TMI Blog2023 (4) TMI 75X X X X Extracts X X X X X X X X Extracts X X X X ..... such companies should not be taken as comparable companies. See FCG Software Services India Ltd. [ 2016 (1) TMI 1359 - ITAT BANGALORE] Functional dissimilarity - Companies functionally dissimilar with that of assessee need to be deselected. Provision for obsolescence of inventory - submission of the assessee in this regard is that there is no distinction between provision and write off when it comes to treatment in the books of accounts and the issue of obsolescence of stock - HELD THAT:- The disallowance has been deleted by the Tribunal in Assessee's own case for AY 2004-05. The Revenue appeal before High Court of Karnataka [ 2016 (6) TMI 1463 - KARNATAKA HIGH COURT] in on this issue is answered in favour of the assessee - we are inclined to decide the above issue in favour of assessee. Loss on exchange fluctuation - HELD THAT:- Currency cannot be treated as stock or shares because inherently they have different characteristic. In the case of the assessees, the foreign exchange exposure for the relevant period specified by R.B.I regulations is quiet substantial in order to justify the forex derivative transactions made by the assessee through Government r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , which is incorrect. Books of accounts of the assessee is not rejected by challenging the entries in the books of accounts. On this point also, we are of the opinion that the claim of assessee is to be allowed as genuine - thus allow the ground taken by the assessee. Miscellaneous expenses - AO has made the disallowance for want of documentary evidence - HELD THAT:- We are of the opinion that assessee has to establish the genuineness of the expenditure by filing the requisite details. In the present case, assessee produced the recipient s details along with details of TDS. Had the AO have any doubt, he should have made further enquiry by summoning the respective party, which he failed to do so. Hence, in our opinion, the expenditure cannot be disallowed only on surmises and conjectures. Accordingly, we allow the ground taken by the assessee. - IT(TP)A No.344/Bang/2021, ITA No.703/Bang/2021 - - - Dated:- 7-10-2022 - SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SMT. BEENA PILLAI, JUDICIAL MEMBER For the Appellant : Shri K.R. Pradeep Smt. Girija G.P., A.Rs For the Respondent : Shri Praveen Karanth, D.R. ORDER PER CHANDRA POOJARI, ACCOUNTANT MEMBER: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also includes expertise in various technologies, implementation, monitoring and support of IT infrastructures and software solutions. The assessee is a captive service provider providing software services only to its AE s. 2.3 The assessee s margin as adopted by the TPO is as under (page 3 of TP order). Operating revenue 29,91,47,461 Operating Cost 27,19,52,238 Operating profit 2,71,95,223 OP/OC 10% 2.4 The final list of comparables selected by the TPO in his order dt.25.10.2019 (page 86 of paper book) are as under: Sl. No. Name of the Company OP/OC (before WC adjustment) 1 Aztech Software Limited 18.09% 2 Geometric Software Solutions Co. Limited 6.70% 3 Infosys Ltd 40.38% 4 Kals Information Systems Ltd 39.75% 5 Mindtree ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... objections on various filters. List of comparable companies contested by the Assessee on various grounds for rejection Sl.No. Name of the Company Grounds of Appeal 1 Aztech Software Ltd Fails RPT filter 2 Geometric Software Limited Fails RPT filter 3 Infosys Ltd Functionally dissimilar engaged in product development and provision of software developments services Ownership of brand and IPR Turnover exceeds 200 crores 4 Kals Information Systems Ltd (seg) Functionally dissimilar engaged in software products development KALS should not be selected based on information received through 133 (6) route 5 Mindtree Consulting Ltd Fails turnover filter Turnover exceeds 200 crores Functionally dissimilar - engaged in R D activities 6 Persistent Systems Limited Fails turnover ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ld. DRP vide its directions u/s 144C(5) of the Act partly allowed the objections of the assessee vide order dated 30.03.2021. The DRP directed the TPO to remove Kals Information Systems Ltd (seg) as a comparable. 2.8 Pursuant to the directions of the DRP, the AO passed the final assessment order u/s 143(3) r.w.s. 254 r.w.s. 144C(1) on 29.05.2021 retaining the addition of Rs. 2,42,58,140/- as per draft assessment order ignoring and without giving effect to the directions of the DRP. 2.9 Against the orders of the authorities, the Assessee has preferred the above appeal before this Tribunal on 15.07.2021 raising the following grounds of appeal. 1. That the order of the Assessing Officer (AO), Transfer Pricing Officer (TPO) and the directions of the Dispute Resolution Panel (DRP) in so far as it is against the appellant is against the law, facts, circumstances, natural justice, equity, without jurisdiction, bad in law and all other known principles of law. 2. That the total income computed and the total tax computed is hereby disputed. 3. That the AO/TPO/DRP erred in not providing adequate and sufficient opportunity as required under law thus violating the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng companies as comparables rejecting the submissions/objections made by the appellant. a) Aztech Software Ltd b) Geometric Software Limited c) Infosys Ltd d) Mindtree Consulting Ltd e) Persistent Systems Limited f) R Systems International Limited (Seg.) g) Sasken Communication Ltd (Seg) h) Tata Elxsi Ltd (Seg) i) Accel Transmatics (Seg.) j) Flextronics Software Systems Ltd (seg) k) Megasoft Limited l) Igate Global Solutions Ltd 23. With prior permission of the ITAT, the appellant reserves the right to add/delete/amend any or all the ground stated above. 24. For the above and other grounds and reasons which may be submitted during the course of hearing of this appeal, the assessee requests that the appeal be allowed as prayed and justice be rendered. 