TaxTMI 
TaxTMI 
2012 (2) TMI 172
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....stice; (ii) making a reference to Transfer Pricing Officer for determining arm's length price; (iii) passing the order without demonstrating that appellant had motive of tax evasion; (iv) not appreciating that the members of Dispute Resolution Panel also being jurisdictional Commissioners/Director of Income Tax of the appellant, the constitution of the DRP is bad in law; (v) not appreciating that the charging or computation provision relating to income under the head "profits and gains of business or profession" do not refer to or include the amounts computed under Chapter X and therefore the addition under Chapter X is bad in law; (vi) adopting a flawed process of issuing notices u/s 133(6) and relying on the same without providing complete information to the appellant or an opportunity to cross examine the parties involved; (vii) rejecting comparables and transfer pricing analysis of the appellant on unjustifiable grounds; (viii) doing fresh transfer pricing analysis and adopting inappropriate filters in such analysis; (ix) considering the data which was not available to the appellant at the time of complying....
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....ct dated 22/06/2010 and one opportunity of hearing was given on 11/8/2010 and the DRP vide its order dated 20/09/2010 upheld the TPO/AO's transfer pricing adjustment with minor modification in regard to M/s Megasoft Ltd. 5. Being aggrieved with the direction of the DRP, the appellant company ['the appellant' in short] has come up with the present appeal. During the course of hearing, the Ld. A.R argued, touching various aspects and also filed two written submissions, the substances of the second written submissions are summarized as under: (1) The appellant rendered software development services wholly to its AE. The total value of software development service was Rs. 24,06,82,087/-. The appellant adopted Transactional Net Margin Method (TNMM) to justify the price charged in the international transactions. The appellant conducted a methodical search process on Prowess database to identify comparable companies. After adopting various search filters, the appellant selected 49 companies as comparables. The arithmetic mean of these comparables was 11.01%. The appellant's operating margin on cost was 10.70%. Since the appellant's margin of 11.01% was within the 5% range as prov....
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.... wide differences. The TNMM (which is adopted by the TPO as the most appropriate method in the instant case), for e.g., contemplates an adjustment for an enterprise wide difference (Rule 10B(1)(e)). Rule 10B (3) outlines various conditions for comparability that in judging whether an uncontrolled transaction is comparable, the enterprise level differences will have to be reckoned. 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. Size is an important facet of an enterprise level difference. Size of an enterprise is thus to be examined for comparability purposes. Significant differences in size of companies would impact comparability. Comparable means something that is similar or equivalent. It is something which possesses the same or almost the same characteristics. It is not that every company in the industry becomes a comparable. To use a simile, a Maruti 800 car cannot be compared to Benz car. In business, size matters. Unusual patterns, stray cases, wide disparities have to be eliminated as they don't satisfy the test of comparability. Companie....
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....r of Rs. 9,028 crores against Rs. 24.07 crores of appellant's AE transactions - bigger than the appellant. - that based on the above, an appropriate turnover range should have been applied in selecting comparable uncontrolled companies; that selection on basis of size may be made based on Dun and Bradstreet's analysis, the classification of the software companies of which is: "The IT industry has been logically divided into 3 categories based on the net sales turnover. Large size firms (> Rs. 20,000 mn) Medium size firms (Rs. 2,000 - 20,000 mn) Small size firms (< Rs. 2,000 mn)" The assessee submits that above extract forms part of TPO's own order passed u/s 92CA. Accordingly, a turnover range of Rs. 1 crore at the lower end and Rs. 200 crores at the higher end may be adopted while choosing the comparables. In the alternative, a selection on the basis of size may be made based on the NASSCOM categorisation. NASSCOM recognises three categories based on turnover: Tier I: Greater than USD 1 billion (approx Rs. 5,000 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) ....
