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M/s. iPass India Pvt. Ltd. Versus Income Tax Officer, Ward 11 (2) , Bangalore.

2015 (10) TMI 485 - ITAT BANGALORE

Interest under Section 234D - Held that:- The charging of interest is consequential and mandatory and the Assessing Officer has no discretion in the matter. This proposition has been upheld by the Hon'ble Apex Court in the case of Anjum H Ghaswala [2001 (10) TMI 4 - SUPREME Court]. In this view of the matter, we uphold the action of the Assessing Officer in charging the assessee the said interest. The Assessing Officer is, however, directed to recompute the interest chargeable under Sections 234 .....

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7 - ITAT MUMBAI ] and Wills Processing Services (I) Pvt. Ltd. [2014 (4) TMI 814 - ITAT MUMBAI] had omitted this company from the list of comparables to a software development service provider as it was established to be in software product company.

Infosys Technologies Ltd. (‘Infosys’) be omitted from the list of comparables to a mere software development service provider since it was found to be functionally dis-similar and different, being a market leader engaged in software product .....

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s company from the list of comparables.

Tata Elxsi Ltd. (Seg.) being into software development service segments such as embedded product design services, industrial design and engineering services, systems integrating services, Visual Computing Labs , etc. cannot be regarded as comparable to a pure software development service provider, like is the assessee in the case on hand.

Foreign Exchange Gain/Loss - computation of operating revenue - Held that:- It has not been dispu .....

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ng revenue should be computed by including the foreign exchange gain/loss. - Decided against revenue. - I.T.(T.P) A. No.1292/Bang/2014, I.T.(T.P) A. No.1310/Bang/2014 - Dated:- 4-9-2015 - SHRI VIJAYPAL RAO, JUDICIAL MEMBER AND SHRI JASON P. BOAZ, ACCOUNTANT MEMBER For The Assessee : Shri Chavali Narayan, C.A. For The Revenue : Dr.P.K. Srihari, Addl. CIT (D.R.) ORDER Per Shri Jason P. Boaz, A.M. : These are cross appeals, one each by the assessee and Revenue, directed against the order of the Com .....

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up basis. For Assessment Year 2009-10, the assessee filed its return of income on 30.9.2009 declaring total income of ₹ 4,44,20,779 as Book Profits under MAT provisions and income of ₹ 34,848 under normal provisions of the Income Tax Act, 1961 (in short 'the Act') after claiming deduction of ₹ 5,05,29,384 under Section 10A of the Act. The return was processed under Section 143(1) of the Act and the case was subsequently taken up for scrutiny. 2.2 The Assessing Officer o .....

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ng Officer completed the assessment under Section 143(3) rws 92CA of the Act vide order dt.5.3.2013 wherein the income of the assessee was determined at ₹ 1,95,94,620 which included the T.P. Adjustment of ₹ 1,95,59,772. Since the assessee decided to prefer an appeal in the matter before the CIT (Appeals), the Assessing Officer passed the final order of assessment under Section 143(3) of the Act dt.15.5.2013. 3. Aggrieved by the order of assessment for Assessment Year 2009-10 dt.15.5. .....

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assessee has raised the following grounds :- On the facts and circumstances of the case and in law: 1. The learned CIT(A) has erred in law and facts, by upholding the addition of ₹ 1,95,59,772 made by the learned Assessing Officer ( AO ) / Transfer Pricing Officer ( TPO ) on account of adjustment to the arm s length price of the payments made by the Appellant to its Associated Enterprise ( AE ) towards software development services; 2. The learned CIT(A) has erred in law and facts by not .....

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not at arm s length; 3. The learned CIT(A) has erred in law and facts by upholding the action of AO/TPO in determination of the arm s length margin/price using only single year data i.e. for FY 2008-09 and not allowing the use of multiple year data as applied by the Appellant in the transfer pricing documentation; 4. The learned CIT(A) has erred in law and facts by upholding the action of AO/ TPO in rejecting certain comparables considered by the Appellant in the comparability analysis by applyi .....

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onsolidated results have been used for analysis. The Appellant had considered the consolidated results in only those cases where the software development services related income of the Indian company constituted more than 75 percent of the consolidated company-wide/ segmental revenues. iii. The learned CIT(A) has erred, in law and in facts, by not accepting the Appellant s plea that companies should not be rejected using employee cost greater than 25% of the total revenues as a comparability cri .....