2.10 During the course of hearing the appellant has submitted a chart seeking for exclusion of the following comparables on various grounds (Ground 22): a) Aztech Software Ltd b) Geometric Software Limited c) Infosys Ltd d) Mindtree Consulting Ltd e) Persistent Systems Limited f) R Systems International Limited (Se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion rendered by the ITAT, Bangalore Bench in the case of Autodesk India P. Ltd., Vs. DCIT (2018) [96 taxmann.com 263] (Bangalore-Trib) reviewing all the conflicting decisions on the point, and concluding that the application of turnover filter still holds good and has not been in any manner diluted by the decision of Hon'ble Karnataka High Court in the case of M/s. Acusis Software (I) Pvt. Ltd., Vs. ITO in ITA No. 223/2017, dt. 14-08-2018, following the relevant observations of the Tribunal, held as under:.. 3.2 Applying the said decision, the companies having turnover more than Rs.200 crores should be eliminated from the list of comparables as the assessee s turnover is Rs.29.91crores. 3.3 The assessee is seeking exclusion of the following 6 comparables on account of turnover filter. a) Infosys Ltd Turnover Rs.9028 crores b) Mindtree Consulting Ltd Turnover Rs.448.79 crores c) Persistent Systems Limited Turnover Rs.209.17 crores d) Sasken Communication Ltd (Seg) Turnover Rs.240.03 crores e) Flextronics Software Systems Ltd (seg) Turnover Rs.595.12 crores f) Igate Global Solutions Ltd Turnover Rs.527.91 crores 3.4 The t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to turnover, were in the nature of obiter dictum. Judicial discipline requires that the Tribunal should follow the decision of a non-jurisdiction High Court, even though the said decision is of a non-jurisdictional High Court. We however find that the Hon'ble Bombay High Court in the case of CIT Vs. Pentair Water India Pvt.Ltd. Tax Appeal No.18 of 2015 judgment dated 16.9.2015 has taken the view that turnover is a relevant criterion for choosing companies as comparable companies in determination of ALP in transfer pricing cases. There is no decision of the jurisdictional High Court on this issue. In the circumstances, following the principle that where two views are available on an issue, the view favourable to the Assessee has to be adopted, we respectfully follow the view of the Hon'ble Bombay High Court on the issue. Respectfully following the aforesaid decision, we uphold the order of the DRP excluding 5 companies from the list of comparable companies chosen by the TPO on the basis that the 5 companies turnover was much higher compared to that the Assessee. 17.8. In view of the above conclusion, there may not be any necessity to examine as to whether the decision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessment year under consideration since the turnover of the assessee company in Rs.9,91 crores in AY 2006-07. Ground 22 6. The assessee is seeking exclusion of the following 3 comparables on account of RPT filter. a) Aztech Software Ltd 17.78% 6.1 The excerpts of the RPT transactions from the annual report are provided below for ease of reference. b) Geometric Software Limited - 19.98% 6.2 The excerpts of the RPT transactions from the annual report are provided below for ease of reference. k) Megasoft Limited 17.08% 6.3 The excerpts of the RPT transactions from the annual report are provided below for ease of reference 6.4 The TPO has considered threshold limit of 25% for Related party transactions. The DRP has upheld the reasoning of the TPO and stated that the limit of 25% is appropriate and rational. The threshold limit adopted by the Bangalore ITAT is 15% of the sales. The Bangalore Tribunal in the case of FCG Software Services (India) (P) Ltd vs ITO in ITA No.1447/Bang/2010 dt.08.01.2016 for AY 2006-07 176 TTJ 145 has excluded the above comparables as the RPT exceeded 15%. Relevant para 21 of the said decision is extracte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessment order. There is no appeal by the department against the direction of the DRP. Hence Ld. A.R. requested that the same be removed from the list of comparables. 10. We have heard both the parties and perused the materials available on record. The AO/TPO has to give the effect to the findings of Ld. DRP and he cannot deviate from such direction of the Ld. DRP. Accordingly, we direct the AO/TPO to pass the final/TPO order in conformity with the Ld. DRP order. Directed accordingly. b) Tata Elxsi Ltd (Seg) 11. Regarding this comparable, the assessee has made the following submissions before TPO and DRP: 11.1 Tata Elxsi is predominantly engaged in product designing services and not software development services provider. Hence, Tata Elxsi cannot be compared to the Assessee. Although the Company has a segment called software development segment, the segment is engaged in embedded product design services and Animation Visual Effect Services, which are different from software development services. The TPO himself in the latest round of transfer audit for the Company has not considered the Company as a comparable. The two segments of the Company along with the activi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DRP has rejected the submissions of the assessee summarily and the directions given are not relevant and is clear case of lack of application of mind. The same is extracted as under: 11.8 The assessee placed reliance on the following decisions where Tata Elxsi was rejected as comparable on the basis of functional dissimilarity. Tesco Hindustan Service Centre Pvt Ltd vs The Deputy Commissioner of Income-Tax in IT(TP).A No.1317/Bang/2010 dt.26.05.2015 for AY 2006-07 - relevant paras 17 18 is extracted hereunder: 17. As far as Tata Elxsi Ltd., a comparable chosen by the TPO is concerned, it was held in the case of 3DPLM Software Solutions Ltd., (supra) that this company is functionally different from a pure software development service provider such as the Assessee and it should be excluded for comparability purposes. 