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2013 (5) TMI 834
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.... 2.2 The learned DRP erred in facts and circumstances of the case and in law in confirming the order of the AO in reducing the expenditure incurred in foreign currency of Rs. 71,56,489/- and telecommunication expenses of Rs. 28, 1 0,371/- from export turnover while computing deduction under section 10A of the Act. 2.3 The AO ought to have appreciated that foreign travel expenditure was incurred on staff travel and not in connection with providing any technical services outside India and as such the same cannot be excluded from the export turnover. 2.4 The AO ought to have appreciated that telecommunication charges were not incurred for the purpose of delivery of software outside India and as such the same cannot be excluded from the export turnover. 2.5 The AO and learned DRP erred in facts and circumstances of the case and in law in not appreciating that foreign travel expenditure and telecommunication charges were not included as part of the export turnover and as such the same cannot be excluded from export turnover, while computing the deduction under section 10A of the Act. 2.6 Without prejudice to the above, the entire quantum of f....
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.... attempted, to the best of our ability, to understand the rationale behind such exclusion in the definition of 'export turnover'. Section 10B was first inserted by the Finance Act, 1988 with effect from the assessment year 1989-90. In the section as first inserted exemption was given to the entire profits and gains derived by the assessee from a hundred per cent export oriented undertaking. Detailed provisions were made in sub-section (4) as to the manner of computing the total income of the assessee for the purpose of granting the exemption. There was no definition of 'export turnover' or 'total turnover' because the exemption was not linked to any formula in which the export turnover and total turnover were the ingredients. The section was amended by the Finance Act, 1993 with retrospective effect from the assessment year 1991-92. A perusal of this Finance Act shows that the amendment made to the section is not in any way relevant for our purpose. The section was again amended by the Finance Act, 1994. Some amendments took effect from the assessment year 1994-95 and some of them took effect from the assessment year 1995-96. These amendments are also not relevant for our purpose. ....
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....its for the purposes of this provision." The circular does not throw any light as to how the total turnover should be ascertained and what should be the ingredients thereof. It is to be noted that both in sections 10A and 10B, only the expression 'export turnover' is defined and there is no definition of the term 'total turnover'. 20. Section 80HHC is also a section which grants deduction in respect of profits retained for export business. Clause (b) of the Explanation below the section defines 'export turnover' as meaning the sale proceeds received in or brought into India by the assessee in convertible foreign exchange of any goods or merchandise which are exported out of India, but does not include freight or insurance attributable to the transport of the goods beyond the customs station as defined in the Customs Act, 1961. Clause (ba) inserted by the Finance (No. 2) Act, 1991 with retrospective effect from 1-4-1987 defined the term 'total turnover' and stated that it shall not include freight or insurance attributable to the transport of the goods or merchandise beyond the customs station as defined in the Customs Act. The proviso to this clause, which took ef....
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....s thus decided on first principles, the principle applied being that there should be uniformity in the ingredients of both the numerator and the denominator of the formula since otherwise it would produce anomalous or absurd results. This order was upheld by the Calcutta High Court in Chloride India Ltd.'s case (supra). Subsequently, a Special Bench was constituted in Calcutta in the case of IFB Agro Industries Ltd.(supra), consisting of three Members of the Tribunal since the Assessing Officer took the view in that case that the order of the Tribunal in the case of Chloride India Ltd. (supra) pertained to the assessment year 1986-87 in which year the expression 'total turnover' was not defined in the section whereas from the assessment year 1987-88 clause (ba) has been inserted in the Explanation defining 'total turnover' which excluded only freight or insurance and, therefore, sales-tax or excise duty cannot be excluded from total turnover. The order of the Special Bench in IFB Agro Industries Ltd.'s case (supra). The question before the Special Bench was whether the excise duty and salestax should be excluded from the total turnover "for the purpose of bringing parity between th....
