Trilogy E Business Software India Pvt. Ltd. v. Cit

ORDER

A. Mohan Alankamony, Accountant Member. - This appeal instituted by the assessee company - Trilogy E Business Software India Pvt. Ltd is directed against the order of the ld. Assessing Officer passed under section 143(3) read with section 144C of the Act for the assessment year 2006-07.

2. The assessee company in its grounds of appeal had raised fifteen grounds in an illustrative and extensive manner. However, in an attentive scrutinizing of the same, it was noticed that the grievances of the assessee are chiefly confined to the following issues, namely:

(i) that the impugned order of the Assessing Officer under section 143(3) read with section 144C of the Act requires to be quashed;
(ii) in the alternative, the adjustments made by the Transfer Pricing Officer (TPO)/Assessing Officer and confirmed by the Dispute Resolution Panel (DRP) varying the reported value of international transaction be deleted;
(iii) various adjustments ought to have been made to reduce the ALP but have not been so made, be directed to be made;
(iv) telecommunication charges, insurance charges and expenses incurred in foreign currency be not excluded from export turnover in computing deduction under section 10A;
(v) without prejudice, expenses, if any, reduced from export turnover to be reduced from the total turnover in computing deduction under section 10A of the Act; and
(vi) interest levied under section 234B and 234D of the Act require to be deleted.

3. Briefly stated, the assessee company ['the assessee' in short] engaged in the business of development of software including E-business software. For the assessment year under consideration, the assessee filed its return of income, admitting a total income of Rs. 4.91 lakhs. The case was referred to determine the arm's length price in relation to the international transactions entered into by the assessee with its AEs under section 92CA of the Act to the Transfer Pricing Officer (TPO) who, after much deliberation, passed an order under section 92CA of the Act. The draft of the proposed order served on the assessee contained variation to the returned income such as re-determination of arm's length price (ALP) on certain international transactions entered into by the assessee and also three other issues other than transfer pricing. Being aggrieved, the assessee had filed its various objections before the Dispute Resolution Panel [DRP].

3.1 After deliberating the issues, the DRP had made the following observations in its directions dated 31-8-2010, the gist of which, are detailed, items-wise as under:

"(i) Validity of the action of the Assessing Officer in preparing a draft assessment order - The Panel is of the opinion that there is fatal error in the process connected with assessment or determination of ALP by the TPO. The alleged lack of opportunity by the TPO to the assessee gets cured by the Panel giving the assessee an opportunity of hearing and considering its objections.
(ii) The TPO rejecting the transfer pricing documentation maintained by the assessee and substituting it by his own TP study - This panel is of the opinion that the TPO has followed strict objective criteria for selecting/rejecting comparables. If any information was not made available to the assessee at the time of TP study, the same is made good by the Panel taking note of the assessee's objections at the time of disposal of the reference under section 144C. Since the Panel is of the opinion that the TPO followed objective criteria for not accepting the TP study of the assessee and conducting his own TP study, the objections of the assessee with regard rejection of its TP study by the TPO and the methodology followed by the TPO in conducting his own TP study, the objection of the assessee was not accepted
(iii) Exercising of powers under section 133(6) of the Act by the TPO - The objection of the assessee was not accepted since sub-section (7) of section 92CA empowers the TPO to call for any information by exercise of powers under section 131 or133(6) of the Act.
(iv) Rejection of some of the filters proposed by the assessee in its own TP study - After going through the reasoning of the TPO and also weighing the same against the objections of the assessee, the Panel is in agreement with the reasoning of the TPO.
(v) Rejection of certain companies taken by the assessee as comparable and adoption of certain companies as comparable by the TPO - After going through the reasons given by the TPO for accepting/rejecting comparables, the Panel is in agreement with TPO. During the course of hearing, the assessee had raised objection that M/s. Megasoft Ltd. has to be rejected as a comparable because it is a IT product company. The Panel had called for a report from the TPO who had held that Megasoft Ltd. is mainly a software development company can be retained as a comparable. The Panel found that the correct PLI i.e., operating profit/operating cost of the company is 51.73 per cent instead of 52.74 per cent while passing the final assessment order, the TPO is directed to take the mean PLI of comparable companies after adopting the correct PLI of Megasoft Ltd. Apart from this, other objections of the assessee to use of filters and adoption of comparables is not accepted.
(vi) The TPO excluding foreign exchange gain, bank charges of the assessee as part of operating profit while computing net profit margins - The panel is of the opinion that the TPO had correctly held that these sums credits to the Profit and Loss account of the assessee having nothing to do with operating profits and has correctly been excluded.
(vii) With regard to not allowing risk adjustments by the TPO, the Panel was in agreement with the reasons recorded by the TPO in his report [pages 154 - 185]. The last objection being the transfer pricing is that working capital adjustment of 1.4 per cent has been wrongly calculated.
Directions of the DRP:
The Assessing Officer is directed to contact the TPO and if any readjustment of working capital adjusted is required to be done either on account of mistake in computation in original TP report or on account of taking the revised figure of PLI in the case of M/s. Megasoft Ltd. the same should be done.
The other adjustments proposed by the Assessing Officer being:

