TaxTMI 
TaxTMI 
2016 (2) TMI 1123
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....as well as from total turnover for the purpose of computation of deduction u/s 1OA, without appreciating the fact that the statute allows exclusion of such expenditure only from export turnover by way of specific definition of export turnover as envisaged by Sub- clause (4) of Explanation 2 below Subsection (8) of Section 10A and the total turnover has not been defined in this Section. 3. On the facts and in the circumstances of the case the Dispute Resolution Panel erred in directing the AO to compute deduction u/s 10A in the above manner by placing reliance on the decision of Hon'ble High Court of Karnataka in the case of M/s Tata Elxsi Ltd., which has not become final since the same has not been accepted by the Department and SLPs are pending before the Hon'ble Supreme Court. 4. On the facts and in the circumstances of the case, the Dispute Resolution Panel erred in directing the TPO/AO to exclude the comparable M/s ICRA Techno Analytics Ltd., M/s Infosys Ltd., M/s KALS Information Systems Ltd., M/s Persistent System Ltd., M/s Sasken Communication Technologies Ltd., M/s HCCA Business Services Pvt. Ltd. & M/s Killick Agencies & Marketing Ltd. without considering....
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....10] 194 Taxman 192 (Bom.). Interpreting sub-Section (4) of Section 10-A, it is held as under: "Under sub-section (4) the proportion between the export turnover in respect of the articles or things, or, as the case may be, computer software exported, to the total turnover of the business carried over by the under-taking is applied to the profits of the business of the undertaking in computing the profits of the business of the undertaking in computing the profits derived from export. In other words, the profits of the business of the undertaking are multiplied by the export turnover in respect of the articles, things or, as the case may be, computer software and divided by the total turnover of the business carried or by the undertaking. The formula which is prescribed by sub-section (4) of section 10A is as follows: Profits derived from export of articles or things or Computer software = Profits of the business of the undertaking X Export turnover in respect of the articles or things or computer software Total turnover of the business carried on by the undertaking The total turnover of the business carried on by the undertaking would consi....
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.... to a situation where freight and insurance, though it has 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." The special bench of the Tribunal, in the case of ITO v. Sak Soft Ltd. [2009] 313 ITR (AT) 353/30 SOT 55 (Chennai) also had an occasion to consider the meaning of the word 'total turnover'. After referring to the various judgments of the High Court as well as the Supreme Court held as under: "53. For the above reasons, we hold that for the purpose of applying the formula under sub-section (4) of Section 10-B, 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." Th....
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....such word is to be in conformity with the context in which it is used. When the statute prescribes 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. If that were the intention of the legislature, they would have expressly stated so. If they have not chosen to expressly define what the total turnover means, then, when the total turnover includes export turnover, the meaning assigned by the legislature to the export turnover is to be respected and given effect to, while interpreting the total turnover which is inclusive of the export turnover. Therefore, the formula for computation of the deduction under Section 10-A, would be as under: Profits of the business of ....
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....ns computed by the TPO are at 14.72% and 6.83% for software development services and sales & marketing services respectively. The assessee has reported international transactions during the year under consideration as per its report as under:- Description Amount Software development services 454,764,558 Sales and marketing services 23,314,047 Interest paid on ECB loan 2,021,113 Cross charge of language translation fees, sales promotion and options cash payout (received) 8,259,293 Cross charge of employee deputation expresses (payment) 75,413 Purchase of fixed assets 6,983,240 Remittance of money collected from employee towards purchase of ESOP/ESPP 6,398,105 10. The assessee has bench-marked its international transactions in software development services segment by selecting 16 comparables. The TPO rejected the TP analysis study of the assessee on the ground that assessee has used multiple year data instead of current financial year data and further applied the filter of less than 25% of revenue from exports as well as related party transactions. The TPO therefore rejected 14 comparables out of 16 selected by the assessee and retai....
