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TMI Blog2012 (5) TMI 208X X X X Extracts X X X X X X X X Extracts X X X X ..... section 92CA(1) of the I T Act, 1961 and referring the computation of the Arm's Length Price to the Transfer Pricing Officer. (iii) That the learned CIT(A) erred in not holding that in absence of a charging provision in the Act, addition to chargeable income cannot be made merely through a transfer pricing adjustment (difference between transaction price of the appellant and alleged arm's length price determined by the Assessing Officer/Transfer Pricing Officer). (iv) That the learned CIT(A) erred in not quashing the adjustment to the transfer price of the appellant, as made by the Assessing Officer, without application of mine, by purely relying on the order of the Transfer Pricing Officer. (v) That on the facts and in the circumstances of the case, the learned CIT(A) erred in holding that the mark-up on total cost (operating profit to total cost ratio of comparables considering Transactional Net Margin Method (TNMM) being the appropriate method) in the case of the appellant, for the purpose of determining Arm's Length Price of international transactions in provision of Research and Development Services (R&D Services) should be 31.73% as against the 5% determi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Act while recomputing the Arm's Length Price. (xv) That the learned CIT(A) erred in upholding the charging of interest under section 234B and 234D of the Act. (xvi) 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. 3.1 The facts in relation to assessee's appeal are as follows:- The assessee company is a wholly owned subsidiary of the Timken Company, USA (Associated Enterprises). The assessee undertakes the following services to its Associated Enterprises:- ♦ Research and development ("R&D") services; ♦ Information Technology ("IT") support services; ♦ Corporate shared services (back office support services); ♦ Global sourcing services. For the above services, according to the assessee, it was compensated on a cost plus 5 percent basis. 3.1.1 The assessee filed return of income on 30/10/2004 declaring an income of Rs. 54,70,420/-. The assessment was completed under section 143(3) of the Act vide order dated 28/12/2006 fixing the total income at Rs. 5,24,37,710/-. The Asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 54,75,257" 3.3 The detailed determination of Arm's Length Price (mark-up) by the assessee, the TPO and the CIT(A) with reference to IT support service and R&D service are as follows:- 1. IT Support Services: Determination of arm's length price (mark-up) for FY 2003-04 Particulars The Appellant The TPO The CIT(A) IT Support Services Most appropriate method Transactional Net Margin Method Profit Level Indicator (PLI Operating profit/total cost Filters Adopted (i) Prowess & Capitaline database updated until May 21, 2004 (ii) Keyword search query was applied resulting in 705 companies (iii) Rejected companies for which sufficient financial data was not available. (iv) Rejected companies for which sufficient descriptive information is not available to determine comparability. (v) Rejected companies that have been declared sick. (vi) Rejected companies that have ceased business operations or are currently inactive. (vii) Rejected companies that have experienced exceptional year of operation. (viii) Rejected companies that are engaged in activities other than provision of services. (ix) Rejected companies that are engaged in provision of serv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ;(i) the company which is having turnover more than Rs. 1 crore but less than Rs. 200 crores only shall be taken into consideration as comparable since the assessee was having a turnover range of 20 crores; (ii) to give the standard deduction of 5% under the proviso to section 92C(2) of the Act; (iii) when companies which are loss making are excluded from the comparables then super profit making company should also be excluded. It was submitted that the above issues were deliberated in the order of the Tribunal in the case of Genisys Integrating Systems (India) (P.) Ltd. (supra) and specific directions were incorporated in the order though the case was remanded by the Tribunal to the Assessing Officer. 3.5.1 The assessee also filed a petition for admission of additional documents. The additional documents were filed in the form of a paper book filed on 29/11/2011. The petition filed by the assessee for admission of the additional evidence reads as follows:- "The appellant would like to submit that the following documents which came in the public domain subsequent to the proceedings before the Transfer Pricing Officer and the Commissioner of Income Tax (Appeal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch Ltd. 74 74 5 Annexure F : Annual report of Infosys Technologies Ltd. for FY 2003-04 75 211 6 Annexure H : Annual report of Mahindra Consulting Ltd. for FY 2003-04 214 298 7 Annexure I : Annual report of Cherrysoft Technologies Ltd. for FY 2003-04 300 321 8 Annexure J : Annual report of Vimta Labs Ltd. for FY 2003-04 322 365 Since these documents are necessary for the disposal of the appeal before the Hon'ble Tribunal, it is humbly prayed before the Hon'ble Tribunal to consider these documents and an opportunity shall be provided to the appellant to present its arguments in relation to the above comparables, before disposing the matter". 