- re-computing relief under section 10A at Rs. 4.44 crores as against Rs. 4.89 crores claimed;
- erred in reducing Rs. 57.64 lakhs [telecommunication and insurance expenses] from the export turnover for computing section 10A relief on the basis the assessee had included the same in the 'export turnover' when the assessee had not included the same;
- in reducing Rs. 2.41 crores [foreign travel, conveyance and training and recruitment expenses incurred in foreign currency] from export turnover for computing relief under section 10A;
- in holding that delivery of computer software was in the nature of rendering 'technical services' as defining in Explanation 2 to section 9(1)( vii) disregarding judicial view on the issue;
- erred in not reducing the expenses of Rs. 2.99 crores only from the export turnover and not from the total turnover for computing section 10A relief.

Directions of the DRP:
Since similar disallowances were made by the Assessing Officer while computing total income of the assessee for earlier years and the issue is subjudice, the disallowance as proposed by the Assessing Officer was approved.
With regard to levy of interest under section 234D of the Act, the Assessing Officer was directed by the DRP to examine the issue of charging of interest as per the provisions of law while passing the final assessment order.

3.2 In the final assessment order under section 143(3) read with section 144C of the Act on 13-9-2010, the ld. Assessing Officer had computed the deduction under section 10A of the Act at Rs. 4,44,03,914. While doing so, the ld. Assessing Officer had reduced Rs. 57.64 lakhs being telecommunication and insurances expenses and also expenses in foreign exchange of Rs. 2.41 crores [travelling and conveyance and training and recruitment expenses] from the export turnover, as according to the ld. Assessing Officer, all the above expenses in foreign exchange were attributable to providing technical services outside India in accordance to proviso to Explanation 2(iv) of section 10A(8) of the Act. Under the caption transfer pricing, on receipt of order under section 92CA of the Act from TPO and after considering the assessee's objections, the total adjustment under section 92CA of the Act was Rs. 46,96,90,273 as against Rs. 43,61,89,694 shown by the assessee, the difference of Rs. 3,35,00,579 being adjustment under section 92CA of the Act, the same was added to the assessee's income under the head 'Transfer Pricing' and, accordingly, the assessment was concluded.

4. Aggrieved, the assessee has come up with the present appeal. During the course of hearing, Shri Padam Chand Khincha, the ld. A R had argued at length, the gist of which is summarized as under:

- during the year under dispute, the assessee had the following international transaction with its AE -

(i) rendering of software development;
(ii) import of assets for a price;
(iii) receipt of assets free of cost;
(iv) cross charge of professional charges towards training of employees; and
(v) cost reimbursements to AE.

- that the ld. TPO had no objection with respect to purchase of assets, receipt of assets free of charge, cross charge of professional charges and cost reimbursements to AE by the assessee;
- the assessee rendered software development services to its AE for Rs. 43.61 crores. The assessee adopted the Transactional Net Margin Method (TNMM) to justify the price charged in the international transactions. After adopting various search filters, the assessee selected 36 companies as comparables and the arithmetic mean of these comparables was 12.06 per cent. The assessee's operating margin on cost was 11.22 per cent. A +5/- per cent variance from the mean arm's length price, as permitted under law meant that the range of the arm's length operating margins of the comparables would fall between 6.46 per cent and 17.66 per cent. Since the assessee's margin of 11.22 per cent was within the above range, it was concluded that the international transactions relating to software development services are at arm's length;
- that the TPO in his show-cause notice proposed to re-determine the arm's length price for software development services and also remarks on assessee's study, new search methodology, comparables proposes and copies of replies received under section 133(6) from other companies for which the assessee filed a detailed reply wherein it had raised various objections to the proposed action of the ld. TPO;
- that the TPO in his further show-cause notice dated 21-4-2009 requiring information on intra group cross charges and reimbursements transactions between the assessee and its AE which was duly furnished; that there was no objection by the TPO with respect to these transactions and they have been accepted at values they were undertaken;
- in his final order, the ld. TPO had selected 20 companies as comparables and considered six additional companies as comparables from that proposed, out of which two companies were selected by the assessee, that these new companies were adopted as comparables without proposing the same or affording an opportunity to the assessee to present its objection to their adoption; that the arithmetic mean was determined at 20.68 per cent and after factoring a working capital adjustment of 1.47 per cent the adjusted arithmetic mean was determined at 19.2 per cent. The transfer pricing adjustment for the software development services was, accordingly, determined at Rs. 3,39,73,620.
- when the assessee had approached the Dispute Resolution Panel [DRP] for succor, the DRP had, however, virtually rejected the assessee's objection except for correcting an error in the margin computation of one comparable, viz., M/s. Megasoft. The ld. Assessing Officer incorporated the TP adjustment as per the directions of the DRP, while determining the total income;
Submission on turnover filter:
- that in its transfer pricing analysis, the assessee did not apply turnover range either on the lower end or at the higher end, however, the TPO had applied a lower turnover filter of Rs. 1 crore, but, the TPO had not applied the upper turnover limit on the ground that there was no relationship between sales and margins; that size of the comparable is an important factor in comparability which is also recognized by the Statute especially the rules. Rule 10B(3) lays down guidelines for comparing an uncontrolled transaction with an international transaction;
- that differences for transfer pricing purposes can be of two types, viz., ( i) differences in transactions being compared or ( ii) differences in enterprises. A comparable should be rejected, if any of the above difference materially affects the price charged or cost paid, or profit arising from such transactions in the open market unless an accurate adjustment can be made for removing the effect of such differences;
- that while applying any of the methods, the rule recognizes and provides for ironing out the enterprise wide differences; that the TNMM (which has been accepted as the most appropriate method in the instant case) for e.g.,
- contemplates an adjustment for an enterprise wide difference [Rule 10B(1)( e)]. The said rule outlines various conditions for comparability; that in choosing the most appropriate method, rule 10C(2)( e) factors the ability of making reliable and accurate adjustment to account for the differences in the enterprises levels; that size was an important facet of an enterprise level difference. Size of an enterprise is thus to be examined for comparability purposes; that significant differences in size of companies remaining unadjusted would impact comparability;
- that companies operating on a large scale benefit from economies of scale, higher risk taking capabilities, robust global delivery and business models as opposed to the smaller or medium-sized companies and that size therefore matters. Two companies of dissimilar size, therefore, cannot be assumed to earn comparable margins;
- that various Tribunals have taken a stand that the size as one of the selection criteria and especially the Hon'ble Chandigarh Special Bench had rejected adoption of the turnover range of one crore on lower end and infinity on the higher end DCIT v. Quark systems Pvt. Ltd. 38 SOT 207. Such a view has been accepted by various Tribunals, viz.,