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.... secretive. It is said that only relevant information was provided. The assessee demanded a disclosure of the entire process as also the furnishing of all the replies. This has not been done. Withholding such information results in prejudice to the assessee and is against principles of natural justice. Authenticity of the Information received Rule 10D (3) provides that information specified in sub-rule (1) shall be supported by authentic documents. The TPO had not established whether the information obtained by way of notice u/s 133(6) was authentic and complete. In spite of these differences, the TPO had relied and completed the assessment based on replies received u/s 133(6), in preference to Annual Report of the companies which were audited by professionally qualified CA and approved by Board of Directors and that such reliance is bad in law. The TPO had relied on segmental information received u/s 133(6), which did not form part of Annual Report. The bifurcation and reporting of income and expense into different segments as done by the company, was not audited by a CA. It was possible that the same may not be as per Accounting Standard 17 issued by the Institute of Cha....
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....therwise, 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 that comes into existence subsequently. Such a process or result is not contemplated. The powers u/s 133(6) is not to be used for gathering data not in existence in public domain by the specified date. The power u/s 133(6) is to be used for validating data that has been adopted. The power u/s 133(6) cannot be used to obtain information to enable selection of comparables. That the data has to be in existence by the specified date is also recognised by the amendment made to the definition of 'specified date' - 30th November. It has been clarified that the date has been extended as sufficient data was not available under the existing specified date to make the comparison meaningful. The extension of the specified date is recognition as also an acceptance by the Legislature that the comparability analysis as also the determination of ALP has to be on the basis of data that is available in the public domain by the specified date. If subsequent information is permitted to be used, then the ALP would remain fluid. The assessee may determine....
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....5% 27.56% 6. Lucid Software Limited 1,01,91,181 8.92% 5.36% 7. Media Soft Solutions Private Limited 1,75,77,145 6.29% 4.10% 8. R S Software (India) Limited 915,707,164 15.69% 15.16% 9. SIP Technologies & Exports Limited 6,53,44,634 3.06% 1.00% 10. Bodhtree Consulting Ltd 5,31,89,165 15.99% 14.85% 11. Accel Transmatics Ltd(seg) 8,02,05,000 44.07% 42.23% 12. Synfosys Business Solutions Ltd 4,48,86,725 10.61% 7.27% 13. Megasoft Ltd 19,21,85,451 16.97% 10.53% 14. Lanco Global Solutions Ltd 35,62,93,560 5.27% 4.78% Arithmetic Mean 17.23% 15.61% NOTES After removing KALS - Mean - 15.50% & WC adjusted mean 13.64% After removing KALS and Tata Elxsi - Mean - 14.49% & WC adjusted mean 12.48% After removing KALS, Tata Elxsi & Accel - Mean - 11.80% & WC adjusted mean 9.77% TABLE 2 - TURNOVER RANGE 1 TO 500 CRORES Sl. No. Name of the Company Operating Revenues Operating Margin on Cost WC Adjusted Operating Margin on Cost 1. Aztec Software Limited 1,28,61,36,000 18.09% 18.61% 2. Geometric....
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....values of the appellant's transactions with its associated enterprises. Based on all the above, the appellant submits that its international transactions relating to software development services are at arm's length and addition made by the TPO and sustained by the DRP in this regard need to be deleted. Based on all the above, the appellant has tabulated below, a list of comparables out of the TPO's comparables without applying turnover filter and rejecting the comparables for reasons already detailed and after considering the margins of the Megasoft at the segment level. TABLE 3 - WITHOUT TURNOVER FILTER AND REJECTING COMPARABLES AS DETAILED ABOVE Sl. No. Name of the Company Operating Revenues Operating Margin on Cost Adjusted Operating Margin on Cost 1. Aztec Software Limited 1,286,136,000 18.09% 18.61% 2. Geometric Software Limited(seg) 985,957,838 6.70% 5.62% 3. iGate Global Solutions Ltd (Seg.) 5,279,075,000 15.61% 13.57% 4. Persistent Systems Limited 2,091,776,542 24.67% 23.79% 5. R Systems International Limited(seg) 794,194,053 22.20% 20.21% 6. Sasken Communic....