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....rt of the receipt for sale consideration is to be taken as part of the total turnover which has an element of profit therein and, accordingly, the receipts of excise duty and sales-tax which do not include an element of profit should be excluded from 'total turnover'." It would be seen that the ultimate decision of the Special Bench rested on the reason that anything which has an element of profit alone can be included in the total turnover. The Special Bench has also recognized that it is possible to restrict the general meaning of turnover considering the particular context of the statute under consideration. 21. A perusal of the judgment of the Bombay High Court in Sudarshan Chemicals Industries Ltd.'s case (supra ) shows that not only did the High Court hold that excise duty and sales tax cannot be included in the total turnover for the purpose of section 80HHC as they do not have any element of profit, but have also held that parity should be maintained between the export turnover and the total turnover which are the numerator and denominator respectively in the formula. This would be clear from the following observations of the court (at page 773 of the repo....
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....spectively in the statutory formula prescribed by section 80HHC. 23. The above discussion shows that the Special Bench of the Tribunal in the case of IFB Agro Industries Ltd. (supra), the Bombay High Court in the case of Sudarshan Chemicals Industries Ltd. (supra) and the Calcutta High Court in the case of Chloride India Ltd. (supra) were all of the view that parity should be maintained between the export turnover and the total turnover appearing in section 80HHC of the Act. 24. We now proceed to a consideration of the judgment of the Supreme Court in the case of LMW (supra). This case arose with reference to the assessment year 1993-94. The short point which arose for consideration before the Supreme Court was whether excise duty and sales-tax were includible in the total turnover which was the denominator in the formula contained in section 80HHC(3) as it stood at the relevant time. It must be remembered that clause (b) of the Explanation defined 'export turnover' as the sale proceeds received or brought into India in convertible foreign exchange, of any goods or merchandise exported out of India, but excluding freight or insurance attributable to the transport ....
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....cannot find a place either in the export turnover or in the total turnover. LMW's case (supra) was followed by the Supreme Court in Catapharma (India) (P.) Ltd.'s case (supra), where the assessment year involved was 1997-98." 8. Respectfully following the decision of the Special Bench of the Tribunal quoted above, we hold that the expenditure on foreign travel and telecommunication should be reduced both from the export turnover and the total turnover of the assessee. Hence, this ground of appeal of the assessee is allowed. 9. Ground No.3 of the appeal is directed against the order of the DRP confirming the order of the Assessing Officer in determining the Arm's Length Price (ALP) of international transaction of software development service by making upward transfer pricing adjustment of ` 5,23,19,210/-. 10. The brief facts of the case, as noted by the DRP, are that the assessee is a wholly owned subsidiary of M/s J&B Software Inc. USA. During the year J&B software Inc., USA and its subsidiaries were acquired by 3i Infotech. The assessee provides software development services to J&B Software Inc., USA and also to unrelated entities. The assessee is remunerated on hourly ra....
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.... with the Rules. For the purpose of establishing the ALP of its international transactions with AE, the assessee had maintained a transfer pricing documentation post a detailed study of the international transactions. A detailed analysis was undertaken to determine the functions performed, risks assumed and assets utilized by the assessee in respect to its transactions with the AE. Further, the economic analysis for the determination of the ALP was undertaken in accordance with the provisions of the Act, read with the Rules. Based on the transfer pricing study, it was concluded that the price received by the assessee with respect to its international transactions with AEs were consistent with the arm's length principles. Though the comparability analysis undertaken by the assessee was based on well accepted transfer pricing principles, the assessee submitted, it was inappropriate on the part of the TPO to reject the comparability analysis which was undertaken by the Company in accordance with the provisions of the Act, read with the Rules. In this context, the assessee also referred to the Central Board of Direct Taxes ("CBDT") Circular 14 issued in 2001, which read with Sectio....
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....68 12.74 10.98 9.47 9 VJIL Consulting Ltd 8.54 -42.16 -5.35 -12.09 Arithmetic Mean 13.01 10.29 7.54 9.88 But the TPO did not agree with the above study and matrix because M/s VJIL Consulting Ltd had incurred losses for 2 years including the relevant financial year, and there was no foreign exchange earnings of M/s Shree Tulsi Online.com during the relevant financial year. The other reason was that the assessee had used 3 years' data, instead of one year data, the assessee informed. But the assessee contended that retention of loss making comparable companies alongside profitable companies tends to even out the risk profile of comparable companies, and so a company with losses cannot be rejected outright as a comparable on that ground alone, if it is still a going concern or its losses do not exceed its net worth. Appropriate analysis for reasons for losses has to be undertaken before selection or rejection of a comparable company. The assessee felt that loss filter applied by the TPO was erroneous and should be rejected. Reference was drawn to the decision of the Income Tax Appell....