(a) Egain Communications Pvt. Ltd. v. ITO 118 TTJ 354 (Pune);
(b) M/s. Sony India (P.) Ltd v. DCIT 114 ITD 448 (Del.);
(c) DCIT v. Indo American Jewellery Ltd., - ITA No. 6194/Mum./2008 - Mumbai;
(d) Philips Software Centre Pvt. Ltd. 26 SOT 226 (Bang).

- that the size as a criteria for selection of comparable was also recommended by OECD in its TP Guidelines, 2010 that -
"(Page 343) Size criteria in terms of sales, assets or number of employees: the size of the transaction in absolute value or in proportion to the activities of the parties might affect the relative competitive positions of the buyer and seller and, therefore, comparability."
- that the ICAI TP Guidance Note (Para 15.4) had also observed that a transaction entered into by a Rs. 1000 crore company cannot be compared with the transaction entered into by Rs. 10 crores company, that the two most obvious reasons are the size of the two companies and the relative economies of scale under which they operate;
- that an appropriate turnover range should have been applied in selecting comparable uncontrolled companies; in the alternative, a selection on the basis of size to be made based on the NASSCOM categorization;
With regard to use of information in pursuance of notice under section 133(6) of the Act:
- that the ld. TPO had adopted the process for issuance of notices and use of such information was inappropriate for the reasons that -

(i) that in all, 165 companies were issued notices, however, it was not clear as to how these companies were selected;
(ii) that the assessee was not fed with the basis of selection of those companies for issuance of notices; that it was not clear whether all the responses have been incorporated in the CD provided to the assessee and that the whole exercise appeared to be a selective;
(iii) that the selection of Megasoft Limited as comparable, as per initial show-cause notice, in fact Megasoft Limited was rejected on the ground that it failed RPT filter and employee cost filter; that in spite of TPO's denial, a notice was issued to Megasoft and information received therefrom was used against the assessee;
(iv) though the TPO had, initially, detailed the process adopted, thereafter, the disclosing the process of exercise under section 133(6) and information obtained being secretive;
(v) when the DRP's attention was drawn to the attitude of the TPO, the Panel had observed that -
'(On page 12) The Panel is of the opinion that there is fatal error in the process connected with assessment or determination of ALP by the TPO. The alleged lack of opportunity by the TPO to the assessee gets cured by the Panel giving an opportunity of hearing and considering its objections.'
(vi) That even the DRP had afforded only one opportunity that too the hearing was for a very minimal duration as many cases were heard by the Panel on the same day; that the assessee was not made known by the DRP that the opportunity of not being heard earlier by the TPO was being cured now and, thus, as admitted by the DRP that the error of not having afforded a sufficient opportunity to the assessee continues, vitiating the entire process whereby making the orders bad in law;