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T(A) has erred, in law and facts, by considering incorrect receivables and payables in computing the working capital adjustment and further erred, by restricting the benefit on account of working capital adjustment to 1.71 percent. 7. The learned CIT(A) has erred, in law and facts, by not making suitable adjustments to account for differences in the risk profile of the Appellant vis-àvis the comparables and concluding that once the working capital adjustment is granted, there is no necess .....

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t the outset itself, the learned Authorised Representative for the assessee submitted that the assessee will only be pressing only the ground at S.No.5 seeking the exclusion of 3 comparable companies from the final set of comparables selected by the TPO. 7. The learned Authorised Representative submitted that the assessee will not press and argue the grounds at S.Nos.1to 4 (I to iv) and 6 to 8. Consequently, since these grounds are not pressed they are rendered infructuous and are accordingly di .....

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ed to recompute the interest chargeable under Sections 234D of the Act, if any, while giving effect to this order. 9. In Ground No.10, the assessee challenges the action of the Assessing Officer in initiating penalty proceedings under Section 271(1)(c) of the Act in its case for Assessment Year 2009-10. This ground is not maintainable as no penalty has been levied on the assessee under Section 271(1)(c) of the Act for any cause of grievance to arise in the assessee's case and for us to adjud .....

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nt for the year under consideration are as under :- Operating Revenues Rs.29,13,15,514 Operating Expenses Rs.24,98,99,748 Operating profit Rs.4,14,15,766 Operating Profit on cost % 16.57% 10.3 The assessee undertook a T.P. Study in respect of the ALP of its international transactions with its AE. The assessee characterizing itself as a routine provider of software development services to its AE, took itself as the tested party, and adopted TNMM as the Most Appropriate Method ( MAM ) to determine .....

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e Technologies Ltd. 24.01 6. Helios & Matherson Information Technology Ltd. 38.09 7. Indium Software (India) Ltd. 1.25 8. Infosys Technologies Ltd. 40.83 9. KPIT Cummins Infosystems Ltd. 12.36 10. Larsen & Toubro Infotech Ltd. 16.46 11. LGS Global Ltd. 24.60 12. Maars Software International Ltd. 7.14 13. Mindtree Limited 12.01 14. Persistent Systems Pvt. Ltd. 24.10 15. Quintegra Solutions Ltd. 18.95 16. R S Software (India) Ltd. 9.80 17. Sasken Communication Technologies Ltd. 19.55 18. S .....

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aking TNMM as the MAM carried out a fresh search using the data bases Prowess and Capitaline and applying various filters. Based on this study, the TPO rejected 13 of the 21 companies selected by the assessee as comparables. The TPO s finally selected 11 comparables in the final set of comparables, 8 being those chosen by the assessee and 3 fresh comparables, with an average Mean Margin of 24.32 % on operating cost. The TPO s final list of comparable is as under : Sl.No. Comparable Margin (%) (U .....

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uted at 24.40% on operating cost. The Assessing Officer then proceeded to compute the ALP of the assessee's international transactions with its AE as under :- Software Development Services. Arm s Length Mean Margin on cost 24.32% Less : Working Capital Adjustment (Annex. C) (0.08%) Adjusted Margin 24.40% Operating Cost Rs.24,98,99,748 Arm s Length Price (ALP) @ 124.40% of Operating Cost. Rs.31,08,75,286 Price Received Rs.29,13,15,514 Shortfall being adjustment u/s.92CA Rs.1,95,59,772 The abo .....

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upport of its claim for exclusion of the above three companies from the list of comparables, the learned Authorised Representative for the assessee has filed written submissions, a chart showing the accept / reject matrix of various comparables, a case law compilation of the judicial pronouncements relied upon, copies of Annual Reports of companies, etc. The learned Authorised Representative submitted that, inter alia, the assessee placed reliance on the decision of the co-ordinate bench of this .....

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r 2009-10, we find that the similarity and applicability of the findings therein would be similar to those of the case on hand. 13. Bodhtree Consulting Ltd. ( Bodhtree ) 13.1 This company was selected by the TPO as a comparable inspite of the assessee's objections to its inclusion in the final list of comparables. The learned CIT (Appeals) upheld the TPO s action in selecting this company as a comparable. 13.2 Before us, the learned Authorised Representative of the assessee contended that th .....

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ehousing, Software Consultancy, design and development of solutions, using latest technologies. 13.2.2 The learned Authorised Representative further submitted that the website of Bodhtree suggests that it is a global IT consulting and product engineering services provider with its key areas being product engineering, analytics, cloud and enterprise services. The services offered include:- Product engineering - outsourced product development, Microsoft Share Point Services, SOA Services and Q& .....

