M/s. Insilica Semiconductors India Pvt. Ltd., Bangalore v. ITO, Bangalore

ITA 1399/BANG/2010 | 2006-2007
Pronouncement Date: 29-03-2012 | Result: Allowed

Appeal Details

RSA Number 139921114 RSA 2010
Assessee PAN AABCC9522F
Bench Bangalore
Appeal Number ITA 1399/BANG/2010
Duration Of Justice 1 year(s) 3 month(s) 22 day(s)
Appellant M/s. Insilica Semiconductors India Pvt. Ltd., Bangalore
Respondent ITO, Bangalore
Appeal Type Income Tax Appeal
Pronouncement Date 29-03-2012
Appeal Filed By Assessee
Order Result Allowed
Bench Allotted B
Tribunal Order Date 29-03-2012
Date Of Final Hearing 07-12-2011
Next Hearing Date 07-12-2011
Assessment Year 2006-2007
Appeal Filed On 07-12-2010
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH : BANGALORE BEFORE SHRI N.K. SAINI ACCOUNTANT MEMBER AND SMT. P. MADHAVI DEVI JUDICIAL MEMBER ITA NO.1399/BANG/2010 ASSESSMENT YEAR : 2006-07 M/S. INSILICA SEMICONDUCTORS INDIA PRIVATE LTD. NO.14 FRONTLINE GRANDEUR WALTON ROAD BANGALORE 560 001. PAN : AABCC 9522F VS. THE INCOME TAX OFFICER WARD 11(2) BANGALORE. APPELLANT RESPONDENT APPELLANT BY : SHRI PADAMCHAND KHINCHA C.A. RESPONDENT BY : SHRI ETWA MUNDA CIT-III(DR) DATE OF HEARING : 02.02.2012 DATE OF PRONOUNCEMENT : 29.02.2012. O R D E R PER N.K. SAINI ACCOUNTANT MEMBER THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST T HE ORDER DATED 06.10.2010 PASSED BY THE ITO WARD 11(2) BANGALORE UNDER SECTION 143(3) R.W. SECTION 144C(1) OF THE INCOME-TAX ACT 1961 [HEREINAFTER REFERRED TO AS THE ACT IN SHORT]. 2. FOLLOWING GROUNDS HAVE BEEN RAISED IN THIS APPEA L: ITA NO.1399/BANG/2010 PAGE 2 OF 32 THE LOWER AUTHORITIES (THE LEARNED ASSESSING OFFIC ER LEARNED TRANSFER PRICING OFFICER AND HONORABLE DISPUTE RESO LUTION PANEL) HAVE ERRED IN 1. PASSING THE ORDER DISREGARDING THE PRINCIPLES OF NA TURAL JUSTICE. 2. MAKING A REFERENCE TO TRANSFER PRICING OFFICER FOR DETERMINING ARM'S LENGTH PRICE. 3. PASSING THE ORDER WITHOUT DEMONSTRATING THAT APPELL ANT HAD MOTIVE OF TAX EVASION. 4. NOT APPRECIATING THAT THE MEMBERS OF DISPUTE RESOLU TION PANEL ALSO BEING JURISDICTIONAL COMMISSIONER/DIRECT ORS OF INCOME TAX OF THE APPELLANT THE CONSTITUTION OF TH E DISPUTE RESOLUTION PANEL IS BAD IN LAW. 5. NOT APPRECIATING THAT THE CHARGING OR COMPUTATION P ROVISION RELATING TO INCOME UNDER THE HEAD 'PROFITS & GAINS OF BUSINESS OR PROFESSION' DO NOT REFER TO OR INCLUDE THE AMOUNTS COMPUTED UNDER CHAPTER X' AND THEREFORE ADD ITION UNDER CHAPTER X IS BAD IN LAW. 6. ADOPTING A FLAWED PROCESS OF ISSUING NOTICES U/S 13 3(6) AND RELYING ON THE SAME WITHOUT PROVIDING COMPLETE INFO RMATION AND OPPORTUNITY TO CROSS EXAMINE TO THE APPELLANT. 7. REJECTING MULTIPLE YEAR DATA COMPARABLES AND TRANS FER PRICING ANALYSIS OF THE APPELLANT ON UNJUSTIFIABLE GROUNDS. 8. NOT APPRECIATING THAT THE LAW DOES NOT COMPEL ADOPT ING MANY (OR ANY MINIMUM) COMPANIES AS COMPARABLES AND THAT THE APPELLANT COULD JUSTIFY THE PRICE PAID/CHARGED ON THE BASIS OF ANYONE COMPARABLE ONLY. 9. DOING FRESH TRANSFER PRICING ANALYSIS ADOPTING CUR RENT YEAR DATA AND INAPPROPRIATE FILTERS IN SUCH ANALYSIS. 10. CONSIDERING THE DATA WHICH WAS NOT AVAILABLE TO THE APPELLANT AT THE TIME OF COMPLYING WITH THE TP DOCUMENTATION REQUIREMENTS. 11. SELECTING INAPPROPRIATE COMPARABLES AND REJECTING APPROPRIATE COMPARABLES. 12. INAPPROPRIATELY COMPUTING THE OPERATING MARGINS OF COMPARABLES AND THE APPELLANT. ITA NO.1399/BANG/2010 PAGE 3 OF 32 13. NOT MAKING PROPER ADJUSTMENT FOR ENTERPRISE LEVEL A ND TRANSACTIONAL LEVEL DIFFERENCES BETWEEN THE APPELLA NT AND THE COMPARABLE COMPANIES. 14. NOT ALLOWING THE BENEFIT OF THE +/-5% RANGE MENTION ED IN THE PROVISO TO SECTION 92C(2). 15. EXCLUDING THE INTERNET CHARGES FROM EXPORT TURNOVER WHILE COMPUTING DEDUCTION U/S LOA. 16. NOT APPRECIATING THAT DEDUCTION UNDER SECTION LOA S HOULD BE ALLOWED IN RESPECT OF CURRENT YEAR PROFITS OF THE E LIGIBLE UNDERTAKING UNINFLUENCED BY THE RESULTS OF OTHER UN ITS / BROUGHT FORWARD BUSINESS LOSS / UNABSORBED DEPRECIA TION ALLOWANCE. 17. LEVYING INTEREST UNDER SECTION 234B AND SECTION 234 D. THE APPELLANT SUBMITS THAT EACH OF THE ABOVE GROUND S/ SUB- GROUNDS ARE INDEPENDENT AND WITHOUT PREJUDICE TO ON E ANOTHER. THE APPELLANT CRAVES LEAVE TO ADD ALTER VARY OMI T SUBSTITUTE OR AMEND THE ABOVE GROUNDS OF APPEAL AT ANY TIME BEFO RE OR AT THE TIME OF HEARING OF THE APPEAL SO AS TO ENABLE THE INCOME-TAX APPELLATE TRIBUNAL TO DECIDE THE APPEAL ACCORDING T O LAW. 3. GROUND NOS. 1 TO 5 ARE GENERAL IN NATURE SO DO NOT REQUIRE ANY COMMENTS ON OUR PART WHILE GRIEVANCE OF THE ASSESS EE VIDE GROUND NO.6 TO 13 IS THAT A FLAWED PROCESS HAD BEEN ADOPTED IN COMPUTING THE OPERATING MARGIN OF COMPARABLES BY CONSIDERING THE DATA WHICH WAS NOT AVAILABLE TO THE ASSESSEE AT THE TIME OF COMPLYING WITH THE TP D OCUMENTATION REQUIREMENTS AND BY SELECTING INAPPROPRIATE COMPARA BLES AND REJECTING THE APPROPRIATE COMPARABLES WITHOUT PROVIDING COMPLETE INFORMATION AND OPPORTUNITY TO THE ASSESSEE. 4. THE FACTS IN BRIEF ARE THAT THE ASSESSEE WAS ENG AGED IN THE BUSINESS OF DEVELOPMENT AND EXPORT OF COMPUTER SOFTWARE AND DERIVED INCOME FROM BUSINESS RELATING TO STPI AND NON-STPI UNITS. THE ASSESSEE FILED THE ITA NO.1399/BANG/2010 PAGE 4 OF 32 RETURN OF INCOME ON 09.11.2006 DECLARING LOSS OF RS .7 56 756 FROM NON- STPI UNITS AFTER CLAIMING DEDUCTION U/S. 10A OF THE ACT AMOUNTING TO RS.1 78 45 526 FOR STPI UNITS. THE SAID RETURN WAS PROCESSED U/S. 143(1) OF THE ACT ON 23.01.2008. CONSEQUENTLY THE CASE W AS SELECTED FOR SCRUTINY. THE AO NOTICED THAT THE ASSESSEE HAD INT ERNATIONAL TRANSACTIONS THEREFORE THE CASE WAS REFERRED TO TRANSFER PRICING OFFICER (TPO) WHO DETERMINED THE ARMS LENGTH PRICE (ALP) AFTER OBTAI NING NECESSARY APPROVAL OF THE CIT BANGALORE-I BANGALORE U/S. 92CA OF THE ACT AND AS PER THE ORDER OF THE TPO DATED 26.10.2009 AN ADJUSTMENT OF RS.1 19 16 091 WAS REQUIRED TO BE MADE TO THE INCOME OF THE ASSESSEE C ONSEQUENT TO THE DETERMINATION OF ALP. 5. THE AO FORWARDED THE DRAFT ASSESSMENT ORDER DATE D 17.12.2009 TO THE ASSESSEE TO FILE ITS OBJECTION BEFORE THE DISPU TE RESOLUTION PANEL (DRP) WHO DIRECTED TO COMPLETE THE ASSESSMENT AFTE R TAKING INTO CONSIDERATION THE DETAILED DISCUSSIONS ON VARIOUS I SSUES VIDE ITS DIRECTIONS ISSUED UNDER SUB-SECTION 5 OF SECTION 144C OF THE A CT R.W. SUB-SECTION 8 OF SECTION 144C OF THE ACT. THE DRP DIRECTED TO MODIF Y THE ASSESSMENT ORDER AFTER RE-WORKING THE CORRECT MARGIN AT 51.73% AS AG AINST 52.74%. THE AO ADOPTED THE ADJUSTMENT AT RS.1 18 78 437 AS AGAINST THE EARLIER ADJUSTMENT AMOUNTING TO RS.1 19 16 091. NOW THE ASSESSEE IS IN APPEAL. 6. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ASSESSEE OPERATED AS A DEDICATED DEVELOPMENT CENTRE FOR ITS ASSOCIATED ENTERPRISE (AE) INSILICA INC. USA AND WAS COMPENSATED ON COST PLUS BASIS FOR ITS SERVICES. THE TOTAL VALUE OF THE SOFTWARE DEVELOPM ENT SERVICES WAS RS.9 83 51 072 AND THE SERVICES WERE WHOLLY RENDERE D TO AE. IT WAS ITA NO.1399/BANG/2010 PAGE 5 OF 32 CONTENDED THAT THE ASSESSEE ADOPTED TRANSACTIONAL N ET MARGIN METHOD (HEREINAFTER REFERRED TO AS TNMM FOR SHORT) TO JU STIFY THE PRICE CHARGED IN THE INTERNATIONAL TRANSACTIONS. IT WAS CONTENDED T HAT THE ASSESSEE CONDUCTED A METHODICAL SEARCH PROCESS ON CAPITALINE AND PROWESS DATABASE TO IDENTIFY COMPARABLE COMPANIES AND AFTER ADOPTING VARIOUS SUCH FILTERS (AS LISTED ON PAGE 74 & 75 OF THE PB-I ) THE ASSESSEE SELECTED 9 COMPANIES AS COMPARABLES. THE ARITHMETIC MEAN OF TH ESE COMPARABLES WAS 10.59% AND THE ASSESSEES OPERATING MARGIN ON C OST WAS 11.55% WHICH WAS ABOVE THE ARITHMETIC MEAN OF COMPARABLE C OMPANIES. THEREFORE THE INTERNATIONAL TRANSACTIONS WERE AT A RMS LENGTH. 