Authenticity of the information received:
- Rule 10(3) provide that the information specified in sub-rule (1) shall be supported by authentic documents. The TPO, had not, however, established whether the information obtained by way of notice under section 133(6) was authentic and complete;
- brushed aside the differences between the annual reports of the comparables and replies received under section 133(6) [for e.g., in the case of Accel] as highlighted by the assessee, the ld. TPO had relied and concluded his report based on replies received, in preference to annual report of the companies which were audited by professional qualified CAs and approved by Board of Directors;
- for e.g., Sankhya Infotech was selected as comparable in preceding assessment year (2005-06) on the ground that it was a software development company despite the stout objection of the assessee that this company was a product company. For the assessment year under consideration, Sankhya Infotech was rejected on the ground that it was software product company. This inconsistency raises doubts as to whether the entire process was transparent and also fair.
Information obtained under section 133(6) of the Act:
- that the assessee had kept and maintained the information and documents required under rule 10D; that the TPO was collecting, collating and compiling data two/three years after the date of the assessee's documentation which was impermissible; that the power under section 133(6)of the Act was to be exercised by the TPO to check and confirm the veracity of data used and adopted by a company and that the power was not to be used to gather information that comes into public domain after the specified date;
- that to invoke the powers under section 92C(3) by either Assessing Officer or TPO to discard the basis on which the ALP computed by the assessee must be that the material or document or information in existence by the specified date, otherwise what was correct and complete on the basis of data existing by the specified date could become unreliable or incomplete in the light of data of other companies that comes into existence subsequently; that powers under section 133(6) were not to be used for gathering data not in existence in public domain by the specified date, that the power under section 133(6) was to be used for validating data which has been adopted, but, cannot be used to obtain information to enable selection of comparables;
- that the amendment made to the definition of specified date by the Finance Act, 2011 recognizes that the data has to be in existence by the specified date which was defined as 30th November; that the extension of the specified date was a recognition that the comparability analysis as also determination of ALP has to be on the basis of data that was available in the public domain by the specified date; that if subsequent information is permitted to be used, then the ALP would remain fluid and, thus, the assessee may determine ALP on the basis of data existing up to a particular date and the TPO may re-determine the ALP on the data subsequently available and subsequently, the DRP will have to re-determine ALP on the basis of up-dated information;
- that the OECD in its TP guidelines discourages use of secret comparables, the data of which is unavailable to the taxpayer;
- that the data as available to it may be used for determination of the arm's length price; that the data available subsequently or obtained through notices under section 133(6) should be rejected as such approach adopted by the TPO of using subsequent data was bad in law;
- without prejudice, that even adopting the subsequent data as used by the TPO, the assessee's margin satisfy the arm's length range
Margin or adoption of various companies as comparables:
( i) Megasoft Ltd.:
- that Megasoft Ltd. [ML] was selected by the TPO in his final order under section 92CA by adopting the margin at 52.74 per cent in the final computation of the arm's length price without affording an opportunity to the assessee;
- that it was contented before the DRP that ML was having revenues from software products as well as software revenues and its year-ending was from January to March, however, the TPO collected the data of the financial year - April to March under section 133(6) - which was otherwise not available in the public domain; that ML had revenues for software products which was fortified by the reply received from ML, according to which, it had two divisions, viz., Product segment and software services segment. ML had provided segmental break-up between the software services segment and software product segment; that the TPO, in case of other comparables similarly placed, had adopted the margins of only the software service segment for comparability purposes; that consistent with such stand, the margins of the software segment only should be adopted in contrast to the entity level margins which contention has been rejected by DRP;
- that DRP had, however, concluded that 65 per cent of the efforts of the product division could be categorized as resulting to software services; that the residual product efforts, performance and revenues comprised of only 23 per cent of the total revenues; that the contribution of the product division to the overall revenues under such analysis being less than 25 per cent, the ML, according to DRP, was to be regarded as predominantly software service company and, hence, eligible for being adopted as a comparable;
- that in the cases of iGate Global, Geometric, Kals Info Systems, R Systems, Sasken Communication, Tata Elxsi, Flextronics etc., the TPO had used segmental margins for comparability purposes; that the revenues from software development in these cases, exceed 75 per cent of total revenues of the entity and, thus, considering Megasoft Ltd. at the entity level would be inconsistent with the PTO's position in case of other comparables; that in case of ML, only the segmental margins should be used for comparability purposes and both the segments being substantially different, considering the margins at entity level would vitiate the comparability; and the margin of 52.74 per cent being abnormal in the case of ML, ML was to be rejected as a comparable.
- relies on case laws:

(a) ITO v. Egain Communication Pvt. Ltd. 2008-TIOL 282 CHD. - SB
(b) Sap labs India Pvt. Ltd. v. ACIT 2010-TII-44 ITAT-BANG.-TP
(c) ITO v. M/s. Saunay Jewels Pvt. Ltd. 2010-TII-51-ITAT-MUM.-TP
(d) Mentor Graphics (Noida) Pvt. Ltd. v. DCIT 109 ITD 101.

