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TMI Blog2023 (11) TMI 1364X X X X Extracts X X X X X X X X Extracts X X X X ..... (AE). To benchmark the transaction, the assessee applied Transactional Net Margin Method (TNMM) as the most appropriate method. The same was accepted by the Transfer Pricing Officer (TPO). The assessee selected 28 companies as comparable having an average net profit margin of 13.37%. The assessee earned net profit margin of 9.82%, since the margin of the assessee was within +/- 5% range, the transaction of software development entered into by the assessee with its AE according to the assessee was at arms length. During the course of assessment proceedings the Assessing Officer made a reference to the TPO u/s. 92CA(1) of the Income Tax Act, 1961 [in short 'the Act']. The TPO accepted TNMM applied by the assessee as most appropriate method, however, he rejected 24 companies out 28 selected by the assessee as comparable. The TPO thereafter, introduced 15 new companies as comparable. Thus, the total number of companies selected by the assessee for determining arms length price was 19 including the four from the list of comparable selected by the assessee. The final list of comparable companies as per TPO is as under: S. No. Company Name OP to Total Cost (%) 1. Bodhtree Consulting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee's claim of deduction u/s. 10A of the Act. The CIT (A) further accepted the assessee's claim of revised long term capital gain made in revised computation of total income and also the claim in respect of interest u/s. 244A of the Act. The Department is in appeal against the findings of CIT (A) allowing relief to the assessee. 3. The grounds of appeal by the Department assailing the order of CIT (A) are as under: "On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in allowing relief to the assessee to the extent impugned in the grounds enumerated below: 1. The order of the CIT (A) is opposed to law and facts of the case. 2. On the facts and in the circumstances of the case and in law, the Ld.CIT (A) erred in holding that telecommunication expenses of Rs. 76.21 lacs be excluded from export turnover and total turnover without appreciating the facts of the case. 3. On the facts and in the circumstances of the case and in law, the Ld.CIT (A) erred in giving relief of Rs. 86,71,275/- to the assessee based on revised return without appreciating the facts that revised return was time barred. 4. On the facts and in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p;10,88,13,422/-. The Assessing Officer rejected the fresh claim made by the assessee in light of the decision in the case of Goetze (India) Ltd., 284 ITR 323 (SC). The ld. Departmental Representative submitted that the CIT (A) accepted the contentions of the assessee without examining as to whether the amount was actually refunded by the assessee and how the transaction has been accounted in books of the assessee. 6. The ground No. 4 of appeal is against allowing of interest u/s. 244A of the Act. The ld. Departmental Representative supported the assessment order and prayed for reversing the findings of CIT(A). 7. In respect of transfer pricing issue raised in ground No. 5 assailing the findings of CIT (A) in deleting addition of Rs. 30.67 crores with respect to provision of service, the ld. Departmental Representative submitted that the entire risk is borne by the assessee in providing service, in return the assessee gets miniscule part of the total consideration. This clearly shows that the assessee is shifting profits to its AEs. The ld. Departmental Representative submitted that before the CIT (A) the assessee was seeking exclusion of various companies selected ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submissions, he placed reliance on the decision in the case of HCL Technologies Ltd., 404 ITR 719(SC). The CIT (A) in first appellate proceedings directed to exclude telecommunication charges from total turnover in accordance with this settled legal position. He thus prayed for upholding the findings of CIT (A) on the issue. 10. In respect of ground No. 3 of appeal, the ld. Counsel for the assessee submitted that while filing return of income the assessee offered LTCG on sale of land situated at Nagar Rd., Pune. The long term capital gains was computed based on sale of land admeasuring 71564 sq.mtrs. vide agreement dated 30/03/2005. As per clause -3 of the said agreement determination of final consideration was dependent on actual measurement of the land sold. Upon physical measurement jointly undertaken by the vendor (assessee) and the buyer it was found that the area of the land sold was 69909 sq. mtrss. Accordingly, excess consideration of Rs. 86.71 lacs initially received as part of total consideration was refunded to the buyer by the assessee. The assessee revised the amount of LTCG in computation of income. The revised computation of total income filed before the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er rejected Thirdware Solutions Ltd. on the ground of lack of segmental data and Exensys Software Solutions Ltd. on account of exceptional event. The CIT (A) included following companies in the list of comparables which were initially selected by the assessee in Transfer Pricing Study, as they were wrongly excluded by the TPO on the parameters of filters: i. ASM Technologies Ltd. & Subex Systems Ltd. The TPO rejected the above companies on the ground of high RPT. The CIT (A) came to the conclusion that there is no RPT during the relevant year in the said companies. ii. Blue Star Infotech Ltd. The TPO rejected the company on account of high RPT. The CIT (A) included the company in the list of comparable as RPT is<4% during the relevant period. iii. Gold Stone Technologies Ltd. The TPO rejected this company for the reason that forex earnings are less than 25%. The CIT (A) after examining the records came to the conclusion that the export turnover of the company is >25%. iv. Megasoft Ltd. The TPO rejected the company for the reason that it is chronically loss making company. The CIT (A) come to the conclusion that it is not a chronically loss-making company, hence, inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to AEs, arms length price is to be computed only in respect of employees who remain in employment for more than six months and on the basis of Indian salary and not on the basis of US salary. The ld. Counsel for the assessee pointed that this issue has already been considered by the Tribunal in assessee's own case in Assessment Year 2004-05 (supra). 