7. IT WAS CONTENDED THAT THE TPO ISSUED A SHOW CAUS E NOTICE DATED 30.04.09 AND PROPOSED TO REDETERMINE THE ALP FOR SO FTWARE DEVELOPMENT SERVICES. THE SAID NOTICE CONTAINED REMARKS ON ASS ESSEES STUDY NEW SEARCH METHODOLOGY COMPARABLES PROPOSED (20) AND C OPIES OF REPLIES RECEIVED U/S. 133(6) OF THE ACT FROM OTHER COMPANIE S. IN RESPONSE TO THAT THE ASSESSEE FILED A DETAILED REPLY ON 26.06.09 IN WHICH IT RAISED VARIOUS OBJECTIONS TO THE PROPOSED ACTION OF THE TPO. A RE FERENCE WAS MADE TO PAGES 129 TO 301 OF THE ASSESSEES PB. IT WAS FURT HER STATED THAT THE TPO SUBSEQUENTLY ISSUED ANOTHER NOTICE ON 20.07.09 WHIC H CONTAINED REMARKS ON REPLIES TO THE NOTICES U/S. 133(6) OF THE ACT YE T TO BE RECEIVED AND OBJECTIONS OF THE ASSESSEE WITH RESPECT TO COMPARAB LES CONSIDERED BY THE TPO IN THE FIRST SHOW CAUSE NOTICE. IN THE SAID NO TICE THE TPO PROPOSED TO ADOPT 14 COMPANIES AS COMPARABLES AND THE ASSESSEE FILED A DETAILED REPLY ON 31.08.09 AND ALSO RAISED VARIOUS OBJECTION S. A REFERENCE WAS MADE TO PAGES 357 TO 604 OF THE PB-I FILED BY THE A SSESSEE. IT WAS POINTED ITA NO.1399/BANG/2010 PAGE 6 OF 32 OUT THAT THE TPO IN THE FINAL ORDER PASSED U/S. 92C A OF THE ACT SELECTED 22 COMPANIES AS COMPARABLES THEREFORE HE CONSIDERED 8 ADDITIONAL COMPANIES AS COMPARABLES FROM THAT PROPOSED IN THE NOTICE DATED 20.07.09 AND THOSE COMPANIES AND THOSE COMPANIES WE RE ADOPTED AS COMPARABLES WITHOUT PROPOSING THE SAME OR AFFORDING AN OPPORTUNITY TO THE ASSESSEE TO PRESENT ITS OBJECTION TO THEIR ADOPTION . IT WAS FURTHER STATED THAT THE ARITHMETIC MEAN WAS DETERMINED AT 20.48% A ND AFTER FACTORING A WORKING CAPITAL ADJUSTMENT OF 2.02% THE ADJUSTED A RITHMETIC MEAN WAS DETERMINED AT 18.46%. ACCORDINGLY THE TRANSFER PRI CING ADJUSTMENT FOR SOFTWARE DEVELOPMENT SERVICES WAS DETERMINED BY THE TPO AT RS.1 19 16 091. IT WAS FURTHER SUBMITTED THAT THE ASSESSEE FILED DETAILED OBJECTION WITH THE DISPUTE RESOLUTION PANEL (DRP) O N 18.01.10 BUT THOSE OBJECTIONS HAD BEEN REJECTED BY THE DRP EXCEPT FOR CORRECTING AN ERROR IN THE MARGIN COMPUTATION OF ONE COMPARABLE VIZ. MEGA SOFT AND THE ORDER OF THE DRP WAS BRIEF AND CRYPTIC. HOWEVER THE AO WHI LE DETERMINING THE TOTAL INCOME INCORPORATED THE TP ADJUSTMENT AS PER THE DIRECTIONS OF THE DRP. 8. IT WAS FURTHER CONTENDED THAT THE ASSESSEE IN IT S TRANSFER PRICING ANALYSIS APPLIED TURNOVER FILTER OF RS.5 CRORES TO RS.250 CRORES BUT THE TPO APPLIED LOWER TURNOVER FILTER OF RS.1 CRORE AND HAD NOT APPLIED THE UPPER TURNOVER LIMIT ON THE GROUND THAT THERE WAS NO RELA TIONSHIP BETWEEN SALES AND MARGINS. IT WAS SUBMITTED THAT SIZE OF THE COM PARABLE IS AN IMPORTANT FACTOR IN COMPARABILITY AND THIS ALSO HAD BEEN RECO GNIZED BY THE STATUTE ESPECIALLY IN RULE 10B(3) OF THE INCOME-TAX RULES 1962 WHICH LAYS DOWN GUIDELINES FOR COMPARING AN UNCONTROLLED TRANSACTIO N WITH AN INTERNATIONAL ITA NO.1399/BANG/2010 PAGE 7 OF 32 TRANSACTION. IT WAS EXPLAINED THAT THE DIFFERENCE S FOR TRANSFER PRICING PURPOSES CAN BE OF TWO TYPES; (I) DIFFERENCES IN TR ANSACTIONS BEING COMPARED OR (II) DIFFERENCES IN ENTERPRISES THERE FORE A COMPARABLE SHOULD BE REJECTED IF ANY OF THE ABOVE DIFFERENCES MATERIA LLY AFFECTS THE PRICE CHARGED OR COST PAID OR PROFIT ARISING FROM SUCH T RANSACTIONS IN THE OPEN MARKET UNLESS AN ACCURATE ADJUSTMENT COULD HAVE BEE N MADE FOR REMOVING THE EFFECT OF SUCH DIFFERENCES. HOWEVER SIGNIFICA NT DIFFERENCE IN SIZE OF COMPANIES REMAINING UNADJUSTED WOULD IMPACT COMPARA BILITY BECAUSE SIZE IS AN IMPORTANT FACET OF AN ENTERPRISE LEVEL DIFFER ENCE. IT WAS ALSO EXPLAINED THAT COMPARABLE MEANS SOMETHING THAT IS SIMILAR OR EQUIVALENT AND THE COMPANIES OPERATING ON A LARGE SCALE ARE HAVING BEN EFIT FROM ECONOMIES OF SCALE HIGHER RISK TAKING CAPABILITIES ROBUST GLOBA L DELIVERY AND BUSINESS MODELS AS OPPOSED TO THE SMALLER OR MEDIUM SIZED CO MPANIES. THEREFORE TWO COMPANIES OF DISSIMILAR SIZE COULD NOT BE ASSUM ED TO EARN COMPARABLE MARGINS. HOWEVER IMPACT OF DIFFERENCE IN SIZE CO ULD BE REMOVED BY A QUANTITATIVE ADJUSTMENT TO THE MARGIN OR PRICE BEIN G COMPARED IF IT WAS POSSIBLE TO DO SO REASONABLY ACCURATELY OTHERWISE UNCONTROLLED TRANSACTIONS MAY HAVE TO BE REJECTED FROM COMPARABI LITY EXERCISE. RELIANCE WAS PLACED ON THE FOLLOWING CASE LAWS: (I) DCIT V. QUARK SYSTEMS PVT LTD. 38 SOT 207 (II) EGAIN COMMUNICATIONS PRIVATE LTD. V. ITO 118 TTJ 354 (PUNE) (III) M/S. SONY INDIA (P) LTD. V. DCIT 114 ITD 448 (DEL) (IV) DCIT V. INDO AMERICAN JEWELLERY LTD. 41 SOT 1 (V) AGNITY INDIA TECHNOLOGIES PVT. LTD. V. ITO ITA NO.3856/DEL/2010 (VI) PHILIPS SOFTWARE CENTRE PVT. LTD. 26 SOT 226 (BANG) (VII) ACIT V. NIT 10 TAXMANN.COM 42 (VIII) DHL EXPRESS INDIA PVT LTD. V. ACIT (2011) 11 TAXMANN.COM 40 ITA NO.1399/BANG/2010 PAGE 8 OF 32 (IX) ITO V. CRM SERVICES INDIA P LTD. ITA NO.4068 & 4796/DEL/2009 (X) DCIT V. DELOITTE CONSULTING INDIA PVT. LTD. ITA NO .1082 & 1084 OF 2010 9. THE LD. COUNSEL FOR THE ASSESSEE CONTENDED THAT SIZE AS A CRITERIA FOR SELECTION OF COMPARABLES IS ALSO RECOMMENDED BY INS TITUTE OF CHARTERED ACCOUNTANTS OF INDIA (ICAI) TRANSFER PRICING GUIDAN CE NOTE WHEREIN IT HAS BEEN OBSERVED THAT A TRANSACTION ENTERED INTO BY A RS.1000 CRORES COMPANY CANNOT BE COMPARED WITH THE TRANSACTION ENT ERED INTO BY A RS.10 CRORE COMPANY. IT WAS CONTENDED THAT THE TPOS RAN GE (RS.1 CRORE TO INFINITY) HAD RESULTED IN SELECTION OF COMPANIES LI KE INFOSYS WHICH IS 918 TIMES BIGGER THAN THE ASSESSEE (TURNOVER OF RS.9 02 8 CRORES AS COMPARED TO RS.9.83 CRORES OF ASSESSEES AE TRANSACTIONS). IT WAS ACCORDINGLY SUBMITTED THAT A PROPER TURNOVER RANGE SHOULD HAVE BEEN APPLIED IN SELECTING COMPARABLE UNCONTROLLED COMPANIES. IT WA S FURTHER SUBMITTED THAT IN ASSESSEES CASE THE TURNOVER RANGE OF RS.1 CRORE AT THE LOWER END TO RS.200 CRORES AT THE HIGHER END MAY BE ADOPTED W HILE CHOOSING THE COMPARABLES. RELIANCE WAS PLACED ON THE DECISION O F THIS BENCH OF THE TRIBUNAL IN THE CASE OF M/S. GENESIS INTEGRATING SYSTEMS (INDIA) PVT. LTD. V. DCIT IN ITA NO.1231/BANG/2010. ALTERNATIVELY IT WAS SUBMITTED THAT A SELECTION ON THE BASIS OF SIZE MAY BE MADE BASED ON THE NASSCOM CATEGORIZATION WHICH RECOGNIZES FOLLOWING THREE CAT EGORIES BASED ON TURNOVER: TIER I : GREATER THAN USD 1 BILLION (APPROX. RS.5 0 00 CRORES) TIER II: BETWEEN USD 100 MILLION TO USD 1 BILLION ( RS.500 CRORES TO RS.5 000 CRORES) OTHERS: LESS THAN USD 100 MILLION (RS.500 CRORES) ITA NO.1399/BANG/2010 PAGE 9 OF 32 THE LD. COUNSEL FOR THE ASSESSEE ALTERNATIVELY SUB MITTED THAT A TURNOVER RANGE OF RS. 1 CRORE TO RS.500 CRORES MIGHT HAVE B EEN ADOPTED FOR SELECTING COMPARABLES. 