18. In view of the aforesaid decision, we hold that Tata Elxsi has to be excluded from the list of comparable chosen by the TPO. FCG Software Services (India) (P) Ltd vs ITO in ITA No.1447/Bang/2010 dt.08.01.2016 for AY 2006-07 176 TTJ 145 11.9 Thus, he submitted that in view of the decisions of the Tribunal mentioned supra, this c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Elxsi has to be excluded from the list of comparable chosen by the TPO. 13.1 In view of the above order of the Coordinate Bench, we inclined to direct the AO to exclude Tata Elxsi Ltd. from the list of comparables. c) Accel Transmatics (Seg.) 14. The assessee has made the following submissions before TPO and DRP: Functionally diversified 14.1 The company s annual report states that the company is engaged in three divisions namely - Transmatic systems (R D, products and solutions for customer interfacing for banks, utilities etc.) - Ushus Technologies is an offshore development center engaged in sale of IP from software product called prodigy - Accel IT academy Engaged in IT Training in Hardware and networking enterprise. The screenshot of the annual report of Accel is provided as below: 14.2 From the above screen shot, it is clear that Accel is engaged in the business of software development services as well as media solutions and services. 14.3 The company under the Ushus technology (Software segment) has mentioned that it has sold its IPR earns royalty. 14.4 Further, the revenue from software servic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ommissioner of Income-Tax in IT(TP).A No.1317/Bang/2010 dt.26.05.2015 for AY 2006-07 The above decision has been followed in the case of FCG Software Services (India) (P) Ltd vs ITO in ITA No.1447/Bang/2010 dt.08.01.2016 for AY 2006-07 176 TTJ 145 relevant paras 18 to 20. 14.9 Thus, based on the above case-laws, it can be seen that Accel is functionally dissimilar to that of the assessee as it is engaged in diversified activities such as Accel IT and Accel animation services for 2D and 3D Technologies whereas the assessee is engaged in providing software services to its AE s. Hence the assessee requests that Accel Transmatics be rejected and removed from the list of comparables. 15. The Ld. D.R. relied on the order of the lower authorities. 16. We have heard both the parties and perused the materials available on record. This comparable considered as not comparable in the case of Tesco Hindustan Service Centre Pvt Ltd vs The Deputy Commissioner of Income-Tax in IT(TP).A No.1317/Bang/2010 dt.26.05.2015 for AY 2006-07 relevant paras 11 to 13 extracted hereunder: 11. Improper selection of comparables: It was submitted by the learned counsel for the Assessee tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot been factually rebutted and, in our view, the said concern is liable to be excluded from the final set of comparables, and thus on this aspect, assessee succeeds. Based on all the above, it was submitted on behalf of the assessee that KALS Information Systems Limited should be rejected as a comparable. 47. We have given a careful consideration to the submission made on behalf of the Assessee. We find that the TPO has drawn conclusions on the basis of information obtained by issue of notice u/s.133(6) of the Act. This information which was not available in public domain could not have been used by the TPO, when the same is contrary to the annual report of this company as highlighted by the Assessee in its letter dated 21.6.2010 to the TPO. We also find that in the decision referred to by the learned counsel for the Assessee, the Mumbai Bench of ITAT has held that this company was developing software products and not purely or mainly software development service provider. We therefore accept the plea of the Assessee that this company is not comparable. (e) Accel Transmatic Ltd. 48. With regard to this company, the complaint of the assessee is that this c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the said decision referred to by the IT(TP)A No.1317/Bang/2010 ld. counsel for the assessee, has accepted that this company was not comparable in the case of the assessees engaged in software development services business. Accepting the argument of the ld. counsel for the assessee, we hold that the aforesaid company should be excluded as comparables. 13. The facts and circumstances under which the aforesaid companies were considered as comparable is identical in the case of the Assessee as well as in the case of Trilogy E-Business Software India Pvt. Ltd. (supra). Respectfully following the decision of the Tribunal referred to above in the case of Trilogy E-Business Software India Pvt. Ltd.(supra), we direct that the said companies be excluded from the list of 22 comparable arrived at by the TPO. 16.1 In view of the above decision of the Tribunal, we inclined to direct the AO/TPO to exclude Accel Transmatics (Seg) from the list of comparables. Ground 18 : 17. The authorities ought to grant the benefit of +/- 5% variances deduction as envisaged in the section 92C(2) of the Act and as per circular no.12 of 2001 dt.23.08.2001. It is requested that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the file of AO/TPO for readjudication in the light of the findings given in earlier years. 21. The following additions have been made by the Assessing Officer on which the assessee is in appeal: Particulars As per Final Assessment order (Rs.) As per Draft Assessment order (Rs.) Transfer Pricing adjustments: 1135625171 1135625171 Royalty 126467850 126467850 Interest in Intra group trade advances 5181085 5181085 Distribution segment 913962617 913962617 Software Development segment 90013619 90013619 Other Issues: Provision for obsolescence of inventory 24997530 24997530 Loss on exchange fluctuation 138526037 138526037 Provision for sales tax and customs duty 9221561 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has not been followed by the lower authorities. Relevant portion extracted hereunder: 18. Since the issue was already set aside to the file of the Assessing Officer for choosing the proper comparable therefore in view of the earlier year of this Tribunal, we set aside this issue to the record of the TPO/AO for reconsideration of the same in the light of the directions of the Tribunal for the Assessment years 2002-03 to 2004-05 (supra). Further in case no comparable is found in respect of royalty payment by the assessee then the TPO/AO may consider the royalty payment as part of the international transactions under trading segment and then determine the ALP by considering the royalty as part of operating cost for the purpose of computing the margin in the trading segment. 