( ii) KALS Information Systems Limited - The TPO had considered KALS as a comparable on the ground that it was engaged in software services and its margin was computed at 39.75 per cent. As there were unusual features such as consistent losses in providing training, salary cost etc., the assessee urged that KALS cannot be adopted as a comparable. However, TPO and DRP have considered KALS as a comparables adopting the figures supplied in compliance to notice under section 133(6), that KALS had claimed that 'the core of our business may be classified as that of Pure Software Development service provider', which was contrary to the information available in the Annual report of KALS; that the assessee's request to summon KALS for cross examination was turned down which is against various rulings including that of Kishinchand Chellaram v. CIT 125 ITR 713 (SC).
Thus, KALS Information Systems Limited cannot be considered as comparable.
( iii) Tata Elxsi Limited - Tata Elxsi Ltd. [TEL] had two segments, viz., software development and services & system integration and services for comparability; that under software Development & services segment TEL was engaged in various activities such as ( i) products design services, ( ii) innovative design engineering services and ( iii) visual computing labs and that as per its annual report, TEL was engaged in diverse activities and was not just restricted to pure software development activities like that of the assessee and that TEL in compliance to notice under section 133(6) had stated that it should not be selected as comparable for other software companies. In spite of such fore-warning, TEL has been adopted as a comparable without rebutting or conducting fresh investigation to disprove the limitation expressed;
( iv) Accel Transmatic Limited [ATL] - The TPO selected ATL as comparable and compared the software services segment based on the reply received under section 133(6) of the Act. ATL was not a pure software development service company as the Director's report had stated that ATL had products.
Computation of margins of the assessee:
Foreign Exchange Gain:

- that the TPO had treated foreign exchange gain of Rs. 21.16 lakhs as non- operating income which is quite contrast to Hon'ble Tribunal's finding in the case of SAP Labs India Pvt. Ltd. v. ACIT 6 ITR 81 (Trib.)(Bang.) wherein it has been held that foreign exchange gain needs to be considered as being operating in nature while determining arm's length price.
Income from AOP:
- the assessee had earned Rs. 1.12 crores as assessee's share in prize money received by AOP from participating in an online competition. The scheme of competition was to create solutions that enable users of popular databases to migrate to Ingres open source platform, that the AOP received the prize money for developing a migration toolset for Oracle databases and applications; that the assessee along with certain employees formed a team to participate in the competition with an agreement with the employees that they would be paid Rs. 1 lakh each for participating and if the prize was awarded to the team and the balance was to be retained by the assessee; that the employees who were paid salaries in the normal course, spent time and used the assessee's infrastructure. All these expenses relating to the participation were debited to P & L account. On receipt of prize money by the team, each employee was paid Rs. 1 lakh and the balance amount was credited to Profit and Loss account. Since this activity was in the nature of software development service which was the main business of the assessee and the assessee incurred various expenses towards this, the said income should be considered as operating in nature;
- that the assessee's margins after considering foreign exchange gain and share in prize money from online competitions, the operating profit/operating cost was worked out at 14.05 per cent; that the margin of the assessee as worked out was greater than the adjusted margin of the comparables after eliminating KALS, Tata Elxsi and Accel. Even at the unadjusted level and without elimination of the above companies, the differential is within the permissible 5 per cent bandwidth and, thus, no adjustment was required to be made to the reported value of the assessee's transactions with its associated enterprises; and
- based on all the above, the assessee's transactions with the associated enterprises were at arm's length and the addition made by the TPO which was sustained by the DRP requires to be deleted;

Alternative contention:
Assuming without admitting that turnover filter should not be applied, the following companies deserve to be rejected on merits:

(i) MindTree Consulting Pvt. Ltd - As per Notes to accounts, Mindtree had entered into an agreement with the customer in December, 2003 whereby the warrants have been issued to customer. Total warrants of 82.66 lakhs can be converted into equity shares at an exercise price of Rs. 2/share; that the customer can convert these warrants into equity shares based on revenues generated by the customers during the defined period and on fulfilling the conditions specified in the agreement; that the issue of Mindtree shares was fixed at Rs. 425/share as on the listing date - 7-3-2007 which provides an incentive of Rs. 423/share to the customer. This was an indirect benefit to the customer to the tune of Rs. 349.68 crores. Mindtree had through the above strategy moved the marketing expenditure from P & L account to balance sheet which has eliminated the impact on the P & L A/c. Because of this unusual event, Mindtree should be rejected as a comparable. Alternatively, if Mindtree was to be selected as comparable, the incentive as above should be factored as a cost while computing operating margins;
(ii) Infosys Technologies Limited - Infosys was 207 times bigger than the assessee was dissimilar in size and, thus, should not be accepted as comparable; that the Delhi Tribunal in the case of Agnity India Technologies Pvt. Ltd. v. ITO in ITA No. 3856 (Del.)/2010 had held that Infosys Technologies Limited cannot be compared with small companies having nominal turnover and bearing minimal risks;

- that the following companies are comparables out of the TPO's comparables without applying turnover filter and rejecting the comparables for the detailed reasons and after considering the margins of Megasoft at the segment level:

(a) Aztec Software Limited; ( b) Geometric Software Limited (seg); ( c) iGate Global Solutions Ltd. (seg); ( d) Persistent Systems Ltd.; ( e) R Systems International Limited (seg); ( f) Sasken Communication Technologies Ltd. (seg) ( g) Lucid Software Ltd., ( h) Media Soft Solutions Pvt. Ltd. ( i) R.S.Software (India) Ltd., ( j) SIP Technologies & Exports Ltd., ( k) Bodhtree Consulting Ltd. (1) Synfosys Business Solutions Ltd. ( m) Megasoft Ltd. ( n) Lanco Global Solutions Ltd. & ( o) Flextronics Software Systems Ltd.