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siness intelligence, speed data management and data clearing operations. 13.3.3 The learned Authorised Representative submits that considering the fact that Bodhtree provides varied business solutions and services as laid out above, it is prayed that it may be excluded from the final list of comparables as it is functionally different from the assessee, in the case on hand, who is a captive software development service provider to its AE. In this regard, the assessee, placed reliance on the deci .....

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e heard the rival contentions and perused and carefully considered the material on record; including the judicial pronouncement relied on by the assessee. We find that a co-ordinate bench of this Tribunal in the case of CISCO Systems (India) Pvt. Ltd. (supra) for Assessment Year 2009-10, following the decisions of the Mumbai Benches of the ITAT in Nethawk Networks Pvt. Ltd. in ITA No.7633/Mum/2012 dt.6.11.2013 and Wills Processing Services (I) Pvt. Ltd. in ITA No.4547/Mum/2012 had omitted this c .....

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is not being considered as a comparable company in the case of companies rendering software development services. In this regard, the ld. counsel for the assessee has brought to our notice the decision of the Mumbai Bench of the Tribunal in the case of Nethawk Networks Pvt. Ltd. v. ITO, ITA No.7633/Mum/2012, order dated 6.11.2013. In this case, the Tribunal followed the decision rendered by the Mumbai Bench of the Tribunal in the case of Wills Processing Services (I) P. Ltd., ITA No.4547/Mum/20 .....

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circumstances in the present year also remains identical to the facts and circumstances as it prevailed in AY 08-09 as far as this comparable company is concerned. Following the aforesaid decision of the Mumbai Bench of the Tribunal, we hold that Bodhtree Consulting Ltd. cannot be regarded as a comparable. In this regards, the fact that the assessee had itself proposed this company as comparable, in our opinion, should not be the basis on which the said company should be retained as a comparabl .....

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Assessing Officer / TPO to exclude this company from the final list of comparables. 14. Infosys Technologies Ltd. ( Infosys ) 14.1 This company was initially chosen by the assessee as a comparable to the assessee. However, before the TPO itself the assessee objected to its inclusion in the final set of comparables on grounds of being functionally different since it has brand attributable profits, was owning significant intangibles, was having significant R&D activities, its scale of operati .....

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s a market leader by virtue of its scale of operations, brand attributable profits, owning of significant IPRs ; and intangibles and having significant R&D activities. 14.2.3 In written submissions before us, the learned Authorised Representative contends that :-  Company should be rejected as functionally different The company provides solutions that span the entire software life cycle encompassing technical consulting, design, development, re-engineering, maintenance, systems integ .....

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to differentiate their products and services thereby enhancing customer experience and achieving greater operational efficiency (Page 13, Annual Report FY 2008-09). (b) Infosys also develops products like Flypp , Infosys Customer Self-Service Energy Manager , Infosys Health Benefit Exchange , Infosys iTransform - ICD - 10 Migration Suite , Infosys mConnect , Infosys Omni-Channel Personalization Engine , Infosys Real Time Expert manager , Infosys Supply chain Performance management Suite , Infos .....

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The intellectual property (IP) created has led to enhance quality, productivity and customer satisfaction. This year we started focusing on creating significant IP to help the company s non-linear growth strategy. R&D is conducted at the various Software Engineering & Technology Labs (SETLabs) at Infosys. The SET Labs are engaged in R&D in various technologies, which inter alia includes (Page 19-20, Annexure to Director s Report)  Next generation of software engineering = .....

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aggregate of 79 patent applications in the U.S. Patent and Trademark Office and Indian Patent Office. (Page 13, Director s Report) SET Labs is also engaged in collaborative R&D efforts like (Page 20, Annexure to Director s Report):  BT (British Telecom) Innovates & SET Labs are jointly working on development and for taking to market a product called Real-time Biz Intelligence Plus (RTBI Plus)  Nomura Securities partnered Infosys regarding Interest Rate Risk Analysis Appli .....

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We continue to concentrate on research and innovation. As of fiscal 2009, we have 200 patent applications (pending) in India and the U.S. We have been granted two patents by the United States Patent and trademark Office, earlier in fiscal 2009. Our Australian subsidiary and our research group have jointly participated in establishing the Smart Services Cooperative Research Centre to develop an R&D program for creating intellectual Property valuable to Australia s services market. Infosys si .....

