TaxTMI 
TaxTMI 
2018 (3) TMI 299
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..... 2011, determining the income of the assessee at Rs. 16. 71 crores. ITA/2392/Mum/2013: 2. First ground of appeal raised by the AO, is about adjustment made to export turnover on account of freight, telecommunication and insurance, on-site fees and marketing fees. During the assessment proceedings, the AO reduced the following items of expenditure from the export turnover: i) Freight, telecommunication and insurance expenditure of Bangalore Exempt Unit (Rs. 58. 28 lacs) ii) Bangalore Exempt Unit in Foreign exchange on providing technical services outside India (Rs. 12. 77 crores) iii) Chennai Exempt Unit on freight, telecommunication and insurance (Rs. 29. 32 lacs) iv) Chennai Exempt Unit on providing technical services outside India (Rs. 5. 30 crores) Aggrieved by the order of the A. O. the assessee preferred an appeal before the first appellate authority(FAA) and made the detailed submissions. After considering the assessment order and the submissions of the assessee, the FAA referred to the judgment of the Hon'ble High Court delivered in the case of Tata Elxsi Ltd. (2011-TIOL-684-HC-KAR-IT)and other cases relied on before him by the a....
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....tation by this Court; . . . . . . . . In section 10A, not only the word 'total turnover' is not defined, there is no clue regarding what is to be excluded while arriving at the total turnover. However, while interpreting the provisions of section 80HHC, the courts have laid down various principles, which are independent of the statutory provisions. There should be uniformity in the ingredients of both the numerator and the denominator of the formula, since otherwise it would produce anomalies or absurd results. Section 10A is a beneficial section which intends to provide incentives to promote exports. In the case of combined business of an assessee, having export business and domestic business, the legislature intended to have a formula to ascertain the profits from export business by apportioning the total profits of the business on the basis of turnovers. Apportionment of profits on the basis of turnover was accepted as a method of arriving at export profits. In the case of section 80HHC, the export profit is to be derived from the total business income of the assxcessee, whereas in section 10-A, the export profit is to be derived from the total business of the u....
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....nstitutes the numerator in the formula prescribed by sub-section (4). Export turnover also forms a constituent element of the denominator in as much as the export turnover is a part of the total turnover. The export turnover, in the numerator must have the same meaning as the export turnover which is constituent element of the total turnover in the denominator. The legislature has provided a definition of the expression "export turnover" in Expln. 2 to s. 10A which the expression is defined to mean the consideration in respect of export by the undertaking of articles, things or computer software received in or brought into India by the assessee in convertible foreign exchange but so as not to include inter alia freight, telecommunication charges or insurance attributable to the delivery of the articles, things or software outside India. Therefore in computing the export turnover the legislature has made a specific exclusion of freight and insurance charges. The submission which has been urged on behalf of the revenue is that while freight and insurance charges are liable to be excluded in computing export turnover, a similar exclusion has not been provided in regard to total turnov....
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....ut corresponding reduction from total turnover, thereby reducing the deduction claimed by the assessment u/s 10B of the Act. 3. 11 In light of the above facts, the Special Bench held as under:- "For the above reasons, we hold that for the purpose of applying the formula under subsection (4) of section 10B, 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. The appeals filed by the department are thus dismissed". 3. 12 In the light of the above judgements of the Hon'ble High Courts and the order of the Special Bench, we are of the view that the CIT(A) is justified in directing the Assessing Officer to exclude the above mentioned expenditure both from the export turnover as well as from the total turnover while calculating deduction under section 10A of the Act. Therefore, the order of the CIT(A) is correct and in accordance with law an....
