Asst C I T Bangalore v. M S Marlabs Software Pvt Ltd Bangalore

In The Income Tax Appellate Tribunal B Bench Bangalore Before Shri Arun Kumar Garodia Accountant Member A Nd Shri Lalit Kumar Judicial Member It Tp A No 588 Bang 201 6 Assessment Year 20 11 12 M S Marlabs Software Pvt Ltd 14 Th Floor Bagmane Citrine Bagmane World Technology Center Kr Puram Marathhalli Outer Ring Road Mahadevapura Village Krishnarajapuramhobli Bangalore 560 048 Pan Aaccm 6627 Q Vs The Assistant Commissioner Of Income Tax Circle 4 1 2 Bangalore Appellant Respondent It Tp A No 424 Bang 2016 Assessment Year 2011 12 The Assistant Commissioner Of Income Tax Circle 4 1 2 Bangalore Vs M S Marlabs Software Pvt Ltd 14 Th Floor Bagmane Citrine Bagmane World Technology Center Kr Puram Marathhalli Outer Ring Road Mahadevapura Village Krishnarajapuramhobli Bangalore 560 048 Pan Aaccm 6627 Q Appellant Respondent Assessee By Shri L Bharath Ca Revenue By Ms Neera Malhotra Cit Dr Date Of Hearing 0 6 1 2 2017 Date Of Pronouncement 0 8 1 2 2017 O R D E R Per Shri A K Garodia Accountant Member These Are Cross Appeals Filed By The Assessee And R Evenue And These Are Directed Against The Assessment Order Dated 27 01 2 016 Passed By The Ao For Assessment Year 2011 12 U S 143 3 R W S 144 C 13 Of The It Act 1961 As Per The Directions Of The Drp It Tp A Nos 588 424 Bang 2016 Page 2 Of 8 2 The Grounds Raised By The Assessee Are As Under 1 On The Facts And In The Circumstances Of The Cas E The Order Passed By The Lao Based On The Directions Issued By The Ho Nble Drp Is Bad In Law To The Extent The Same Are Prejudicial To T He Appellant 2 The Lao Based On The Directions Of Honble Drp Erred In Confirming The Order Of The Learned Tpo Rejecting T He Transfer Pricing Documentation Maintained By The Appellant O N The Basis That A In Respect Of The Comparable Companies Identifie D By The Appellant Current Year Data Was Not Used B The Appellant Had Considered Comparables Compani Es Having Related Party Transaction In Excess Of 25 Of Sales And C The Appellant Had Identified Comparable Companie S For Which Sufficient Financial Information Is Not Available 3 The Honble Drp And The Lao Erred In Confirming The Order Of The Learned Tpo In Rejecting The Following Comparable C Ompanies Identified By The Appellant Swd Segment Comparable Companies Reason For Rejection Akshay Software Technologies Limited Functionally Different Thirdware Solutions Limited Thinksoft Global Services Limited Ancent Software International Limited Not Available In The Public Domain Caliber Point Business Solutions Limited Lgs Global Limited Employee Cost Data Is Not Available Cat Technologies Limited Related Party Transactions Rpt Information Not Available Cg Vak Software And Exports Limited Employee Cost Is Less Than 25 Of Total Sales R Systems International Limited Different Financial Year Ending Saven Technologies Limited Rpt Is More Than 25 Of Sales Zylog Systems Limited Forex By Sales 75 Goldstone Technologies Limited It Tp A Nos 588 424 Bang 2016 Page 3 Of 8 It Enabled Services Comparable Companies Reason Coral Hub Limited Not Found In The Public Database Caliber Point Business Solutions Limited Different Financial Year R Systems International Limited Informed Technologies Limited Functionally Differen T Microgenetics Systems Limited No Financial Data Is Available Cg Vak Software And Exports Limited Income From Comparable Functions Is Less Than Rs 1 Crore 4 The Honble Drp And The Lao Erred In Confirming The Order Of The Learned Tpo Which