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2015 (11) TMI 1582

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..... of providing low and contract software development services to its AE. Therefore, on this very basis, Genesys needs to be excluded from the set of comparables. As seen if the Forex gain and the first three comparables, i.e., 3D PLM, Bodhtree Consulting Ltd. and Genesys International Corporation Ltd. are excluded, the OP/OC of the remaining nine comparable companies, as taken by the TPO, works out at 19.56%, as against the assessee’s OP/OC of 18.15%, which falls within the +/- 5% range, as provided in the proviso to section 92C(1) of the Act. Therefore, we find no need to go into the merits of the comparability of the remaining two companies, i.e., Cosmic Global Ltd. and Infosys Ltd. and we are not doing so. deduction u/s 10A computation - Held that:- Net foreign exchange fluctuation gain booked by the assessee in its books of account is directed to be included in the export turnover for computing deduction u/s 10A of the Act. For computation of deduction u/s 10A of the Act, the total turnover in the denominator and the export turnover in the numerator have to be read in the same manner. Therefore, the assessee is correct in contending that an equivalent amount of foreign .....

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..... enied consistent treatment of foreign exchange gain/loss to the Appellant. 1.3 The Appellant prays that the foreign exchange gain amounting to INR 15,99,29,779 be treated as operating in nature for the computation of profit level indicator (PLI) and the consequential upward adjustment be deleted. Ground no.2: Systematic exclusion of comparable companies identified by the Appellant. 2.1 On the facts and circumstances of the case, and in law, the DRP have erred in selectively excluding Computech International Ltd. a comparable company identified by the Appellant, having negative operating margin, from the finanl set of comparable companies stating that the company is not comparable in the absence of segmental information without appreciating that the annual report of the relevant year contains the segmental information and only the relevant segment has been considered comparable by the Appellant and was also provided during the DRP hearing. 2.2. On the facts and circumstances of the case, and in law, the TPO and DRP have erred in selectively excluding Kaashyap Technologies Ltd. and SIP Technologies Exports Ltd., an identified comparable companies by the Appe .....

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..... onally different compared to the appellant. 3.4 On the facts and circumstances of the case, and in law, the TPO and DRP have erred in including infosys Technologies Limited, Igate Global Solutions Ltd., Mindtree Ltd. and Persistent Systems Ltd. in the final set of comparable companies without appreciating that the turnover of the said companies is far greater than the turnover of the appellant. 3.5 Aggrieved by the systematic inclusion of the above mentioned companies and non consideration of your appellant s submissions. Your appellant humbly prays that the systematic inclusion of the above companies be struck down and the consequential upward adjustment be deleted. The appellant prays to exclude the above companies from the final comparable set. Ground no.4: Inclusion of pass through cost in the cost base at the time of calculating the PLI of the appellant 4.1. On the facts and circumstances of the case, and in law, the TPO and the DRP has erred in ignoring the fact that the outsourcing third party service cost of INR 7,95,55,035/- is a pass through cost and no value addition is created by the Appellant on such services. It is a pure reimbursement of costs .....

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..... however included in Total Turnover while computing deduction under section 10A of the Act. 10.1 On the facts and circumstances of the case and in law, the learned AO and DRP has erred in including realized foreign exchange gain amounting to INR 9,68,96,182/- only in Total Turnover and not in Export Turnover. 10.2 The Appellant prays that the foreign exchange gain be excluded from the total turnover of the Appellant and the relief under section 10A of the Act be recomputed accordingly. 10.3 Without prejudice to the above, even if accepting the ground of TPO and DRP to consider realized foreign exchange gain to be considered as part of Total Turnover the assessee prays that a similar adjustment be made to the Export Turnover for computing deduction under section 10A of the Act. Ground no.11: Levy of Interest by AO 11.1 On the facts and in the circumstances of the case and in law, the AO erred in levying interest under section 234B and 234D of the Act. The Appellant prays that the interest levied be deleted. The Appellant craves leave to add, alter, vary, omit, substitute or amend the above grounds, at any time before or at the time of hearing of th .....