10. AS REGARDS TO THE INFORMATION RECEIVED IN PURSU ANCE OF NOTICE U/S. 133(6) OF THE ACT BY THE TPO THE LD. COUNSEL FOR T HE ASSESSEE SUBMITTED THAT THE ASSESSEE WAS PROVIDED NOTICES AND REPLIES RECEIVED IN A CD AND THAT THE TPO PROPOSED TO ACCEPT/REJECT THOSE COMPAN IES AS COMPARABLES BASED ON THE RESPONSES RECEIVED FROM THOSE COMPANIE S TO THE NOTICES U/S. 133(6) OF THE ACT AND IN CASE OF VARIANCE BETWEEN R EPLY U/S. 133(6) OF THE ACT IN PREFERENCE TO THE ANNUAL REPORT OF THE COMPA NIES WHICH IS AUDITED BY PROFESSIONAL QUALIFIED CHARTERED ACCOUNTANT AND APPROVED BY BOARD OF DIRECTORS REPLY U/S. 133(6) OF THE ACT WAS GIVEN P REFERENCE AS SUCH THE PROCESS ADOPTED FOR ISSUANCE OF NOTICE AND USE OF S UCH INFORMATION WAS INAPPROPRIATE BECAUSE THE TPO ISSUED NOTICES TO 165 COMPANIES BUT IT WAS NOT CLEAR HOW THOSE COMPANIES WERE SELECTED SINCE T HE BASIS OF SELECTION FOR ISSUING NOTICES U/S. 133(6) OF THE ACT WAS NOT PROVIDED TO THE ASSESSEE THEREFORE THE ENTIRE PROCESS LACKED TRANSPARENCY AN D FAIRNESS AS SUCH THE ARBITRARY APPROACH OF THE TPO WAS CLEAR WHEN ONE LO OKS AT THE SELECTION OF M/S. MEGASOFT LTD. AS COMPARABLE BECAUSE THE SAID C OMPANY WAS REJECTED ON THE GROUND THAT IT FAILS RPT FILTER AND EMPLOYEE COST FILTER. IT WAS POINTED OUT THAT THE TPO HAD STATED THAT NOTICE U/S. 133(6) WAS NOT ISSUED IF THE COMPANY FAILED RPT FILTER HOWEVER IT WAS NOT CLE AR THAT WHAT PROMPTED THE TPO TO ISSUE NOTICE TO SUCH COMPANIES THEREFOR E THE PROCESS ADOPTED BY THE TPO IN SELECTION OF COMPARABLE WAS ARBITRARY AS ALSO SELECTIVE AND HENCE FAULTY. ITA NO.1399/BANG/2010 PAGE 10 OF 32 11. IT WAS CONTENDED THAT THE TPO IN ITS INITIAL SH OW CAUSE NOTICE HAD DETAILED THE PROCESS ADOPTED HOWEVER IN DISCLOSING THE PROCESS OF EXERCISE OF ITS POWERS U/S. 133(6) OF THE ACT AND I NFORMATION OBTAINED THEREUNDER IT WAS BEING SECRETIVE A REFERENCE WAS MADE TO PAGE 90 OF THE TPOS ORDER. IT WAS ACCORDINGLY SUBMITTED THAT WIT HHOLDING THE INFORMATION RESULTED IN PREJUDICE TO THE ASSESSEE AND WAS AGAIN ST THE PRINCIPLES OF NATURAL JUSTICE. IT WAS ALSO SUBMITTED THAT AS PER THE PROVISIONS CONTAINED IN RULE 10D(3) INFORMATION SPECIFIED SHALL BE SUPP ORTED BY AUTHENTIC DOCUMENTS BUT IN THE ASSESSEES CASE THE TPO HAD NOT ESTABLISHED WHETHER THE INFORMATION OBTAINED BY WAY OF NOTICE U /S. 133(6) OF THE ACT WAS AUTHENTIC AND COMPLETE PARTICULARLY WHEN THERE WERE DIFFERENCES BETWEEN THE ANNUAL REPORTS OF THE COMPARABLES AND T HE REPLIES RECEIVED U/S. 133(6) OF THE ACT. IT WAS EMPHASIZED THAT IN SPITE OF DIFFERENCES THE TPO RELIED AND COMPLETED ASSESSMENT BASED ON REPLIE S U/S. 133(6) OF THE ACT IN PREFERENCE TO ANNUAL REPORTS OF THE COMPANI ES WHICH WERE AUDITED BY PROFESSIONALLY QUALIFIED CHARTERED ACCOUNTANT AN D APPROVED BY THE BOARD OF DIRECTORS AN INSTANCE WAS QUOTED FOR M/S . SANKHYA INFOTECH WHICH WAS SELECTED AS COMPARABLE IN THE PRECEDING A SSESSMENT YEAR ON THE GROUND THAT IT WAS SOFTWARE DEVELOPMENT COMPANY DESPITE THE OBJECTION OF THE ASSESSEE THAT IT WAS A PRODUCT COMPANY AND F OR THE YEAR UNDER CONSIDERATION THE SAID COMPANY I.E. M/S. SANKHYA INFOTECH HAD BEEN REJECTED ON THE GROUND THAT IT WAS A SOFTWARE PRODU CT COMPANY (BASED ON REPLY U/S. 133(6) OF THE ACT) THEREFORE THE INCONS ISTENCY RAISED DOUBTS AS TO WHETHER THE ENTIRE PROCESS WAS TRANSPARENT AS ALSO FAIR. IT WAS CONTENDED THAT THE TPO WAS COLLECTING COLLATING AND COMPILIN G DATA TWO/THREE YEARS ITA NO.1399/BANG/2010 PAGE 11 OF 32 AFTER THE DATE OF THE ASSESSEES DOCUMENTATION WHIC H WAS IMPERMISSIBLE AS PER THE PROVISIONS CONTAINED IN RULE 10D OF THE INC OME-TAX RULES 1962 PARTICULARLY WHEN THERE WAS NO FINDING BY THE TPO T HAT A PARTICULAR COMPANY HAD BEEN REJECTED OR IGNORED AS A COMPARABL E ALTHOUGH THE DATA WAS AVAILABLE IN PUBLIC DOMAIN BY THE SPECIFIED DAT E WHICH CLEARLY ESTABLISHED THAT POWER U/S. 133(6) OF THE ACT WAS N OT PROPERLY EXERCISED BY THE TPO WHO USED THE POWER TO GATHER INFORMATION WH ICH CAME INTO PUBLIC DOMAIN AFTER THE SPECIFIED DATE. IT WAS CONTENDED THAT THE POWER U/S. 133(6) OF THE ACT COULD NOT HAVE BEEN USED TO OBTAI N INFORMATION TO ENABLE SELECTION OF COMPARABLES BECAUSE THE DATA HAS TO BE IN EXISTENCE BY THE SPECIFIED DATE I.E. 30 TH NOV. AS RECOGNIZED BY THE AMENDMENT MADE TO DEFINITION OF SPECIFIED DATE BY THE FINANCE ACT 20 11 WHEREIN IT HAS BEEN CLARIFIED THAT THE DATE WAS EXTENDED AS SUFFICIENT DATA WAS NOT AVAILABLE UNDER THE EXISTING SPECIFIED DATE TO MAKE THE COMPA RISON MEANINGFUL. THEREFORE EXTENSION OF SPECIFIED DATE WAS A RECOGN ITION AS ALSO ACCEPTANCE BY THE LEGISLATURE THAT THE COMPARABILIT Y ANALYSIS AS ALSO THE DETERMINATION OF ALP HAS TO BE ON THE BASIS OF DATA THAT WAS AVAILABLE IN PUBLIC DOMAIN BY THE SPECIFIED DATE AND IF SUBSEQUE NT INFORMATION WAS PERMITTED TO BE USED THEN THE ALP WOULD REMAIN FLU ID WHICH COULD LEAD TO EVER CHANGING ALP. IT WAS ALSO CONTENDED THAT THE LAW DOES NOT EXPECT A PERSON TO DO AN IMPOSSIBLE THING AS PER THE MAXIM LEX NON COGIT AD IMPOSSIBILIA I.E. THE LAW CANNOT COMPEL A MAN TO DO THAT WHICH HE CANNOT POSSIBLY PERFORM. THE LD. COUNSEL FOR THE ASSESSEE STATED THAT THE ASSESSEE COULD NOT BE EXPECTED TO ADOPT DATA WHICH WAS NOT IN EXISTENCE BY THE SPECIFIED DATE AND IT WAS SUCH DATA THAT SHO ULD HAVE BEEN VALIDATED ITA NO.1399/BANG/2010 PAGE 12 OF 32 BY THE TPO WHEN A REFERENCE WAS MADE U/S. 92CA OF T HE ACT PARTICULARLY WHEN THERE WAS NO ALLEGATION THAT IT WAS SHORT OR T HE MATERIAL FACTS HAD BEEN DODGED OR IT WAS INCOMPLETE THEREFORE THE SAI D DATA SHOULD HAVE BEEN USED FOR DETERMINATION OF THE ALP AND DATA AVA ILABLE SUBSEQUENTLY OBTAINED THROUGH NOTICE U/S. 133(6) OF THE ACT SHOU LD HAVE BEEN REJECTED THUS THE APPROACH ADOPTED BY THE TPO OF USING SUBSE QUENT DATA WAS BAD IN LAW. 12. IT WAS SPECIFICALLY MENTIONED THAT THE COMPANY M/S. MEGASOFT LTD. WAS SELECTED BY THE TPO IN THE FINAL ORDER PASSED U /S. 92CA OF THE ACT WITHOUT GIVING AN OPPORTUNITY OF BEING HEARD TO THE ASSESSEE THE MARGIN OF THIS COMPANY WAS ADOPTED AT 52.74% IN THE FINAL COM PUTATION OF THE ARMS LENGTH PRICE. THE LD. COUNSEL FOR THE ASSESSEE FUR THER SUBMITTED THAT BEFORE THE DRP IT WAS SUBMITTED THAT THIS COMPANY WAS HAVI NG REVENUES FROM SOFTWARE PRODUCTS AS WELL AS SOFTWARE REVENUES. TH E SAID CONTENTION WAS FORTIFIED BY THE REPLY RECEIVED FROM THE COMPANY M /S. MEGASOFT LTD. A REFERENCE WAS MADE TO PAGE 40 OF PB-II WHICH IS A C OPY OF THE REPLY GIVEN BY M/S. MEGASOFT LTD. IT WAS EMPHASIZED THAT THE D RP REJECTED THE ASSESSEES CONTENTION AND CONCLUDED THAT 65% OF THE EFFORTS OF THE PRODUCT DIVISION COULD BE CATEGORIZED AS RESULTING TO SOFTW ARE SERVICES THE RESIDUAL PRODUCT EFFORTS PERFORMANCE AND REVENUES COMPRISED ONLY OF 23% OF THE TOTAL REVENUES. THE CONTRIBUTION OF THE PRODUCT DI VISION TO THE OVERALL REVENUES UNDER SUCH ANALYSIS BEING LESS THAN 25% OF THE COMPANY IN THE OPINION OF THE DRP WAS TO BE REGARDED AS PREDOMINA NTLY SOFTWARE SERVICE COMPANY AND HENCE ELIGIBLE BEING ADOPTED AS A COMPA RABLE AND THAT THE PRODUCT SEGMENT IN THE CASE OF M/S. MEGASOFT LTD. H AD AN EMPLOYEE COST OF ITA NO.1399/BANG/2010 PAGE 13 OF 32 24.68% WHEREAS THE SOFTWARE SERVICES SEGMENT HAD AN EMPLOYEE COST OF 50.29% WHICH HIGHLIGHTED THE DIFFERENCE BETWEEN TH E SEGMENTS. 