- that the margins of the assessee as computed after considering foreign exchange gain and income from share in prize money from online competition was greater than the adjusted margin of the comparables on the above companies after eliminating KALS, Tata Elxsi, Accel, Infosys Technologies and Mindtree and, thus, no adjustment was required to be made to the reported values of the assessee's transactions with its associated enterprises.
Benefit of 5 per cent range:
- assuming without admitting that a TP adjustment was to be made, it should be given a standard deduction of 5 per cent as provided under proviso to section 92C(2) before making adjustments for the transfer price; that the following case laws support the assessee's view:

(i) Sap Labs India Pvt. Ltd. v. ACIT 2010-TII-44-ITAT-BANG.-TP
(ii) Philips Software Centre Pvt. Ltd.26 SOT 226
(iii) MSS India Pvt. Ltd. 32 SOT 132
(iv) Customer Services India (P.) Ltd. v. ACIT 30 SOT 486
(v) Development Consultants (P.) Ltd. v. DCIT 23 SOT 455
(vi) Sony India (P.) Ltd. 315 ITR 150
(vii) TNT India Pvt. Ltd. v. ACIT 10 Txmann.com 161.

That the Hon'ble Bangalore Bench in the case of SAP Labs ( supra ) had held that amendment to section 92C was not retrospective in nature; that based on the above, if at all any adjustment is to be made, it should be given the benefit of standard deduction of 5 per cent and
In conclusion, even after adopting the comparables as chosen by the TPO subject to rejection of some companies for reasons supra, the margins of the assessee is above the arithmetic mean of comparable companies, that these margins would skew more favourably, if comparables of the assessee that deserve to be adopted are considered.

4.1 To strengthen his arguments, the ld. A.R during the course of hearing, furnished two voluminous paper books which consist of, among others, copies of (i) financial statements; (ii) Form No. 3CEB; (iii) transfer pricing study, (iv) correspondence with TPO, DRP, Assessing Officer; (v) Replies to notice under section 133(6) and extracts from annual reports of KLAS, Megasoft Ltd., Tata Elxsi Ltd. Accel Transmatic Ltd., Mindtree Consulting Pvt. Ltd. etc.,

4.2 On the other hand, Shri Etwa Munda, the ld. D R had strongly supported the stand of the ld. Assessing Officer, ld. TPO as well as DRP in arriving at such a conclusion which, according to the ld. D.R, requires to be sustained.

5. We have decisively considered the rival submissions, diligently perused the relevant case records and also various documentary evidences adduced by the ld. AR through voluminous paper books.

5.1 While concluding the assessment under section 143(3) read with section 144C of the Act, the ld. Assessing Officer, under the head 'Computation of income under section 10A' had reduced Rs. 3,23,84,900 [Rs. 57,64,220 + 2,41,79,150] ( sic) Rs. 2,99,43,370 (Rs. 57.64 lakhs being telecommunication expenses and insurance and Rs. 2.41 crores being travelling, conveyance, training and recruitment expenses) from the export turnover of Rs. 43,83,06,498 claimed by the assessee. Brushing aside the assessee's objection, the ld. Assessing Officer made an addition of Rs. 33,43,357 under this head after re-computation.

5.1-1 Under the head 'transfer pricing' as per the order of ld. TPO under section 92CA of the Act, the difference of Rs. 3,35,00,579 [total adjustment was determined under section 92CA at Rs. 46,96,90,273 as against the assessee's claim of Rs. 43,61,89,694] was also added to the assessee's income.