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.... Pvt. Ltd. v. ACIT 10 Taxmann.com 161 * Abhishek Auto Industries Ltd v. DCIT 2010-TII-54-ITAT-DEL-TP * Technimont ICB Pvt Ltd v. ACIT 2011-TII-31-ITAT-MUM-TP 5.1 In conclusion, it was averred that even after adopting the comparables as chosen by the TPO subject to rejection of some companies for justifiable reasons, the margins of the appellant are within the arm's length range of the adjusted ALP. These margins would skew more favourably, if comparables of the appellant that deserve to be adopted are considered. In view of the favourable conclusion on facts, detailed arguments or submissions have not been made on legal issues likes (i) the reference to TPO being bad in law; (ii) the CIT's approval for reference to TPO also being bad in law; and (iii) the additions being unsustainable as the definition of income or the computation process under section 28 to 44 not envisaging a reference to or incorporation of an adjustment proposed under Chapter X. DEDUCTION UNDER SECTION 10A While computing deduction u/s 10A, the AO reduced Rs. 527,929 from the export turnover. However the same has not been reduced from the total turnover. In this regard, ....
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....und Nos. 3 & 4 These grounds relate to administrative matters and the DRP constituted by the CBDT by specific notification and, hence, validly constituted as per provisions of Act. Moreover, appeal in ground nos. 3 and 4 are not emanating from the order of the TPO and the DRP; hence not maintainable. Ground No. 5 Relating to Charge of Income-tax That s. 92(1) of Chapter X clearly provides the procedure for computation of income arising from an international transaction. S. 92(1), says that "Any income arising from an international transaction shall be computed having regard to the arm's length price." The term international transaction has been defined in s. 92B and the procedure for determining arm's length price in relation to an international transaction has been provided in s. 92C. Therefore, there remains no doubt that the adjustments have to be made to the income on the basis of arms length price determined, and, therefore, while computing the income of the assessee the provisions of Ch. X are clearly applicable. Ground No.6 In regard to the issue of notices u/s 133(6), it was stated that the TPO discussed in detail in para 14.5 to 14.5.1, which reveals that....
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....levant to mention the ruling of the Hon'ble ITAT, Mumbai in ACIT v. M/s Maersk Global Services Centre (India) Pvt. Ltd. ITA No 3774/Mum/2011. In the instant case, since the TPO has excluded comparables chosen by the assessee which can be seen in the order u/s 92CA of the Act cited. TURN OVER FILTER The assessee had contended that TNMM method followed by the TPO, adopting a turn over filters of Rs. 1 crore on the lower end and infinity on the higher side is wrong. The assessee submitted new study order TNMM adopting turn over range of Rs. 1 crore at the lower end and Rs. 200 crores at the higher end while choosing the comparables is based on Dan & Bradstreet analysis of classification of software companies. Further, the assessee had provided fresh comparables having a turnover filter range of Rs. 1 crore to 500 crores based on Nasscom categorisation. It was submitted by the learned DR that the ICAI TP Guideline note and NASSCOM categorisation are only certain opinion formed by the agencies and general in nature. Against the assessee's argument, it was submitted that the TPO in his order stated that the tax payer's argument of size, scale and nature of operation was also ....
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....cations where there is ambiguity or insufficiency or obfuscation of data or information in public domain so that the ALP can be arrived at in a more precise manner. As long as the TPO has acted objectively, fairly and without any bias, the assessee cannot have any grievance on the issue. As far as use of M/s Megasoft Ltd as a comparable is concerned, any lacuna on the part of the TPO to giving of opportunity to the assessee before including the company as a comparable gets cured by the DRP taking into consideration assessee's objections in the matter. The DRP discussed comparability in regard to M/s Megasoft Ltd and this is common in both the case, hence the DRP's findings are equally applicable in the instant case. Further, it was submitted that: M/s Megasoft has furnished segmental information in pursuance to the notice issued u/s 133(6) which is given below: Financial statement for year ending 31-03-2006 operating Revenue (excluding non operating Revenue) are: Particulars Blue ally(consulting Division) in Rs. XIUS-Bcits Division (product Division) in Rs. Total in Rs. Sale/service Export 17,07,45,151 24,32,21,163 41,39,66,314 Domestic 2,1....