22.2 For the impugned year this issue was restored by the Tribunal vide order in IT(TP)A 340/Bang/2017 dated 31.08.2017 to the file of AO/TPO for re-adjudication in the light of the findings given in earlier years. In the set aside proceedings, the TPO has considered the following comparables used for benchmark in the Equipment segment: Sl.No Company name ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Average 18.43% 22.5 Since the margin of the assessee (46.69%) is higher than that of the comparable (18.43%), the transaction is at arm s length and consequently the addition requires to be deleted. 22.6 The ITAT in assessee s own case for AY 2005-06 2006-07 in IT(TP)A 701 702/Bang/2021 dated 05.08.2022 has held as extracted hereunder: 3.7 We have heard the rival submissions and perused the materials available on record. In earlier occasion, assessee came in appeal before this Tribunal. The Tribunal remitted the issue with the directions in IT(TP)(A) No.40/Bang/2011 1647/Bang/203 dated 21.4.2017 as discussed in para 3.3 of this order. 3.8 On set aside assessment, the TPO repeated the same what he has done on earlier occasion without considering the direction of the Tribunal where the Tribunal given a direction that in case comparable is not found in respect of payment of royalty by the assessee, then the TPO/AO may consider the royalty payment on part of the international transaction under trading segment and determine the ALP by considering the roya ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on entered into by the Taxpayer of receipt of interest on loan advanced is computed as under. The taxpayer has not submitted the month wise details of the advance made. Hence, the total loan amount of Rs. 11,05,41,602 is considered for computation of interest at the rate of 4.687%. 25.3 The adjustment has been made on the alleged transaction of Rs.11,05,00,000/- adopting LIBOR + 400 basis points at 4.687%. The above finding is contrary to facts emerging from the record. The DRP has upheld the action of the AO/TPO without appreciating the facts on record and hence the directions of the DRP are without application of mind. 25.4 Without prejudice to the above, the AO/TPO has not identified any comparable as required under law. Though the TPO has stated that he has followed the CUP method, there is no comparable transaction which has been brought on record. What is stated by the TPO as rate of 4.687% is not the arm s length interest rate comparable with the interest charged in a similar transaction. The assessee prays for deletion of the interest adjustment proposed on the alleged outstanding balance of Rs. 11,05,41,602/- as it is not based on facts, law and IT Act. 26. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es that exceeded 30 days. It has been argued by Ld.AR that authorities below disregarded business/commercial arrangement between the assessee and its AE's, by holding outstanding receivables to be an independent international transaction. 23.2. Ld.AR placed reliance on decision of Delhi Tribunal in Kusum Healthcare (P.) Ltd. v. Asstt. CIT [2015] 62 taxmann.com 79, deleted addition by considering the above principle, and subsequently Hon'ble Delhi High Court in Pr. CIT v. Kusum Health Care (P.) Ltd. [2018] 99 taxmann.com 431/[2017] 398 ITR 66, held that no interest could have been charged as it cannot be considered as international transaction. He also placed reliance upon decision of Delhi Tribunal in case of Bechtel India (P.) Ltd. v. Dy. CIT [2016] 66 taxman.com 6 which subsequently upheld by Hon'ble Delhi High Court vide order in Pr. CIT v. Bechtel India (P.) Ltd. [IT Appeal No. 379 of 2016, dated 21-7-16] also upheld by Hon'ble Supreme Court vide order, in CC No. 4956/2017. 23.3. It has been submitted by Ld.AR that outstanding receivables are closely linked to main transaction and so the same cannot be considered as separate international transaction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt in the case of CIT v. Patni Computer Systems Ltd. [2013] 33 taxmann.com 3/215 Taxman 108 (Bom.), which dealt with question of law: (c) 'Whether on the facts and circumstances of the case and in law, the Tribunal did not err in holding that the loss suffered by the assessee by allowing excess period of credit to the associated enterprises without charging an interest during such credit period would not amount to international transaction whereas section 92B(1) of the Income-tax Act, 1961 refers to any other transaction having a bearing on the profits, income, losses or assets of such enterprises? 23.6. Ld.CIT.DR submitted that, while answering above question, Hon'ble Bombay High Court referred to amendment to section 92B by Finance Act, 2012 with retrospective effect from 1.4.2002. Setting aside view taken by Tribunal, Hon'ble Bombay High Court restored the issue to file of Tribunal for fresh decision in light of legislative amendment. It was thus argued that non/under-charging of interest on excess period of credit allowed to AEs for realization of invoices, amounts to an international transaction and ALP of such international transaction has to be dete ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... veral factors which need to be considered before holding that every receivable is an international transaction and it requires an assessment on the working capital of the assessee. Applying the decision in Kusum Health Care (supra), the Hon'ble High Court directed the TPO to study the impact of the receivables appearing in the accounts of the assessee; looking into the various factors as to the reasons why the same are shown as receivables and also as to whether the said transactions can be characterised as international transactions. 23.9. In view of the above, we deem it appropriate to set aside this issue to Ld.AO/TPO for deciding it in conformity with the above referred judgment. Needless to say, the assessee will be allowed a reasonable opportunity of being heard in accordance with law. 36. Accordingly, we are of the opinion that deferred receivables would constitute an independent international transaction and the same is required to be benchmarked independently as held by the Hon ble Karnataka High Court in PCIT v. AMD (India) Pl. Ltd., ITA No.274/2018 dated 31.8.2018. 37. Once we have held that the transaction between the assessee and AE was in forei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3 Central Scientific Supplies Co. Ltd -0.15 4 Frontline Electro Medical Ltd 0.01 5 Kusum Electrical Inds Ltd 9.84 6 Softouch Hygiene Products Ltd 10.41 Arithmetical Mean 5.10 28.3 Out of the 6 comparables selected by the Assessee, the TPO accepted the 1 highlighted above, viz. Advanced Micronic Devices Ltd and rejected the other 5 comparables. 