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....y deduction under the Chapter. Therefore, the deduction under section 10A has to be given at the stage when the profits and gains of business are computed in the first instance. The Tribunal was right in holding that the deduction under section 10A in respect of the allowable unit under section 10A has to be allowed before setting off brought forwarded losses of a non-section 10A unit. " Considering the above, we dismiss ground nos. 3(i) and 3(ii) raised by the AO. ITA/336/Mum/2013: 4. The assessee has raised 8 grounds of appeal. Before us, the AR stated that the ground nos. 4 and 4. 1 only were to be adjudicated, pertaining to the transfer pricing (TP)adjustments. During the assessment proceedings, the AO found that the assessee entered into International Taxations (IT. s)with its Associated Enterprises (AE). He made a reference to the Transfer Pricing Officer (TPO) to determine the Arms Length Price (ALP) of the IT. s. 4.1. During the TP proceedings, the TPO found that assessee had selected 50 comparables and had used TNMM as the most appropriate method. The PLI adopted was operating profit/ operating cost. The arithmetic margin of the IT. s was 9. 95% as against the ....
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...., the AR contended that the comparable in question did not appear in databases when the search process was conducted, that from the annual report of comparable it was clear that it was involved in providing full range of custom development solutions, focused software products as well as consultancy services, that QSL incurred R&D expenses which worked out to 2. 18% of operating revenue for the year under appeal, that segmental break-up of RPT was not apparent from audited financials. Referring to the annual report of Thirdware Solutions Ltd. (TSL), he argued that apart from providing software development services TSL was involved in product development, trading in software and giving licenses for use of software, that it was difficult to bifurcate operating profits between product development and software development services. About Accel Transmatic Ltd. (Segmental)(ATL), he contended that it was not a pure software development services provider, that it had reported Manufacturing and Trading sales income, that it was also providing training and educational services, that it did not appear in databases when the search process was conducted, that segmental break-up of RPT was ....
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....e FAA for first five comparables. About TSL, he stated that if it had to be excluded then others comparables selected by assessee should also be excluded on the same basis. 6. We have bestowed our due consideration to the respective submissions of the representatives of both the parties. We find that the assessee in engaged in the business of software development, that it had adopted TNMM for benchmarking the IT. s, that the it had selected 50 comparables, that the margin shown by it was 9. 95%, that the average margin of the comparables was 12. 82%, that it claimed that the IT. s entered into by it were at Arm's Length, that the TPO rejected 42 of the comparables and added 18 new comparables while recommending TP adjustments, that the FAA excluded one comparable selected by the TPO, that he partly allowed the appeal of the assessee. The AR had stated that if seven of the comparables were taken out of the final list the assessee would be in safe zone. We would like to discuss the validity of each of the comparables that was objected to by the assessee. 6.1. We find that QSL is engaged in software services, that as per its Annual Report QSL was engaged in providing of computer....
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....s rendered by the assessee. The Assessing Officer then issued a draft order of assessment under Section 143(3) r. w. s. 144C of the Act dt. 30. 12. 2011 determining the assessable income of the assessee at Rs. 54, 10, 24, 876; which included the T. P. Adjustment of Rs. 20, 53, 68, 934 to the ALP of international transactions in respect of the software development services rendered by the assessee as proposed by the TPO in the order under Section 92CA of the Act. 3.1. Aggrieved by the order of assessment for Assessment Year 2008-09 dt. 27. 9. 2012, the assessee has preferred this appeal raising the following grounds :- xxxx 4. The learned AO / Transfer Pricing Officer ("TPO") have erred, in law and in facts, in making an addition of Rs. 20, 53, 68, 934 to the total income of the Appellant on account of adjustment in the arm's length price of the software development services transaction entered by the Appellant with its associated enterprise. xxxx 7. The learned AO / TPO have erred, in law and in facts, in rejecting certain comparables considered by the Appellant in the comparability analysis by applying different quantitative and qualitati....