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....elopment service providers. M/s Megasoft limited vide letter dated 19-04-2010 clarified that XIUS-BCGI (product division) is a product which caters the needs of mobile software industries. This product is not ready made to the industry. It has to be customised to the requirement of each customer and pricing has been done accordingly. It indicate that company products are in the form of license from third parties and customised as per requirement of its customers, under these circumstances M/s Megasoft Limited as a service provider akin to software development services. The A.R of the assessee stated that company has made extraordinary or supernormal profit of Rs. 34,62,63,000/- This figures nowhere appears in the financial statement furnished in the company. In fact operating profit of the comparable company is Rs. 18,80,33,698. Arm's length price is the basic foundations for determinations of income from international transactional. It is provided that any income arising from an international transaction would be determined by adopting the arm's length price as the basis disregarding transfer price recorded by the eternises concerned. The AR of the assessee stated that M/s M....
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....he reply to notice u/s 133(6), the company has contended that it is a pure software development company by stating that: (refer page 67 of the TP order): "The core of our business may be classified as that of Pure Software Development Service Provider." The above is contrary to the factual information as available in the annual report of the company. In view of all the above, this company is not to be adopted as a comparable. Even otherwise, the opportunity of cross examination as requested was not granted. However, it was the stand of the Revenue that on a perusal of the financial statement of KALS for year ending 31-03-2006, from it reveals that export receipt and other receipts disclosed as below: Rs. Application Software 1,93,29,198 97.54% Other Receipts 3,61,192 1.82% Training 1,25,949 64% Total 1,98,16,339 100% Thus operating revenue consist software application, other receipts and training, same also appears in segmental information (please refer col-9 of notes on account). Further it also observed that auditors has not given quantitative details and corresponding amount in regard to purchase, production ....
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....perating". Despite such "warning" from the company, the same has been adopted as a comparable without rebutting the "warning" or conducting fresh investigation to disprove or discredit the limitation expressed. Further Tata Elxsi Limited does substantial research and development and owns substantial intangibles. This fact is highlighted in the extracts of annual report of the company. Based on all the above, it is submitted that this company should be rejected as comparable." Similar submission also made before the TPO and considered the assessee's objections. The TPO have also asked information by issue of notice u/s 133(6) of the Income Tax Act and in compliance, M/s Tata Elxsi Limited clarified that product development services mainly develops software for customers who look for solution through embedded software. Innovations design engineering provides products, design and engineering for automotive consumer goods and electronics enclosures. It delivers concept of now products though computers models, using a team of highly specialised industrial designers and graphics specialists and generals 3D CAD models and specification for products. Visual computing labs order....
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....ployee cost filter as the segmental employee cost is Rs. 268.05 lakhs on the segmental revenues of Rs. 802.05 lakhs i.e. 33.30% on revenues. Thus the software segment qualifies the employee cost filter as the same is applied on the segment and not on each of the undertaking which make include inter-transfer that might not be reflected in the above unit wise. Holding thus considered as comparable. (i) "The assessee in its written submission contended that:- 4.3 On careful perusal of the business activities of Accel Transmatic Ltd. DRP agreed with the assessee that the company was functionally different form the assessee company as it was engaged in the services in the form of ACCEL IT and ACCEL animation services for 2D and 3D animation and therefore directed the Assessing Officer to exclude ACCEL Transmatic Ltd., form the final list of comparables for the purpose of determining TNMM margin." Based on the above, the appellant submits that Accel Transmatic Limited should be rejected as comparable. To refute the assessee's contentions, the Revenue has contended that on verification of relevant details reveal that the financial statement for the year 31-03-2006. Sa....
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....y has given segmental information (kindly refer column-20.15, based on these information, the TPO considered as comparable. The fact discussed above Accel has rightly been retained as a comparable. (v) M/S MINDTREE CONSULTING LIMITED The TPO has selected as a comparable since the company engaged in software development services and qualifies all the filters applied by her. As per final list of TPO's comparable M/s Megasoft having a turn over Just Rs. 56 crores and profit margin of 52.74%. Similarly M/s I Gate Global Solution Ltd having a turnover of Rs. 527 crores and profit margin only 15.61% even M/s Mindtree consulting Ltd. Having turnover of Rs. 448 crores has a profit margin only 14.67%, thus the TPO held that there is no relationship between margin and turnover and, hence considered as a comparable. In written argument the assessee stated that:- "As per the notes the Account (extract in page 87 of PB-II) Mindtree has entered into an agreement with the customers in December 2003 where by the warrant have been issued to the customer. The warrant can be converted into equity shares at an exercise price of Rs. 2 per share. A total of 8,266,777 warrants had been iss....