3.5.2 The learned AR essentially submitted that the specific directions contained in the order of the Tribunal in the case of Genisys Integrating Systems (India) (P.) Ltd. (supra) may be incorporated in this case also wherever the facts are found identical while remanding the case to the AO. 3.6 The learned DR opposed the admission of additional evidence and submitted that the assessee ought to have filed these documents before the authorities below. It was contended that since these documents ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p; ♦ Satyam Computer Services Ltd. ♦ VMF Soft Tech Ltd. 3.7.2 The issue of standard deduction of 5% as provided under the proviso to section 92A(2) before making adjustment for price is squarely covered by various orders of the Tribunal namely, Genisys Integrating Systems (India) Pvt. Ltd. case (supra), Sap Labs India (P.) Ltd. v. Asstt. CIT [2011] 44 SOT 156/[2010] 8 taxmann.com 207 (Bang.), Philips Software Centre (P.) Ltd. v. Asstt. CIT [2008] 26 SOT 226 (Bang.) and Asstt. CIT v. MSS India (P.) Ltd. [2009] 32 SOT 132 (Pune). 3.7.3 The assessee has filed a petition for admission of additional documents. As per the provisions contained in Rule 29 of the Income Tax (Appellate Tribunal) Rules, 1963, the parties shall not be entitled to produce additional documents either oral or documentary before the Tribunal. The provisions contained in the said rule are pari materia with the order 41 Rule 27 of the Code of Civil Procedure, 1908 which also does not allow the parties to appeal to adduce any additional evidence unless and until such exceptional circumstances are set out. In the present case, the assessee had moved a petition for admission of additio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al evidence if the said authority requires any document to enable it to pass orders or for any other substantial cause. The Tribunal is the final fact finding body under the scheme of the Income Tax Act, 1961 and powers, therefore, have necessarily to be exercised by it for deciding the questions of fact. While exercising its powers, if the Tribunal is of the opinion that additional evidence is material in the interest of justice for deciding a particular issue, its discretion cannot be interfered with unless it has been exercised on non existing or imaginary grounds. In the case or Mahavir Singh (supra) cited by the Ld. Counsel for the assessee it was held that section 107 of CPC enables an appellate court to take additional evidence or to require such other evidence to be taken subject to such conditions and limitations as are prescribed under Order 41 of Rule 27 of CPC. It was also held that the parties are not entitled, as of right, to the admission of such evidence and the matter is entirely in the discretion of the court which is of course to be exercised judicially and sparingly. It was observed that Order 41 Rule 27 of CPC envisages certain circumstances when additional evi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of justice, something which remains obscure, should be filed up so that it can pronounce the judgment in a more satisfactory manner. Such requirement of the Tribunal is likely to arise ordinarily when some inherent lacuna or defect becomes apparent upon its appreciation of the evidence. The power of the Tribunal to admit addition evidence in support of the claim in appeal is discretionary and no fetters can be imposed on the exercise of such power. However, as held by Hon'ble Allahabad High Court in the case of Ram Prasad Sharma v. CIT [1979] 119 ITR 867 and by the Hon'ble Andhra Pradesh High Court in the case of A. K. Babu Khan v. CWT [1976] 102 ITR 756 it is not an arbitrary power but it is a judicial one circumscribed by the limitations given in Rule 29 of the Appellate Tribunal Rules, 1963. The conditions precedent for the exercise of power under Rule 29 must, therefore, be found to have been established. However, where there is no lack of evidence but yet the plea in support of admitting the evidence is so decisive and of clinching value with reference to the points at issue, it is open to the Tribunal to invoke its power of allowing additional evidence to render substantial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h after providing adequate opportunity to the assessee of being heard. 48. As already noted, the additional evidence would be relevant to consider and decide the case already made out by the Revenue and it is, therefore not a case of tendering of fresh evidence by the department to support a new point or to make out a new case. According to us, the additional evidence filed by the revenue is quite relevant for the purpose of deciding the issue before us and the same, therefore, can be admitted as per rule 29 of Appellate Tribunal Rules, 1963 as held by Hon'ble Madras High Court in the case of RSS Shanmugam Pi1lai & Sons (supra). The said additional evidence also needs to be taken into consideration in the interest of justice for deciding the issue relating to the PE. 52. As already noted the assessee was given an opportunity during the course of hearing to advance the arguments on the admission of additional evidence as well as on merits of the issue taking into consideration the said additional evidence and availing this opportunity, Ld. Counsel for the assessee has not only raised elaborate arguments on both these aspects but has also filed, a detailed written submission. In th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gly. 3.7-8 In the result, the appeal filed by the assessee is allowed for statistical purposes. ITA No.983/Bang/2008 (Revenue's appeal) 4. The effective grounds raised by the revenue reads as follows:- (2) The learned CIT(A) has erred in law and on facts in directing the Assessing Officer to exclude the expenses incurred in foreign currency from the total turnover for the purpose of computing deduction under section 10A. (3) The learned CIT(A) has erred in holding that the expenses incurred for purchase of software are revenue in nature without considering the fact that the software is giving enduring benefit to the assessee. 