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....A. Y. 2008-09. Yodlee Infotech Pvt. Ltd. (IT(TP)A No. 1538/Bang/2012 dt. 30. 8. 2013) 3DPLM Software Solutions Ltd. (IT(TP)A No. 1303/Bang/2012 dt. 28. 11. 2013) for A. Y. 2008-09. 6.2 It was submitted, by the learned Authorised Representative, that the set of comparables chosen by the TPO in the cited cases (supra) are the same as those selected in the case on hand and therefore the assessee places reliance on the decisions in the cited cases. xxxx 7.1 As per the T. P. Study carried out by the assessee, for the software development service segment, adopting TNMM as the Most Appropriate Method ('MAM') and taking itself as the tested party, the assessee selected a set of 23 companies as comparables with an average profit margin of 14. 84% on cost. The assessee's list of comparables, as per its T. P. Study, are as under :- xxxx Since the average profit margin of the assessee was 12. 64% on total cost, the assessee held its international transactions in the software development services segment to be at arm's length. 7. 2 The TPO, while accepting TNMM as the MAM, as adopted by the assessee, rejected the assessee's T. P. Study for va....
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.... comparable, observing that it was developing software products and was not purely a software service provider and at para 10. 4 thereof it was held as under :- " 10. 4 We have heard both parties and perused and carefully considered the material on record. We find from the record that the TPO has drawn conclusions as to the comparability of this company to the assessee based on information obtained u/s. 133(6) of the Act. This information which was not in the public domain ought not to have been used by the TPO, more so when the same is contrary to the Annual Report of the company, as pointed out by the learned Authorised Representative. We also find that the co-ordinate benches of this Tribunal in the assessee's own case for Assessment Year 2007-08 (supra) and in the case of Triology E-Business Software India Pvt. Ltd. (supra) have held that this company was developing software products and was not purely or mainly a software service provider. Apart from relying of the above cited decisions of co-ordinate benches of the Tribunal (supra), the assessee has also brought on record evidence from various portions of the company's Annual Report to establish that this com....
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.... company to give a finding whether the services performed by this company are similar to the software development services performed by the assessee. From the details on record, we find that while the assessee is into software development services, this company i. e. e-Zest Solutions Ltd. , is rendering product development services and high end technical services which come under the category of KPO services. It has been held by the co-ordinate bench of this Tribunal in the case of Capital I-Q Information Systems (India) (P) Ltd. Supra) that KPO services are not comparable to software development services and are therefore not comparable. Following the aforesaid decision of the co-ordinate bench of the Hyderabad Tribunal in the aforesaid case, we hold that this company, i. e. e-Zest Solutions Ltd. be omitted from the set of comparables for the period under consideration in the case on hand. The A. O. /TPO is accordingly directed. " 16.4.2 Following the above decision of the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra), we direct the A. O. / TPO to exclude this company from the list of comparables as it is functionally different fr....
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.... comparables as it is functionally different from the assessee in the case on hand who is rendering purely software development services. It is ordered accordingly. xxxx 18. Lucid Software Ltd. 18. 1 This company has been selected as a comparable by the TPO. In proceedings before us, the assessee objected to the inclusion of this company as a comparable on the ground that it is into software product development and is therefore functionally different from the assessee. 18.3.1 We have heard the rival submissions and perused and carefully considered the material on record; including the judicial decision cited and placed reliance upon. We find that the coordinate bench of this Tribunal in the case of M/s. 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09 has held that this company has to be excluded from the list of comparables for software development service providers as it is engaged in software product development and the relevant observations of the order at para 16. 3 thereof is extracted hereunder :- "16.3 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the d....
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....refully considered the material on record. We find that a co-ordinate bench of this Tribunal in its order in the case of M/s. 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09 has held that this company be excluded from the list of comparables for software development service providers, holding as under at paras 18. 3. 1 to 18. 3. 3 thereof :- " 18. 3. 1 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the details brought on record that this company i. e. Quintegra Solutions Ltd. is engaged in product engineering services and is not purely a software development service provider as is the assessee in the case on hand. It is also seen that this company is also engaged in proprietary software products and has substantial R&D activity which has resulted in creation of its IPRs. Having applied for trade mark registration of its products, it evidences the fact that this company owns intangible assets. The co-ordinate bench of this Tribunal in the case of 24/7 Customer. Com Pvt. Ltd. (ITA No. 227/Bang/2010 dt. 9. 11. 2012) has held that if a company possesses or owns intangibles or IPRs, then it cann....