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ted and admired company in India (Page 14, Director s Report). We were ranked 14th among the most respected companies in the world by Reputation Institute. We were ranked second in the Global Sourcing list of 100 best performing IT service providers. Hays Group and CEO magazine ranked us among the best companies in the world for leaders. Infosys is also spending substantial amounts for branding activities. During FY 2008-09, it had incurred an amount of INR 77 crore for brand building and market .....

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arges 21 0.1 14 0.1 50.0 Professional charges 21 0.1 18 0.1 16.7 Others 40 0.2 36 0.2 11.1 Total : 933 4.6 730 4.7 27.8 14.2.4 The learned Authorised Representative prays that in view of the elaborate reasons given above, this company i.e. Infosys should be excluded for the final list of comparables to the assessee. In support of this proposition, the assessee placed reliance on the decision of the co-ordinate bench of this Tribunal in the case of CISCO Systems (India) Pvt. Ltd. (supra) for Asse .....

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ave heard the rival contentions and perused and carefully considered the material on record, including the judicial decisions cited. We find that a co-ordinate bench of this Tribunal in the case of CISCO Systems (India) Pvt. Ltd. (supra) for Assessment Year 2009-10, following the decision of an earlier co-ordinate bench in the case of 3DPLM Software Solutions P. Ltd. V DCIT in IT(TP)A No.1303/Bang/2013 dt.28.11.2013, has omitted this company from the list of comparables to a mere software develo .....

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een considered to be functionally different from a company providing simple software development services, as this company owns significant intangibles and has huge revenues from software products. In this regard, we find that the Bangalore Bench of the Tribunal in the case of M/s. TDPLM Software Solutions Ltd. v. DCIT, ITA No.1303/Bang/2012, by order dated 28.11.2013 with regard to this comparable has held as follows:- 11.0 Infosys Technologies L t d . 11.1 This was a comparable selected by the .....

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e learned Authorised Representative drew our attention to various parts of the Annual Report of this company to submit that this company commands substantial brand value, owns intellectual property rights and is a market leader in software development activities, whereas the assessee is merely a software service provider operating its business in India and does not possess either any brand value or own any intangible or intellectual property rights (IPRs). It was also submitted by the learned Au .....

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not be comparable to the assessee ; (ii) the observation of the ITAT, Delhi Bench in the case of Agnity India Technologies Pvt. Ltd. in ITA No.3856 (Del)/2010 at para 5.2 thereof, that Infosys Technologies Ltd. being a giant company and market leader assuming all risks leading to higher profits cannot be considered as comparable to captive service providers assuming limited risk ; (iii) the company has generated several inventions and filed for many patents in India and USA ; (iv) the company ha .....

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omparable companies. 11.3 Per contra, opposing the contentions of the assessee, the learned Departmental Representative submitted that comparability cannot be decided merely on the basis of scale of operations and the brand attributable profit margins of this company have not been extraordinary. In view of this, the learned Departmental Representative supported the decision of the TPO to include this company in the list of comparable companies. 11.4 We have heard the rival submissions and peruse .....

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nctionally comparable since it owns significant intangible and has huge revenues from software products. It is also seen that the break up of revenue from software services and software products is not available. In this view of the matter, we hold that this company ought to be omitted from the set of comparable companies. It is ordered accordingly. The decision rendered as aforesaid pertains to A.Y. 2008-09. It was affirmed by the learned counsel for the Assessee that the facts and circumstance .....

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comparable to a captive software development service provider, like the assessee in the case on hand, and consequently direct the Assessing Officer / TPO to exclude this company from the list of comparables. 15. Tata Elxsi Ltd. (Seg.) 15.1 This company selected by the TPO as a comparable overruling the objections of the assessee to its inclusion as a comparable, on grounds that this company was a product company and into systems integration and support services and was therefore functionally di .....

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e Annual Report of Tata Elxsi Ltd. for F.Y. 2008-09 indicates that the software development services segment cannot be considered for analysis since it comprises of 3 sub-segments, namely - i. Product design services i.e. Design and development of hardware and software; ii. Innovation design engineering (i.e. Mechanical design with a focus on industrial design) and iii. Visual Computing Labs (i.e. animation and special effects for movies). It is submitted that there being no sub-services break u .....

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s (India) Pvt. Ltd. in IT(TP)A No.271/Bang/2014 dt.14.8.2014. 15.3 Per contra, the learned Departmental Representative supported the decision of the authorities below in selecting this company to be a comparable to the assessee. 15.4.1 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial pronouncement relied upon by the assessee. We find that a co-ordinate bench of this Tribunal in the case of CISCO Systems (India) Pvt. Ltd. (sup .....