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..... e and in law, the DRP erred in rejecting the contention of the applicant regarding risk adjustment without giving the applicant an opportunity to provide workings to support the claim of risk adjustment. 2. That on facts and circumstances of the case and in law, the DRP/TPO ought to have excluded the following companies from the set of comparable companies for the purpose of benchmarking analysis: a) Cosmic Global Ltd. b) Bodhtree Consulting Ltd. c)3D PLM Software Solutions Ltd. 3. That on the facts and circumstances of the case and in law, Bodhtree Consulting Ltd. and 3D PLM Software Solutions Ltd. ought to be excluded from the final set of comparables on account of super normal profits earned by both the companies and also considering specific functional characteristic in comparison to the applicant which is a low end captive service provider. 4. That on the facts and circumstances of the case and in law, the DRP/TPO ought to have excluded Bodhtree Consulting Ltd. and Cosmic Global Ltd. from the final set of comparable companies on account of the fact that the year under consideration is the exceptional year of operation of both the companies. .....

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..... any. However, even now, they can be rejected for determination of arm s length price of the international transaction of provision of software development services, as is being sought for. In this regard, reliance is sought to be placed on the following case laws: i) CIT vs. C. Parakh Co. (India ) Ltd. , 29 ITR 661 (SC) ii) CIT vs. V.M.R.P. Firm , 56 ITR 67 (SC) iii) National Thermal Power Co. Ltd. vs. CIT , 229 ITR 383(SC) iv) CIT vs. Enron Expat Services Ind. , 327 ITR 626 (Uttrakhand) v) R.B.Jessa Ram Fateh Chand vs. CIT , 81 ITR 409 (All.) vi) Pandit Seho Nath Prasad Sharma vs. CIT , 66 ITR 647 (Del.) vii) CIT vs. Bharat General Reinsurance Co. Ltd. , 81 ITR 303 (Del). viii) DCIT vs. Quark Systems Pvt. Ltd. , ITA No.s 100 115/Chd/2009 (SB) [approved by the Hon ble P H Court). ix) Honeywell Autoation India Pvt. Ltd. vs. DCIT , (ITA No.4/PN/08). x) Sapient Corporation Pvt. Ltd. vs. DCIT (ITA No. 5263/Del/2010) xi) DCIT vs. BP India Services Pvt. Ltd. (ITA No. 4425/Mum/2010). So far as regards the additional evidence, it has also been contended that this additional evidence is, even otherwise, available in the public domain. 8. .....

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..... ra). 10. In view of the above, the Additional Grounds are admitted. The request for additional evidence is accepted too, particularly keeping in view that this evidence is also available even otherwise in the public domain. 11. Concerning Modified Ground No.1, the assessee contends that the TPO/DRP erred in not considering foreign exchange gains amounting to ₹ 15,99,29,770/- as part of the operating income of the assessee for computation of the operating profit margin of the assessee for undertaking bench-marking analysis applying TNMM. In this regard, it has been contended that operating profit includes within its scope, the profit earned from the normal operational activity of an enterprise and only extraneous transaction and expenses of purely financial nature are required to be excluded therefrom. It has been submitted that the ld. DRP erred in upholding the TPO s finding that the foreign exchange gain/loss is neither a consideration, nor can it be considered to negotiate or determine the price of the product or service, since it is uncertain and indefinite and can fluctuate either direction. As per the assessee, in its case, as well as in the case of the comparab .....

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..... argin of the assessee works out to 11.85% and the same is required to be considered for the purpose of benchmarking analysis. 13. On the other hand, the Department has contended that as against ground taken, the order of the ld. DRP which excludes foreign exchange gain/loss from the ambit of operating income should be upheld. It was further contended that however, without prejudice, in case, foreign exchange gain, is to be treated as operating income, the true effect of the ratio of the judgment in the case of Techbook International , (supra) of the Tribunal be given. Attention in this regard was drawn to para 4.6 of this decision, as per which, when the foreign exchange gain directly emanates from the consideration received for rendering of services by the assessee to its AE, the foreign exchange gain fluctuates and it ought not to be considered as an item of non-operating revenue, and that the same is also equally true for the foreign exchange loss, which needs to be considered as part of operating cost from the transactions of revenue nature. 14. It is further contended on behalf of the Department that though complete details of the foreign exchange of ₹ 15.99 crore .....