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.... report that the service segment comprises of software development, software consultancy, engineering services, web development, web hosting, etc. for which no segmental information is available and therefore, the objection of the assessee is found acceptable. Accordingly, Assessing Officer is directed to exclude the above company from the comparables." 15. We find that the facts recorded by the DRP in respect of business activity of this company are not in dispute. Therefore, when this company is engaged in diversified activities of software development and consultancy, engineering services, web development & hosting and substantially diversified itself into domain of business analysis and business process outsourcing, then the same cannot be regarded as functionally comparable with that of the assessee who is rendering software development services to its AE. 16. In view of the above facts, we do not find any error or illegality in the findings of the DRP that this company is functionally not comparable with that of a pure software development service provider. (2) Infosys Ltd. 17. The assessee objected against the selection of this company on the ground that this com....
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....with software development service providing company. 22. The DRP has directed the AO to exclude this company from the list of comparables by taking note of the fact that there were inventories in the books of accounts of this company which shows that this company is in the software product business. Further, by following the decision of this Tribunal in the case of Trilogy e-business Software India Ltd. v. DCIT, ITA No.1054/Bang/2011 dated 23.11.2012, this company was found to be not comparable with that of the assessee. 23. We have heard the ld. DR as well as ld. AR and considered the relevant material on record. The ld. DR has not disputed the fact that comparability of this company has been examined by this Tribunal in a series of decisions including in the case of Trilogy e-business Software India Ltd. (supra). We further note that in the balance sheet of this company as on 31.3.2010, there are inventories of Rs. 60,47,977. Therefore, when this company is in the business of software products, the same cannot be compared with a pure software development services provider. Accordingly, we do not find any error or illegality in the impugned findings of the DRP. (4) Persis....
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....e Services 37,736.22 40,531.20 Software products 2,041.00 6,146.43 Other services 372.77 1,297.05 Total revenues 40,150.89 47,974.68 29. Thus, there is no dispute that this company earns revenue from 3 segments. However, the segmental operating margins are not available. Therefore, in the absence of segmental relevant data and particularly operating margins, this composite data cannot be considered as comparable with the assessee for software development services segment. Accordingly, we do not find any error or illegality in the findings of the DRP. (6) Tata Elxsi Ltd. 30. The assessee has raised objections against this company on the ground that the company is functionally different from the assessee. Though the TPO has considered the software development and services segment of this company as comparable to that of assessee, however, the assessee contended that even within the software segment, this company is engaged in diverse activities. The assessee placed reliance on the information in the annual report under the Directors Report and submitted before the DRP that even under the software development services segment, this company is ....
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....he TPO has accepted foreign exchange gain/loss while computing operating margin of comparable companies. However, in the case of assessee, foreign exchange loss has been considered as non-operating in nature. Thus, the assessee raised an objection before the DRP that exchange gain/loss arises on account of factors like realization of sales, payment to suppliers and restatement of value of assets & liability are operating in nature. The assessee placed reliance on the decision of coordinate Bench of this Tribunal in the case of SAP Labs India Pvt. Ltd. v. ACIT (2010-TII-44-ITATBANG-TP) wherein it has been held that foreign exchange gain need to be considered as operating in nature, if it arises on realization of sale proceeds or on payment against supplies. The DRP has accepted the contention of the assessee by following the decision in the case of SAP Labs India Pvt. Ltd. (supra) and accordingly directed the AO to consider the foreign exchange fluctuation in respect of assessee company as well as comparables as operating in nature. 35. We have considered the rival submissions as well as the relevant material on record. There is no quarrel on the point that if the foreign exchang....
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....rived at the mean margin of 24.48% as against the assessee's margin in this segment at 6.83%. Accordingly the TPO proposed an upward adjustment of Rs. 38,51,181 as per provisions of section 92CA. 40. The assessee challenged the action of TPO before the DRP. The DRP excluded 3 out of 6 comparable companies selected by the TPO against which Revenue has filed appeal before us. We will discuss comparability of two companies which are excluded by the DRP and challenged by the Revenue as under:- (1) HCCA Business Services Pvt. Ltd. 41. The assessee objected against inclusion of this company in the list of comparables on the ground that this company is engaged in providing payroll process services and therefore it is functionally different. In support of its contention, the assessee referred to Notes to the Accounts wherein the company's operations comprise of payroll processing services is mentioned and hence it is not possible to give the quantitative details of sales and certain information separately. 42. The DRP after considering the annual report noted that except the Note 2.14, there is no other observation in the annual report from which it can be established that the ....