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....fosys which means that brand or size per se does not affect the margins though brand name may set higher turnover but it does not necessarily generate higher margin. The margins does not automatically indicate that the company charged premium over market for the services rendered, however the assessee did not produced any evidence except making statement that it charges premium over market for its services. Holding thus the TPO retained this company as a comparable. The AR of the assessee argued in writing and the same is reproduced below: "Infosys Technologies Limited is 443 times bigger than the appellant and is thus significantly dissimilar in size. For the reasons already detailed, Infosys Technologies Limited should not be accepted as a comparable. The Delhi Tribunal decision in the case of Agnity India Technologies Pvt. Ltd v. Income-tax Officer ITA No. 3856 (Del)/2010 has held that Infosys Technologies limited cannot be compared with small companies having nominal turnover and bearing minimal risks". Against the assessee's argument it was submitted that the observation of the TPO is that Infosys Technologies Limited engaged n software development services and brand ....
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....etic mean as per Table - 1 would be 19.71% Table - 2 at 19.36% and as per Table - 3 at 16.39% Alternatively, the assessee listed 17 comparables based on turnover range Rs. 1 crore to 500 crores and in Table B 15 comparables after excluding KALS, Tata Elxsi, Accel, Infosys Technologies and Mindtree also not acceptable as discussed in preceding paragraphs. Relies on the case laws: (i) Exxon Mobil Company India Pvt. Ltd v. DCIT ITA No. 8311/mum/2010; (ii) Symantec Software Solution Pvt. Ltd v. ACIT ITA No. 7894/mum/2010 As held by the Hon'ble ITAT, Mumbai in the case of Symantec Software Solution Pvt. Ltd (supra) that in the case of hand, the assessee raised objections only because some of the comparables are having profit and also high difference in the turnover and not because of high or low turnover has influenced the operating margin of the comparables. All the objectives and contentions raised by the assessee are discussed above and the TPO as well as the DRP were justified in retaining as comparables. APPELLANT'S COMPATEBLES:- In the written submission the assessee submitted that certain comparables proposed by the appellant hav....
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....nt is Rs. 56,86,28,000/-. What are these "extraordinary expenses" is not detailed. The amount of "extraordinary expenses" is 10.77% of revenues. However no details on the nature of expense or reasons for treating this as "extraordinary expenses" are forthcoming. Further, from the audited financial statements of iGate it is clear that it has not treated any expense as "extraordinary expenses". Possibly, iGate has during the course of its own TP assessment claimed these expenses "extraordinary expenses". The TPO has possibly taken those margins for comparability purposes without detailing the reasons for treating the expenses as "extraordinary expenses". Accordingly, the assessee submits that these expenses should be considered as normal operating expenses. The revised operating margin of iGate would then be as follows: Description Amount (Rs. In 000s) Operating Revenues 5,279,075 Expenses debited to P&L Account 5,135,006 Less: Non-operating items - Operating Expenses 5,135,006 Operating Profit 144,069 Op Margin 2.81% The assessee submitted that the revised operating ....
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....tional transaction is required to keep and maintain such information and document in respect thereof, as is being prescribed under rule 10D (I) of IT Rules. This rules required maintenance of a record of the analysis performed to evaluate comparable as well as a record of the actual working carried out for determining the ALP. Under rule 10D (4) of the I.T. rules requires that the information and documentation to be maintained. Under rule 10D(1) should be contemporaneous as for as possible and should exist latest by the due date of filing of the return. The assessee admitted that they did not undertake any risk adjustment in the TP document report. In the absence of that comparability, it is difficult to make adjustment. As for as the decision of the ITAT is concerned, that relates to facts of the relevant cases. In a given circumstance, some estimate mark upon may not be applied for risk adjustment. The assessee ought to have demonstrated this factor before the TPO as well as before the DRP. Rely on the following case laws. * M/s. Marubeni India Private Limited v. Addl. CIT ITA No 945/Del/2009. * Symantec Software Solution Private Limited v. ACIT....