Involved Adoption Of The Foll Owing Inappropriate Filters For Selection Of Comparable C Ompanies Thereby Making The Arms Length Price Determined By The Ld Tpo Incorrect In Law And In Fact A Exclusion Of Companies With Employee Cost Of Less T Han 25 Of Sales B Exclusion Of Companies Which Have A Financial Year Ending Different From That Of The Taxpayer 5 The Honble Drp And The Lao Erred In Confirming The Order Of The Learned Tpo Which Had Selected The Fol Lowing Comparable Companies That Are Functionally Differen T From The Appellant Swd Services Companies Wrongly Identified By Drp Tpo As Comparable E Zest Solutions Limited E Infochips Limited Icra Techno Analytics Limited It Tp A Nos 588 424 Bang 2016 Page 4 Of 8 It Enables Services Companies Wrongly Identified By Drp Tpo As Comparable Acropetal Technologies Limited Icra Online Limited Jeevan Scientific Technologies Limited 6 The Honble Drp And The Lao Erred In Confirming The Order Of The Learned Tpo That Computed The Operating Profit Marg In Of The Comparable Companies By Considering Provision For B Ad Debts As Non Operating In Nature 7 The Honble Drp And The Lao Erred In Confirming The Order Of The Learned Tpo Which Has Considered Incorrect Valu E Of Receivables And Payable In The Case Of The Appellan T While Computing The Working Capital Adjustment For Determ Ining The Arms Length Price 8 The Honble Drp And The Lao Erred In Confirming The Order Of The Learned Tpo Which Contained An Improper Computation Of The Working Capital Adjustment While Determining The Ar Ms Length Price The Drp Tpo And The Lao Erred In A Not Considering The Unbilled Revenue Advances R Eceived From The Associated Enterprises Towards Provision O F Services Unearned Revenue Prepaid Expense Advanc E To Suppliers Advance Recoverable In Cash Or In Kind A Nd Other Payables Receivables While Computing The Adjustment For Working Capital Deployed By The Appellant Vis A Vis The Comparables B Incorrectly Computing The Value Of The Accounts Receivable And Accounts Payable Of The Comparable Companies C Arbitrarily Restricting The Working Capital Adju Stment At 1 63 To The Software Development Services And At 1 47 To The It Enabled Services Segment 9 The Honble Drp And The Lao Erred In Confirming The Order Of The Learned Tpo Which Had Failed To Provide Adequate Ad Justment Towards Differences In Risk As Claimed By The Appel Lant To Improve Degree Of Comparability 10 Without Prejudice To The Above Grounds The Lao Erred While Giving Effect To The Directions Of The Drp In Comp Uting The Transfer Pricing Adjustment At Rs 3 21 79 754 Instead Of Rs 2 91 86 154 On The Above And Such Other Grounds As May Be Urged At The Time It Tp A Nos 588 424 Bang 2016 Page 5 Of 8 Of Hearing Your Appellant Prays Your Honour To Cons Ider The Facts And Circumstances Of The Case And Render Justice 3 The Grounds Raised By The Revenue Are As Under 1 The Directions Of The Dispute Resolution Panel A Re Opposed To Law And Facts Of The Case 2 The Honble Drp Erred In Directing The Ao To Red Uced The Expenses Both From The Export Turnover As Well As Total Turn Over When There Is No Provision In Section 10 A Which Requires The S Aid Expenses To Be Reduced From The Total Turnover 3 The Honble Drp Erred In Holding That Foreign Ex Change Loss Or Gain Is A Part Of Operating Expense Or Operating In Come As The Case May Be When The Tpo Has Excluded This Data From Th At Of The Comparables 4 Whether The Drp Is Correct In Foreign Exchange F Luctuation As Operating In Nature While Treating