28.4 Final Comparables selected by TPO and their arithmetic mean: Sl No Company Name (OP/OR) (in%) 1 Maestors Medline Systems Ltd (seg) 29.57 2 Advanced Micronic Devices Ltd (seg) 7.29 Average 18.43 Computation of arm s length price by the TPO and the adjustment made: PLI Margin 18.43 OR 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ifference between the purchase price paid to AE and sale price realized offers a simple and reliable basis. Accordingly, TPO will do so. This decision takes care of the guidance offered in rule 10(c) of the rules. 28.8 The said ruling by the ITAT has been accepted by the department and no further appeal has been made to the High Court. The Order giving effect to ITAT order passed by the TPO dt.09.07.2013 for AY 2002- 03 to 2004-05 wherein the TPO accepted the margin computation/results of the assessee and deleted the TP adjustment. The issue stands concluded in this manner. The same is extracted hereunder: 28.9 Similarly, the Tribunal in assessee s own case for the AY 2005-06 vide order dt.21.04.2017 in IT(TP)A 40/Bang/11 and 1647/Bang/2013 held that the adjustment on account of transfer pricing can be made only in respect of the international transaction and in this case to be confined to the purchases made from AE. Relevant portion is extracted hereunder: 15. Having considered the rival submissions as well as the relevant material on record, we find that the TPO while computing the ALP has apparently taken the gross profit margin of the AMDL at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vide order dt.28.10.2019 has followed the direction of the ITAT of applying RPM method and restricting the adjustment only in respect of the international transactions and thus held that no adjustment was required. Relevant portion is extracted hereunder: 28.11 For AY 2006-07, similar computation considering RPM method, AE purchases and AMDL as comparable was made in line with the direction of ITAT for earlier years and the Learned CIT-A vide order dated 18.09.2013 deleted the TP adjustment in trading segment as the margin of the assessee was higher compared to that of the comparable. There has been no appeal by the department against the CIT-A order on this issue and thus stands concluded. Thus, for the earlier years the lower authorities have followed the binding decision of the Tribunal in assessee s own case. 28.12 It may be noted that the same TPO i.e, DCIT, TP-2(2)(1), Bangalore passed the Order giving effect for both AY 2005-06 and AY 2012-13 on the same day 28.10.2019. Though TPO followed the specific direction of the ITAT for AY 2005-06, the same was not followed for the AY 2012-13. Thus the TPO has been inconsistent in her own approach. The TPO is in error in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent. 28.16 In view of the above, since the facts and law are the same and on the parity of reasoning the TP adjustment in the trading segment is to be deleted. 29. The Ld. D.R. relied on the order of the lower authorities. 30. We have heard both the parties and perused the materials available on record. The main grievance of the Ld. A.R. on this issue is that AO/TPO/DRP has not considered the earlier decision of Tribunal in A.Y. 2002-03 to 2004-05, 2005-06, 2006-07, as such order passed by the lower authorities is bad in law. The Judicial discipline requires consistency in its proceedings. The AO/TPO what criteria followed in earlier year for determining the ALP, the same to be followed in next assessment year unless and until there is a change in facts of the case. In the present case, the Ld. D.R. not brought on record any change in circumstances to deviate from earlier order of the Tribunal for the assessment year especially 2005-06 and 2006-07 in IT(TP)A No.40/Bang/2011 1647/Bang/2013 dated 21.4.2017 wherein the Tribunal followed the earlier order of the Tribunal for the AY 2002-03 and 2004-05, which has been reproduced in earlier para of this order. Being so, we dir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shay Software Technologies Ltd 7.77 2 C G-VAK Software Exports Ltd -11.78 3 Cades Digitech Pvt Ltd 5.47 4 Larsen Toubro Infotech Ltd 23.80 5 Mindtree Ltd 11.18 6 Persistent Systems Ltd 26.14 7 R S Software (India) Limited 15.34 8 R systems International Ltd 4.22 9 Sasken Communication Technologies Ltd 12.49 10 Sonata Software Ltd 4.80 11 Spry Resources India Pvt Ltd 33.28 12 Tata Elxsi Ltd 12.78 Arithmetic Mean 12.12 31.4 Out of the 12 comparables selected by the assessee, the TPO accepted the 5 highlighted above and rejected 7 other com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rsistent Systems Ltd, 6. R S Software (India) Ltd, 7. Spry Resources India Pvt Ltd The assessee is seeking inclusion of the following comparables: - 1. Akshay Software Technologies Ltd 2. Cades Digitech Pvt Ltd 31.10 However, at the time of hearing, below mentioned comparables are not pressed. 1. CG VAK Software Exports Ltd, 2. R System International Ltd, 3. Sonata Software Ltd : Accordingly, these comparables are dismissed as not pressed. 31.11 On the issue of turnover filter, the TPO has excluded companies having turnover of less than 1crore. It is the view of the TPO that the exclusion of comparables on the basis of size and turnover of the companies is not justified in view of the judgment of Hon ble Delhi High Court in Chryscapital Investment Advisors India (P) Ltd vs DCIT. The TPO in para 3.2 of the TP order has also relied on the decisions of Societe Generale Global Solution Centre P Ltd vs DCIT in IT(TP)A 1188/B/2011 and Capgemini India Pvt Ltd vs ACIT in ITA 7861/Mum2011 in his support. The DRP has held that comparables cannot be excluded on the ground of size and level of operations. 31.12 The assessee submits that the Bangalo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 31.15 The turnover of the above companies are far higher than that of the assessee company. Since the assessee falls under category of companies having turnover less than Rs.200crores, the above comparables needs to be excluded. 32. The Ld. D.R. made submission as in the AY 2006-07. 