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....d 6.30 5 Shree Tulsi Online.com Ltd 15.79 6 SIP Technologies & Exports Ltd -33.44 7 Helios & Matheson It(Bangalore) Ltd 24.47 8 Tutis Technologies Ltd 10.98 Arithmetic Mean 8.20 Thus, undertaking a new search and using the FY 2007-08 information of the comparable companies is not appropriate as the Rule 10D(4) requires that information and documentation are to be maintained by the assessee. The assessee also stated that it is not appropriate to undertake new search/update the margins based on the data available at the time of assessment. This would lead to anomaly since if this approach is adopted then the arm's length margins earned by the comparable companies will not be as per the provisions of the Act but 'will depend upon the date of performing the search/updating of margin, which is not the intention of the legislature. On segmental approach, the assessee informed that during the previous financial year, the assessee was in the process of setting up its operations to cater to the needs of the domestic customers. Though during the current year, assessee earned ` 3.86 Cror....
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....inance Act, 2002 has amended the proviso to subsection (2) of section 92C to provide that where the most appropriate method results in more than one price, a price which differs from the arithmetical mean by an amount not exceeding five per cent of such mean may be taken to be the arm's length price, at the option of the assessee." The proviso of Section 92C(2) was amended by the Finance (No. 2) Act, 2009 and was replaced by two provisos wherein the first proviso provides that on availability of more than one ALP, the ALP may be determined by taking arithmetical mean of such prices. The second proviso provides that if the price at which the international transaction has been undertaken does not exceed 5% of the ALP determined as per first proviso the same is deemed to be at arm's length price. In respect of the same, the CBDT issued a Circular No. 5/2010 dated 3 June 2010 giving explanatory notes to the provisions of the Finance (No.2) Act, 2009. Para 37 to 37.5 in the aforesaid circular talks about the amendment made in the proviso to Section 92C(2). Para 37.5 contains the applicability of the said amendment and it dearly states that the amendment has been made wi....
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....rations. It mainly provides the following services * Strategy studies * Package implementation * Custom development * Testing services * BPO / IT Enabled services For KALS Information Systems Limited and Magnasoft Consulting, the assessee submitted that they are predominantly a product company, and hence should be rejected. The assessee also stated that in many instances the margins computed are not correct. The assessee submitted that the margins of the said comparable companies need to be rectified as per the computation performed by the assessee from the annual reports of the respective comparable companies. The detailed computation of the margins from the annual reports of the respective comparable companies provided by the assessee is given below: Name of the company Margin computed by the TPO Correct Margin Nettlinx Ltd 30.29 25.48 Magnasoft Consulting India Pvt. Ltd 32.08 26.23 7seas Entertainment Ltd 37.66 29.69 Trigyn Technologies Ltd 24.42 20.29 Cybertech Systems and Software Ltd 31.55 1.29 13. The DRP, after considering the submission of t....
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....y RPT at all, and that would be the best scenario. But as it has been stated by some court, we may not find any comparable in the market. That would defeat the comparability method. So, as a compromise 25% of RPT has been taken to be a benchmark for undertaking TP analysis. It can be kept at 10-15% as has been stated in some courts, but that is also as arbitrary as 25%. No scientific study has been done to establish RPT level. Till something happens, I guess we would have to live with an arbitrary level, and most of the TP analysis, this panel has seen benchmarked at 25%. So, we would stick to that. But if Trigyn Technologies Ltd had 100% RPT, it is a mistake and needs to be rectified. The TPO would undertake to find before order is finalised whether Trigyn Technologies Ltd had 100% RPT as claimed by the assessee. 26. For the functional difference in the cases of 3K Technologies Limited, KALS Information Systems Limited and Magnasoft Consulting, the Panel did not find any strong reason to convincingly reject these comparables, thus no interference. On the calculation error, it was decided that the TPO would work out the PLI and use that to calculate average PLI, and the ar....
