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Income Tax Appellate Tribunal, BANGALORE BENCH ‘B’, BANGALORE
Before: SHRI A. K. GARODIA & SHRI VIJAY PAL RAO
are directed against the order of the learned CIT(A)-IV, Bangalore dated 16- 09-2013 for the assessment year : 2005-06.
2. The grounds raised by the revenue in its appeal are as under; “1.The order of the ld.CIT(A) is opposed to law and the facts and circumstances of the case.
2. The CIT(A) erred in directing the AO to exclude the internet charges of Rs.1019,612 from the total turnover also while computing the deduction u/s 10A of the IT Act, without appreciating the fact that there is no provision in section 10A that such expenses should be reduced from the total turnover also, as clause(iv) of the explanation to sec.10A provides that such expenses are to be reduced only from the export turnover.
3. The CIT(A) erred in not appreciating the fact that the jurisdictional High Court’s decision in the case of Tata Elxsi Ltd. 349 ITR 98 has not been accepted by the department and an appeal has been filed before the Hon’ble Supreme Court.
4. The CIT(A) erred in directing the TPO to exclude companies which are functionally dissimilar subject to the guidelines laid down by the Delhi Bench of the Tribunal in the case of Actis Advisers P.Ltd Vs DCIT 20 ITR (Trib.)138 without appreciating the fact that the directions issued are beyond the mandate of the provisions of Sec.251(1)(a) of the IT Act, which does not empower the CIT(A) to set aside the issue.
The CIT(A) erred in not appreciating the fact that when any filter or criteria applied by the assessee is accepted or if any filter or criteria applied by the TPO is relaxed, the entire accept/reject matrix changes resulting in a new set of comparables including those comparables which are neither taken by the assessee or the TPO and which do not find a place in the order under section 92CA.
For these and such other grounds that may be urged at the time of hearing, it is humbly prayed that the order of the CIT(A) be recovered and that of the AO be restored.
The appellate craves leave to add, to alter, to amend or delete any of the grounds that may be urged at the time of hearing of the appeal”.
The assessee has raised the following grounds in its appeal;
“1. The Learned ("Ld.') Commissioner of Income-Tax (Appeals) - IV- Bangalore, ["CIT (A)"] has grossly erred in ignoring the contentions of the Appellant and passing a cryptic and nonspeaking order.
The Ld. CIT (A) in his order has provided a vague direction to the Id. Assessing Officer ("AO") instead of providing specific guidance to reject or accept the ground of appeal of the Appellant.
3. The Ld. CIT (A) has rightly directed that the functionally dissimilar companies ought to be excluded, however the Ld. CIT (A) has erred in not passing a speaking order specifying the functionally dissimilar companies. In this connection, the Ld. CIT (A) has also erred in not taking cognizance of the jurisdictional ruling of Hon'ble Income Tax Appellate Tribunal, Bangalore Bench in case of Toshiba Embedded Software India Private Limited [IT(TP)A No. 1368/BangJ201land IT(TP)A No.1/Bang/2012), wherein the following comparable companies have been rejected as comparable to the taxpayer engaged in captive software development services similar to the Appellant. 3.1 Four Soft limited is engaged in the provision of software product development services, therefore, functionally dissimilar to the Appellant;
3.2 Thirdware Solutions Limited is engaged in purchase and sale of license, hence functionally dissimilar to the Appellant; 3.3 Geometric Software Solutions Limited is engaged in provision of product development and engineering services, hence functionally dissimilar to the Appellant; 3.4 Tata Elxsi limited is engaged in provision of product engineering and design services, therefore functionally dissimilar to the Appellant; 3.5 Exensys Software Solutions Limited is engaged in provision of software product development services, therefore functionally dissimilar to the Appellant; and 3.6 Sankhya Infotech Limited is engaged in provision of software product development services and performs significant research and development activities and selling and marketing activities, hence functionally dissimilar to the Appellant.
4. The Ld. CIT (A) erred in not adjudicating on the contention of the Appellant against the action of the Id. Additional Director of Income Tax (Transfer Pricing-I), Bangalore (TPO") of rejecting the following functionally comparable companies. a) Maars Software International limited; b) Quintegra Solutions limited; c) C. Zylog Systems Limited; d) Datamatics Limited; and e) TVS lnfotech Limited
f. The Ld. CIT (A) erred in upholding the action of the id TPO Of rejecting the Transfer Pricing Documentation without appreciating the contentions, arguments, and evidentiary data put forward by the Appellant during the course of the assessment proceedings. g. The Id. CIT (A) erred in upholding the action the id. TPO in rejecting the use of multiple year data by the Appellant in the Transfer Pricing documentation despite Rule 109(4) of the Income Tax Rules. 1962 providing for the use of such data and selected the single year data of the companies for the year ended March 31, 2005 in determining the arm's length price. h. The Id. CIT (A) failed to appreciate the fact the comparable companies proposed by the Ld. TPO provide services to independent third parties in a capacity of a full-fledged service providers, assuming entrepreneurial risks, as compared to the Appellant who operates as a risk insulated captive service provider. Hence the Ld. CIT (A) has erred in not allowing the adjustment for the difference in the risk profile. i. The Ld. CIT (A) erred in upholding the action of Ld. TPO in applying the onsite filter and adopting an ad hoc threshold of 75 percent for rejecting comparable companies. In doing so, the learned TPO erred in rejecting Quintegra Solutions Limited and Datamatics limited. j. The Ld. CIT(A) erred in upholding the action of Id. TPO in applying export turnover filter and adopting an ad hoc threshold of 25 percent for rejecting comparable companies. k. The ld. CIT(A) erred in upholding the action of Ld. TPO of considering 25 percent as the threshold limit for the Related Party Transactions filter as this number is an arbitrary number and has been adopted without any reasonable basis. l. The Ld. CIT (A) erred in upholding the action of Ld. TPO of rejecting companies with different financial year ending without appreciating the fact that the Companies Act. 1956 allows companies to follow different financial year as their reporting period. In doing so, the learned IPO erred in rejecting Maars Software International Limited and TVS Infotech Limited. m. The Ld. CIT (A) is erred in upholding the action of the Ld. TPO of not allowing the benefit of range of /- 5% as provided in proviso to Section 92C(2) of the Act to the Appellant, while determining the arm's length price. n. The Ld. CIT (A) is erred in upholding the action of the Id. TPO in completely relying on the unaudited data requisitioned and consequently obtained by taking recourse to the provision of section 133(6) of the Act, which, in many instances are inconsistent with the data disclosed in audited reports and thereby not complying with the principles of natural justice.