13. IT WAS CONTENDED THAT THE MARGINS AT THE ENTITY LEVEL IN THE CASE OF M/S. MEGASOFT LTD. WERE HIGHER THAN THAT OF SEGMENT LEVEL WHEREAS IN THE CASE OF OTHER COMPARABLES E.G. KALS SASKEN TATA ELXSI IGATE ETC. MARGINS AT THE SEGMENT LEVEL WERE HIGHER. THEREFOR E THE APPROACH OF THE TPO WAS ARBITRARY AS SUCH THE SAID COMPANY M/S. M EGASOFT LTD. WAS TO BE REJECTED AS A COMPARABLE. RELIANCE WAS PLACED O N THE FOLLOWING CASELAWS:- (I) ITO V. EGAIN COMMUNICATION PVT. LTD. 2008-TIOL-282- ITAT-PUNE. (II) DCIT V. QUARK SYSTEMS PVT LTD. 2010-TIOL-31-ITAT- CHD-SB (III) M/S. SAP LABS INDIA PRIVATE LTD. V. ACIT 2010-TII-4 4- ITAT-BANG-TP (IV) ITO V. M/S. SAUNAY JEWELS PVT LTD 2010-TII-51-ITAT- MUM-TP (V) MENTOR GRAPHICS (NOIDA) PVT LTD. V. DCUT 109 ITD 10 1 14. IT WAS POINTED OUT THAT ANOTHER COMPARABLE CONS IDERED BY THE TPO AND THE DRP WAS KALS WHICH WAS CONSIDERED AS A COMP ARABLE BY ADOPTING THE FIGURES SUPPLIED IN THE INFORMATION U/ S. 133(6) OF THE ACT WHERE THE SAID COMPANY CONTENDED THAT IT WAS A PURELY SOF TWARE DEVELOPMENT COMPANY CONTRARY TO THE FACTUAL INFORMATION AS AVA ILABLE IN THE ANNUAL REPORT OF THE SAID COMPANY WHICH MENTIONS UNDER THE HEAD INVENTORIES THAT COMPUTER SPARES WERE CHARGED TO CONSUMPTION IN THE YEAR OF PURCHASE AND THE COMPANY WAS ENGAGED IN PROVIDING TRAINING. IN THE SAID SEGMENT I.E. TRAINING CONSISTENT LOSSES WERE REPORTED AND IN THE YEAR UNDER CONSIDERATION THE LOSSES IN THE TRAINING SEGMENT WA S 507%. IT WAS STATED ITA NO.1399/BANG/2010 PAGE 14 OF 32 THAT IT WAS NOT EASY TO CONCEIVE A LOSS AND THAT TO O CONSISTENTLY IN THE TRAINING SEGMENT THEREFORE THIS FEATURE RAISED QUE STION ABOUT THE ALLOCATION OF EXPENSES BETWEEN SEGMENTS WITH A CONSEQUENT DOUB T ON THE VERACITY OF ACCOUNTS AND INVITED FURTHER PROBE AND INVESTIGATIO N AND WITHOUT SUCH PROBE THE RESULTS WERE NOT TO BE CASUALLY ADOPTED IN COMPARING THE MARGINS PARTICULARLY WHEN AS PER ANNUAL REPORT TH E SALARY COST DEBITED UNDER SOFTWARE DEVELOPMENT EXPENDITURE WAS LESS THA N 25% OF THE SOFTWARE SERVICE REVENUES THUS KALS FAILED SALARY COST FILTER AS APPLIED BY THE TPO. THE LD. COUNSEL FOR THE ASSESSEE POINTED OUT THAT SOME OTHER CASES LIKE TATA ELXSI LTD. ACCEL TRANSMATICS LTD. ETC. WERE ALSO NOT COMPARABLE AS SUCH THOSE SHOULD HAVE BEEN REJECTED AS COMPARABLES AND IF THOSE COMPANIES CONSIDERED BY THE TPO AND THE DR P WERE TO BE REMOVED FROM THE LIST OF COMPARABLES THEN THE MARG INS THAT REMAINED AFTER EXCLUDING THE COMPANIES DID NOT DESERVE TO BE MADE AS COMPARABLES. IT WAS CONTENDED THAT THE ASSESSEES MARGINS AFTER EXC LUDING NON-OPERATING COSTS WAS 11.55% WHICH WAS HIGHER AS COMPARED TO TH E ADJUSTED MARGIN OF THE COMPARABLES USING TURNOVER FILTER OF RS.1 CRORE TO RS.200 CRORES AFTER ELIMINATING KALS TATA ELXSI AND ACCEL TRANSMATICS LTD. AND THE MARGIN OF THE ASSESSEE WAS EQUAL TO THE ADJUSTED MARGIN OF TH E COMPARABLES USING TURNOVER FILTER OF RS.1 CRORE TO RS.500 CRORES AFTE R ELIMINATING KALS TATA ELXSI AND ACCEL TRANSMATICS LTD. 15. IT WAS FURTHER STATED THAT EVEN AT THE UNADJUST ED LEVEL AND WITHOUT ELIMINATING KALS TATA ELEXSI ACCEL INFOSYS TECHN OLOGIES THE DIFFERENTIAL WAS WITHIN THE PERMISSIBLE 5% BANDWIDTH THE BENEFI T OF WHICH WAS AVAILABLE TO THE ASSESSEE AS PER CIRCULAR NO.12 OF 2001. ACCORDINGLY IT WAS ITA NO.1399/BANG/2010 PAGE 15 OF 32 SUBMITTED THAT THE ASSESSEES INTERNATIONAL TRANSAC TIONS RELATING TO SOFTWARE DEVELOPMENT SERVICES WERE AT ARMS LENGTH THEREFOR E ADDITION MADE BY THE TPO AND SUSTAINED BY THE DRP WAS TO BE DELETED. 16. IT WAS FURTHER SUBMITTED THAT ONE OF THE COMPAN IES I.E. M/S. INFOSYS TECHNOLOGIES LTD. WHICH IS 906 TIMES BIGGER THAN TH E ASSESSEE WAS REQUIRED TO BE EXCLUDED FROM THE LIST OF COMPARABLE BEING SIGNIFICANTLY DISSIMILAR IN SIZE. RELIANCE WAS PLACED ON THE DEC ISION OF THE ITAT DELHI BENCH IN THE CASE OF AGNITY INDIA TECHNOLOGIES PVT. LTD. V. ITO ITA NO.3856(DEL)/2010. IT WAS ALSO CONTENDED THAT THE TPO REJECTED CERTAIN COMPARABLES SELECTED BY THE ASSESSEE AND HAD THE AN ALYSIS BEEN MODIFIED INCORPORATING THE COMPARABLES SELECTED BY THE ASSES SEE THE RESULTED ARMS LENGTH PRICE WOULD INCREASINGLY SKEW IN FAVOU R OF THE ASSESSEE. 17. IN HIS RIVAL SUBMISSIONS THE LD. CIT(DR) STRON GLY SUPPORTED THE ORDER PASSED BY THE AO AND REITERATED THE OBSERVATIONS MA DE IN THE ASSESSMENT ORDER. HE FURTHER SUBMITTED THAT THE DRP ONLY AFTE R CONSIDERING THE OBJECTIONS OF THE ASSESSEE WORKED OUT THE ARMS LEN GTH PRICE THEREFORE THE ADDITION MADE BY THE AO WAS JUSTIFIED. 18. WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE PARTIES AND CAREFULLY GONE THROUGH THE MATERIAL AVAILABLE ON RE CORD. IN THE PRESENT CASE IT IS NOTICED THAT THE ASSESSEE SELECTED 10 C OMPARABLES OUT OF WHICH 2 VIZ. VISUAL SOFT TECHNOLOGIES LTD. AND VJIL CONS ULTANCY LTD. WERE REJECTED BY THE TPO. HOWEVER THE TPO INCLUDED ANO THER COMPANY M/S. INFOSYS TECHNOLOGIES LTD. WHICH WAS CLAIMED TO BE 9 06 TIMES BIGGER THAN THE ASSESSEE. IN OUR OPINION THE SAID COMPANY BEIN G SIGNIFICANTLY DISSIMILAR IN SIZE SHOULD NOT HAVE BEEN CONSIDERED AS COMPARABLE. IN THE ITA NO.1399/BANG/2010 PAGE 16 OF 32 PRESENT CASE THE TPO INCLUDED CERTAIN COMPANIES AS COMPARABLE ON THE BASIS OF INFORMATION OBTAINED BY WAY OF NOTICE U/S. 133(6) OF THE ACT BUT WITHOUT PROVIDING AN OPPORTUNITY OF BEING HEARD TO THE ASSESSEE THE TPO ISSUED A SHOW CAUSE NOTICE DATED 30.04.09 COPY OF W HICH IS PLACED ON PAGES 95 TO 125 OF THE ASSESSEES PB AND PROPOSED T O REDETERMINE THE ALP ON THE BASIS OF 20 COMPARABLES AND SUBSEQUENTLY ISSUED ANOTHER NOTICE ON 20.07.09 AND PROPOSED TO ADOPT 14 COMPANI ES AS COMPARABLES BUT IN THE FINAL ORDER THE TPO SELECTED 22 COMPANIE S AS COMPARABLES. IN OTHER WORDS 8 ADDITIONAL COMPANIES WERE CONSIDERED AS COMPARABLES APART FROM THOSE WHICH WERE PROPOSED IN THE NOTICE DATED 20.07.09 COPY OF WHICH IS PLACED AT PAGES 305 TO 355 OF THE ASSESSEE S COMPILATION. IT THEREFORE APPEARS THAT NEW COMPANIES WERE ADOPTED B Y THE TPO AS COMPARABLES WITHOUT AFFORDING OPPORTUNITY TO THE AS SESSEE TO PRESENT ITS OBJECTIONS TO THEIR ADOPTION. IT IS WELL SETTLED T HAT NOBODY SHOULD BE CONDEMNED UNHEARD AS PER THE MAXIM AUDI ALTERAM PARTEM BUT IN THE PRESENT CASE NOTHING IS BROUGHT ON RECORD TO SUBSTA NTIATE THAT THE TPO/AO WHILE ADOPTING ADDITIONAL COMPARABLES HAD PROVIDED OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. THEREFORE THIS ISSUE DESERV ES TO BE SET ASIDE TO BE DECIDED AFRESH AT THE LEVEL OF THE ASSESSING OFFICE R. FOR THE AFORESAID VIEW WE ARE FORTIFIED BY THE ORDER DATED 31.01.201 2 OF THE ITAT A BENCH BANGALORE IN THE CASE OF GENESIS MICROCHIP (I) PVT. LTD. BANGALORE V. DCIT CIRCLE 11(3) BANGALORE IN ITA NO.1254/BANG/2 010 FOR THE A.Y. 2006- 07 . 19. IN THE PRESENT CASE THE AO ADOPTED M/S. INFOSY S TECHNOLOGIES LTD. KALS INFORMATION SYSTEM LTD. ACCEL TRANSMATICS LTD . AND TATA ELXSI LTD. ITA NO.1399/BANG/2010 PAGE 17 OF 32 AS COMPARABLES ON THE BASIS OF DATA WHICH WAS OBTAI NED BY HIM IN RESPONSE OF THE NOTICES ISSUED U/S. 133(6) OF THE A CT HOWEVER NO OPPORTUNITY OF BEING HEARD WAS PROVIDED TO THE ASSE SSEE FOR REBUTTAL THEREFORE THE ASSESSING OFFICER WAS NOT JUSTIFIED I N CONSIDERING THOSE COMPARABLES WHILE WORKING OUT THE ALP IN ASSESSEES CASE. IN THAT VIEW OF THE MATTER WE DEEM IT APPROPRIATE TO SET ASIDE THI S ISSUE BACK TO THE FILE OF THE ASSESSING OFFICER TO BE ADJUDICATED AFRESH IN ACCORDANCE WITH LAW AFTER PROVIDING DUE AND REASONABLE OPPORTUNITY OF B EING HEARD TO THE ASSESSEE. THE AO/TPO IS ALSO DIRECTED TO ALLOW TH E OPPORTUNITY TO CROSS- EXAMINE THE COMPARABLES WHOSE REPLIES WERE OBTAINED U/S. 133(6) OF THE ACT AND WERE SOUGHT TO BE USED AGAINST THE ASSESSEE IF THE ASSESSEE SO DESIRES. 20. THE NEXT ISSUE VIDE GROUND NO.14 RELATES TO TH E BENEFIT OF +/- 5% RANGE MENTIONED IN THE PROVISO TO SECTION 92C(2) OF THE ACT. 21. THE FACTS RELATED TO THIS ISSUE IN BRIEF ARE TH AT THE ASSESSEE HAD INTERNATIONAL TRANSACTIONS DURING THE FINANCIAL YEA R 2005-06 AND THE CASE WAS REFERRED TO THE TPO TO DETERMINE THE ALP. THE TPO VIDE ORDER DATED 26.10.2009 STATED THAT AN ADJUSTMENT OF RS.1 19 16 091 WAS REQUIRED TO BE MADE TO THE INCOME OF THE ASSESSEE COMPANY CONSEQU ENT TO DETERMINATION OF THE ALP. THE AO FORWARDED THE DRA FT ORDER DATED 17.12.09 TO THE ASSESSEE TO FILE ITS OBJECTIONS BEF ORE THE DRP. THE DRP DIRECTED THE AO TO COMPLETE THE ASSESSMENT AFTER TA KING INTO CONSIDERATION THE DETAILED DISCUSSION ON VARIOUS ISSUES VIDE DIRE CTIONS UNDER SUB- SECTIONS (5) & (8) OF SECTION 144C OF THE ACT DATED 17.09.10. THE DRP DIRECTED TO MODIFY THE ASSESSMENT ORDER AFTER REWOR KING THE CORRECT MARGIN ITA NO.1399/BANG/2010 PAGE 18 OF 32 AT 51.73% AS AGAINST 52.74% ADOPTED IN THE DRAFT AS SESSMENT ORDER. THE AO ADOPTED THE ADJUSTMENT AT RS.1 18 78 437 AS AGAI NST EARLIER ADJUSTMENT OF RS.1 19 16 091. NOW THE ASSESSEE IS IN APPEAL. 22. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ASSESSEE SHOULD HAVE BEEN GIVEN A STANDARD DEDUCTION OF 5% AS PROVI DED UNDER PROVISO TO SECTION 92C(2) OF THE ACT BEFORE MAKING ADJUSTMENT FOR THE TRANSFER PRICE. RELIANCE WAS PLACED ON THE FOLLOWING CASE LAWS: (1) M/S. SAP LABS INDIA PVT. LTD. V. ACIT 2010-TII-44- ITAT-BANG-TP (2) M/S. GENISYS INTEGRATING SYSTEMS (INDIA) PVT. LTD. V. DCIT ITA NO.1231/BANG/2010 (3) PHILIPS SOFTWARE CENTRE PVT. LTD. 26 SOT 226 (4) MSS INDIA PVT. LTD. 32 SOT 132 (5) CUSTOMER SERVICES INDIA (P) LTD. V. ACIT 30 SOT 486 (6) SKODA AUTO INDIA PVT LTD. V. ACIT 2009-TIOL-214- ITAT-PUNE (7) DEVELOPMENT CONSULTANTS P LTD. V. ACIT 2009-TIOL- 214-ITAT-PUNE (8) SONY INDIA P. LTD. 315 ITR 150 (9) CUMMINS INDIA LTD. V. DCIT ITA NO.277 & 1412/PN/07 (10) TNT INDIA PVT. LTD. V. ACIT 10 TAXMANN.COM 161 (11) ABHISHEK AUTO INDUSTRIES LTD. V. DCIT 2010-TII-54- ITAT-DEL-TP (12) TECHNIMOT ICB PVT LTD. V. ACIT 2011-TII-31-ITAT- MUM-TP (13) M/S. TATRA VECTRA MOTORS LTD. V. DCIT ITA NO.1284/BANG/2010 DTD. 31.01.2012. 23. THE LD. COUNSEL FOR THE ASSESSEE CONTENDED THAT THE CONTENTION OF THE ASSESSEE WAS REJECTED BY THE DRP ON THE GROUND THAT AMENDMENT TO PROVISO TO SECTION 92C WAS CLARIFICATORY IN NATURE AND THEREFORE RETROSPECTIVE IN EFFECT. IT WAS CONTENDED THAT THE AMENDMENT TO PROVISO TO SECTION 92C WAS NOT RETROSPECTIVE AS CLARIFIED BY T HE CBDT BY WAY OF LETTER NO.F.142/13/2010-SO(TPL) DATED 30.09.2010 AND IT WA S CONTENDED THAT A ITA NO.1399/BANG/2010 PAGE 19 OF 32 DEEMING PROVISION HAS BEEN CREATED TO ADOPT AN ARMS LENGTH PRICE IF THE PRICE ACTUALLY UNDERTAKEN BY THE ASSESSEE DOES NOT EXCEED 5% OF THE AMOUNT AT WHICH INTERNATIONAL TRANSACTION HAS ACTUA LLY BEEN UNDERTAKEN INSTEAD OF RECKONING THE PRICE WHICH IS DETERMINED BY THE TPO WHICH WAS THE POSITION UNDER UNAMENDED PROVISO TO SECTION 92C (2) OF THE ACT. IT WAS ACCORDINGLY SUBMITTED THAT THE BENEFIT OF STANDARD DEDUCTION OF 5% SHOULD HAVE BEEN GIVEN TO THE ASSESSEE. 24. IN HIS RIVAL SUBMISSIONS THE LD. CIT(DR) SUBMI TTED THAT NO BENEFIT OF 5% BE GIVEN TO THE ASSESSEE PARTICULARLY WHEN THE P ROVISO TO SECTION 92C(2) OF THE ACT HAS BEEN AMENDED W.E.F. 1.10.2009 . 25. AFTER CONSIDERING THE SUBMISSIONS OF BOTH THE P ARTIES AND MATERIAL ON RECORD IT IS NOTICED THAT A SIMILAR ISSUE HAS BEEN ADJUDICATED BY THE ITAT A BENCH BANGALORE HAVING THE SAME CONSTITUTION IN THE CASE OF M/S. TATRA VECTRA MOTORS LTD. V. DCIT ITA NO.1284/BANG/2010 F OR THE A.Y. 2006-07 WHEREIN THE RELEVANT FINDING HAS BEEN GIVEN IN PARA S 12 TO 17 OF THE ORDER DATED 31.01.2012 WHICH READ AS UNDER: 12. WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE PARTIES AND CAREFULLY GONE THROUGH THE MATERIAL AVAILABLE O N RECORD. IN THE PRESENT CASE THE ASSESSEE HAS NOT DISPUTED THE ADJUSTMENTS U/S. 92CA OF THE ACT BUT CHALLENGING THE WORKING O F ALP WITHOUT GIVING BENEFIT OF THE OPTION AVAILABLE UNDE R THE ERSTWHILE PROVISO TO SECTION 92C(2) OF THE ACT SO IT BECOMES RELEVANT TO DISCUSS THE PROVISIONS CONTAINED IN THE ERSTWHILE P ROVISO TO SECTION 92C(2) OF THE ACT WHICH WAS INSERTED BY FI NANCE ACT 2002 W.E.F. 1-4-2002 AND READS AS UNDER: PROVIDED THAT WHERE MORE THAN ONE PRICE IS DETERMINED BY THE MOST APPROPRIATE METHOD THE ARMS LENGTH PR ICE SHALL BE TAKEN TO BE THE ARITHMETICAL MEAN OF SUCH PRICES OR AT THE OPTION OF THE ASSESSEE A PRICE WHICH MA Y VARY FROM THE ARITHMETICAL MEAN BY AN AMOUNT NOT EXCEEDI NG FIVE PER CENT OF SUCH ARITHMETICAL MEAN. ITA NO.1399/BANG/2010 PAGE 20 OF 32 13. FROM THE PLAIN READING OF THE ABOVE PROVISO I T IS CLEAR THAT THE OPTION IS AVAILABLE TO THE ASSESSEE FOR ADJUSTM ENT OF +/- 5% VARIATION FOR THE PURPOSES OF COMPUTING ALP. AS PE R THE SAID PROVISO WHERE MORE THAN ONE PRICE IS DETERMINED BY THE MOST APPROPRIATE METHOD THE ALP SHALL BE TAKEN TO BE TH E ARITHMETICAL MEAN OF SUCH PRICES OR AT THE OPTION OF THE ASSES SEE A PRICE WHICH MAY VARY FROM THE ARITHMETICAL MEAN BY AN AMO UNT NOT EXCEEDING FIVE PER CENT OF SUCH ARITHMETICAL MEAN. IN OUR OPINION THE BENEFIT OF OPTION I.E. ADJUSTMENT OF +/- 5% VARIATION AS PROVIDED IN PROVISO TO SECTION 92C(2) OF THE ACT IS AVAILABLE TO THE ASSESSEE. 14. ON A SIMILAR ISSUE THE ITAT DELHI BENCH IN T HE CASE OF SONY INDIA PVT. LTD. V. DCIT (2009) 315 ITR (AT) 15 0 HAS HELD AS UNDER: THE PROVISO TO SECTION 92C(2) OF THE ACT CONSISTS MAINLY OF TWO PARTS: (A) WHERE MORE THAN ONE PRICE IS DETERMINED BY THE MOST APPROPRIATE METHOD THEN THE ARMS LENGTH PRICE SHA LL BE TAKEN TO BE THE ARITHMETICAL MEAN OF SUCH PRICE; OR (B) AT THE OPTION OF THE ASSESSEE A PRICE WHICH MAY VARY FROM THE ARITHMETICAL MEAN BY AN AMOUNT NOT EXCEEDING 5 PER CENT OF SUCH ARITHMETICAL MEAN. THE FIRST LIMB OF THE PROVISO HAS GENERAL APPLICATION. THERE IS NO OPTIO N WITH NOR ANY SORT OF CONCESSION ALLOWED TO THE ASSESSEE. THE ARMS LENGTH PRICE SO DETERMINED MAY BE ACCEPTED OR CONTESTED BY THE ASSESSEE OR BY ANY AGGRIEVED PERSO N IN ACCORDANCE WITH THE STATUTORY PROVISIONS. IT IS A STATUTORY LEVY WITHOUT ANY OPTION. THE SECOND LIMB OF THE PR OVISO GIVES AN OPTION TO THE ASSESSEE TO TAKE THE ARMS LENGTH PRICE WHICH MAY VARY FROM THE ARITHMETIC MEAN BY AN AMOUNT NOT EXCEEDING 5 PER CENT OF SUCH ARITHMETIC MEAN. THE WORD OPTION IS SYNONYMOUS WITH CHOICE OR PREFERENCE. THEREFORE IT IS THE CHOICE OF THE A SSESSEE TO TAKE THE ARMS LENGTH PRICE WITH A MARGINAL BENE FIT AND NOT THE ARITHMETICAL MEAN DETERMINED AS THE MOST APPROPRIATE METHOD. THERE IS NOTHING IN THE LANGUA GE TO RESTRICT THE APPLICATION OF THE PROVISION ONLY TO M ARGINAL CASES WHERE THE PRICE DISCLOSED BY THE ASSESSEE DOE S NOT EXCEED 5 PER CENT OF THE ARITHMETIC MEAN. THE ARM S LENGTH PRICE DETERMINED ON APPLICATION OF THE MOST APPROPRIATE METHOD IS ONLY AN APPROXIMATION AND IS NOT A SCIENTIFIC EVALUATION. THEREFORE THE LEGISLATURE THOUGHT IT PROPER TO ALLOW MARGINAL BENEFIT TO ASSESSEES WHO O PT FOR SUCH BENEFIT. IN THE CASE OF AN ASSESSEE WHO EXERC ISES THE ITA NO.1399/BANG/2010 PAGE 21 OF 32 OPTION AND ACCEPTS THE ARMS LENGTH PRICE EVEN EXCE EDING 5 PER CENT OF THE ARITHMETIC MEAN DETERMINED BY THE TAX AUTHORITY AS CORRECT AND IS READY TO PAY TAX ON THE DIFFERENCE BETWEEN THE PRICE DISCLOSED BY HIM AND T HE ARMS LENGTH PRICE THE APPLICATION OF THE PROVISO I S NOT EXCLUDED. THE LEGAL POSITION CANNOT BE DIFFERENT I N A CASE WHERE MINOR VARIATION OF 5 PER CENT IS NOT ACCEPTED AND THE ARMS LENGTH PRICE IS FURTHER CHALLENGED IN APP EAL. THE MERE FACT OF ACCEPTANCE OR NON-ACCEPTANCE OF TH E ARITHMETIC MEAN CANNOT BE TAKEN TO BE THE DETERMINI NG FACTOR RELATING TO THE RIGHT TO CONTEST THE ARMS L ENGTH PRICE IN APPEAL. SUCH INFERENCE IS NOT SUPPORTED B Y THE LANGUAGE OF THE PROVISION. BOTH IN THE FIRST AS ALS O IN THE SECOND LIMB THE IMPLICATIONS OF THE DETERMINED THE ARMS LENGTH PRICE ARE THE SAME EXCEPT FOR THE MARGINAL B ENEFIT ALLOWED TO THE ASSESSEE UNDER THE SECOND LIMB. HEN CE THE SECOND LIMB OF THE PROVISO IS APPLICABLE EVEN TO CA SES WHERE THE ASSESSEE INTENDS TO CHALLENGE THE ARMS L ENGTH PRICE TAKEN AS ARITHMETIC MEAN AND DETERMINED THROU GH THE MOST APPROPRIATE METHOD. THEREFORE THE BENEFI T OF SECOND LIMB IS AVAILABLE TO ALL ASSESSEES IRRESPECT IVE OF THE FACT THAT THE PRICE OF INTERNATIONAL TRANSACTION DI SCLOSED BY THEM EXCEEDS THE MARGIN PROVIDED IN THE PROVISIO N. 15. IN THE PRESENT CASE IT APPEARS THAT THE BENEF IT OF +/- 5% ADJUSTMENT HAS NOT BEEN GIVEN TO THE ASSESSEE FOR T HE REASON (AS MENTIONED BY THE TPO) THAT SALES MADE BY THE ASSESS EE TO THIRD PARTIES WERE HIGHER IN COMPARISON TO THE RATES OF S ALE BY AES TO THE ASSESSEE. BUT NOTHING IS BROUGHT ON RECORD TO SUBSTANTIATE THE AFORESAID OBSERVATIONS OF THE TPO. THE AO HAD ACCE PTED THE RECOMMENDATION OF THE TPO IN HIS REPORT DATED 30.8. 