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..... rom the assessee, by affording due and adequate opportunity of hearing to the assessee. 16. As such, Modified Ground No.1 is treated as allowed, for statistical purposes. 17. Turning to Ground No.2 of the Modified Grounds of Appeal, according to the assessee, the TPO/DRP erred in considering the following companies as companies comparable to the assessee, holding them to be functionally comparable to the assessee: i) 3D PLM Software Solutions Ltd. ii) Bodhtree Consulting Ltd. iii) Cosmic Global Ltd. iv) Genesys International Corporation Ltd. v) Infosys Ltd. 18. Apropos the first company, i.e., 3D PLM Software Solutions Ltd., this company was taken as a comparable by the assessee in its TP study. Its OP/OC percentage is 69.93. The contention of the assessee is that since the related party transactions (RPT) of 3D PLM is more than 25%, it does not satisfy the filter applied by the TPO. In this regard, the assessee has sought to rely on the decision of the Delhi Bench of the Tribunal in the case of Global Logic India Pvt. Ltd. vs. DCIT , rendered in ITA No.5110/Del/2010. 19. Here, it is seen, that as per the record, the related party transactions to sales r .....

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..... ed that Bodhtree Consulting Ltd. has been excluded from the set of comparable companies by the Mumbai Bench of the Tribunal in the cases of Nethawk Networks Pvt. Ltd. (ITA No. 7633/M/2012) and Wills Processing Services (I) P. Ltd. ( ITA No.4547/M/2012) (copies of which decisions have been placed on record) and that following these decisions, the Bangalore Bench of the Tribunal, in the case of CISCO Systems Pvt. Ltd. , for A.Y. 2009-10, directed CISCO to be excluded from the set of comparables. 24. The ld. DR s objection in this regard is that the assessee is also a product manufacturing company and, therefore, Bodhtree Consulting Ltd., ought not to be excluded from the final set of comparables. 24(a) In the Department s written submission at page 4, para 3.2.3, as also by way of his oral arguments, the ld. DR has sought to place reliance on the assessee s Transfer Pricing Report ( TPR), as per which, according to the ld. DR, the assessee is into application development , which includes, interalia, product release . Therefore, according to the ld. DR, the assessee is a product manufacturing company. This, however, has been emphatically denied on behalf of the assessee. I .....

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..... idered it in the set of comparables. The assessee s objection against such inclusion of Genesys International Corporation Ltd. in set of comparable is that Genesys is engaged in the business of providing Geospatial Information System or GIS services, which comprises of photogrammetric remote sensing, cartography, data conversion related computer based services and other related computer based services and that, therefore, this company is also functionally not comparable to the assessee company. Moreover, it is earning super normal profits and is in an exceptional year of operation. For the assessment year 2008-09 in assessee s case, this company was excluded by the DRP, which action has wrongly been sought to be distinguished for the year under consideration, though there are no features distinguishing the facts for the year under consideration from those of A.Y. 2008-09. 28. The Department objects that the Additional Grounds relate to three comparables and the reasons are given in the table below: Sr. No. Name of the Companies Reasons 1 Cosmic Global Ltd. Abnormal profit marg .....