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....y argument on that. The only place three years data could be employed where the market situations so demand and these are exceptional cases as per the proviso to Rule 10B(4) of the IT Rules. Here no such extra-ordinary situation was there which required for invoking of the proviso. The proviso allows the use of earlier year data, if (and only if) such data reveals facts which could have all influence on the determination of transfer prices in relation to the transactions being compared. In all other circumstances only the data relating the Financial Year of the international transaction should be used for comparability analysis. In any case, onus is on the assessee to demonstrate and establish existence of factors necessitating the use of such data. The assessee has not even mentioned any such specific factors, leave alone discharging the onus of establishing them. Emphasis of the assessee's submission was on the policy issue rather than on the specific reason relevant for the business nee. So, the action of the TPO on adopting single year data cannot be faulted, and so needs no interference." 14. The ld. AR of the assessee submitted that the DRP erred in confirming the TPO's or....
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....round that the segmental results were unaudited. (ix) The benefit of using +/- 5% range to determine the ALP should be provided to the assessee even if the arithmetic mean is determined by the TPO. (x) The learned Transfer Pricing Officer ('TPO") erred in selecting comparable companies which are functionally dissimilar when compared to the assessee. (xi) The learned Transfer Pricing Officer ("TPO'') should have rejected companies with abnormal profit margins, which squarely fall within the ambit of the term "outliers" vis-a-vis the average industry. (xii) The learned Transfer Pricing Officer (hereinafter referred to as 'TPO") erred in considering 25 percent as the threshold limit for the Related Party Transactions filter as this number is an arbitrary number that has been adopted without any judicial precedence or reasonable basis. (xiii) The learned TPO in the event not in acceptance of the zero percent threshold limit for Related Party Transactions filter, should have considered the threshold limit for Related Party Transactions filter as prescribed in the recent Income Tax Appellate Tribunal ("ITAT") decision in the ca....
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....tted that it agreed with the TPO's stand in disregarding the use of multiple year data in determining the price of the international transaction with AEs, but the TPO did not appreciate that the software service industry in India had witnessed robust growth over the last few years and continued to be the fastest growing segment within Indian IT industry. Given the nature of industrial and economic conditions, the use of multiple year data i.e to which three year average reduced the variability/distortions to the financial results arising from the use of single user data. It was further submitted that the DRP erred in confirming the TPO's stand in rejecting VJIL Consulting Ltd without appreciating that losses are part of business and hence company cannot be removed just because it incurs losses. 17. It was submitted that the DRP erred in confirming the TPO's stand in rejecting Shree Tulsi Online.com Ltd as a comparable company without appreciating that the company is functionally comparable to the business of the assessee. It was also submitted that even as per TPO's criteria only two companies selected by the assessee will get eliminated and the recomputed average margin of comp....
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....ted risk bearing software development service provider with respect to the transaction with AEs. The comparables adopted by the TPO were of companies either designing, developing and manufacturing and assembly of computers or software product sale/licensing and training activities apart from software service or were providing sales and services of their own software product. It was submitted that the segmental PLI worked out by the assessee for its international transaction with the AEs was supported by the certificate of the CA in Form 3CEB and therefore, the TPO as well as the DRP were not justified in rejecting the PLI of 34.17% worked out by the assessee for its ALP with AEs. 22. On the other hand, the ld.CIT/DR supported the orders of the lower authorities. 23. We have heard the rival submissions and perused the orders of the lower authorities and materials available on record. The assessee is engaged in software development services. During the year it also provided software development services to M/s J&B software Inc. USA to the tune of ` 26,02,80,790/-. Thus, the assessee entered into transactions with its AE of ` 26,02,80,790/-. In the audit report submitted u/s 92A....
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.... under: "7. The TPO on p. 12 in the order extracted by the AO in the assessment order himself accepted that adjustment is required to be made to the value of international transaction related to commission on sales and warranty service. He has made the adjustment on these two items only. The grievance of the assessee is that if the TPO wants to determine the ALP of international transaction with associated concern then he should work out the profit disclosed the assessee on those receipts and compare that result with the comparables of independent cases, who have carried out similar international transactions with independent parties. In that exercise the domestic receipts which have nothing to do with the AEs are required to be excluded for working out the profit level indicator shown by the assessee in respect of international transaction. We find force in this contention of the learned counsel for the assessee. The TPO ought to have considered the international receipts with the AEs only while determining the profit shown by the assessee in such transaction if the PLI is lower than the one comes out from comparable cases only then he could make necessary adjustment. In ....