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Income Tax Appellate Tribunal, BANGALORE BENCH ‘B’, BANGALORE
Before: SHRI A. K. GARODIA & SMT ASHA VIJAYARAGHAVAN
O R D E R PER SHRI A.K.GARODIA, AM
These are cross appeals filed by the assessee and the revenue and these are directed against the order of learned CIT (A) – IV Bangalore dated 20.06.2012 for A. Y. 2005 – 06. 2. The grounds raised by the assessee are as under:
“The grounds hereinafter taken by the Appellant are without prejudice to one another.
That the order passed by the learned Commissioner of Income Tax (Appeals) - IV, Bangalore ["CIT (Appeals)"], to the extent prejudicial to the Appellant, is bad in law and liable to be quashed.
2. That the learned CIT (Appeals) erred in upholding the rejection of Transfer Pricing ('TP') documentation by the learned Transfer Pricing Officer ('TPO')/ Assessing Officer ('AO') and thereby erred in not appreciating that the Appellant had prepared the TP documentation bona fide and in good faith and conducted the comparable analysis based on the detailed Functional Asset and Risk ('FAR') analysis performed with due diligence and the data available at the time of conducting the comparability analysis.
3. That on the facts and in the circumstances of the case, the learned CIT (Appeals) erred in determining upward adjustment to the transfer price of the Appellant under Section 92CA of the Income Tax Act, 1961 (the 'Act'), in respect of its contract software development services and in doing so grossly erred in: (a) Ignoring the limited risk nature of the services provided by the Appellant as detailed in the TP documentation and in upholding the conclusion of the learned TPO that no adjustment on account of risk differential is required while determining the Arm's Length Price of the international transactions of the Appellant, as the arithmetic mean of the margins of the comparables under Transactional Net Margin Method takes care of such insignificant differences. (b) Rejecting the fact that the Appellant had continued to be remunerated on an arm's length basis for its services during its 3 IT(TP)A No.1072 & 1060(B)2012 start up period of operations even though the associated enterprise had suffered losses, during the relevant financial year. (c) Rejecting the additional factual evidences filed by the Appellant to support the fact that the associated enterprise had remunerate the Appellant more than what the associated enterprise had received from independent third parties for similar services, without providing any cogent reasons. (d) Upholding the rejection of comparability analysis of the Appellant in the TP documentation and accepting the comparability analysis performed by the learned TPO in the TP Order. (e) Upholding the introduction of additional filters and comparables by the learned TPO that do not satisfy the test of comparability. (f) Performing his own comparability analysis by modifying certain filters applied by the learned TPO and therein selecting certain companies that ought to have been rejected as not satisfying the test of comparability and rejecting companies that ought to have been considered as they are functionally similar to the Appellant. (g) Disregarding application of multiple year/ prior year data as used by the Appellant in the TP documentation and holding that current year (i.e. Financial Year 2004-05) data for comparable companies should be used. (h) Not appreciating the fact that the search strategy applied by the learned TPO for introduction of companies as comparables and the responses obtained by the learned TPO by exercising his power under section 133(6) of the Act, was not provided to the Appellant during the assessment proceedings.
4. The learned CIT (Appeals) erred in upholding the charging of interest under section 234B of the Act.
5. That the Appellant craves leave to add to and / or alter, amend, rescind or modify the grounds taken hereinabove before or at the time of hearing of this appeal.”
The grounds raised by the Revenue are as under:
“1. The order of the learned CIT(A) is opposed to law and facts of the case.
4 IT(TP)A No.1072 & 1060(B)2012
On the facts and in the circumstances of the case the learned CIT(A) erred in holding that communication & traveling expenses amounting - to Rs. 19,63,837 are to be excluded from the total turnover as well, for computation of deduction u/s. 10A of the Act whereas such exclusion is permitted to arrive at the export turnover only as per the definitions given in section 10A of the IT Act and total turnover has not been defined in section 10A of the Act.
3. The CIT(A) ought to have appreciated that the decision of Hon'ble High Court of Karnataka in the case of M/s Tata Elxsi Ltd. on the issue of computing deduction u/s 10A by excluding the above expenses from export turnover and total turnover as well, has not reached finality in view of the pending Department's SLP before the Hon'ble Supreme Court. 4. On the facts and in the circumstances of the case the learned CIT(A) erred in holding that the TPO ought to have excluded comparables having any related party transactions, not only those with more than 25% related party transactions on sales. 5. On the facts and in the circumstances of the case the learned CIT(A) erred in holding that the size, turnover and brand of the company are deciding factors for treating a company as a comparable, and accordingly erred in excluding M/s Infosys Technologies Ltd as a comparable. 6. On the facts and in the circumstances of the case the learned CIT(A) erred in excluding M/s Exensys Software Solution Ltd., M/s Thirdware Solutions Ltd. and M/s Tata Elxsi Ltd. as comparables to the software development segment of the assessee company. 7. For these and other grounds that may be urged at the time of hearing, it is prayed that the order of the CIT(A) in so far as it relates to the above grounds may be reversed and that of the Assessing Officer may be restored. 8. The appellant craves leave to add, alter, amend and / or delete any of the grounds mentioned above.”
It was submitted by the learned AR of the assessee that Learned CIT(A) has adopted 0% RPT filter and now the tribunal is taking a view that this filter should be 15%. He submitted that if 15% RPT filter is applied, various comparables rejected by CIT (A) will get reinstated but thereafter, those comparables has to examined on other aspects such as Functional
5 IT(TP)A No.1072 & 1060(B)2012 similarity etc. and therefore, the entire TP matter may be restored back to CIT (A) for a fresh decision by applying 15% RPT Filter. Learned DR of the revenue also agreed with this proposition.
We have considered the rival submissions and we find force in the submissions of the learned AR of the assessee because 15% RPT Filter is the accepted norms and once this 15% RPT filter is applied, various comparables rejected by CIT (A) will get reinstated but thereafter, those comparables has to examined on other aspects such as Functional similarity etc. Hence, we set aside the order of the learned CIT (A) on total TP issues and restore back the matter to him for a fresh decision by applying 15% RPT Filter and examining the comparables left after applying this filter on various other aspects such as functional comparability etc. after providing adequate opportunity of being heard to both sides. There is no other issue in these appeals except interest issue in assessee’s appeal, which is consequential.
In the result, the appeal of the assessee as well as of revenue is allowed for statistical purposes.
Order pronounced in the open court on the date mentioned on the caption page.