TMI Blog2017 (4) TMI 1627X X X X Extracts X X X X X X X X Extracts X X X X ..... e the concerned company is adopting different accounting year, he should find out the possibility of compilation of the data for AY: 2002-03 on the basis of quarterly reports of the relevant company. Satyam Computer Services Ltd. - We feel it proper that this issue regarding Satyam Computers should also be decided by AO/TPO afresh after finding out the factual aspect as to whether the accounts for current year i.e. FY: 2002-03 were also falsified by that company i.e. Satyam Computers and if the assessee can establish that the accounts of that company were falsified in FY: 2002-03 then the same should be excluded. Deduction u/s 10A in respect of interest and Misc. income earned by the assessee - HELD THAT:- As n the case of CIT Vs Motorola India Electronics (P) Ltd [ 2014 (1) TMI 1235 - KARNATAKA HIGH COURT] held that there is a direct nexus between the interest income and income of the business of the undertaking. In the present case, neither any of the authorities below have examined this aspect nor the relevant facts are available on records before us and hence, we feel it proper to restore this issue also to the file of the AO for fresh decision. Suppression of cost ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stment of Rs. 8,42,92,189/- to the arm s length price of the appellant s international transactions with associated enterprises, with respect to the software development services rendered by the appellant u/s 92CA of the IT Act, 1961.. 2. The learned CIT(A) and the learned TPO erred in rejecting the TP documentation prepared by the appellant. In doing so, 2a) the ld.CIT(A) and the ld., TPO have failed to appreciate that at the time of preparation of the TP documentation for March 2003, contemporaneous data for a financial year 2002-03 was not available in the data base (Prowess Capitaline) for some of the companies. 2b) the ld.CIT(A) and the ld. TPO ought to have appreciated that the appellant in its transfer pricing (TP) documentation had screened 707 companies engaged in the provisions of software development services based on systematic criteria i.e. functional difference, absence of foreign exchange earnings, significant related party transactions etc. However, the ld CIT(A) has cherry picked certain comparables having huge margins with a sole intention of making adjustments. 2c) the ld. CIT(A) has disregarded the submission made with regard to the use of contempo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rred in upholding the action of the ld. TPO of considering 25% as the threshold limit for the related party transactions filter as this number is an arbitrary number and has been adopted without any reasonable basis. 7. The ld. TPO in his order has erred in including the notional interest cost while computing the arm s length price. The ld. CIT(A) has failed to adjudicate on this specific ground and has only commented on the rate of interest in his order. II Corporate Tax Denial of deduction under section 10A on interest and miscellaneous income. 1.1 The ld. CIT(A)-IV, Bangalore erred in confirming the denial of deduction u/s 10A of the IT Act on interest and miscellaneous income earned by the appellant. 1.2 The ld. CIT(A) failed to appreciate the fact that the interest income had arisen on account of short term investment of surplus funds lying with the appellant. The ld CIT(A) has erred in not appreciating the fact that the interest income has a direct nexus with the profits o the business and accordingly, is eligible for deduction under the provisions of sec.10A of the Act. The Appellant craves leave to add, to alter or amend all or any of the afore-state ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8. The appellate craves leave to add, to alter, to amend or delete any of the grounds that may be urged at the time of hearing f the appeal . 4. It was submitted by the ld. AR of the assessee that in assessee s appeal, there are seven grounds in respect of TP issue, out of which ground no. 3 is not pressed and accordingly, Ground no. 3 of the assessee s appeal is rejected as not pressed. 5. Regarding remaining grounds of the appeal of the assessee in respect of TP issues, ld. AR of the assessee submitted that as per page-9 of the TPO s order, it can be seen that from the list of 13 comparables selected by him, comparable no. 1 M/s ADCC Research Computing Centre Ltd. is on the basis of data for FY ended on 31, 2002 and similarly, for the comparable company no. 2 M/s Bodhtree Consulting Ltd., the data considered are for FY ended on 30-06-2002 and similarly, for comparable company no. 8 i.e. M/s Onward Technologies Ltd., the data considered by the TPO is for FY ended 30-06-2002 and we are concerned with assessment year 2003-04 i.e. For FY ended on 31-03-2003. Thereafter, he has drawn our attention to para-8 of the same order of TPO on the same page, where it is stated by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 172/Bang/2013 and M/s Symbol Technologies India Pvt. Ltd. in IT(TP)A no. 391/Bang/2012. He submitted that in all these Tribunal orders, it was held that M/s Satyam Computers Co. is not a good comparable because of falsification of accounts by that company. In reply, it was submitted by the ld. DR of the revenue that in the case of M/s NTT Data Global Delivery Services Ltd. in IT (TP) A no. 1487(Bang)/2013 dated 06-04-2016 for AY: 2005-06, (copy submitted by him), in para-24.2 of this Tribunal order, it was observed by the Tribunal that this company is alleged to have indulged in malpractice in the subsequent periods. He submitted that if for assessment year 2005-06, the Tribunal says that this company is engaged in malpractice in subsequent period, then for assessment year 2003-04, this cannot be a basis to conclude that this company is engaged in malpractice and exclude on that basis. 