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inate bench in CISCO Systems (India) Pvt. Ltd. (supra) for Assessment Year 2009-10 has held as under :- 26.4 Tata Elxsi Ltd.:- As far as this company is concerned, it is not in dispute before us that in assessee s own case for the A.Y. 2007-08, this company was not regarded as a comparable in its software development services segment in ITA No.1076/Bang/2011, order dated 29.3.2013. Following were the relevant observations of the Tribunal:- II. UNREASONABLE COMPARABILITY CRITERIA : 19. The learne .....

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nd system integration services segment. There is no sub-services break up/information provided in the annual report or the databases based on which the margin from software services activity only could be computed. The company has also in its response to the notice u/s.133(6) stated that it cannot be considered as comparable to any other software services company because of its complex nature. Hence, Tata Elxsi Ltd., is to be excluded from the list of comparables. (ii) Flextronics Software Syste .....

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e earned on a hybrid revenue model, and the same is not similar to the regular models adopted by other software service providers. The learned representative pleaded that a regular software services provider could not be compared to a company having such a unique revenue model, wherein the revenues of the company from software/product development services depends on the success of the products sold by its clients in the marketplace. Hence, it would be inappropriate to compare the business operat .....

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ted the contents of para 14.2.25 of the TPO's order. He also read out the following portion from the TPO's order : "Thus as stated above by the company, the following facts emerge : 1. The company's software development and services segment constitutes three sub-segments i) product design services; ii) engineering design services and iii) visual computing labs. 2. The product design services sub-segment is into embedded software development. Thus this segment is into software de .....

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s read out by him as his submissions : "It is very pertinent to mention here that the company was considered by the taxpayer as a comparable for the preceding assessment year i.e., AY 2006-07. When the same was accepted by the TPO as a comparable, the same was not objected to it by the taxpayer. As the facts mentioned by the taxpayer are the same and these were there in the earlier FY 2005-06, there is no reason why the taxpayer is objecting to it. How the company is functionally similar in .....

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t from that of the assessee and hence they deserve to be deleted from the list of six comparables and hence there remains only four companies as comparables, as listed below: 26.5. Following the aforesaid decision of the Tribunal, we hold that M/s. Tata Elxsi Ltd. should not be regarded as a comparable. 15.4.2 Following the aforesaid decision of the co-ordinate bench of this Tribunal in the case of CISCO Systems (India) Pvt. Ltd. (supra) for Assessment Year 2009-10, we hold that Tata Elxsi Ltd. .....

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s and circumstances of the case. 2. The CIT (Appeals) erred in holding that foreign exchange loss/gain is operating in nature without ascertaining the nexus of the forex gain/loss with the business activity of the taxpayer and without appreciating that such loss/gain though attributable to the operating activity is not derived from the operating activity. 3. The CIT (Appeals) erred in concluding that forex gain/loss are to be treated as operating in nature without appreciating that though they m .....

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al in Triology E-Business Software V DCIT 23 ITR (Trib) 464 without appreciating that in transfer pricing every case is unique and requires to be decided independently and that the directions issued are beyond the mandate of the provisions of Section 251(1)(a) of the IT Act which does not empower the CIT (Appeals) to set aside the issue. 5. 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 (Appeals) be reversed and that of th .....

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/loss is operating in nature without appreciating that such gain/loss through attributable to the operating activity of the assessee is not derived from the operating activity but is only incidental to it. Revenue also assailed the decision of the learned CIT (Appeals) in following the decisions of the Delhi Bench of the ITAT in the case of Haworth (India) Pvt. Ltd. in 11 ITR (Trib) 757 and of the co-ordinate bench of the ITAT, Bangalore in the case of Triology EBusiness Software India Pvt. Ltd. .....

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benches of the ITAT and the learned CIT (Appeals) had, inter alia, rightly followed and directed the Assessing Officer to follow the decisions of the co-ordinate bench of the ITAT, Bangalore Benches in the case of Triology E-Business Software India Pvt. Ltd. (supra). It was prayed, in the light of the above averments, that Revenue s appeal on this issue be dismissed. 19.3.1 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial dec .....

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. Ltd. in IT(TP)A No.1376/Bang/2014 dt.17.4.2015 wherein at para 5.7 thereof it has been held as under :- 5.7 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial decisions cited and placed reliance upon. We observe that it has not been disputed that the foreign exchange gain has arisen as a consequence of the realization of the consideration for rendering ITES services and therefore there is no reason for its exclusion from the .....

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