The Appellant craves leave to add, to alter or amend all or any of the aforementioned grounds of appeal”.
3. It was submitted by the learned AR of the assessee that ground nos.4(a) to 4(e) are not pressed and accordingly, these grounds are rejected as not pressed. He also submitted that the remaining grounds are interconnected with ground no.4 to 7 of the revenue’s appeal in respect of Transfer Pricing issue. He also submitted that ground no.4 of the revenue’s appeal also it is the grievance of the revenue that as per the provisions of sec.251(1)(a) of the IT Act, learned CIT(A) is not empowered to set aside the issue. He also submitted that as per the grounds in assessee’s appeal also it is the contention of the assessee that the ld.CIT(A) has not decided the issue in proper manner, because his order is not a speaking order and has simply set aside the matter and restored it to the file of the AO/TPO with direction to ignore these comparables which are in respect of functionally dissimilar companies, but he has not decided the issue in respect of rejection of six comparables as per ground no.3.1 to 3.6 of the assessee’s appeal and inclusion of five comparables as per ground no.4(a) to 4(e) of the assessee’s appeal. He submitted that under these facts the issue regarding the TP matter should be restored back to the file of the CIT(A) for a fair decision by way of a speaking order in respect of specific grounds of the assessee for excluding six comparables on account of functionally dissimilarity and inclusion of five comparables which were rejected by the TPO by alleging the functionally dissimilarity whereas the same are functionally comparable companies as per the assessee. As against this it was submitted by the ld. DR of the revenue that since the ld. CIT(A) has not decided the issue himself and set aside the matter to the file of the AO/TPO his order on TP issue is not sustainable. As per the provisions of Sec.251(1)(a) of the IT Act which does not empower the CIT(A) o set aside the issue.
Regarding ground no.1 to 3 of the revenue’s appeal he supported the assessment order, whereas the ld. AR of the assessee supported the order of the ld.CIT(A) on this issue.
We have considered the rival submissions. Regarding the TP issue raised by the revenue at ground no.4 to 7 by the assessee as also ground no.1,2,3 & 4(a) to 4(e), now we find that the matter has to go back to the file of the ld.CIT(A) for a fresh decision, because ld.CIT(A) has not decided the issue himself and he has set aside the matter to the file of TPO with the direction to exclude functionally dissimilar companies subject to the guidelines laid down by the Delhi Bench of the Tribunal rendered in the case of Actis Advisers Pvt. Ltd Vs DCIT as reported in 20 ITR(Trib.) 138 and decision of Bangalore Bench of the Tribunal rendered in the case of Witness Systems Software India (P) Ltd. Vs DCIT 34 Taxmann.com 183. In our considered opinion, instead of setting aside the matter and restoring back the same to the file of the TPO with direction ld.CIT(A) should have decided the issue himself with comparables companies is to be included and with comparables companies is to be excluded as per these Tribunal orders.
Hence, we asset aside the order on this issue and restore the matter to the file of the CT(A) for fresh decision with direction to decide the issue by way of speaking order, instead of setting aside the matter to the file of the TPO with direction if required, he may obtain remand report from the AO on this issue and needless to say he should provide adequate opportunity of being heard to the assessee. Accordingly, grounds raised by the assessee in its appeal being ground no.3.1 to 3.6, ground no.4(a) to 4(e) are allowed for statistical purposes and similarly, ground nos.4 to 6 of the revenue’s appeal are also allowed for statistical purposes.
Ground no.1 & 2 of the assessee’s appeal are general and does not require any separate adjudication. Regarding ground no.1 to 3 of the revenue’s appeal, we find that this issue is covered in favour of assessee by the judgment of the Hon’ble Karnataka High Court reported in the case of CIT Vs Tata Elxsi Ltd. (349 ITR 98)(Kar.), wherein it was held that total turnover in sum total on export turnover and domestic turnover and therefore, if some item is excluded from export turnover then, as a consequence the total turnover is also reduced by the same amount. In view of this matter, respectfully following the judgment of Hon’ble Karnataka High Court, we are not inclined to interfere in the order of theld.CIT(A) on this issue. Accordingly, ground no.1 to 3 of the revenue’s appeal are rejected.
In the result, the appeal of the assessee as well as of the revenue are partly allowed for statistical purposes.
Order pronounced in the open court on the date mentioned on the caption page.