8. In the rejoinder, it is submitted by the ld. AR of the assessee that the Tribunal order rendered in the case of M/s Sap Labs India Pvt. Ltd (Supra) is for the same year i.e. assessment year 2003-04 and therefore, this issue should be decided in favour of the assessee by following various Tri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also find that in para7.2.1 of this Tribunal order, it is mentioned by the Tribunal that Satyam was already excluded in the lists of comparable companies by the TPO as well as by the CIT(A) and therefore, neither ground nor the written submissions could have been raised for its exclusion before the Tribunal. After making this observation in the same Para i.e. 7.2.1., we do not know the basis of this statement of the Tribunal in the same Para that it is admitted position that Satyam company s statement of affairs were falsified during the period 2002-08 and it became publicly known in January, 2009. In the absence of any ground regarding exclusion of Satyam Computer from the list of final comparables and in the absence of any written submissions in that regard before the Tribunal, we feel that this finding of the Tribunal that Satyam Computers statement of affairs were falsified during the period 2002-08 is without any valid basis. In addition to that, the finding of the Tribunal in the case of NTT Data Global Delivery Services Ltd. (Supra), to the effect that this company is alleged to have involved malpractice only in the subsequent period and this finding is given by the Tribu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 100% EOU, which has exported software and earned the income. A portion of that income is included in EEFC account. Yet another portion of the amount is invested with the country by way of fixed deposits, another portion of the amount is invested by way of loan to the sister concern which is deriving interest or the consideration received from sale of the import entitlement, which is permissible in law. Now the question is whether the interest received and the consideration received by sale of import entitlement is to be construed as income of the business of the undertaking. There is a direct nexus between this income and the income of the business of the undertaking. Though, it does not par take the character of a profit and gains from the sale of an article, it is the income, which is derived from the consideration realized by export of article. In view of the definition of income from Profo9ts and gains incorporated in sub-section (4), the assessee is entitled to the benefit of exemption of the said amount as contemplated u/s 10B of the Act. Therefore, the Tribunal was justified in extending the benefit to the aforesaid amounts also. We do not find any merit in these appeals. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ently suppressed its income also because, the assessee is getting remuneration on cost plus basis from its AE. In this regard, he has drawn our attention to page-6 7 of TPO s order. 18. The ld. AR of the assessee submitted that no cost has been incurred by the assessee in respect of a ESOP and fixed assets supplied by the AE at free of cost and also for the alleged administrative and management support services said to have been provided by the AE to the assessee company and therefore, no addition is justified in respect of this notional adjustment made by the AO. In this regard, he placed reliance on the following judicial pronouncements:- a) Haworth India Pvt. Ltd Vs DCIT 11 ITR(T) 757(Del.) b) Mitsubishi Corpn.India Pvt. Ltd. Vs DCIT 44 ITR 416 c) Marubeni Itochu Steel India Pvt. Ltd. Vs DCIT 156 ITD 62- (Del.Trib.) d) Li and Fung India Pvt. Ltd. Vs DCIT 361 ITR (Del.). 19. He has raised one alternative contention that even if some addition is called for on this account then also ESOP cannot be included in the operating cost and in support of his contention; he placed reliance on the following judicial pronouncements; a) HOV Services Ltd Vs JCIT 73 Taxmann ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it, it is suppressing its cost and consequently its revenue. 12.7.3. The action of the TPO, in my considered view, cannot be sustained. It is now well settled under transfer pricing law in India that only operating revenue and operating costs have to be taken in to consideration for mark-ups for the purpose of computation of ALP. The term operational expenses relating to transfer pricing was examined by the Delhi Bench of the Hon ble Tribunal in Haworth (India)_ Pvt. Ltd. Vs DCIT (11 ITR (Tri.) 757). The Bench observed as under; We have carefully considered the rival submissions on this issue. We find no force in the contention of the ld. AR that such expenses were required to be excluded. The reason for not accepting such argument s that what are operational expenses are the expenses which are incurred to earn that income. It is not even the case of the assessee that those expenses did not relate to manufacturing segment of the assessee out of which the revenue earned by the assessee. If the expenses have nexus with the revenue then they are to be considered as operational expenses and they cannot be excluded simply for the reason that the date of occurrence of the revenu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ortunity of being heard to the assessee. We order accordingly. 22. For the sake of completeness, we examine the applicability of various judicial pronouncements on which reliance has been placed by the learned AR of the assessee in support of his contention that notional adjustment cannot be the basis for making addition. Regarding reliance on other Tribunal orders in respect of ESOP, we have already held that the same cannot be included in the operating cost. Hence, we have to consider only the first set of judgments noted above. The first judgment is the Tribunal order rendered in the case of Haworth India Pvt. Ltd (Supra). In this case, the facts and dispute were different. In that case, the commission expenses were suo motu disallowed by the assessee in the revised return and the assessee also had paid the due taxes on that. Under these facts, it was held that the same cannot be considered as part of operating cost. These facts of that case also very important that the major component of receipt of international transactions of the assessee was commission income which amounts to Rs. 1539.33 lakhs out of total operating income of Rs. 1773.98 lakhs and it is observed by the Tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Hon ble Delhi High Court rendered in the case of Li Fung India Pvt. Ltd. (Supra). In that case, the TPO enhanced the assessee s cost base for applying the operating profit margin over total cost. The assessee s compensation model in that case was based on functions performed by it and the operating costs incurred by it and not on the cost of goods sourced from third party vendors in India. Under these facts, it was held that allotting margin on the value of goods sourced by third party customers from Indian exporters/vendors to compute the assessee s profit is unjustified. In the present case, this is not an allegation of the TPO that cost of goods sourced from third party vendors is to be included in total cost and profit margin should be applied to such enhanced cost. In the present case, the allegation is this that the assessee had suppressed its operating cost by availing various services from its AE free of cost. Unless this allegation of the TPO is proved to be wrong, the assessee has no case because if the assessee has suppressed its cost by obtaining certain services from its AE free of cost then, the cost of such services has to be included in the cost base of the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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