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..... d. , which is at parity with Genesys as a comparable. Whereas Genesys is involved in Geospatial Information System, M/s. Rolta India Ltd., as per its profile given by the assessee itself, is a provider and developer of digital map based geospatial information system and, thus, it is exactly similar to Genesys. 30. Here also, the work profile of the comparable sought to be excluded, i.e., Genesys, is entirely different from that of the assessee. Genesys is engaged in the business of providing Geospatial Information System services, which is not at all the calling of the assessee. To reiterate, the assessee company is engaged in the business of providing low and contract software development services to its AE. Therefore, on this very basis, Genesys needs to be excluded from the set of comparables. It is noteworthy that this company was excluded by the ld. DRP in the assessee s case for AY 2008-09. However, while upholding the inclusion this was of Genesys in the set of comparables for the year under consideration, the ld. DRP has not pointed out any distinguishing features or facts different from those in AY 2008-09. Moreover, reference by the ld. DR to M/s. Rolta India Ltd., as .....

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..... in related to Sundry Creditors 14,54,16,911 Exchange gain related to Sundry Creditors Realised Gain (72,81,213) Unrealised Gain (36,70,082) Total Exchange gain related to Sundry Creditors (1,09,51,295) Exchange Gain related other revenue item 2,54,64,163 15,99,29,779 37. This amount was credited to the profit loss account and was offered for tax as business income. However, the AO disallowed an amount of ₹ 3,75,69,434/- representing unrealized foreign exchange gain arising on account of reinstatement of debtors and creditors outstanding at the end of the relevant financial year. The AO observed that mere reinstatement of books of account cannot be treated as profit of the undertaking or export turnover from the export activity eligib .....

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..... affirmed by Karnataka High Court in CIT vs. Tata Elxsi Ltd.: ITA No.70/2009, decided on 30.8.2011. x) Nous Infosystems (P) Ltd. vs. ITO , ITA No.1042/Bang/07 (Bang.) xi) Mphasis Ltd. vs. ACIT , ITA No.884/Bang/07 (Bang). xii) Patni Telecom (P) Ltd. v. ITO , 22 SOT 26 (Hyd.) xiii) DCIT vs. Softsol India Ltd. , 22 SOT 271 (Hyd) xiv) CIT vs. Sitel Operating Corpn. India Ltd. , IT no. 153 of 2011 (Kar HC) xv) DCIT vs. Binary Semantics Ltd. , 109 TTJ 556 xvi) ITO vs. Sak Soft Limited , 313 ITR (AT) 353 (Chennai ITAT) 44. Here also, the Department has remained unable to effectively controvert the assessee s contention. In Gem Plus Jewellery India Ltd. (supra), under similar circumstances, it has been held that since the export turnover forms part of the total turnover, if an item is excluded from the export turnover, the same should also be reduced from the total turnover to maintain parity between the numerator and the denominator while calculating deduction u/s 10A of the Act. No decision to the contrary has been brought to our notice. All other case laws cited on behalf of the assessee also reiterate that for computation of deduction u/s 10A of the A .....

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..... 8377; 17,61,98,340 as against the returned income of ₹ 8,98,670 fled by the Appellant. The grounds of the Appellant against the action of the AO are as follows: 1. The assessment order dated November14, 2014, passed by the AO under section 143(3) read with section 144C of the Act is not in accordance with the law and is contrary to the facts and circumstances of the present case. Transfer pricing related grounds 2. The AO has erred in law and on facts in making an adjustment of ₹ 12,72,63,996 to the arm s length price ( ALP ) determined by the Appellant in respect of the international transactions in connection with IT and ITES activity undertaken by the Appellant with its Associated Enterprises (AE) In doing so, the AO has erred in law and in facts a follows: 2.1. Rejecting the transfer pricing analysis undertaken and the comparable companies identified by the appellant. 2.2. Not computing ALP in respect of the international transactions as computed by the Appellant and in ignoring the provisions of Rule 10B (4) of the I.T. Rules, 1962 which authorizes usage of multiple year data of comparable companies for the purpose of determination o .....

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..... ologies Ltd. 13.68% 3. Bodhtree Consulting Ltd. 41.22% 4. California Software Co. Ltd. 3.98% 5. Cosmic Global Ltd. 31.98% 6. Goldston Technologies Ltd. -1.38% 7. Indus Networks Ltd. 3.00% 8. Intertec Communication Ltd. 7.00% 9. Kaashyap Technologies Ltd. 18.66% 10. Mindtech (India) Ltd. 0.77% 11. R.S. Software (India ) Ltd. 8.34% 12 R Systems International Ltd . 18.49% 13. S Q L Star International Ltd. 7.20% 14. Sagarsoft (India) Ltd. -8.12% 15 Synetairos Technologies Ltd. 20.91% .....