Foreign Exchang E Fluctuation Non Operating In Nature As Applied By The Tpo 5 The Honble Drp Erred In Granting 1 Risk Adjust Ment Arbitrarily Without Appreciating The Facts Of The Case And Its Comparables 6 The Appellant Craves Leave To Add Alter Amend And Or Delete Any Of The Grounds Mentioned Above 4 First We Take Up The Appeal Of The Assessee It Was Submitted By Ld Ar Of Assessee That Ground No 1 Is General And Ground No S 2 3 And 4 Are Not Pressed 5 Regarding Ground No 5 He Drawn Our Attention T O Page No 9 Of The Drp Order He Submitted That As Per The Decision Of Drp On Thi S Page It Was Held By Drp That Since Some Of These Comparables Will Get Exclu Ded For The Reason That The Objection Of Assessee Regarding Turnover Filter Hav Ing Been Accepted The Objection Regarding Functional Dissimilarity Of Rem Aining Comparables Is Not Accepted As For Tnmm Only Broad Functional Compara Bility Is Required And Exact Matching Of Functions Is Not Required He Su Bmitted That Hence It Can Be Seen That Noted Drp Has Decided The Issue In A Cryp Tic Manner Without It Tp A Nos 588 424 Bang 2016 Page 6 Of 8 Considering Various Specific Contentions Raised By The Assessee Regarding This Aspect That Several Comparables Are Functionally Di Ssimilar 6 Regarding Ground No 6 He Drawn Our Attention T O Page No 11 Of The Drp Order And Pointed Out That In Respect Of Assessees Claim For Accepting Provisions Written Back Provision For Doubtful Deb Ts In Operating Nature Also The Decision Of Drp Is Very Cryptic 7 Regarding Ground Nos 7 8 And 10 Our Attention Was Drawn To Page No 12 Of The Order Of Drp And Pointed Out That In Respect Of Working Capital Adjustment Claim Also The Issue Was Decided By Drp In A Crypt Ic Manner By Directing The Ao Tpo To Verify The Claim And Correct It If Ther E Is Any Inaccuracy In The Same 8 Regarding Ground No 9 Our Attention Was Drawn To Page No 15 Of Drp Order And It Was Pointed Out That The Issue Regarding Ris K Adjustment Was Also Decided By Drp In A Cryptic Manner The Ld Dr Of Revenue Also Admitted That The Order Of Drp On Several Issues Is Cryptic And H Ence The Matter May Be Restored Back To The File Of Drp For Fresh Decision 9 We Have Considered The Rival Submissions And Gon E Through The Order Of Drp And In Our Considered Opinion The Order Of Drp Are Very Cryptic In Respect Of The Issues Raised By The Assessee As Per Ground Nos 5 To 10 We Set Aside The Assessment Order On These Issues And Restore This M Atter Back To The File Of Drp For Fresh Decision By Way Of A Speaking And Rea Soned Order After Providing Adequate Opportunity Of Being Heard To Both Sides 10 In The Result The Appeal Filed By The Assessee Is Partly Allowed For Statistical Purposes 11 Now We Take Up The Appeal Of The Revenue The Ld Dr Of Revenue Submitted That Ground No 1 Is General Regarding Ground No 2 It Was Agreed By Both Sides That This Issue Is Now Covered In Favour Of T He Assessee By The Judgement Of Honble Karnataka High Court Rendered In The Cas E Of Cit Vs Tata Elxsi Ltd As Reported In 349 Itr 98 Respectfully Following This Judgement We Hold That It Tp A Nos 588 424 Bang 2016 Page 7 Of 8 There Is No Infirmity In The Directions Of Drp On T His Issue Because The Direction Of Drp On This Issue Is In Line With This Judgment Of Honble Karnataka High Court Wherein It Was Held By Honble Karnataka High Court That Total Turnover Is Sum Total Of Export Turnover And Domest Ic Turnover And Therefore If An Amount Is Reduced From Export Turnover Then Tota L Turnover Also Goes Down