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2015 (8) TMI 1447
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....ation of deduction u/s 10A, 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 Sub-section (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 learned CIT(A) erred in directing the AO to compute deduction u/s 1OA 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. These grounds are with regard to exclusion of internet charges and travelling expenses incurred in foreign currency from export turnover without reducing the same from the total turnover, while computing deduction u/s. 10A of the Act. 5. According to the AO, as per the definition of export turnover given in clause (iv) to Explanation 2, the expenses incurred for freight expenses attributable to the delivery of the product or software outside India shoul....
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....onal computing platforms. Its products have broad market reach and are incorporated into a variety of platforms, including consumer and enterprise PCs, notebooks, workstations, mobile phones and game consoles. The assessee provides research and development services to NVIDIA International, from its Bangalore, Pune and Hyderabad facilities. It also provides marketing support services to NVIDA Singapore Pte. Ltd. NVIDIA India is compensated on a cost plus mark-up basis for the provision of research and development services to NVIDA International and marketing support services provided to NVIDIA Singapore. The details of segmental financials are as follows:- Description Research & Development Services (Software) (Rs.) Operating Revenues 208,44,86,068 Operating Expenses 183,33,97,561 Operating Profit/Loss 25,10,88,507 Op Profit on cost 13.70% 14. The issue raised by the Assessee in Grounds No.2 to 9 relates to the determination of Arm's Length Price (ALP) in respect of receipts by the Assessee from it's AE in respect of transaction of rendering software development services. In support of the claim of the Assessee that the price paid....
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....he assessee filed objections before the CIT(A) to the proposal made by the TPO in the order passed u/s. 92CA of the Act. The CIT(A) confirmed the order of the TPO in so far as it relates to selection of comparable companies. The CIT(A), however, held that forex loss/ gain is operating in nature and has to be considered as part of the operating profits for the purpose of computing profit margin of the Assessee. The AO passed fair assessment order in which the addition proposed by the TPO was added to the total income of the assessee. Aggrieved by the order of the CIT(A), the Assessee as well as the Revenue are in appeal before the Tribunal. 17. The first aspect that needs consideration is the computation of revenues from software development services. In ground No. 3 raised by the revenue, the revenue has challenged the order of the CIT(A) whereby he held that forex loss/gain is operating in nature and therefore has to be regarded as part of the operative income for the purpose of determining the profit margins of the Assessee as well as that of the comparable companies. It was the plea of the assessee before the CIT(A) that the TPO erred in not treating the foreign exchange fluc....
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....omparables chosen by him. The assessee has also submitted that some of the comparable chosen by the Assessee ought not to have been rejected by the TPO. We will deal with each of such comparable companies in the following paras. COMPANIES INCLUDED IN THE FINAL LIST OF COMPARABLES WHICH THE ASSESSEE WANTS TO BE EXCLUDED:- 22. Bodhtree Consulting Ltd.:- As far as this company is concerned, it is not in dispute that in the list of comparables chosen by the assessee, this company was also included by the assessee. The assessee, however, submits before us that later on it came to the assessee's notice that this company is not being considered as a comparable company in the case of companies rendering software development services. In this regard, the ld. counsel for the assessee has brought to our notice the decision of the Mumbai Bench of the Tribunal in the case of Nethawk Networks Pvt. Ltd. v. ITO, ITA No.7633/Mum/2012, order dated 6.11.2013. In this case, the Tribunal followed the decision rendered by the Mumbai Bench of the Tribunal in the case of Wills Processing Services (I) P. Ltd., ITA No.4547/Mum/2012. In the aforesaid decisions, the Tribunal has taken the view that Bodh....
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....nd is a market leader in software development activities, whereas the assessee is merely a software service provider operating its business in India and does not possess either any brand value or own any intangible or intellectual property rights (IPRs). It was also submitted by the learned Authorised Representative that :- (i) the co-ordinate bench of this Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. in ITA No.227/Bang/2010 has held that a company owning intangibles cannot be compared to a low risk captive service provider who does not own any intangible and hence does not have an additional advantage in the market. It is submitted that this decision is applicable to the assessee's case, as the assessee does not own any intangibles and hence Infosys Technologies Ltd. cannot be comparable to the assessee ; (ii) the observation of the ITAT, Delhi Bench in the case of Agnity India Technologies Pvt. Ltd. in ITA No.3856 (Del)/2010 at para 5.2 thereof, that Infosys Technologies Ltd. being a giant company and market leader assuming all risks leading to higher profits cannot be considered as comparable to captive service providers assuming limited risk ; ....
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...., we hold that Infosys Ltd. be excluded from the list of comparable companies. 24. KALS Information Systems Ltd.:- As far as this company is concerned, it is not in dispute before us that this company has been considered as not comparable to a pure software development services company by the Bangalore Bench of the Tribunal in the case of M/s. Trilogy e-business Software India Pvt. Ltd. (supra). The following were the relevant observations of the Tribunal:- "(d) KALS Information Systems Ltd. 46. As far as this company is concerned, the contention of the assessee is that the aforesaid company has revenues from both software development and software products. Besides the above, it was also pointed out that this company is engaged in providing training. It was also submitted that as per the annual repot, the salary cost debited under the software development expenditure was Rs. 45,93,351. The same was less than 25% of the software services revenue and therefore the salary cost filter test fails in this case. Reference was made to the Pune Bench Tribunal's decision of the ITAT in the case of Bindview India Private Limited Vs. DCI, ITA No. ITA No 1386/PN/1O wherein ....
