable companies should be adjusted for such risk.
The learned TPO and the learned AO have erred in making an adhoc downward adjustment of only 2 per cent towards both working capital and risk differentials, which is baseless and very minimal.
Without prejudice, in arriving at the arm's length margin, the learned TPO and the learned AO have erred in not considering the lower range of 5 per cent as allowed by the Rules. The learned TPO and the learned AO have therefore erred in considering the comparable margin as 21 per cent instead of 16 per cent as allowed by the Rules. Denial of foreign tax credit 56. The learned CIT(A) has erred in law and on facts in dismissing and thereby denying the eligible foreign tax credit as per the provisions of section 90 of the Act read with the relevant Double Taxation Avoidance Agreements, in respect of the foreign taxes paid by the Appellant for the AY 2004-05. Charge of interest 57. The learned CIT (A) has erred in confirming the levy of interests under section 234B and section 234D of the Act.
The Appellant craves leave to add, alter, vary, omit, substitute or amend the above grounds of appeal, at any time before or at the time of hearing of the appeal, so as to enable the Honourable Income Tax Appellate Tribunal to decide this appeal according to law.”
Learned AR of the assessee submitted a copy of the tribunal order rendered in assessee’s own case for A. Y. 2005–06 in dated 24.06.2016 and submitted that as in the present year, in that year also, the issue in dispute was in course of assessment order passed by the A.O. in pursuance to directions of CIT u/s 263. He submitted that in the present year also, the issues in dispute may be decided on similar line as the facts are similar. Learned DR of the revenue supported the orders of the authorities below.
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We have considered the rival submissions. We find that Para 9 to 12 of the Tribunal order in A.Y. 2005 – 06 are relevant and hence, these paras are reproduced herein below:-
“9. We have gone through the order passed by the ld. CIT u/s 263 of the Act and as per the same, he has set aside the original assessment order in respect of two issues i.e. allowability of depreciation on the software expenditure and allowability of deduction u/s 10A and u/s 80HHE of the Act in respect of profit derived from the export of Computer Software. Therefore, in respect of these two issues only, AO can pass fresh assessment order consequent to order passed by the ld. CIT u/s 263 of the IT Act, 1961 and as a consequence, only these two issues can be raised in an appeal before the ld. CIT (A) and before the Tribunal in the proceedings u/s 143(3) of the IT Act, r.w.s.263 of the IT Act, 1961.
In the present appeal, the assessee has raised before us some TP issues also which in our considered opinion, cannot be raised before us, in the present proceedings. Hence, these grounds of assessee are rejected.
Regarding the issue in respect of allowability of deduction 10A of the IT Act, we feel it proper that this issue should go back to the file of the ld.CIT (A) for a fresh decision in the light of the judgment of the Hon’ble jurisdictional High Court in the case of M/s Tata Elxsi Ltd., (Supra).
Regarding the issue no.1, 2 & 3 noted by theld.CIT (A) in para-9 of his order, these were not decided by the ld. CIT (A). We remand the matter back to the file of the ld. CIT(A) for a fresh decision on this issue because these issues were set aside by the ld.CIT to the file of the AO for a fresh decision and therefore, these issues had to be decided by the ld. CIT(A) in the present proceedings. We order accordingly.”
4. As per the order passed by CIT u/s 263 in the present year, copy available on pages 56 to 59 of the paper book, only on two issues, the CIT has set aside the assessment order i.e. about 1) deduction u/s 10A and 2) deduction u/s 80 HHE. Hence in the present year also, we hold that the assessee can raise only these two issues in appeal before CIT (A) and before the tribunal and accordingly, all other grounds are rejected. On the issue of deduction u/s 10A, we restore the matter back to CIT (A) for a fresh decision
12 IT (TP) A No.1211/B/2012 in the light of the judgment of Hon’ble Karnataka High Court rendered in the case of Tata Elxsi Ltd. as reported in 349 ITR 98. On the issue of deduction u/s 80HHE also, we restore the back to CIT (A) for a fresh decision because this issue was not decided by him.
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.