By The Same Amount Hence On This Issue We Declin E To Interfere In The Assessment Order Accordingly Ground No 2 Of The Revenues Appeal Is Rejected 12 Regarding Ground Nos 3 4 And 5 It Was Submit Ted By Ld Dr Of Revenue That The Order Of Drp Is Very Cryptic And Therefore On Both These Issues The Matter May Be Restored Back To The File Of Drp For Fresh D Ecision By Way Of A Speaking And Reasoned Order The Ld Ar Of Assessee Support Ed The Order Of Drp 13 We Have Considered The Rival Submissions And We Find That The Order Of Drp Is Very Cryptic In Respect Of Both The Issues I E Reg Arding Foreign Exchange Fluctuation And Risk Adjustment Hence We Restore Both These Matters Back To The File Of Drp For Fresh Decision With The Directi On That In Respect Of Foreign Exchange Fluctuation It Has To Be Seen That Whethe R Such Foreign Exchange Fluctuation Gain Loss Is In Respect Of Turnover O F The Present Year Or Of The Earlier Year And If It Is Found That The Same Is In Respect Of The Turnover Of The Present Year Then The Same Should Be Considered As Operating Gain Loss Of The Present Year For The Purpose Of Computing Alp But If It Is For Earlier Years Turnover Then The Same Should Not Be Considered In The Present Year For The Purpose Of Computing Alp Although Its Nature Is Adm Ittedly Of Operating Revenue Expenditure Because For The Purpose Of Comp Uting Alp Under Tnmm Operating Profit Percentage Is Worked Out By Dividi Ng Operating Profit By Turnover And Therefore If The Foreign Exchange Flu Ctuation Gain Loss Is In Respect Of Earlier Years Turnover Then The Corre Sponding Turnover Is Not Getting Included In The Denominator And Therefore Adding The Foreign Exchange Fluctuation Gain In The Profit Will Give Absurd Res Ult Hence Foreign Exchange Fluctuation Gain Loss In Respect Of Earlier Year Turnover Should Not Be Considered For Alp Calculation Of The Tested Party Similarly For The Comparable Companies Also Only Those Exchange Fluctuation Gai N Loss Should Be It Tp A Nos 588 424 Bang 2016 Page 8 Of 8 Considered Which Are In Respect Of Turnover Of The Present Year And If The Same Is For Earlier Years Turnover It Should Not Be Co Nsidered For The Purpose Of Computing Alp If This Information Is Not Available As To Whether Such Gain Loss Is Relatable To The Turnover Of The Present Ye Ar Or An Earlier Year Then It Should Be Accepted That Such Gain Loss Is In Resp Ect Of Earlier Years Turnover And Therefore It Should Not Be Considered For The Purpose Of Computing Alp Because Normally Any Fluctuation Gain Loss For C Urrent Year Is Adjusted In Turnover Itself Without Showing It Separately As Fo Reign Exchange Fluctuation Gain Loss Similarly Regarding Risk Adjustment A Lso The Assessee Should Provide Working Of Such Claim And Only Thereafter The Drp Should Adjudicate This Issue After Providing Reasonable Opportunity O F Being Heard To Both Sides The Order Of Drp On All The Issues Should Be A Spea King And Reasoned Order 14 In The Result The Appeal Filed By The Revenue Is Partly Allowed For Statistical Purposes 15 In The Combined Result The Appeal Filed By The Revenue And That Of The Assessee Are Partly Allowed For Statistical Purposes Order Pronounced In The Open Court On The Date Ment Ioned On The Caption Page Sd Sd Lalit Kumar Arun Kumar Garodia Judicial Member Accountant Member Bangalore Dated The 08 Th December 2017 Ms Copy To 1 App Ellant 2 Respondent 3 Cit 4 Cit A 5 Dr Itat Bangalore 6 Guard File By Order Senior Private Secretary Income Tax Appellate Tribunal Bangalore