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..... ) 16.61% 59. As evident, the arithmetic mean of the operating profit margin of these comparable companies was 15.51%. As such, according to the assessee, the assessee s OP/TC fell within permitted AL range of +/-5% as provided by the proviso to section 92C(2) of the Act, requiring no adjustment as per the assessee. 60. However, the TPO finally selected seven comparables, as follows: Sr. No. Comparable companies NCP 1. Cosmic Global Ltd 16.59% 2. RS Software (India) Ltd. 10.27% 3. Igate Global Solutions Ltd. 19.19% 4 . Infosys Technologies Ltd. 45.47% 5 . Kals Information Systems Ltd. Segmental 34.41% 6. Mindtree Ltd. 22.83% 7. Persistent Systems Ltd. 30.56% Arithmetic Mean .....

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..... lso provides solutions that span the entire software lifecycle encompassing technical consulting, design, development, re-engineering, maintenance, systems integration, package evaluation and implementation, testing and infrastructure management services; and that additionally, Infosys also offers software products for the banking industry. 66. Concerning Kals Information System Ltd., it has been submitted that on perusal of the annual report, the company consists of an STPL unit engaged in development of software and software products and a training centre engaged in training of software professional online projects; that the company derives its revenues primarily from software services and software products; that some of the products sold by the company are Shine ERP software, Docuflo, Dac4Cast, CMSS, La Vision Virtual Insure etc.; and that since KALS Ltd. does not report separate segmental information for the development of software and software products, it cannot be considered as a comparable. 67. On the other hand, the ld. DR has sought to place reliance on the assessee s Transfer Pricing Report (TPR), as per which, according to the ld. DR, the assessee is into appli .....

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..... LI technology and integrating the LB US and LI processes and infrastructure with the client content management processes and technology. LB India is able to manage the content development in a semi-automated manner for large volumes of content. Examples of client content requiring these types of services include online support site maintained in multiple languages, learning programs and marketing product databases all of which are frequently updated to reflect the latest products and terminologies. 71. It has been argued that the services rendered by the assessee give rise to intellectual properties rights, which rights are vested with the assessee s AE in Ireland. It has been contended that the assessee itself, in its TP Study, has chosen these comparables having the profile identical with itself. 72. With regard to KALS, it has been contended that this was also the TPO s comparable for AY 2009-10. Its margin is 23%. It was not contested for AY 2009-10 and it is not comprehensible as to how, in these facts, it is not a comparable for the year under consideration. The assessee is also rendering a mixture of high-end services and release of products. Therefore, according to th .....

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..... efore tax 5373695 4586475 3. Other information Segment assets (Net of Liabilities) Application software 27185317 17752290 Training Investments 27147046 30407835 Total 54332363 48160125 4. Sales Overseas Application Software 21692935 20533880 Domestic Training 267961 704683 Translation Interpretation 1084248 166123 So, it is not possible to make a comparison. 74. In this regard, the DRP has held as follows: 2.2 Before us the ARs objected to selection of 3 fresh comparable by the TPO as erroneous inclusion. Two out of three comparables viz. M/s. Infosys technologies Ltd. and M/s. KALS Infosys Ltd. were rejected by the TPO in the previous year as well, which was agitated before the pr .....

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..... The company was incorporated under the Companies Act, 1956 as a Private Limited Company in the year 1993. Subsequently the company was converted into a public limited company in the year 2000. The company is engaged in development of Software and Software products since its inception. The company consisting of STPL unit engaged in Development of Software and Software products and a Training Centre engaged in training of Software professionals on online projects. 80. This clearly shows that KALS is into development of software and software products. 81. The segmental information of KALS is available at APB 293, as follows: Year Ended 31.3.2010 1.Segment Revenue Application Software 21692935 20533880 Training 1352209 870807 Net Sales/Income from operations 23045144 21404686 2. Segment Results Profit/loss before ta .....