15. We have heard the submissions made by rival sides and have examined the orders of authorities below. We have also considered the documents and decisions on which rival sides have placed reliance in support of their respective submissions. 16. The ground No. 1 and 7 in appeal by the Revenue are general in nature, hence, require no separate adjudication. 17. In ground No. 2 of appeal, the Revenue has assailed the findings of CIT (A) with respect to telecommunication expenses amounting to Rs. 76.21 lcas excluded from export turnover and total turnover. The Assessing Officer in assessment proceedings has excluded telecommunication charges from export turnover only. The CIT (A) in first appellate proceedings has directed the Assessing Officer you to reduce telecommunication charges from export turnover and total tur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ware under Section 10A of the IT Act are allowed only in Export Turnover but not from the Total Turnover then, it would give rise to inadvertent, unlawful, meaningless and illogical result which would cause grave injustice to the Respondent which could have never been the intention of the legislature. 20. Even in common parlance, when the object of the formula is to arrive at the profit from export business, expenses excluded from export turnover have to be excluded from total turnover also. Otherwise, any other interpretation makes the formula unworkable and absurd. Hence, we are satisfied that such deduction shall be allowed from the total turnover in same proportion as well." Thus, in the light of the facts of the instant case and the aforesaid decision rendered by Hon'ble Supreme Court, we find no infirmity in the findings of CIT (A) on this issue. Hence, ground No. 2 of appeal of Revenue is dismissed being devoid of any merit. 18. In ground No. 3 of appeal, the Revenue has assailed the findings of CIT (A) in allowing relief of Rs. 86,71,275/- to the assessee based on revised computation of total income furnished before the Assessing Officer during the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... into account two points of time at which liability to tax is attracted, viz. the accrual of its income or its receipt; but the substance of the matter is income, if income does not result, there cannot be a tax, even though in book-keeping an entry is made about a hypothetical income, which does not materialize." The aforesaid principal laid down by the Hon'ble Supreme Court has been reiterated by the Hon'ble Jurisdictional High Court in the case of Hemal Raje Shete and Dinesh Vazirani (supra). Thus in an undisputed facts of the case we find no merit in ground No. 3 of appeal, hence, ground No. 3 of appeal is dismissed. 19. In ground No. 4 of appeal, the Revenue has assailed findings of CIT (A) in allowing interest u/s. 244A of the Act on the refund arising out of excess self- assessment tax paid by the assessee. In so far as the fact of refund arising out of self-assessment tax paid there is no dispute. The Hon'ble Jurisdictional High Court in the case of Stockholding Corporation of India (Supra) has held that tax paid on self-assessment would fall u/s. 244A(1)(b) of the Act that is a residual clause. The said section clearly mandates that the Revenue w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tention to the extracts of P&L Accounts for the year ended 31/03/2005 of Tata Elxsi Limited at page 668 of the paper book to contend that RPT of the said company is >5.74%. Flextronics Software Systems Ltd.: The said company has also been rejected by the CIT (A) on the ground of RPT filter >4%. As per the findings of the CIT (A) the RPT of the said company for the relevant Assessment Year is 5.23% Infosys Technology Limited. The said company has also been rejected by the CIT (A) on the ground that RPT is >4%. The ld.Counsel for the assessee has drawn our attention to the extract of the Annual Report of the company at page 666 and 667 of the Paper Book to contend that RPT to cost is 5.26%. Exensys Software Solutions Ltd.: The CIT (A) has excluded the said company from the list of comparables as an exceptional event had happened during the relevant period. During the relevant period, another company Holool India Ltd. was amalgamated with Exensys Software Solutions Ltd. w.e.f. 01/04/2004, which had purportedly significant impact on the financial results of company for the year ended 31/03/2005. Larsen & Toubro Infotech Ltd. The said company was excluded from the list of co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is not available. The assessee has furnished extracts of the Annual Report of the said company at pages 680 and 681 of the Paper Book . A perusal of the same reveals that segmental information is available. The company has indicated segmental revenue from IT Services and BPO services. 20.3 Thus, considering the documents available on record, we see no error in the findings of the CIT (A) to include aforementioned six companies in the list of comparable. 20.4 Another facet of the submissions of the Revenue is that the CIT (A) has erred in allowing depreciation and working capital adjustment. The contention of the ld. Counsel for the assessee is that the assessee has provided depreciation at a rate higher than the rates of depreciation charged by the comparable companies. Comparable companies have charged depreciation at rates provided in Schedule -XIV of the Companies Act, 1956. Therefore, depreciation adjustment has been claimed. The CIT (A) has verified the claim of the assessee and has given a specific finding that depreciation in the books of the assessee are at a higher rate than the rate prescribed under the Companies Act, 1956. We find that depreciation adjustment is not an ..... X X X X Extracts X X X X X X X X Extracts X X X X
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