33. We have heard both the parties and perused the materials available on record. As discussed in AY 2006-07, in ITA No.344/Bang/2021, the turnover of these companies is more than Rs.200 crores. These 5 companies listed in above para (a) to (d) are excluded from the list of comparables by applying the turnover filter as the turnover of assessee company was Rs.92.29 cores (software development segment). 34. Regarding the comparable Datamatics Global Services Ltd, the DRP vide order dated 11.02.2021 directed the TPO to remove Datamatics Global Services Ltd as a comparable on the ground of functional dissimilarity. Relevant portion from DRP directions is extracted as under: 34.1 However the AO/TPO did not give effect to the same in the final assessment order. There is no appeal by the department against the direction of the DRP. Hence it is requested that the same be removed from the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ought for inclusion of the following companies: 1) Akshay Software Technologies Ltd 2) Cades Digitech Pvt. Ltd. 41.1 The Ld. A.R. submitted regarding this comparable as follows:- Akshaya Software Technologies Ltd 41.2 This company has been considered as a comparable in the TP report by the assessee. The TPO proposed to reject this as a comparable on the basis of functional dissimilarity. The assessee objected to the rejection by providing a copy of the annual report of the company and stating that the company is engaged in providing software services and also passes all the filters of the TPO. However, the TPO rejected this as a comparable in the TP order on the reason of functional dissimilarity. The reason as stated by the TPO in his order is extracted hereunder: Akshay Software Technologies Limited ('the Parent') is engaged in providing professional services, procurement, installation, implementation, support and maintenance of ERP products and services, in India and overseas. As reported in Note 27 of the annual report, the company has incurred Foreign Branch Expenditure of Rs. 11.64 Cr. against total expenditure of Rs.13.64 Cr. durin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al report of the company and stated that the company is functionally similar to that of the assessee. However, the TPO rejected this as a comparable in the TP order on the reason of functional dissimilarity. The reason as stated by the TPO in his order is extracted hereunder: The company derives its revenues primarily from engineering design services as shown in the Note 17 and Note 24 of the AR. Hence, the company is functionally dissimilar to the taxpayer and therefore rejected. 44.1 The assessee filed objections before DRP seeking inclusion of the said company, however DRP upheld the action of the TPO and rejected the prayer of the assessee. 44.2 The assessee submits that the said company has been selected as functionally comparable by the Pune Tribunal in the case of DCIT vs Applied Micro Circuits India Private Limited - ITA 1250/Pun/2015 dt.24.11.2017. 44.3 The functional profile of the assessee is stated supra. The assessee is engaged in software and engineering and design services similar to the company Cades Digitech. In view of the decision above, L. A.R. requested that the company should be considered as a comparable. 44.4 The final list of comparabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the Profit and Loss Account, Balance Sheet and even in the Notes to accounts. He further pointed out that this year details are available in public domain, may be, not at that relevant time. He further pointed out that the TPO himself in assessment year 2013-14 had taken the said concern as comparable. We find merit in the plea of assessee, in view of information available in public domain and accordingly, we direct the TPO to include Cades Digitech Pvt. Ltd. as comparable in the hands of assessee and re-work the mean margins of external comparables and also determine the arm's length price of international transactions. Before parting, we may also refer to the transfer pricing order for assessment year 2013-14 in assessee's own case, wherein Cades Digitech Pvt. Ltd. was considered as comparable for design engineering segment. Further, the Delhi Bench of Tribunal in Bechtel India Pvt. Ltd. Vs. DCIT in ITA No.1478/Del/2015, relating to assessment year 2010-11, order dated 21.12.2015 had also considered Cades Digitech Pvt. Ltd. as comparable for design engineering segment. In view thereof, the said concern is to be considered as comparable. Accordingly, ground of objection ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llow the same as cost by reckoning higher value of the opening stock. The AO while disallowing ought to have allowed what has been disallowed in the earlier years as opening stock. However, as a principle of consistency the claim of the assessee being factually and legally correct, the disallowance is uncalled for. 47.5 The argument of the AO that similar amount has been disallowed under MAT computation is not relevant. The assessment in this case has not been made under MAT. The assessee reserves the right to seek exclusion of this as and when the assessment is made under MAT, till then this becomes a non-issue. In any case if a deduction is allowable in law, the same cannot be denied on the plea of estoppel as the assessee is entitled to rectify its stand. Further no addition can be made on the basis of admission or estoppel or any other equitable doctrine. If an item is taxable same would be taxable irrespective of what the assessee may say or may not say. In this regard, reliance is placed by the Ld. A.R. on the decision of the Hon ble Supreme Court in the cases of Kedarnath Jute Mfg Co Ltd vs CIT - 82 ITR 363 and CIT vs V.MR.P.Firm - 56 ITR 67. Hence the disallowance may be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... k written which was furnished by the appellant a copy which is also submitted during the course of hearing before me along with the written submissions. The AO has disallowed the same on the ground that date of purchase has not been furnished and how the same has become obsolete. It was submitted that the stock was written off as obsolete due to lack of demand for the said stock and technological changes in the products. That the stock written off when compared to the turnover of the appellant was very