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..... its product engineering processes to develop best-in-class solutions for its customers who are players in the technology, telecommunication, life science, healthcare, banking and consumer products sectors. 84. On the other hand, the ld. DR, again, like in the case of KALS, states the assessee to be a product manufacturing company. 85. However, while dealing with KALS, we have rejected this company as a comparable. Like-wise, we hold that Persistent Systems Ltd., has also not been correctly chosen as acomparable. This comparable is also rejected. 86. Coming to Infosys Technologies Ltd.. the assessee s contention is that it provides end-to-end business solutions that leverage cutting-edge technology, thereby enabling clients to enhance business performance. It was further contended that Infosys also provides solutions that span the entire software lifecycle encompassing technical consulting, design, development, re-engineering, maintenance, systems integration, package evaluation and implementation, testing and infrastructure management services. This company also offers software products for the banking industry. 87. It has been contended that (as available at APB 452 i .....

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..... eports on our key services and markets. The services for which we were rated highly include, Service Oriented Architecture, Oracle Service providers. Comprehensive Finance and Accounting Business Process Outsourcing, and also for the Finacle product suite. We had over a million visits to our blogs on business and technology related topics on our website wwwinfosys.com during the year. Our employees contributed and published several thought leadership articles across various industry for a and publications. We leveraged social media platforms and engaged with our stakeholders and investors on You Tube, Slide Share. Twitter and Facebook. Leading global publications wrote about us, our leadership, our talent and our performance. We continued to have leadership presence at premier industry events like Oracle Open World and Sapphire. Our annual client events in the U.S. and Europe were well attended and highly appreciated. At the World Economic Forum in Davos, Switzerland, our lunch panel discussion witnessed a (full audience and the evening get-together hosted by us was attended by some of the most influential and powerful global business leaders. 5. Our end to end so .....

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..... Infosys has a strength of 92,688 employees. It has further been pointed out that per contra, the assessee company has a team of approximately 4600 employees only, out of whom, 1600 are professionals. It has been contended that in the case of Agnity India Technologies P. Ltd. , ITA/1204/11 (HC Delhi), Infosys has been rejected as a comparable. 90. On the other hand, the ld. DR has adopted the same argument as in the case of KALS. 91. In this regard, it is seen that the DRP, for the AY 2009-10, observed, with regard to Infosys, as follows: 4.3.3. Infosys Technologies Limited is said to be a large company and not comparable with the assessee company for the reason that it operates as full-fledged risk taking enterprises, having diversified activities like consulting application design, development, re-engineering and maintenance system integration, package evaluation and implementation and business process management, etc., high turnover exceeding ₹ 20,000 crores, having large numbers of patented products, spends about ₹ 276 crores in R D, and has about 50% onsite development revenue. Further reliance is also placed on the judgment of Delhi High Court in cas .....

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..... 2. I-Gate Global Solutions Ltd. 19.19% 3. Mindtree Ltd. 22.83% 4. R.S. Software (India) Ltd. 10.27% Arithmetic mean 17.22% Appellants margin (computed by TPO) 12.10% 96. Apropos Corporate Tax related Grounds, as per Ground no.3, the AO erred in disallowing the foreign exchange loss of ₹ 4,80,35,675/- on account of the same being neither accrued nor an actual loss. 97. As per the assessee, this issue has been decided in favour of the assessee in assessee s own case by the Mumbai Bench of the Tribunal for the assessment year 2009-10. 98. This contention of the assessee is found to be correct. At APB 563 to 581 is a copy of the order of the Mumbai Tribunal in the assessee s own case for AY 2009-10. 99. With regard to the assessee, it has been held as follows: 10.1 In the draft assessment order, the AO has proposed disallowance of foreign exchange loss on the ground that loss is only contingent .....

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