TaxTMI 
TaxTMI 
2012 (8) TMI 257
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....acts and in the circumstances of the case and in law and based on the directions of DRP, the learned Assessing Officer erred in assessing the total income at Rs. 3,25,93,235/- as against returned income of Rs. 13,60,601/- computed by the appellant. (3) On the facts and in the circumstances of the case and in law and based on the directions of Hon'ble DRP, the learned AO erred in disallowing the software expenses amounting to Rs. 22,94,928 incurred by the Appellant towards annual software license fees which was charged off as software expenses to the Profit and Loss account as it does not result in any enduring benefit to the company. (4) On the facts and in the circumstances of the case and in law and based on the directions of Hon'ble DRP, the learned AO erred in disallowing the foreign exchange loss amounting to Rs. 63,30,156 incurred by the Appellant on restatement of export proceeds, import payables, travelling expenses, etc., which is revenue in nature and which has arisen in the normal course of business. (5) On the facts and in the circumstances of the case and in law and based on the directions of Hon'ble DRP, the learned AO erred in h....
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....t the time of complying with the transfer pricing documentation requirements. (12) The learned Assessing Officer/TPO erred in rejecting certain comparables considered by the Appellant in the comparability analysis by applying different quantitative and qualitative filters: a. the learned AO/TPO erred in rejecting certain comparable companies identified by the Appellant using turnover < Rs. 1 Crore as a comparability criterion; and b. the learned Assessing Officer/TPO erred in rejecting certain comparable companies identified by the Appellant as having economic performance contrary to the industry behavior (e.g. companies which showed a diminishing revenue trend); and (13) The learned TPO erred in obtaining information which was not available in public domain by exercising powers u/s 133(6) of the Act and relying on the information for comparability analysis. (14) The learned AO/TPO erred in not considering the foreign exchange fluctuation gain (loss) as part of the operating income while computing the operating margin. (15) The learned AO/TPO erred in not making suitable adjustments on account of differences in the....
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....&L account largely represent expenses incurred towards annual software licence fee which are in the nature of annual maintenance charges (AMC) and purchase of other application software. It was submitted before the Assessing Officer that by incurring these expenses, there was no enduring benefit to the assessee and the same is allowable expenditure under section 37 of the Act. The Assessing Officer however disallowed the software expenses of Rs. 22,94,928/- paid towards the purchase of application software and annual licence fee, considering the same to be capital in nature. The Assessing Officer held that since the assessee has used the words "software worth Rs. 3,65,511/- has been purchased", it has been definitely brought in enduring benefit in perpetuity and hence, the same is to be capitalized. Further, the Assessing Officer held that the remaining part of the software expenditure amounting to Rs. 19,29,418/- was expended to obtain continuous uninterrupted usage of the software and hence, it is nothing but an enduring benefit obtained by the assessee. 4.1 Aggrieved, the assessee is in appeal before us. 4.2 It was submitted that the said expenditure is an allowable expend....
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....onsidered whether the expenditure in respect of purchase of software is capital or revenue. The Hon'ble High Court at para 3 of its judgement held as follows :- "As rightly pointed out by the authorities, when the life of a computer or software is less than two years and as such, the right to use it is for a limited period, the fee paid for acquisition of the said right is allowable as revenue expenditure and these software if they are licenced for a particular period, for utilising the same for the subsequent years fresh licence fee is to be paid. Therefore, without renewing the licence or without paying the fee on such renewal, it is not possible to use those software. In those circumstances, the findings recorded by the authorities that the fee paid for obtaining the software and the licence and for renewing the same is to be construed as only revenue expenditure do not call for interference by this Court." 4.5 The Special Bench in the case of Amway India Enterprises (supra) had laid down various tests to determine whether the expenditure incurred for purchase of computer software is capital or revenue. In the instant case, the Assessing Officer did have the benefit of....
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....n in the normal course of business and therefore should be considered as revenue in nature. Further it was submitted that the loss on account of exchange rate fluctuation has been expensed in the books of accounts during the assessment year 2007-08 as : (i) Such loss/gain has arisen on trading account, during the course of business operations and is incidental to the same. (ii) Since Kodiak India is following mercantile system of accounting, exchange loss incurred by Kodiak India cannot be considered as contingent in nature. The assessee also placed reliance on the judgement of the Hon'ble Apex Court in the case of CIT v. Woodward Governor India (P.) Ltd. [2009] 312 ITR 254/179 Taxman 326, Sutlej Cotton Mills Ltd. v. CIT [1979] 116 ITR 1 (SC), Oil & Natural Gas Corpn. Ltd. v. Dy. CIT [2002] 83 ITD 151 (Delhi) (SB) and Smt. Sujata Grover v. Dy. CIT [2002] 74 TTJ 347 (Delhi). 5.3 The learned DR present was duly heard. 5.4 We have heard the rival submissions and perused the materials on record. In the case of Woodward Governor India (P.) Ltd. (supra), the Hon'ble Supreme Court analysed various issues relating to treatment of exchange gain/loss ....