5.2 The cruxes of the submission of the assessee are summarized as under:

"(i) the TPO had applied a lower turnover filter of Rs. 1 crore, but, not applied the upper turnover limit on the ground that there was no relationship between sales and margins which, according to the assessee, contrary to the guidelines laid down in rule 10B(3);
(ii) the TPO had not provided the basis of selection of companies for issuance of notice under section 133(6) of the Act and also it was not clear as to whether all the responses received have been incorporated in the CD supplied to the assessee;
(iii) as the initial details provided to the assessee, e.g., Megasoft Ltd. was rejected on the ground that it fails RPT filter and employee cost filter;
(iv) in initial show-cause notices, the TPO had detailed the process adopted, however, in disclosing the process exercise of its powers under section 133(6) and the information obtained there-under, it was being secretive and only relevant information was provided which, according to the assessee, leads to bias in choosing the comparables;
(v) when DRP's attention was drawn to this lapse of the TPO, the DRP opined that 'there was a fatal error in the process connected with assessment or determination of ALP by the TPO. The alleged lack of opportunity by the TPO to the assessee gets cured by the Panel giving an opportunity of hearing and considering its objection';
(vi) that DRP had afforded only one opportunity that too the hearing was for a very minimal duration as many cases were heard by the Panel on the same day that the assessee was not informed by the panel that the opportunity of being heard early was cured now;
(vii) the TPO had not established whether the information obtained by way of notice under section 133(6) was authentic and complete and when the assessee drew the attention of the TPO the difference between the annual reports of the comparables and replies received (for e.g., ACCEL), ignoring the assessee's protest, the TPO had relied and completed the process based on replies received under section 133(6) in preference to annual reports of the companies audited by the professionally qualified C.As;
(viii) Sankhya Infotech was, for example, selected as comparable in preceding assessment year on the ground that it was a software development company despite the assessee's objection that it was a product company. For the year under consideration, the said company was again rejected on the ground that it was a software company based on reply under section 133(6). These types of inconsistency-galore on the part of TPO, leads to question as to whether the entire process was transparent and fair;
(ix) The information obtained by process of issuance of notice under section 133(6) was not available in public domain or at the time of study by the assessee;
(x) Megasoft Ltd. was selected by the TPO in the order passed under section 92CA of the Act without affording an opportunity to the assessee of being heard. The margin of this company was adopted at 52.74 per cent in the final computation of the arm's length price. When the DRP's attention was drawn by the assessee to the effect that Megasoft Ltd. was having revenues from software products as well as software revenues, the DRP had overruled the assessee's objection and concluded that 65 per cent of the efforts of the product division could be categorized as resulting to software services. This view of the DRP was quite contrast to the TPO's view that a product segment is substantially different from a software service segment. At page 55 of the TP order, the TPO himself has listed various differences between software product company and software service company;
(xi) In the cases of iGate Global, Geometric, KALS Info Systems, R. Systems, Sasken Communication, Tata Elxsi Comparables, the TPO had used segmental margins for comparability purposes where the revenues from software development exceed 75 per cent of total revenues of the entity. Considering Megasoft at the entity level would be inconsistent with the TPO's position in case of other comparables. In case of Megasoft, the margins at the entity level were higher than that at the segment level whereas in case of other comparables e.g., KALS, Sasken, Tata Elxsi, iGate etc., margins at the segment level were higher. This shows the approach of the TPO was arbitrary and without basis.

5.3 On a decisive examination of the relevant records, perusal of impugned orders of TPO, DRP and also submission of the ld. A.R, the following lacunae have been noticed, namely:

"(i) the TPO had applied a lower turnover filter of Rs. 1 crore, but, not applied the upper turnover limit on the ground that there was no relationship between sales and margins which, according to the assessee, contrary to the guidelines laid down in rule 10B(3);
-the assessee, in its argument before this Bench, had vehemently portrayed that the size of the comparable was an important factor in comparability. While doing so, it had drawn strength by citing rule 10B(3) which laid down guidelines for comparing an uncontrolled transaction with an international transaction;
(ii) the assessee's other grievance was that the TPO had selected the companies for issuance of notices under section 133(6) in an arbitrary manner. To drive home its point, the assessee had cited the selection of Megasoft Limited as comparable. According to the assessee, from the details provided along with the initial show-cause notice, Megasoft Limited was rejected as it failed RPT filter and employee cost filter. In spite of TPO's averment that the company was not issued notice under section 133(6) as it failed RPT filter, however, as per assessee's version, a notice was nonetheless issued;
(iii) when the TPO had selectively disclosed the process of exercise of his powers under section 133(6) and the information obtained there-under, that the assessee had urged for disclosure of the entire process as also the furnishing of all the replies, the TPO, according to the assessee, was unresponsive;
-when this short-coming on the part of the TPO was brought to the reference of DRP, the DRP had observed, in its finding, that -
'The Panel is of the opinion that there is fatal error in the process connected with assessment or determination of ALP by the TPO. The alleged lack of opportunity by the TPO to the assessee gets cured by the Panel giving an opportunity of hearing and considering its objections.'
However, on a quick look at the panel's report, it was noticed that the panel had afforded an opportunity to the assessee only on 24-6-2010 that was being the hearing date and consequently the directions were issued on 31-8-2010. According to the assessee, on receipt of the directions of the DRP, the assessee came to know that the DRP mentions about having made good the opportunity not being afforded earlier. It appears that no reasonable opportunity was afforded to the assessee either by the TPO or by the DRP to put-forth its view on the issue and, thus, as admitted by the DRP, the error was allowed to continue thereby vitiating the entire process as highlighted by the assessee;
(iv) there were inconsistencies in selecting the companies as comparables;
(v) On the margin or adoption of various companies as comparable, it was the case of the assessee that Megasoft Limited was selected by the TPO in his final order under section 92CA of the Act without giving an opportunity of hearing at any time to the assessee and when the assessee had protested before the DRP the selection of Megasoft Limited as comparable by the TPO, the DRP, brushing aside the assessee's objection, had justified the TPO's stand;
(vi) The assessee also opposed the TPO's stand in considering KALS Information Systems Limited, Tata Elexsi Limited, Accel Transmatic Limited etc., as comparables which has been summarily rejected by the TPO as well as DRP;
(vii) With regard to computation of margins of the assessee under 'Foreign Exchange Gain', the ld. TPO had, perhaps, treated the same as non-operating income which is quite contrary to the finding of the Hon'ble Bench in the case of SAP Labs India Private Limited v. ACIT 6 ITR 81 (Trib.)(Bang.) wherein it was held that foreign exchange gain needs to be considered as being operating in nature while determining arm's length price. The finding of the jurisdictional Tribunal has not been adhered to while dealing with a similar issue;
(viii) The assessee's sustained urge was that some of the companies such as ( a) MindTree Consulting Private Limited, ( b) Infosys Technologies Limited ought not to have been considered as comparables for the reasons listed ( supra). The TPO had rejected, according to the assessee, certain comparables selected by the assessee without assigning valid reasons;
(ix) According to the assessee, it should be given standard deduction of 5 per cent as provided under proviso to section 92C(2) before making adjustments for the transfer price. To drive home its point, the assessee relies on the jurisdictional Bench's finding in the case of TNT India Private Limited v. ACIT 10 taxmann.com 161 - ITA No. 1442 (BAN.)/08 wherein it was held that '15-2. Having heard both parties and having considered the material on record, we respectfully follow the decisions of our co-ordinate Benches cited supra and direct the Assessing Officer that the ALP shall be arrived at after giving the standard deduction of 5 per cent of the arithmetical mean arrived at by the TPO/Assessing Officer. The Assessing Officer is directed to adopt the arm's length price accordingly' and
(x) With regard to deduction under section 10A of the Act, the assessee's contention was that the expenses claimed were not recovered from the customers and also did not form part of export turnover and the assessee was not engaged in providing technical services outside India."