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....India Pvt. Ltd v. DCIT ITA No 8311/Mum/2010 * ST Micro Electronics Pvt. Ltd v. CIT(A) ITA No. 1806,1807/Del/2008 * ADP (P) Ltd v. DCIT ITA No 106/Hyd/2009 * Wrigley India (P) Ltd v. Addl. CIT ITA No 5224/Del/2010, (2011) 62 DTR (Del) (Trib) 201 The decisions cited above, support the TPO's view. Therefore the claim of the assessee on this issue deserves for rejection. In conclusion, the Ld. D R forcefully pleaded that the stand of the TPO and the DRP requires to be sustained. In the rejoinder, it was submitted by the learned counsel for the assessee that on page 4 of the Note filed by the Ld. D.R, it is stated that the appellant did not raise the issue of cross examination before TPO/DRP. In this regard, the appellant submitted that it made specific request for cross examination before the TPO as well as DRP. It was submitted that the appellant's contention was also supported the Note of the Ld. DR (page 26) wherein the Ld. DR had extracted the submission of the appellant and acknowledged therein that appellant had requested for cross examination. The Ld. D R (on pages 27 & 28 of the Note), it was stated that in case of KALS, ....
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.... be given' (vii) Difference between replies received u/s 133(6) and annual reports have been tabulated by the appellant. No comments have been made on the same either by the TPO or DRP. No opportunity was extended as sought for to cross-examine in cases where replies u/s 133(6) of the Act have been relied upon; The DRP in its impugned order stated that the office of the TPO cannot be converted into an office granting opportunity of cross -examination to the appellant; (viii) The appellant had made detailed submissions for rejection of KALS as comparable, however, the appellants submissions have not been commented either by the TPO or the DRP; (ix) In the case of Megasoft, the TPO and the DRP have considered entity-wide margins on the ground that software product segment also consists software services and, therefore, at entity level software services were more than 75% of operating revenues. However, similar situation in the case of other comparables have been ignored. If at all Megasoft was to be adopted as a comparable, the margin of the software segment may be used; & (x) Benefit of 5% deduction in determining the arm's length price in accorda....
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.... provides that the information and documents specified under sub-rule 1 & 2 should as far as possible be contemporaneous and should exists latest by the 'specified date' referred to in clause-4 of s. 92F. Clause 4 of s. 92F gives the definition of 'specified date' to have the same meaning as assigned to 'due date' in Expln. 2 below sub-section 1 of s. 139. Explanation 2 to s. 139 defines 'due date' in a case of a company to be 30th of September of the relevant assessment year, the assessee is supposed to maintain information and documents. After going through the above provisions of law, it is clear that the Act has not provided for any cut off date up-to which only the information available in public domain has to be taken into consideration by the TPO, while making the transfer pricing adjustments and arriving at arm's length price. The assessee as well as the Revenue is both bound by the Act and the rules there-under and, therefore, as provided under the Act and rules, they are supposed to be taking into consideration, the contemporaneous data relevant to the previous year in which the transaction has taken place. The assessee had strenuously argued that the provisions of s. 92D....
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....had not considered the objections of the appellant judiciously. In such a case, it would be an error of judgment, but, not violation of principles of natural justice. The objections of the appellant were that certain companies have been taken into consideration by the TPO as comparables without affording the appellant an opportunity of furnishing its objections, if any, and also with regard to certain other companies, it had sought opportunity to cross-examine them, but, it has been observed that no such an opportunity has been extended to the appellant. 7.5. As recorded earlier, if any information is sought to be used against the appellant, the same has to be furnished to the appellant and thereafter, taking into consideration the appellant's objections, if any, only then can the TPO proceed to take a decision. If the appellant seeks an opportunity to cross-examine the parties concerned, the appellant shall be provided such an opportunity. It is only during a cross-examination that the appellant can rebut the stand of that particular party (company). As listed out earlier, the appellant had also brought out various defects in the additional comparables selected by the TPO and h....