4.1 The facts in relation to ground no.2 mentioned above are as follows:- The assessee had claimed deduction under section 10B of the Act to the extent of Rs. 51,39,238/-. The Assessing Officer recalculated the deduction by reducing from the export turnover, the communication expenses. The Assessing Officer while doing so had placed reliance on the Explanation 2(iii) to 10B. The Assessing Officer also rejected the alternative contention of the assessee that if the communication expenses are reduced from the export turnover while calculating deduction un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve laid down various principles, which are independent of the statutory provisions. There should be uniformity in the ingredients of both the numerator and the denominator of the formula, since otherwise it would produce anomalies or absurd results. Section 10A is a beneficial section which intends to provide incentives to promote exports. In the case of combined business of an assessee, having export business and domestic business, the legislature intended to have a formula to ascertain the profits from export business by apportioning the total profits of the business on the basis of turnovers. Apportionment of profits on the basis of turnover was accepted as a method of arriving at export profits. In the case of section 80HHC, the export profit is to be derived from the total business income of the assessee, whereas in section 10-A, the export profit is to be derived from the total business of the undertaking. Even in the case of business of an undertaking, it may include export business and domestic business, in other words, export turnover and domestic turnover. To the extent of export turnover, there would be a commonality between the numerator and the denominator of the formu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tituent element of the total turnover in the denominator. The legislature has provided a definition of the expression "export turnover" in Expln.2 to s.10A which the expression is defined to mean the consideration in respect of export by the undertaking of articles, things or computer software received in or brought into India by the assessee in convertible foreign exchange but so as not to include inter alia freight, telecommunication charges or insurance attributable to the delivery of the articles, things or software outside India. Therefore in computing the export turnover the legislature has made a specific exclusion of freight and insurance charges. The submission which has been urged on behalf of the revenue is that while freight and insurance charges are liable to be excluded in computing export turnover, a similar exclusion has not been provided in regard to total turnover. The submission of the revenue, however, misses the point that the expression "total turnover" has not been defined at all by Parliament for the purposes of s.10A. However, the expression "export turnover" has been defined. The definition of "export turnover" excludes freight and insurance. Since export ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r insurance attributable to the delivery of articles or things or computer software outside India or the expenses, if any, incurred in foreign exchange in providing the technical services outside India are to be excluded both from the export turnover and from the total turnover, which are the numerator and the denominator respectively in the formula. The appeals filed by the department are thus dismissed". 4.9 In the light of the above judgements of the Hon'ble High Courts and the order of the Special Bench, we are of the view that the CIT(A) is justified in directing the Assessing Officer to exclude the above mentioned expenditure both from the export turnover as well as from the total turnover while calculating deduction under section 10A of the Act. Therefore, the order of the CIT(A) is correct and in accordance with law and no interference is called for. In the result, ground no.2 raised by the revenue is dismissed. 5. The facts in relation to ground no.3 in revenue's appeal are as follows:- The assessee had debited an amount of Rs. 52,02,934/- as expenditure for purchase of different software licences. It was disallowed by the Assessing Officer since according to him; these ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the case of Amway India Enterprises (supra) had laid down various tests to determine whether the expenditure incurred for purchase of computer software is capital or revenue. In the instant case, the CIT(A) did have the benefit of the judgement of Hon'ble jurisdictional High Court in the case of Toyota Kriloskar Motors Pvt. Ltd. (supra) when she passed the impugned order. The CIT(A) has also not referred to the order of the Special Bench of the Tribunal in the case of Amway India Enterprises (supra). The Special Bench had laid various principles to determine whether the expenditure incurred for the purchase of a software licence is capital or revenue. The judgement of Hon'ble jurisdictional High Court and the order of the Special Bench cited supra are directly applicable to the facts of the instant case. Since the impugned order of the CIT(A) did not consider the judgement of the Hon'ble High Court and the order of the Special Bench, we deem it fit and proper to restore the matter to the Assessing Officer for an elaborate discussion on the same. The assessee shall produce the details with reference to the expenditure incurred and shall cooperate with the Assessing Officer for exp ..... X X X X Extracts X X X X X X X X Extracts X X X X
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