negligible, its accounts were audited and on the advice of its technical team and auditors, the same has been treated as obsolete and written off in the books. The disallowance has been made for unsustainable reasons and prayed for deletion of the disallowance in the interests of justice. I have looked into the discussion on this issue in the assessment order and the details submitted. After considering the same, I am of the view, there is no case for any disallowance when the details have been furnished, and its accounts have been audited and have been written off on the advice of technical team. Moreover such stock obsolence is a commercial reality in any kind of business due to ch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of the date of purchase of the stock, but the same is not the only criteria, and there could be other criteria including that of the advice of the technical team, auditor, etc. The CIT (A) has found that not only the stock which is written off is very negligible in comparison to the total turnover, but the same was audited and upon the advice of the technical team of the auditor, the stock is written off. In our view, sufficiency of evidence cannot be invoked, as sought to be canvassed, that too, for upsetting the finding of fact, for which the Tribunal is the ultimate authority. Under these circumstances, we find that while considering the question (b), it cannot be said that such is a substantial question of law as sought to be canvassed. Hence, need not be answered. 49.1 In view of above judgement of High Court, we are inclined to decide the above issue in favour of assessee. Ground No 18 - Loss on exchange fluctuation - Rs. 13,85,26,037/- 50. The assessee has debited a sum of Rs.13,85,26,037/- towards foreign exchange loss. The AO has disallowed the said sum under the title Mark to Market losses and applied CBDT s Instruction no. 03 of 2010 dated 23.03.201 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... loss. 50.3 The issue is covered in favour of the assessee by the decision of Bangalore Tribunal in the case of Quality Engineering and Software Technologies Pvt Ltd vs DCIT - ITA 257 275/B/2014 dt. 14.11.2014 (PB-II page 346 to 375 ) 50.4 The issue is covered in favour of the assessee by the decision of ITAT Bangalore in the case of Bharat Mines and Minerals vs DCIT - ITA 2378 2379/B/2018 dt.30.03.2022 - (PB-III page 672 to 684) 50.5 In view of the said decisions, the addition has to be deleted. 51. The Ld. D.R. submitted that this loss is notional and contingent in nature. As per CBDT instruction No.3/2010, even actual losses i.e. hedge loss are allowable as non-speculative only if the transaction quality under clause D of the proviso to section 43(5), Marked to Market losses claimed as notional losses prior to settlement has to be treated as speculative loss in terms of section 43(5) of the Act. 52. We have heard both the parties and perused the materials available on record. This issue has been considered by Coordinate Bench in the case of Bharat Mines and Minerals Vs. DCIT in ITA No.2378 2379/Bang/2018 dated 30.3.2022, wherein held as under:- 10. We ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0,000 7 SBI 8,54,00,000 26.07.2007 27.07.2012 2,54,80,000 8 SBI 8,74,00,000 17.08.2007 13.08.2012 2,31,70,000 Total 69,32,00,000 20,67,40,000 13. As per definition of Section 43(5) of the Act trading of shares which is done by eking delivery does not come under the purview of the said Section. Similarly in: clause (d) of Section 43(5) derivative transaction in shares is also not speculation transaction as defined in the said section. Therefore, both profit/ loss from all the share delivery transactions and derivative transaction are having the same meaning, so far as Section 45(3) of the Act is concerned. In view of the fact that both delivery transactions and derivative transactions are having the same meaning, so far as section 43(5) of the Act. Again, in view of the fact that both delivery transactions and derivativ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 23.03.2010 has recognized the loss out of forex derivatives on actual settlement/conclusion of contracts as allowable business loss, however they have directed the Revenue to examine whether the transactions would fall U/s. 43(5)(d) of the Act, and if so to treat the same as non-speculative transaction. By the above directions, it appears that though the CBDT has recognized the loss arising out of forex derivatives on actual settlement of the contracts, directed the Revenue to treat the same as speculative transaction when they are transacted through nationalized banks and as not speculative, when these transactions are transacted through recognized stock exchange. (vii) It is pertinent to note here that the bankers act as an advisory agent to in order to protect them from foreign exchange exposure their expertise and these services cannot be obtained by the stock exchange where their scope of service is very limited. (viii) In the present case the assessee has taken a hedging position as mentioned in these assessment years based on the RBI guidelines. The guidelines permitted hedging to the extent of last three years annual average turnover, or current year's actu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 15. Thus in the present case before us, the assessee is an exporter of iron who 'has entered into forex derivative transactions through its bankers with a view to effectively hedge its foreign currency risk. Therefore, these forex derivative transactions have a close proximity or rather incidental to the export business of the assessee, which cannot be considered as speculative. Moreover, in the case of the assessee foreign currency contracts cannot be treated as wagering contracts for the reasons discussed herein above. Section-43(5) of the Act is applicable to transactions in commodity or stocks and shares. If currency is treated as commodity, then according to Section 43(5) (a) of the Act, such transaction shall not be deemed to be speculative transaction. Further currency cannot be treated as stock or shares because inherently they have different characteristic. Further, in the case of the assessees, the foreign exchange exposure for the relevant period specified by R.B.I regulations is quiet substantial in order to justify the