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....nover, the same should also be reduced from the total turnover is covered by the judgement of the Hon'ble jurisdictional High Court in the case of CIT v. Tata Elxsi Ltd. [2012] 204 Taxman 321/17 taxmann.com 100 (Kar.), Hon'ble Mumbai High Court in the case of CIT v. Gem Plus Jewellery India Ltd. [2011] 330 ITR 175/[2010] 194 Taxman 192 and the order of the Special Bench in the case of ITO v. Sak Soft Ltd. [2009] 30 SOT 55 (Chennai), in which it has been held the following :- "that the expenses should be reduced not only from export turnover but also from the total turnover while computing deduction under section 10A of the Act". 6.3 The learned DR unable to controvert the submissions made by the learned AR. 6.4 We have heard the rival submission and perused the material on record. The Hon'ble Karnataka High Court in the case of Tata Elxsi Ltd. (supra) 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 from the total turnover in the denominator. The relevant finding of the Hon'ble jurisdictional High Court reads as follows:- "......
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....ng the export turnover as a component of total turnover in the denominator. The reason being the total turnover includes export turnover. The components of the export 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 as 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....
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....r" cannot have a different meaning when it forms a constituent part of the total turnover for the purposes of the application of the formula. Undoubtedly, it was open to Parliament to make a provision 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 item....
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....rnational transactions of the assessee company with its Associated Enterprises was as under:- Nature of International Transactions Amount in Rs. Software Services 28,57,55,540 Sales & Marketing Support and Customer Support Services (CSS/ITES) 2,57,18,896 For the purpose of establishing the Arm's Length Price (ALP) of its international transactions with its AEs, the assessee had undertaken a Transfer Pricing (TP) study, carried out by an independent external consultant. Based on the TP study, the independent external consultant concluded that the price received by the assessee in respect of its transactions with AEs is at arm's length. The key features of the TP study undertaken by the assessee for software services and ITES are summarized below:- (i) As per the functional analysis, the assessee was selected as the tested party; (ii) Transactional Net Margin Method (TNMM) was determined as the most appropriate method to determine the ALP; (iii) The search was conducted on Prowess database for obtaining publicly available financial information of companies in India engaged in similar business activity as that of the as....
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.... * The TPO provided an adjustment towards capital of 2.23% and 2.89% for software services and ITES respectively. The adjusted net margins of comparable companies after providing the working capital adjustment was determined at 22.91% and 27.66% on operating cost for software services and ITES respectively. 7.2 The details of the comparable companies as per TPO in software development and related services and the customer support services are as follows:- Software development and related services Sl. No. Name of the Company As per Order of TPO Sales in Rs. Crore Operating Margin 1. Accel Transmatics Limited (Seg.) 9.68 21.11% 2. Avani Cimcon Technologies Limited 3.55 52.59% 3. Celestial Labs Limited 14.13 58.35% 4. Datamatics Limited 54.51 1.38% 5. E-zest Solutions Limited 6.26 36.12% 6. Flextronics Software Systems Limited 848.66 25.31% 7. Geometric Limited (Seg.) 158.38 10.71% 8. Helios & Matheson Information Technology Limited 178.63 36.63% 9. iGate Global Solutions Limited (Seg.) 747.27 7.49% 10. Infosys Tec....
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....7 13.35% 14. HCL Comnet Systems & Services Limited (Seg) 260.18 44.99% 15. ICRA Techno Analytics Limited (Seg) 7.23 12.24% 16. Informed Technologies India Limited 4.08 35.56% 17. Infosys BPO Limited 649.56 28.78% 18. Iservices India Private Limited 16.29 49.27% 19. Maple Esolutions Limited 12.21 34.05% 20. Mold Tek Technologies Limited (Seg) 11.40 113.49% 21. R Systems International Limited (seg) 17.34 20.18% 22. Spanco Limited (seg) 17.34 25.81% 23. Triton Corp Limited 35.00 34.93% 24. Vishal Information Technologies Limited 30.60 51.19% 25. Wipro Limited (seg) 939.78 29.70% 26. Nittany Outsourcing Services Pvt. Ltd. 23.23 11.50% 27. Accurate Data Converters 4.33 50.68% 28. Apex Advanced Technology Pvt. Limited 7.93 39.89% ARITHMETIC MEAN BEFORE WORKING CAPITAL AND RISK ADJUSTMENT 30.55% Less : Working capital adjustment 2.89% ARITHMETIC MEAN AFTER WORKING CAPITAL ADJUSTMENT 2....
