IN INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH B , BANGALORE BEFORE SHRI A. K. GARODIA, ACCOUNTANT MEMBER AND SMT ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER ITA No.1072 (Bang) 2012 (Assessment year : 2005-06) M/s Open Silicon Research Private Ltd., 11/1 & 12/1, Third Floor, Maruthi Infotech Centre, Indiranagar, Koramangala Intermediate Ring Road, Bangalore -560 078 PAN: AAACO5915B Appellant Vs ITO, Ward 12 (1), Bangalore Respondent ITA No.1060(Bang) 2012 (Assessment Year : 2005-06) ITO, Ward 12 (1), Bangalore Appellant Vs M/s Open Silicon Research Private Ltd., 11/1 & 12/1, Third Floor, Maruthi Infotech Centre, Indiranagar, Koramangala Intermediate Ring Road, Bangalore -560 078 PAN: AAACO5915B Respondent Assessee by : Shri T. Suryanarayana. Advocate Revenue by : Ms. Neera Malhotra, CIT Date of hearing : 26-09-2016 Date of pronouncement: : 13-10-2016 2 IT(TP)A No.1072 & 1060(B)2012 ORDER PER SHRI A.K.GARODIA, AM These are cross appeals filed by assessee and revenue and these are directed against order of learned CIT (A) IV Bangalore dated 20.06.2012 for A. Y. 2005 06. 2. grounds raised by assessee are as under: grounds hereinafter taken by Appellant are without prejudice to one another. 1. That order passed by learned Commissioner of Income Tax (Appeals) - IV, Bangalore ["CIT (Appeals)"], to extent prejudicial to Appellant, is bad in law and liable to be quashed. 2. That learned CIT (Appeals) erred in upholding rejection of Transfer Pricing ('TP') documentation by learned Transfer Pricing Officer ('TPO')/ Assessing Officer ('AO') and thereby erred in not appreciating that Appellant had prepared TP documentation bona fide and in good faith and conducted comparable analysis based on detailed Functional Asset and Risk ('FAR') analysis performed with due diligence and data available at time of conducting comparability analysis. 3. That on facts and in circumstances of case, learned CIT (Appeals) erred in determining upward adjustment to transfer price of Appellant under Section 92CA of Income Tax Act, 1961 (the 'Act'), in respect of its contract software development services and in doing so grossly erred in: (a) Ignoring limited risk nature of services provided by Appellant as detailed in TP documentation and in upholding conclusion of learned TPO that no adjustment on account of risk differential is required while determining Arm's Length Price of international transactions of Appellant, as arithmetic mean of margins of comparables under Transactional Net Margin Method takes care of such insignificant differences. (b) Rejecting fact that Appellant had continued to be remunerated on arm's length basis for its services during its 3 IT(TP)A No.1072 & 1060(B)2012 start up period of operations even though associated enterprise had suffered losses, during relevant financial year. (c) Rejecting additional factual evidences filed by Appellant to support fact that associated enterprise had remunerate Appellant more than what associated enterprise had received from independent third parties for similar services, without providing any cogent reasons. (d) Upholding rejection of comparability analysis of Appellant in TP documentation and accepting comparability analysis performed by learned TPO in TP Order. (e) Upholding introduction of additional filters and comparables by learned TPO that do not satisfy test of comparability. (f) Performing his own comparability analysis by modifying certain filters applied by learned TPO and therein selecting certain companies that ought to have been rejected as not satisfying test of comparability and rejecting companies that ought to have been considered as they are functionally similar to Appellant. (g) Disregarding application of multiple year/ prior year data as used by Appellant in TP documentation and holding that current year (i.e. Financial Year 2004-05) data for comparable companies should be used. (h) Not appreciating fact that search strategy applied by learned TPO for introduction of companies as comparables and responses obtained by learned TPO by exercising his power under section 133(6) of Act, was not provided to Appellant during assessment proceedings. 4. learned CIT (Appeals) erred in upholding charging of interest under section 234B of Act. 5. That Appellant craves leave to add to and / or alter, amend, rescind or modify grounds taken hereinabove before or at time of hearing of this appeal. 3. grounds raised by Revenue are as under: 1. order of learned CIT(A) is opposed to law and facts of case. 4 IT(TP)A No.1072 & 1060(B)2012 2. On facts and in circumstances of case learned CIT(A) erred in holding that communication & traveling expenses amounting - to Rs. 19,63,837 are to be excluded from total turnover as well, for computation of deduction u/s. 10A of Act whereas such exclusion is permitted to arrive at export turnover only as per definitions given in section 10A of IT Act and total turnover has not been defined in section 10A of Act. 3. CIT(A) ought to have appreciated that decision of Hon'ble High Court of Karnataka in case of M/s Tata Elxsi Ltd. on issue of computing deduction u/s 10A by excluding above expenses from export turnover and total turnover as well, has not reached finality in view of pending Department's SLP before Hon'ble Supreme Court. 4. On facts and in circumstances of case learned CIT(A) erred in holding that TPO ought to have excluded comparables having any related party transactions, not only those with more than 25% related party transactions on sales. 5. On facts and in circumstances of case learned CIT(A) erred in holding that size, turnover and brand of company are deciding factors for treating company as comparable, and accordingly erred in excluding M/s Infosys Technologies Ltd as comparable. 6. On facts and in circumstances of case learned CIT(A) erred in excluding M/s Exensys Software Solution Ltd., M/s Thirdware Solutions Ltd. and M/s Tata Elxsi Ltd. as comparables to software development segment of assessee company. 7. For these and other grounds that may be urged at time of hearing, it is prayed that order of CIT(A) in so far as it relates to above grounds may be reversed and that of Assessing Officer may be restored. 8. appellant craves leave to add, alter, amend and / or delete any of grounds mentioned above. 4. It was submitted by learned AR of assessee that Learned CIT(A) has adopted 0% RPT filter and now tribunal is taking view that this filter should be 15%. He submitted that if 15% RPT filter is applied, various comparables rejected by CIT (A) will get reinstated but thereafter, those comparables has to examined on other aspects such as Functional 5 IT(TP)A No.1072 & 1060(B)2012 similarity etc. and therefore, entire TP matter may be restored back to CIT (A) for fresh decision by applying 15% RPT Filter. Learned DR of revenue also agreed with this proposition. 5. We have considered rival submissions and we find force in submissions of learned AR of assessee because 15% RPT Filter is accepted norms and once this 15% RPT filter is applied, various comparables rejected by CIT (A) will get reinstated but thereafter, those comparables has to examined on other aspects such as Functional similarity etc. Hence, we set aside order of learned CIT (A) on total TP issues and restore back matter to him for fresh decision by applying 15% RPT Filter and examining comparables left after applying this filter on various other aspects such as functional comparability etc. after providing adequate opportunity of being heard to both sides. There is no other issue in these appeals except interest issue in assessee s appeal, which is consequential. 6. In result, appeal of assessee as well as of revenue is allowed for statistical purposes. Order pronounced in open court on date mentioned on caption page. Sd/- Sd/- (SMT ASHA VIJAYARAGHAVAN) (A.K. GARODIA) JUDICAL MEMBER ACCOUNTANT MEMBER Place: Bangalore: Dated: 13.10.2016 DS 6 IT(TP)A No.1072 & 1060(B)2012 Copy to : 1 Appellant 2 Respondent 3 CIT(A)-II Bangalore 4 CIT 5 DR, ITAT, Bangalore. 6 Guard file By order AR, ITAT, Bangalore M/s Open Silicon Research Private Ltd. v. ITO, Ward12 (1), Bangalore