forex derivative transactions made by the assessee through Government recognized channel, otherwise the RBI would not have entertained these t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yable by the assessee as an employer in lieu of any leave at the credit of his employee cannot be allowed as deduction unless this amount is paid by the assessee on or before the due date for furnishing the return of income u/s 139(1) of the Act. In view of this legislative amendment nullifying the ratio of the decision in the case of Bharat Earth Movers (supra), the amount of such provision can be claimed as deduction only on actual payment and not on the simple creation of provision. However, when we peruse the mandate of Explanation 1 to section 115JB, it becomes clear that clause (c) talks of making addition to book profit for the amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities; or . If we consider the judgment of the Hon ble Supreme Court holding such a provision as an ascertained liability and clause (f) of section 43B on one hand and clause (c) of Explanation 1 to section 115JB on the other, it becomes vivid that computation of income under the normal provisions debars deduction for the ascertained liability towards provision for leave encashment etc., unless the amount is actually paid before the due date. However, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mount, alongwith TDS details which are placed in paperbook-II page 389 to 392. The assessee has also placed the TDS certificates at paperbook -II pages 398 to 401 and Sample copies of invoices (Paperbook-II page 402 to 536). The disallowance has been made inspite of submitting all the details and particulars which has been duly noted by the AO and DRP. The AO did not ask for any other evidence or detail. The notice u/s 142(1) on this issue does not bring out any lapse on the part of the assessee to submit any detail/evidence. This is a case wherein the AO has made an addition without any justification and for no lapse on the part of the assessee. The details furnished by the assessee are self-explanatory and has been incurred wholly and exclusively for the purpose of business and is allowable u/s 37 of the Act. Hence the addition has to be deleted. 56. The Ld. D.R. relied on the order of the lower authorities. 57. After hearing both the parties, we are of the opinion that assessee has to establish the genuineness of the expenditure by filing the requisite details. In the present case, assessee produced the recipient s details along with details of TDS and other evidence suppo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee are selfexplanatory and has been incurred wholly and exclusively for the purpose of business and is allowable u/s 37 of the Act. Hence the addition has to be deleted. 59. Ld. D.R. relied on the order of lower authorities. 60. After hearing both the parties, we are of the opinion that assessee has to establish the genuineness of the expenditure/provisions by filing the requisite details and details of TDS. If the assessee furnishes these details, the claim of assessee to be allowed. In the present case, it is not the case of revenue that this expenditure is bogus. The assessee has furnished the details called for by AO u/s 142(1) of the Act. There is no failure on the part of the assessee to substantiate the claim, we allow the ground taken by the assessee. Ground No 23 - Dealer Commission - Rs. 13,85,00,000/- 61. The assessee has debited expenditure towards dealer commission and was asked to provide details of the same. The assessee in the written submissions made on 26.12.2019 submitted as under: The details Dealers Commission and the TDS made thereon is enclosed as Annexure-6. It may be noted that the dealer commission debited to profit and loss acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . relied on the order of lower authorities. 63. We have both the parties on this issue and perused the materials available on record. In this case assessee has filed all the details called for by AO and Ld. D.R. is not able to point out the lapse on the part of the assessee, hence, this ground of appeal is allowed by placing reliance on the earlier order of the Tribunal for the assessment year 2005-06 in ITA No.701/Bang/2021 dated 5.8.2022, wherein held as under:- 4.4. We have heard the rival submissions and perused the materials available on record. The assessee claimed that it has paid a sum of Rs.2,42,33,641/- towards commission to dealers and according to the assessee, it is wholly and exclusively incurred for the purpose of business. Further, assessee submitted the list of payments made to various parties and also furnished the details of deductions of TDS at the time of payment of commission to various dealers. It was also noted that in the case of receipt of this commission by those parties, the department has accepted it. However, in the hands of assessee it was treated as not incurred by the assessee, which is incorrect. Further, the books of accounts of the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee produced the recipient s details along with details of TDS. Had the AO have any doubt, he should have made further enquiry by summoning the respective party, which he failed to do so. Hence, in our opinion, the expenditure cannot be disallowed only on surmises and conjectures. Accordingly, we allow the ground taken by the assessee Ground No 26 TDS Credit 66. The assessee requests that the eligible TDS credit as claimed in the return of income may be given. The issue is remitted to AO for giving due TDS credit. Ground No 27, 28 234B interest 67. The above grounds are regarding interest u/s 234B of the Act. The assessee prays for consequential relief in this regard. This is mandatory and consequential in nature and to be recomputed accordingly. 67.1 No other grounds are argued before us. Hence, not considered for adjudication. 68. The appeal in IT(TP)A No.703/Bang/2021 is partly allowed for statistical purposes. 69. In the result, the appeal filed by the assessee in IT(TP)A No.344/Bang/2021 is allowed and the appeal in IT(TP)A No.703/Bang/2021 is partly allowed for statistical purposes. Order pronounced in the open court on 7th Oct, 2022 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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