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....ed the rival contentions and also the judicial precedents on the issue, we find that the TPO himself has rejected the companies which are making losses as comparables. This shows that there is a limit for the lower end for identifying the comparables. In such a situation, we are unable to understand as to why there should not be an upper limit also. What should be upper limit is another factor to be considered. We agree with the contention of the learned counsel for the assessee that the size matters in business. A big company would be in a position to bargain the price and also attract more customers. It would also have a broad base of skilled employees who are able to give better output. A small company may not have these benefits and therefore, the turnover also would come down reducing profit margin. Thus, as held by the various benches of the Tribunal, when companies which are loss making are excluded from comparables, then the super profit making companies should also be excluded. For the purpose of classification of companies on the basis of net sales or turnover, we find that a reasonable classification has to be made. Dun & Bradstreet and NASSCOM have given different range....
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.... was reduced from export turnover should also be reduced from the total turnover. 8.1 The learned AR submitted that the issue in question is squarely covered by the judgement of the Hon'ble Karnataka High Court in the case of CIT v. M/s Tata Elxsi Ltd. & Others (2011-TIOL-684-HC-KAR-II), Hon'ble Mumbai High Court in the case of CIT v. Gem Plus Jewellery India Ltd. 330 ITR 175 and the order of the Special Bench in the case of ITO v. M/s Sak Soft Ltd. 313 ITR 353. The learned DR was unable to controvert the submissions of the learned AR. 8.2. We have heard the rival submission and perused the material on record. The Hon'ble Karnataka High Court in the case of CIT v. M/s Tata Elxsi Ltd. & Others had held that while computing the exemption u/s 10A, if the export turnover in the numerator is to be arrived at after excluding certain expenses, the same should also be excluded in computing the export turnover as a component of total turnover in the denominator. The relevant finding of the Hon'ble jurisdictional High Court reads as follows:- "...........Section 10A is enacted as an incentive to exporters to enable their products to be competitive in the global market and consequent....
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....port turnover in the numerator and the denominator cannot be different. Therefore, though there is no definition of the term 'total turnover' in section 10A, there is nothing in the said section to mandate that, what is excluded from the numerator that is export turnover would nevertheless form part of the denominator. When the statute prescribed a formula and in the said formula, 'export turnover' is defined, and when the 'total turnover' includes export turnover, the very same meaning given to the export turnover by the legislature is to be adopted while understanding the meaning of the total turnover, when the total turnover includes export turnover. If what is excluded in computing the export turnover is included while arriving at the total turnover, when the export turnover is a component of total turnover, such an interpretation would run counter to the legislative intent and impermissible. Thus, there is no error committed by the Tribunal in following the judgements rendered in the context of section 80HHC in interpreting section 10A when the principle underlying both these provisions is one and the same". 8.3. The Hon'ble Mumbai High Court in the case of Gem Plus Jewelle....
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....sion which has been enunciated earlier must prevail as a matter of correct statutory interpretation. Any other interpretation would lead to an absurdity. If the contention of the Revenue were to be accepted, the same expression viz. 'export turnover' would have a different connotation in the application of the same formula. The submission of the Revenue would lead to a situation where freight and insurance, though these have been specifically excluded from 'export turnover' for the purposes of the numerator would be brought in as part of the 'export turnover' when it forms an element of the total turnover as a denominator in the formula. A construction of a statutory provision which would lead to an absurdity must be avoided. Moreover, a receipt such as freight and insurance which does not have any element of profit cannot be included in the total turnover. Freight and insurance charges do not have any element of turnover. For this reason in addition, these two items would have to be excluded from the total turnover particularly in the absence of a legislative prescription to the contrary - CIT v. Sudarshan Chemicals Industries Ltd. [2000] 163 CTR (Bom) 596: [2000] 245 ITR 769 (Bom....