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....ons as well as relevant material on record, we note that in the profit & loss account for the year under consideration, this company has shown sales (export of Rs. 1,18,00,000 and commission/service charges of Rs. 2,19,00,000. Therefore, export income revenue of this company is less than 75% of the total revenue, a filter applied by the TPO. Once the TPO has applied a filter of 75% of export sale, then this company which fails the filter applied by the TPO cannot be considered as a good comparable. Further, we note that this company is entirely in a different activity with that of the assessee. Undisputedly, this company is acting as agent for various foreign principals for sale of dredgers, dredging equipment, steerable rudder propulsions and other equipments and machineries. Accordingly, we do not find any error or illegality in the findings of the DRP and direct the AO to exclude this company from the comparables. CO No.94/B/15 (By assessee) 50. The assessee has raised various objections in the CO. However, we find that the only effective ground raised by the assessee in the marketing support segment is regarding Asian Business Exhibition & Conference Ltd., a comparable se....
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.... that the TPO while dealing with assessee's objection with regard to selection of Asian Business Exhibition and Conferences Limited as a comparable has admitted that the nature of function performed by this company is event management. It is further relevant to observe, on perusal of annual report of this company it is seen that as per directors report, the main operation is organizing exhibition and events. Further, schedule 12 of the profit and loss account as well as notes to the accounts reveals, revenue earned by the company is from sponsorship, delegates attending conferences, events and entry fees charged from visitors for visiting exhibition, sale of stall place etc. 12. Thus, on overall analysis of facts and materials placed on record it is very much clear that the business model of the assessee and Asian Business Exhibition and Conferences Limited are totally different. While assessee undoubtedly is providing support services to its overseas AE's, Asian Business Exhibition and Conferences Limited is primarily and fundamentally engaged in event management. Thus, under no circumstances it can be considered as a comparable to the assessee. Therefore, for the aforest....
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....es of Rs. 15 crores debited in the profit & loss account. Thus, it was concluded by the DRP that this company is predominantly onsite software development company and therefore cannot be retained as comparable. 59. We have heard the ld. AR as well as ld. DR and considered the relevant material on record. At the outset, we note that this company has reported expenditure in foreign currency at Rs. 124.2 crores as against earning in foreign currency at Rs. 158.3 crores. Therefore, it is clear that more than 80% of the expenditure has been incurred by this company in foreign branch expenditure, which shows that the company has main activity of onsite software development. In view of the above fact, we do not find any error or illegality in the finding of the DRP in excluding this company from the list of comparables. This ground is dismissed. Persistent Systems & Solutions Ltd. 60. The assessee has the grievance against rejection of this company by the DRP. The ld. AR has submitted that assessee did not raise any objection against this company, however, the DRP has rejected the said company. Therefore, the said company should be retained in the list of comparables. 61. Havi....
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....15% RPT, the same cannot be considered as a good comparable. 64. On the other hand, the ld. DR has submitted that TPO has applied RPT filter of 25% and therefore only for this company, the RPT cannot be reduced to 15%. Further, the DRP has examined annual report of this company and found that this company earns revenue from software development services and accordingly is comparable. 65. We have considered the rival submissions and relevant material on record. We find that in the normal circumstances the tolerance range of RPT should not be more than 15%. In the case of the assessee, the availability of the comparable is not an issue and therefore we do agree with the view taken by the coordinate Benches of the Tribunal that the threshold limit of tolerance range should not exceed 15% as far as RPT revenue is concerned. Therefore, we direct the AO/TPO to apply 15% RPT filter in respect of all the comparables. 66. As regards the functional comparability of this company is concerned, the assessee has referred to the income under the head software development services and products. However, it is not clear from the details whether any revenue is earned from products or entire....