5.3-1 Out of the 10 points listed out above, two issues as mentioned at Sl. Nos. (vii) and (x), we find that the decisions of the Hon'ble Tribunals are squarely applicable to the facts of issues on hand which are illustrated as under:

(i) With regard to computation of margins of the assessee under 'Foreign Exchange Gain' we find that an identical issue had cropped up before the earlier Bench wherein the Hon'ble Bench in the case of Sap Labs India Pvt. Ltd. v. Asstt. CIT [2011] 44 SOT 156 (Bang.) referred supra had held that the foreign exchange gain needs to be considered as being operating in nature while determining arm's length price. In conformity with the said finding, we decide the issue in favour of the assessee; and
(ii) In respect of deduction under section 10A of the Act, the assessee's contention was that the expenses claimed were not recovered from the customers and also did not form part of export turnover as the assessee was not engaged in providing technical services outside India. In this connection, we recall the finding of the Hon'ble ITAT, Chennai Special Bench in the case of ITO v. Sak Soft Ltd. [2009] 30 SOT 55 wherein the Hon'ble Special Bench made it unambiguously that
"53………..the freight, telecom charges or insurance attributable to the delivery of articles or things or computer software outside India or the expenses, if any, incurred in foreign exchange in providing the technical services outside India are to be excluded both from the export turnover and from the total turnover which are the numerator and the denominator respectively in the formula…."

In conformity with the finding of the Hon'ble Special Bench referred supra, we decide this issue in favour of the assessee.

5.3-2 Taking into account the facts and circumstances with regard to the remaining short-comings as listed out in the fore-going paragraphs and also a fact that the assessee has been deprived of its rightful opportunity to put-forth its view on the issues which have been dealt with at the levels of TPO and DRP and in the interests of natural justice and fairness, the issues raised by the assessee are remitted back on the files of the ld. Assessing Officer/Ld. TPO for consideration afresh and also affording a reasonable opportunity to the assessee of being heard. In the meanwhile, the assessee, through its ld. A.R, is advised to place all the relevant particulars before the authorities concerned to facilitate them to implement the directions of this Bench cited supra, expeditiously.

5.4 Before parting with, we would like to emphasize that though the assessee had raised a ground that the impugned order of the Assessing Officer under section 143(3) read with section 144C of the Act requires to be quashed, however, during the course of hearing, no submission was made to substantiate that the impugned order of the ld. Assessing Officer deserves to be quashed. In view of the above, this ground has not been taken cognizance of. The other ground being charging of interest of interest under section 234B of the Act. This ground is not maintainable as charging of interest under section 234B of the Act is mandatory and consequential in nature. With regard to charging of interest under section 234D of the Act, we would like to recall the finding of the Hon'ble ITAT Delhi E Special Bench in the case of ITO v. Ekta Promoters (P.) Ltd. [2008] 113 ITD 719 wherein it has been held that the levy of interest under section 234D is purely a legal ground and is chargeable for the assessment year 2006-07 and, thus, this ground goes against the assessee.

6. In the result, the assessee's appeal is partly allowed.