2000 AND MADE THE ADDITION OF RS.1 76 56 164 HOWEVER WHILE DOING SO HE DID NOT ALLOW THE BENEFIT OF THE ADJUSTMENT AS PROV IDED IN THE PROVISO TO SECTION 92C(2) OF THE ACT AND THE CONTEN TION OF THE LD. CIT(DR) WAS THAT SINCE THE IMPUGNED ASSESSMENT WAS MADE AFTER 1.10.2009 THE AMENDED PROVISO TO SECTION 92C(2) OF THE ACT SHALL APPLY IN THIS CASE WHICH ARE APPLICABLE FROM W.E.F . 1.10.2009. AND SHALL ACCORDINGLY APPLY TO THE CASES IN WHICH T HE PROCEEDINGS WERE PENDING BEFORE THE TPO ON OR AFTER SUCH DATE. THEREFORE THE BENEFIT OF +/- 5% INTENDED BY THE ERSTWHILE PRO VISO TO SECTION 92C(2) OF THE ACT WAS NOT AVAILABLE TO THE ASSESSEE . ACCORDINGLY THE LD. CIT(DR) HAD STRONGLY DEFENDED THE ASSESSMEN T FRAMED BY THE AO AND HIS METHOD OF DETERMINING THE ALP. ITA NO.1399/BANG/2010 PAGE 22 OF 32 16. AS REGARDS TO THE APPLICABILITY OF THE AMENDED PROVISIONS IN PROVISO TO SECTION 92C(2) OF THE ACT WHICH IS AP PLICABLE W.E.F. 1.10.2009 IS CONCERNED IT IS NOTICED THAT THIS ISS UE HAS BEEN ADJUDICATED BY THE ITAT PUNE BENCH A PUNE IN ITA NO.1350/PN/2010 IN THE CASE OF STARNET NETWORKS (INDIA) P. LTD. V. DCIT (SUPRA) WHEREIN THE RELEVANT FINDINGS HAS BEEN GIVEN IN PARAS 20 TO 23 OF THE ORDER DATED 03.10.2011 AND RE AD AS UNDER: 20. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIONS. IN THIS CASE A PERTINENT ISSUE WHICH HAS BEEN VEHEMENTLY AGITATED BY THE APPELLANT IS WITH REGARD TO ITS CLAIM OF SEEKING BENEFIT OF THE OPTION AVAILABLE UN DER THE ERSTWHILE PROVISO TO SECTION 92C(2) OF THE ACT. THE ERSTWHILE PROVISO WHICH WAS INSERTED BY FINANCE ACT 2002 WITH EFFECT FROM 1.4.2002 READ AS UNDER: PROVIDED THAT WHERE MORE THAN ONE PRICE IS DETERMI NED BY THE MOST APPROPRIATE METHOD THE ARMS LENGTH PR ICE SHALL BE TAKEN TO BE THE ARITHMETICAL MEAN OF SUCH PRICES OR AT THE OPTION OF THE ASSESSEE A PRICE WHICH MA Y VARY FROM THE ARITHMETICAL MEAN BY AN AMOUNT NOT EXCEEDI NG FIVE PERCENT OF SUCH ARITHMETICAL MEAN. AS PER THE SAID PROVISO AN OPTION IS AVAILABLE TO THE ASSESSEE FOR ADJUSTMENT OF +/-5% VARIATION FOR THE PURPOSES OF COMPUTING ALP. AS PER THE PROVISO WHER E MORE THAN ONE PRICE IS DETERMINED BY THE MOST APPRO PRIATE METHOD THE ARMS LENGTH PRICE SHALL BE TAKEN TO BE THE ARITHMETICAL MEAN OF SUCH PRICES OR AT THE OPTION O F THE ASSESSEE A PRICE WHICH MAY VARY FROM THE ARITHMETI CAL MEAN BY AN AMOUNT NOT EXCEEDING 5% OF SUCH ARITHMET ICAL MEAN. THE POINT MADE OUT BY THE ASSESSEE IS BASED O N THE LATTER PART OF THE PROVISO WHEREBY AN OPTION IS GIV EN TO THE ASSESSEE TO TAKE AN ALP WHICH MAY VARY FROM THE ARITHMETICAL MEAN BY AN AMOUNT NOT EXCEEDING 5% OF SUCH ARITHMETICAL MEAN. FIRSTLY THE CLAIM OF THE REVENU E IS THAT SUCH BENEFIT IS NOT AVAILABLE TO THE PRESENT ASSESS EE BECAUSE THE PRICE OF INTERNATIONAL TRANSACTION DIS CLOSED BY THE ASSESSEE EXCEEDS THE MARGIN PROVIDED IN THE PRO VISO. THIS ASPECT OF THE CONTROVERSY IN OUR VIEW IS NO LONGER GERMANE IN VIEW OF THE PLETHORA OF DECISIONS OF OUR CO- ORDINATE BENCHES NAMELY SONY INDIA (P) LTD. (SUPR A); ELECTROBUG TECHNOLOGIES LTD. (SUPRA) AND DEVELOPME NT CONSULTANT P LTD V DCIT 115 TTJ 577 (KOL.) WHEREIN IT HAS BEEN OBSERVED THAT THE BENEFIT OF THE OPTION CO NTAINED IN THE LATTER PART OF THE PROVISO TO SECTION 92C(2) IS AVAILABLE TO ALL ASSESSEES IRRESPECTIVE OF THE FAC T THAT PRICE ITA NO.1399/BANG/2010 PAGE 23 OF 32 OF THE INTERNATIONAL TRANSACTION DISCLOSED BY THEM EXCEEDS THE MARGIN PRESCRIBED IN THE PROVISO. 21. SO HOWEVER THE OTHER ARGUMENT SET UP BY THE REVENUE AND WHICH HAS BEEN MORE POTENTLY ARGUED IS TO THE EFFECT THAT THE BENEFIT OF SUCH PROVISO IS NOT AVAILABLE TO THE ASSESSEE IN THE INSTANT CASE BECAUSE THE SA ID PROVISO HAS BEEN AMENDED BY THE FINANCE (NO 2) ACT 2009 WI TH EFFECT FROM 1.10.2009 WHICH READS AS UNDER: PROVIDED THAT WHERE MORE THAN ONE PRICE IS DETERMI NED BY THE MOST APPROPRIATE METHOD THE ARMS LENGTH PR ICE SHALL BE TAKEN TO BE THE ARITHMETICAL MEAN OF SUCH PRICES: PROVIDED FURTHER THAT IF THE VARIATION BETWEEN THE ARMS LENGTH PRICE SO DETERMINED AND PRICE AT WHICH THE INTERNATIONAL TRANSACTION HAS ACTUALLY BEEN UNDERTA KEN DOES NOT EXCEED FIVE PER CENT OF THE LATTER THE PR ICE AT WHICH THE INTERNATIONAL TRANSACTION HAS ACTUALLY BE EN UNDERTAKEN SHALL BE DEEMED TO BE THE ARMS LENGTH P RICE. THE CASE SET UP BY THE REVENUE IS THAT THE AMENDED PROVISO SHALL GOVERN THE DETERMINATION OF ALP IN TH E PRESENT CASE INASMUCH AS THE AMENDED PROVISIONS WE RE ON STATUTE WHEN THE PROCEEDINGS WERE CARRIED ON BY THE TRANSFER PRICING OFFICER (TPO). AS PER THE REVENUE THE AMENDED PROVISO WOULD HAVE A RETROSPECTIVE OPERATIO N AND IN ANY CASE WOULD BE APPLICABLE TO THE PROCEED INGS WHICH ARE PENDING BEFORE THE TPO ON INSERTION OF TH E AMENDED PROVISO WHICH HAS BEEN INSERTED BY THE FIN ANCE (NO. 2) ACT 2009 WITH EFFECT FROM 1.10.2009 AND I N THIS CASE THE TPO HAS PASSED HIS ORDER ON 30.10.2009. T HE LEARNED DEPARTMENTAL REPRESENTATIVE HAS ALSO REFERR ED TO THE CBDT CIRCULAR NO 5/2010 (SUPRA) READ WITH CORRIGENDUM DATED 30.9.2010 ISSUED BY THE CBDT IN T HIS REGARD. PER CONTRA THE STAND OF THE ASSESSEE IS TH AT THE AMENDED PROVISO WOULD BE APPLICABLE PROSPECTIVELY A ND WOULD NOT APPLY IN RESPECT OF THE STATED ASSESSMENT YEAR WHICH IS PRIOR TO THE INSERTION OF THE AMENDED PROV ISO WITH EFFECT FROM 1.10.2009. 22. WE HAVE CAREFULLY EXAMINED THE RIVAL STANDS ON THIS ASPECT. THE AMENDED PROVISO HAS BEEN BROUGHT O N THE STATUTE BY THE FINANCE (NO. 2) ACT 2009 WITH EFFEC T FROM 1.10.2009. THE EXPLANATORY NOTES TO THE PROVISIONS OF FINANCE (NO 2) ACT 2009 CONTAINED IN CIRCULAR NO 5 OF 2010 (SUPRA) PROVIDES THE OBJECTIVE BEHIND THE AMEN DMENT ITA NO.1399/BANG/2010 PAGE 24 OF 32 OF THE PROVISO. THE LEGISLATURE NOTICED THE CONFLIC TING INTERPRETATION OF THE ERSTWHILE PROVISO BY THE ASSE SSEE AND THE INCOME-TAX DEPARTMENT. THE ASSESSEES VIEW WAS THAT THE ARITHMETICAL MEAN SHOULD BE ADJUSTED BY 5% TO A RRIVE AT ALP WHEREAS THE DEPARTMENTAL VIEW WAS THAT NO S UCH ADJUSTMENT IS REQUIRED TO BE MADE IF THE VARIATION BETWEEN THE TRANSFER PRICE AND THE ARITHMETICAL MEAN IS MOR E THAN 5% OF THE ARITHMETICAL MEAN. WITH A VIEW TO RESOLVI NG THIS CONTROVERSY THE LEGISLATURE SOUGHT TO AMEND THE PR OVISO TO SECTION 92C(2) WHICH HAS BEEN REPRODUCED BY US IN THE EARLIER PART OF THIS ORDER. IN THE SAID CIRCULAR I T HAS ALSO BEEN ELABORATED THAT THE ABOVE AMENDMENT HAS BEEN M ADE APPLICABLE WITH EFFECT FROM 1.4.2009 AND WILL ACCOR DINGLY APPLY IN RESPECT OF ASSESSMENT YEAR 2009-10 AND SUBSEQUENT YEARS. IN ANY CASE THE PROVISO CONTAIN S A PRESCRIPTION TO DETERMINE THE ALP AND QUITE CLEARLY IT IS A SUBSTANTIVE PROVISION ENCOMPASSING THE EVENTUAL DETERMINATION OF AN ASSESSEES TAX LIABILITY. THUS IT CAN BE SAID THAT THE PROVISO IS NOT A PROCEDURAL PIECE OF LEGISLATION AND THEREFORE UNLESS IT IS SO CLEARLY INTENDED THE NEWLY AMENDED PROVISO CANNOT BE UNDERSTOOD TO B E RETROSPECTIVE IN NATURE. IN FACT IT IS A WELL-SETT LED PROPOSITION THAT THE STATUTORY PROVISIONS AS THEY S TAND ON THE FIRST DAY OF APRIL OF THE ASSESSMENT YEAR MUST APPLY TO THE ASSESSMENT OF THE YEAR AND THE MODIFICATION OF THE PROVISIONS DURING THE PENDENCY OF ASSESSMENT WOULD