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....ollowing were the relevant observations of the Tribunal:- II. UNREASONABLE COMPARABILITY CRITERIA : 19. The learned Chartered Accountant pleaded that out of the six comparables shortlisted above as comparables based on the turnover filter, the following two companies, namely (i) Tata Elxsi Ltd; and (ii) M/s. Flextronics Software Systems Ltd., deserve to be eliminated for the following reasons : (i) Tata Elxsi Ltd., : The company operates in the segments of software development services which comprises of embedded product design services, industrial design and engineering services and visual computing labs and system integration services segment. There is no sub-services break up/information provided in the annual report or the databases based on which the margin from software services activity only could be computed. The company has also in its response to the notice u/s.133(6) stated that it cannot be considered as comparable to any other software services company because of its complex nature. Hence, Tata Elxsi Ltd., is to be excluded from the list of comparables. (ii) Flextronics Software Systems Ltd. : The learned TPO has considered this company as a com....
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.... the following extract from page 143 of TPO's order was read out by him as his submissions : "It is very pertinent to mention here that the company was considered by the taxpayer as a comparable for the preceding assessment year i.e., AY 2006-07. When the same was accepted by the TPO as a comparable, the same was not objected to it by the taxpayer. As the facts mentioned by the taxpayer are the same and these were there in the earlier FY 2005-06, there is no reason why the taxpayer is objecting to it. How the company is functionally similar in the earlier FY 2005-06 but the same is not functionally similar for the subsequent FY 2006-07 even when no facts have been changed from the preceding year. Thus the taxpayer is arguing against this comparable as the company was not considered as a comparable by the taxpayer for the present FY 2006-07." 21. We have heard the rival submissions and considered the facts and materials on record. After considering the submissions, we find that Tata Elxsi and Flextronics are functionally different from that of the assessee and hence they deserve to be deleted from the list of six comparables and hence there remains only four co....
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....08. 10.2 By confirming the re-computation of the eligible depreciation for the AY 2009-10 and the consequent disallowance of the excess depreciation of Rs. 1,409,854 from the profits of STP unit, by the learned AO." 32. The grievance of the assessee lies in the action of the AO in disallowance of depreciation on building. Relevant facts of the case are that the Assessee has three STPI Units in Bangalore, Pune & Hyderabad and one Non-STPI Unit in Bangalore. The AO noted that a company by name M/s. Portal Player Pvt. Ltd. ["PPPL"] was amalgamated with the assessee company w.e.f. 01.04.2007. Consequently the ownership of the property being land and building at Hyderabad belonging to PPPL vested with the assessee and was shown under the head "Fixed Assets". Consequent on amalgamation, the work-in progress in the books of the amalgamating entity as on 31.03.2007 along with expenses incurred by the assessee till 22.04.2007 was capitalized as addition to the block of the building in the fixed assets and depreciation was claimed. According to the work-in progress in the books of the amalgamating entity also included building that was put to use by the amalgamating company....
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....nits in the ratio of turnover." 37. During the AY 2009-10, NVIDIA India has incurred total advertisement expenses of Rs. 25,053,976 [Rs. 676,870 STP Unit and Rs. 24,377,106 Non STP Unit]. During the assessment proceedings the AO questioned as to why the whole of the advertisement expenses is debited to the Non STP unit. In this regard, it was submitted that the Non-STP unit is engaged in providing marketing support services to NVIDIA Singapore Pte. Ltd ("NVIDIA Singapore") and in this regard, the advertisement expenses of Rs. 24,377,106 have been incurred by the NVIDIA India's Non-STP unit. The AO held that all the group companies may be benefitted due to increase in popularity of the brand and Company through marketing in India. Accordingly, without providing any other justification, he apportioned 15% of whole of the expenses of the Non-STP unit (i.e. expenditure on employees and operating and other expenses) amounting to Rs. 75,027,928 to the STP unit. With this apportionment, the profit of the Non-STP unit has been increased by Rs. 11,254,190 and profit of the STP unit has decreased by an equivalent amount. 38. The Assessee submitted that the software development activity....
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....aged in providing only marketing support services to its group companies overseas. In respect of the marketing support activity, the appellant has entered into a service representative agreement with its group company Nvidia Singapore and the advertisement expenses referred by the AO has been incurred by this unit in the course of rendering marketing support activities. In [2011] 16 taxmann.com 305 (Delhi) Commissioner of Incometax v. EHPT India (P.) Ltd., the Hon'ble High Court of Delhi laid down the proposition that in case distortion of profits is detected between STPI & Non-STPI units for the purposes of deduction u/s. 10A apportionment of expenditure can be made, but on very sound basis. I have considered the facts and circumstances of the case and I find the explanation of the assessee is selfcontradictory as the STPI unit at Pune has been apportioned a part of this expenditure at Rs. 6.76 lakhs, whereas no part of this expenditure has been apportioned to the Bangalore & Hyderabad units. There is definitely some substance in the finding of the AO that such expenditure benefits all the group companies including the STPI units in India on account of increase in popularity of th....