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....he proviso to section 92C(2) of the Act. 7.5.2 The Ld. A R finally stated that most of the above issues raised in the present appeal under consideration have since been covered in the assessee's own case in Kodiak Networks (India) (P.) Ltd. v. Asstt. CIT [2012] 8 taxmann.com 32 (Bang.) for the AY 2006-07, such of the issues, namely: (i) the comparable having the turnover of more than Rs. 1 crore, but, less than Rs. 200 crores; (ii) all the information relating to comparables which were sought to be used against the appellant to be furnished to the appellant; (iii) the appellant has to be extended an opportunity to cross-examine the parties whose replies sought to be used against the appellant; (iv) to give the benefit of +/- 5 per cent under the proviso to s.92C(2) of the Act; (v) with regard to deduction u/s 10A of the Act, etc., 7.5.3 The Ld. A. R., however, again put stress on the following three issues, namely: (1) The AO/TPO erred in not considering the foreign exchange fluctuation gain (loss) as part of the operating income while computing the operational margin. In this connection, it was argued that the appe....
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....e items have direct nexus with the operating profit/loss of the enterprises. Without appreciating the above, it was submitted that the TPO had erred in not considering the realized/unrealized foreign exchange gain/loss as operating in nature. In conclusion, it was submitted that as the same was normal expenditure incurred in the ordinary course of business and, therefore, should not have been excluded by treating them as non-recurring item of expenditure while computing the operating margin. (2) With regard to difference in the risk profile, it was the submission of the Ld. A R that the authorities below have erred by not making suitable adjustments to account for differences in the risk profile of the assessee vis-à-vis the comparables; that the assessee undertakes functions under a limited risk environment vis-à-vis comparable companies who bear entrepreneurial risk being independent service providers and, accordingly, an adjustment for risk level differences was warranted. It was, further, contended that the assessee had used the TNMM in determining the ALP for the international transaction entered into during the FY 2006-07; that the provisions of rule 10B of t....
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....ks, the appellant does not bear any credit risk. Where a related party sets prices for inter-company transactions so that the appellant receives a specified level of operating profitability, the pricing policy can have the effect of removing virtually all business risk from the controlled entity. When analyzing controlled entities that bear such a low level of risk by reference to a set of broadly comparable independent firms - as is the case under TNMM - it is a challenge to identify independent firms that are sufficiently comparable to the controlled entities in terms of risks assumed. In circumstances where the appellant has been effectively guaranteed a fixed return, functional similarity does not adequately address this risk differential. In such cases, an adjustment to the comparables for this risk differential seems warranted under the rules and would provide a more precise pricing of the true risk borne by the appellant. To buttress its claim, the assessee placed reliance on the following case laws: (a) Westreco Inc. v. Commissioner 64 T.C.M. (CCH) 849; (1992) (b) Mentor Graphics (Noida) (P.) Ltd. v. Dy. CIT [2007] 109 ITD 101 (Delhi); (c) P....
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.... Average bank rate during FY 2006-07 (B) 06.00 per cent Difference between the prime lending rate and bank rate 05.88 per cent Risk adjustment (C) 05.88 per cent In conclusion, it was pleaded that in the light of the principles embodied in the above findings, the benefit of a risk adjustment be extended to the assessee. (3) Another grievance of the assessee was that Celestial Lab Limited (Celestial Labs) ought not to have been selected as a comparable. In this connection, the Ld. AR had submitted that Celestial Labs was a diversified company operating in varied fields such as rendering IT Services encompassing application development and maintenance production support, EERP, data ware-housing SAP implementation. Celestial Labs was also is into manufacturing and trading of products such as ERP package for manufacturing and had a product 'Sanjivani' which was a portal for live ayurvedic consultation. The company was also engaged in the distribution of herbal ayurvedic products. Further illustrating, it was explained that - SAP Services: Celestial delivers SAP consulting, SAP implementation and post-SAP implementation services for ....
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....resh consideration. In consonance with the findings of the earlier Bench, we are of the firm view that the issues listed out by the appellant require fresh consideration at the level of the TPO. Accordingly, we remit back the entire issues to the file of the TPO for needful. It is needless to reiterate that the directions of the earlier Bench contained its findings in the assessee's own case for the AY 2006-07 hold-good for this assessment year under consideration also. The specific directions in assessee's case for assessment year 2006-07, for ready reference reproduced below :- (i) the operating revenue and the operating cost of the transactions relating to associated enterprises only shall be considered; (ii) the comparables having the turnover of more than Rs. 1 crore, but, less than Rs. 200 crores only shall be taken into consideration; (iii) all the information relating to comparables which were sought to be used against the appellant shall be furnished to the appellant; (iv) the appellant shall also be extended an opportunity to cross-examine the parties whose replies were sought to be used against the appellant; (v) to co....