NOT GENERALLY PREJUDICE THE RIGHTS OF THE ASSESSEE. FURTHERMORE WE ARE FORTIFIED BY THE INTENTION OF T HE LEGISLATURE AS FOUND FROM CIRCULAR NO 5 OF 2010 (SU PRA) WHEREBY IN PARA 37.5 THE APPLICABILITY OF THE ABOV E AMENDMENT HAS BEEN STATED TO BE WITH EFFECT FROM 1.4.2009 SO AS TO APPLY IN RESPECT OF ASSESSMENT YE AR 2009-10 AND SUBSEQUENT YEARS. IN THIS REGARD WE AL SO FIND THAT THE DELHI BENCH OF THE TRIBUNAL IN THE CASE OF ACIT V UE TRADE CORPORATION INDIA (P) LTD. VIDE ITA NO 4405(DEL)/2009 DT 24.12.2010 HAS OBSERVED THAT THE PROVISO INSERTED BY THE FINANCE (NO 2) ACT 2009 WO ULD NOT APPLY TO AN ASSESSMENT YEAR PRIOR TO ITS INSERT ION. IN THIS VIEW OF THE MATTER WE THEREFORE FIND NO JUSTI FICATION TO DENY THE BENEFIT OF +/-5% TO THE ASSESSEE IN TER MS OF THE ERSTWHILE PROVISO FOR THE PURPOSES OF COMPUTING THE ALP. 23. HOWEVER BEFORE PARTING WE MAY ALSO REFER TO A CORRIGENDUM DATED 30.9.2010 BY THE CBDT BY WAY OF WHICH PARA 37.5 OF THE CIRCULAR NO 5/2010 (SUPRA) H AS ITA NO.1399/BANG/2010 PAGE 25 OF 32 BEEN SOUGHT TO BE MODIFIED. THE CORRIGENDUM READS A S UNDER: CORRIGENDUM IN PARTIAL MODIFICATION OF CIRCULAR NO. 5/2010 DATE D 03.6.2010 (I) IN PARA 37.5 OF THE SAID CIRCULAR FOR THE LINE S THE ABOVE AMENDMENT HAS BEEN MADE APPLICABLE WITH EFFECT FROM 1 ST APRIL 2009 AND WILL ACCORDINGLY APPLY IN RESPECT OF ASSESSMENT YEAR 2009-10 AND SUBSEQUENT YEARS. THE FOLLOWING LINES SHALL BE READ; THE ABOVE AMENDMENT HAS BEEN MADE APPLICABLE WITH EFFECT FROM 1 ST OCTOBER 2009 AND SHALL ACCORDINGLY APPLY IN RELATION TO ALL CASES IN WHICH PROCEEDINGS ARE P ENDING BEFORE THE TRANSFER PRICING OFFICER (TPO)ON OR AFTE R SUCH DATE. (II) IN PARA 38.3 FOR THE DATE 1ST OCTOBER 2009 THE FOLLOWING DATE SHALL BE READ: 1ST APRIL 2009. IN TERMS THEREOF IT IS CANVASSED THAT THE AMENDED PROVISO HAS BEEN MADE APPLICABLE WITH EFFECT FROM 1.10.2009 AND SHALL APPLY EVEN TO CASES WHERE PROCEEDINGS WERE PE NDING BEFORE THE TPO ON OR AFTER SUCH DATE IRRESPECTIVE OF THE ASSESSMENT YEAR INVOLVED AND THEREFORE IN THE INS TANT CASE THE BENEFIT OF THE ERSTWHILE PROVISO CANNOT BE EXTENDED TO THE ASSESSEE. WE HAVE CAREFULLY PONDERE D OVER THE ASSERTION MADE BY THE APPELLANT THAT THE CORRIG ENDUM IS UNTENABLE IN THE EYES OF LAW. FIRSTLY THE SAID CORRIGENDUM DOES NOT BRING OUT ANY PREAMBLE SO AS T O THROW LIGHT ON THE CIRCUMSTANCES AND THE BACKGROUND IN WHICH THE SAME HAS BEEN ISSUED. SECONDLY IT IS WEL L UNDERSTOOD THAT THE EXPLANATORY NOTES TO THE PROVIS IONS OF A FINANCE ACT PASSED BY THE PARLIAMENT SEEKS TO EXP LAIN THE SUBSTANCE OF THE PROVISIONS OF THE ACT AS INTEN DED BY THE LEGISLATURE. IN FACT THE HONBLE SUPREME COURT IN THE CASE OF K.P VARGHESE V ITO 131 ITR 597 (KER) EMPHASIZED THE SANCTITY OF THE STATEMENTS CONTAINED IN THE EXPLANATORY NOTES OF THE PROVISIONS AND STATED THAT THE INTERPRETATION PLACED IN SUCH DOCUMENTS IS BINDING INTERPRETATION OF LAW. THE CONTENTS OF THE CORRIGEN DUM ARE QUITE INEXPLICABLE. NOTWITHSTANDING THE AFORESAID A ND WITHOUT GOING INTO THE VALIDITY OF THE CORRIGENDUM DATED ITA NO.1399/BANG/2010 PAGE 26 OF 32 30.9.2010 (SUPRA) WE ARE OF THE VIEW THAT THE SAME WOULD NOT OPERATE TO THE DETRIMENT OF THE ASSESSEE SINCE AT THE RELEVANT POINT OF TIME THE CONTENTS OF THE CIRCULAR NO 5/2010 (SUPRA) WERE IN OPERATION. IN OTHER WORDS T HE WITHDRAWAL OF THE INTERPRETATION PLACED IN CIRCULAR NO 5 /2010 (SUPRA) ON THE APPLICABILITY OF THE AMENDED P ROVISO IS SOUGHT TO BE DONE AWAY BY THE CORRIGENDUM DATED 30.9.2010 AND THEREFORE SUCH WITHDRAWAL SHALL BE EFFECTIVE ONLY AFTER 30.9.2010 EVEN IF SUCH CORRIG ENDUM IS ACCEPTED AS VALID. WE MAY NOTE HERE THAT THE APP ELLANT HAS ASSAILED THE VALIDITY OF THE CORRIGENDUM ITSELF ON WHICH WE HAVE NOT MADE ANY DETERMINATION. THEREFORE THE CORRIGENDUM DATED 30.9.2010 IN OUR CONSIDERED OPINION HAS NO BEARING SO AS TO DIS-ENTITLE THE AS SESSEE FROM ITS CLAIM OF THE BENEFIT OF +/-5% IN TERMS OF THE ERSTWHILE PROVISO TO SECTION 92C(2) OF THE ACT. IN COMING TO THE AFORESAID WE HAVE BEEN GUIDED BY THE PARITY OF REASONING LAID DOWN IN THE JUDGMENTS OF THE HONBLE BOMBAY HIGH COURT IN THE CASES OF BASF (INDIA) LTD. V CIT 280 ITR 136 (BOM); SHAKTI RAJ FILMS DISTRIBUTOR S V CIT 213 ITR 20 (BOM); AND UNIT TRUST OF INDIA & AN RS. V ITO 249 ITR 612 (BOM). THE HONBLE HIGH COURT HAS OPINED IN THE CASE OF BASF (INDIA) LTD. (SUPRA) THA T THE CIRCULARS WHICH ARE IN FORCE DURING THE RELEVANT PE RIOD ARE TO BE APPLIED AND THE SUBSEQUENT CIRCULARS EITHER WITHDRAWING OR MODIFYING THE EARLIER CIRCULARS HAVE NO APPLICATION. MOREOVER THE CIRCULARS IN THE NATURE OF CONCESSION CAN BE WITHDRAWN PROSPECTIVELY ONLY AS H ELD BY THE HONBLE SUPREME COURT IN THE CASE OF STATE B ANK OF TRAVANCORE V CIT 50 CTR 102 (SC). CONSIDERING AL L THESE ASPECTS WE THEREFORE FIND NO JUSTIFICATION I N THE ACTION OF THE LOWER AUTHORITIES IN DISENTITLING THE ASSESSEE FROM ITS CLAIM FOR THE BENEFIT OF +/-5% TO COMPUTE ALP IN TERMS OF THE ERSTWHILE PROVISO TO SECTION 92C(2) OF THE ACT. WE ORDER ACCORDINGLY. 17. WE THEREFORE CONSIDERING THE TOTALITY OF THE FA CTS AND RESPECTFULLY FOLLOWING THE AFORESAID REFERRED TO OR DERS OF THE CO- ORDINATE BENCHES OF THE ITAT AT DELHI & PUNE DIREC T THE ASSESSING OFFICER TO ALLOW THE BENEFIT OF +/-5% TO THE ASSESSEE WHILE COMPUTING THE ALP IN TERMS OF THE ERSTWHILE P ROVISO TO SECTION 92C(2) OF THE ACT. ITA NO.1399/BANG/2010 PAGE 27 OF 32 26. SINCE THE FACTS OF THE PRESENT CASE ARE SIMILAR TO THE FACTS INVOLVED IN THE AFORESAID REFERRED TO CASE OF M/S. TATRA VECTRA MOTORS LTD. V. DCIT IN ITA NO.1284/BANG/2010 ORDER DATED 31.01.2012 SO RE SPECTFULLY FOLLOWING THE SAID ORDER WE DIRECT THE AO TO ALLOW THE BENEF IT OF +/- 5% TO THE ASSESSEE WHILE COMPUTING THE ALP. 27. VIDE GROUND NO.15 THE GRIEVANCE OF THE ASSESSE E RELATES TO THE ACTION OF THE ASSESSING OFFICER IN EXCLUDING THE IN TERNET CHARGES FROM EXPORT TURNOVER WHILE COMPUTING DEDUCTION U/S. 10A OF THE ACT. 28. THE FACTS RELATED TO THIS ISSUE IN BRIEF ARE TH AT THE AO DURING THE COURSE OF ASSESSMENT PROCEEDINGS NOTICED THAT THE A SSESSEE DEBITED A SUM OF RS.13 50 250 IN THE PROFIT & LOSS ACCOUNT TO WARDS COMMUNICATION CHARGES AND THE SAME HAD NOT BEEN REDUCED FROM THE EXPORT TURNOVER FOR THE PURPOSES OF COMPUTING DEDUCTION U/S. 10A OF THE ACT. THE AO ALSO NOTICED THAT THE SAID COMMUNICATION CHARGES INCLUDE D INTERNET CHARGES AMOUNTING TO RS.2 67 047. THE CONTENTION OF THE ASS ESSEE BEFORE THE AO WAS THAT THE PROVISIONS OF SECTION 10A OF THE ACT H AVE BEEN INCORPORATED WITH AN OBJECTIVE OF PROVIDING INCENTIVE TO SOFTWAR E INDUSTRIES AND THE PROPOSAL OF EXCLUDING TELECOMMUNICATION CHARGES FRO M THE EXPORT TURNOVER AND THEN COMPUTING DEDUCTION U/S. 10A OF THE ACT WO ULD ACCORDINGLY FRUSTRATE THE OBJECT BEHIND THE INSERTION OF SECTIO N 10A OF THE ACT AS INCOME OF THE ASSESSEE DERIVED FROM EXPORT OF SERVI CES WOULD BE SUBJECTED TO TAX UNDER THE ACT. THE AO DID NOT FIND MERIT IN THE SUBMISSIONS OF THE ASSESSEE AND HELD THAT A SUM OF RS.2 67 047 BEING E XPENDITURE TOWARDS INTERNET CHARGES WAS TO BE REDUCED FROM THE EXPORT TURNOVER FOR THE ITA NO.1399/BANG/2010 PAGE 28 OF 32 PURPOSE OF COMPUTATION OF PROFIT ELIGIBLE FOR DEDUC TION U/S. 10A OF THE ACT. NOW THE ASSESSEE IS IN APPEAL. 29. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THIS ISSUE HAS BEEN DECIDED IN FAVOUR OF THE ASSESSEE BY THE HONBLE JU RISDICTIONAL HIGH COURT IN THE CASE OF TATA ELXSI LTD. & ORS. 2011-TIOL-684-HC-KAR-II . 30. IN HIS RIVAL SUBMISSIONS THE LD. CIT(DR) SUPPO RTED THE ORDER OF THE ASSESSING OFFICER. 31. WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE PARTIES AND CAREFULLY GONE THROUGH THE MATERIAL AVAILABLE ON RE CORD. IT IS NOTICED THAT AN IDENTICAL ISSUE HAS BEEN DECIDED IN FAVOUR OF TH E ASSESSEE BY THE SPECIAL BENCH OF ITAT CHENNAI IN THE CASE OF ITO V. SAK SOFT LTD. 313 ITR (AT) 353 (CHENNAI)(SB) WHEREIN IT HAS BEEN HELD AS UNDER: TO SAY THAT IN THE ABSENCE OF ANY DEFINITION OF T OTAL TURNOVER FOR THE PURPOSE OF SECTION 10B THERE IS NO AUTHORITY TO EXCLUDE ANYTHING FROM THE EXPRESSION AS UNDERSTOOD IN GENERAL PARLANCE WOULD BE WRONG AS THERE HAS TO BE AN ELEM ENT OF TURNOVER IN THE RECEIPT IF IT HAS TO BE INCLUDED IN THE TOTAL TURNOVER. THAT ELEMENT IS MISSING IN THE CASE OF FR EIGHT TELECOM CHARGES OR INSURANCE ATTRIBUTABLE TO THE DELIVERY O F THE GOODS OUTSIDE INDIA AND EXPENSES INCURRED IN FOREIGN EXCH ANGE IN CONNECTION WITH THE PROVIDING OF TECHNICAL SERVICES OUTSIDE INDIA. THESE RECEIPTS CAN ONLY BE RECEIVED BY THE ASSESSEE AS REIMBURSEMENT OF SUCH EXPENSES INCURRED BY HIM. MER E REIMBURSEMENT OF EXPENSES CANNOT HAVE AN ELEMENT OF TURNOVER. IT IS ONLY IN RECOGNITION OF THIS POSITION THAT IN THE DEFINITION OF EXPORT TURNOVER IN SECTION 10B THE AFORESAID TWO ITEMS HAVE BEEN DIRECTED TO BE EXCLUDED. SECONDLY THE DEFINIT ION OF EXPORT TURNOVER CONTEMPLATES THAT THE AMOUNT RECEIVED BY T HE ASSESSEE IN CONVERTIBLE FOREIGN EXCHANGE SHOULD REPRESENT CONS IDERATION IN RESPECT OF THE EXPORT. ANY REIMBURSEMENT OF THE TWO ITEMS OF EXPENSES MENTIONED IN THE DEFINITION CAN UNDER NO C IRCUMSTANCES BE CONSIDERED TO REPRESENT CONSIDERATION FOR THE EXPORT OF THE COMPUTER SOFTWARE OR ARTICLES OR THINGS. THUS THE EXPRESSION TOTAL TURNOVER WHICH IS NOT DEFINED IN SECTION 10 B SHOULD ALSO ITA NO.1399/BANG/2010 PAGE 29 OF 32 BE INTERPRETED IN THE SAME MANNER. THUS THE TWO IT EMS OF EXPENSES REFERRED TO IN THE DEFINITION OF EXPORT T URNOVER CANNOT FORM PART OF THE TOTAL TURNOVER SINCE THE RECEIPTS BY WAY OF RECOVERY OF SUCH EXPENSES CANNOT BE SAID TO REPRESE NT CONSIDERATION FOR THE GOODS EXPORTED SINCE TOTAL TURNOVER IS NOTHING BUT THE AGGREGATE OF THE DOMESTIC TURNOVER AND THE EXPORT TURNOVER. IN THE FORMULA PRESCRIBED BY SECTION 10B( 4) THE FIGURE OF EXPORT TURNOVER HAS TO BE THE SAME BOTH IN THE N UMERATOR AND IN THE DENOMINATOR OF THE FORMULA. IT FOLLOWS THAT THE TOTAL TURNOVER CANNOT INCLUDE THE TWO ITEMS OF EXPENSES R ECOVERED BY THE ASSESSEE AND REFERRED TO IN THE DEFINITION OF EXPORT TURNOVER. 32. THE AFORESAID DECISION HAD BEEN CONSIDERED AND AFFIRMED BY THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF TATA ELXSI LTD. & ORS. 2011- TIOL-684-HC-KAR-II WHEREIN IT HAS BEEN HELD THAT FOR THE PURPOSE OF COMPUTATION OF DEDUCTION U/S. 10A OF THE ACT IF AN Y EXPENDITURE IS EXCLUDED FROM THE EXPORT TURNOVER THE SAME HAS TO BE EXCLUD ED FROM THE TOTAL TURNOVER ALSO. A SIMILAR VIEW HAS ALSO BEEN TAKEN BY THE HONBLE BOMBAY HIGH COURT IN THE CASE OF GEM PLUS JEWELLERY INDIA LTD. 2010-TIOL-456- HC-MUM-IT . WE THEREFORE BY CONSIDERING THE TOTALITY OF TH E FACTS AS DISCUSSED HEREINABOVE DIRECT THE AO TO EXCLUDE THE EXPENSES BOTH FROM EXPORT TURNOVER AS WELL AS TOTAL TURNOVER WHILE CAL CULATING THE DEDUCTION U/S. 10A OF THE ACT. 33. VIDE GROUND NO.16 THE GRIEVANCE OF THE ASSESSE E RELATES TO THE DEDUCTION U/S. 10A OF THE ACT. THE FACTS RELATING TO THIS ISSUE IN BRIEF ARE THAT THE AO DURING THE COURSE OF ASSESSMENT PROCEED INGS NOTICED THAT IN THE COMPUTATION OF TOTAL INCOME STATEMENT THE ASSE SSEE HAS DECLARED LOSS OF RS.7 06 756 FROM NON-STPI UNIT. THE SAME WAS SH OWN AS CARRIED FORWARD TO SUBSEQUENT YEARS THOUGH THERE WAS BUSINE SS INCOME TO THE TUNE ITA NO.1399/BANG/2010 PAGE 30 OF 32 OF RS.1 78 45 526 WHICH WAS CLAIMED AS DEDUCTIBLE U /S. 10A OF THE ACT. THE AO WAS OF THE VIEW THAT THE TOTAL INCOME OF THE ASSESSEE HAS TO BE ARRIVED AT AFTER AGGREGATING THE INCOME UNDER VARIO US HEADS INCLUDING BUSINESS INCOME WHICH HAS TO BE ARRIVED AT AFTER SE T OFF OF ANY LOSS VIZ. BOTH CURRENT YEAR LOSS AND BROUGHT FORWARD LOSSES A ND DEPRECIATION. HE ACCORDINGLY HELD THAT DEDUCTION U/S. 10A WILL HAVE TO BE ALLOWED ONLY AFTER SET OFF OF SUCH LOSS AS PER PROVISIONS OF SECTION 7 2 OF THE ACT. RELIANCE WAS PLACED ON THE JUDGMENT OF THE HONBLE KARNATAKA HIG H COURT IN THE CASE OF HIMATSINGIKE SEIDE LTD. (2006) 286 ITR 225 . NOW THE ASSESSEE IS IN APPEAL. 34. THE LD. COUNSEL FOR THE ASSESSEE AT THE VERY OU TSET STATED THAT THIS ISSUE IS NOW COVERED IN FAVOUR OF THE ASSESSEE AND AGAINST THE DEPARTMENT BY THE JUDGMENT OF HONBLE JURISDICTIONAL HIGH COUR T ORDER DATED 9.08.2011 IN THE CASE OF CIT LTU V. YOKOGAWA INDIA LTD. BANGALORE COPY OF THE SAID JUDGMENT WAS FURNISHED. 35. THE LD. DR ALTHOUGH SUPPORTED THE ORDER OF THE AO BUT COULD NOT CONTROVERT THE AFORESAID CONTENTION OF THE LD. COUN SEL FOR THE ASSESSEE. 36. AFTER CONSIDERING THE SUBMISSIONS OF BOTH THE P ARTIES AND THE MATERIAL ON RECORD IT IS NOTICED THAT THIS ISSUE H AS NOT BEEN SETTLED BY THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT LTU V. YOKOGAWA INDIA LTD. BANGALORE IN ITA NO.78 OF 2011 VIDE JUDGMENT DATED 09.08.2011. THEIR LORDSHIPS IN PARA 31 OF THE SAID ORDER OBSERV ED AS UNDER: 31. AS THE INCOME OF 10-A UNIT HAS TO BE EXCLUDED AT SOURCE ITSELF BEFORE ARRIVING AT THE GROSS TOTAL INCOME T HE LOSS OF NON 10- A UNIT CANNOT BE SET OFF AGAINST THE INCOME OF 10-A UNIT UNDER SECTION 72. THE LOSS INCURRED BY THE ASSESSEE UNDE R THE HEAD ITA NO.1399/BANG/2010 PAGE 31 OF 32 PROFITS AND GAINS OF BUSINESS OR PROFESSION HAS TO BE SET OFF AGAINST THE PROFITS AND GAINS IF ANY OF ANY BUSINE SS OR PROFESSION CARRIED ON BY SUCH ASSESSEE. THEREFORE AS THE PRO FITS AND GAINS UNDER SECTION 10-A IS NOT TO BE INCLUDED IN THE INC OME OF THE ASSESSEE AT ALL THE QUESTION OF SETTING OFF THE LO SS OF THE ASSESSEE OF ANY PROFITS AND GAINS OF BUSINESS AGAINST SUCH P ROFITS AND GAINS OF THE UNDERTAKING WOULD NOT ARISE. SIMILARLY AS PER SECTION 72(2) UNABSORBED BUSINESS LOSS IS TO BE FIRST SET OFF AND THEREAFTER UNABSORBED DEPRECIATION TREATED AS CURRENT YEARS DE PRECIATION UNDER SECTION 32(2) IS TO BE SET OFF. AS DEDUCTION UNDER SECTION 10-A HAS TO BE EXCLUDED FROM THE TOTAL INCOME OF TH E ASSESSEE THE QUESTION OF UNABSORBED BUSINESS LOSS BEING SET OFF AGAINST SUCH PROFIT AND GAINS OF THE UNDERTAKING WOULD NOT ARISE. IN THAT VIEW OF THE MATTER THE APPROACH OF THE ASSESSING A UTHORITY WAS QUITE CONTRARY TO THE AFORESAID STATUTORY PROVISION S AND THE APPELLATE COMMISSIONER AS WELL AS THE TRIBUNAL WERE FULLY JUSTIFIED IN SETTING ASIDE THE SAID ASSESSMENT ORDE R AND GRANTING THE BENEFIT OF SECTION 10-A TO THE ASSESSEE. HENCE THE MAIN SUBSTANTIAL QUESTION OF LAW IS ANSWERED IN FAVOUR O F THE ASSESSEES AND AGAINST THE REVENUE. 37. IN VIEW OF THE ABOVE THIS ISSUE IS DECIDED IN FAVOUR OF THE ASSESSEE. 38. THE LAST ISSUE VIDE GROUND 17 RELATES TO THE CH ARGING OF INTEREST U/.S 234B AND 234D OF THE ACT. IN THIS REGARD IT WAS T HE COMMON CONTENTION OF BOTH THE PARTIES THAT CHARGING OF INTEREST U/S. 234 B AND 234D OF THE ACT IS CONSEQUENTIAL IN NATURE. WE ORDER ACCORDINGLY. 39. IN THE RESULT THE APPEAL IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. PRONOUNCED IN THE OPEN COURT ON THIS 29 TH DAY OF FEBRUARY 2012. SD/- SD/- ( SMT. P. MADHAVI DEVI ) ( N.K. SAINI ) JUDICIAL MEMBER ACCOUNTANT MEMBER BANGALORE DATED THE 29TH FEBRUARY 2012. DS/- ITA NO.1399/BANG/2010 PAGE 32 OF 32 COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR ITAT BANGALORE. 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR ITAT BANGALORE.