TaxTMI 
TaxTMI 
2017 (11) TMI 1758
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.... the assessee No. 132/Mum/2010 for AY 2005-06 is against the order of CIT(A) restricting the additions made by AO/Transfer Pricing Officer (in short TPO) making transfer pricing adjustments to the value of the international transactions in respect of assessee's transactions in Information Technology (in short IT) Software and IT Enabled Services (ITES). For this Revenue has raised following ground No.1: - "1. On the facts and in the circumstances of the case and in law, the ld CIT(A) erred in deleting the addition of Rs. 16,06,265,520/- made on account of Transfer Pricing adjustment by TPO to the value of the international transactions of the assessee in respect of IT enabled services and software development services." 3. The assessee has also raised the issue in its CO for AY 2005-06 regarding non-allowance of working capital adjustment and risk adjustments by the following ground Nos. 4 & 5: - "4. The learned CIT(A) has erred in not adjudicating on the contention of the Respondent that the benefit of the working capital adjustment should be allowed to the Respondent, which is required to be undertaken in its case to account for the difference in working capi....
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....oftware Enterprise Limited 9.89% 4. Fortune Infotech Limited 14.12% 5. Genesys International Corporation Limited -2.15% 6. Mercury Outsourcing Management Limited -36.94% 7. Nucleus Netsoft and GIS (India) Limited 41.33% 8. Spanco Telesystems and Solutions Limited 13.07% 9. Transworks Information Services Limited 2.09% 10. Vishal Information Technologies Limited 45.62% Arithmetic Mean 12.87% The TPO out of 10 comparables selected by the assessee rejected 6 comparables. The TPO also introduced 6 more additional comparables and accordingly, he selected the final set of comparables for computing the arm's length operating margin of ITES as under: - Sr. No. Name of the Company Operating Margin 1. Allsec Technologies Limited 28.58% 2. Tulsyan Technologies Limited (Cosmic Global) 18.75% 5 Saffron Global Limited 24.91% 4. Vishal Information Technologies Limited 51.26% 5. Ace Software Exports Limited 21.11% 6. Nucleus Netsoft & GIS Limited 45.31% 7. Asian Cere Information Technology Limited 37.40% 8. Airline Financial Support Serv....
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....ectively reject a comparable chosen initially on account of functional differences, the revenue should also be given an opportunity to examine all the comparables particularly when assessee had rejected 408 companies on account of functional differences initially. 5. Whether principles of natural justices does not require that, where the assessee is permitted to selectively review its selection process and reject comparables chosen by it initially, the revenue should also be given an opportunity to examine all the comparable particularly when assessee had rejected 192 companies On account of insufficient financial information initially and whose data are now available." It means that the above six companies are under dispute now, which we will adjudicate. 8. First we will deal with the CS Software Enterprise Limited. The TPO has rejected the company for the reason that it is engaged in providing both IT software development as well as ITES. According to TPO, the annual report of the company does not provide separate segmental data in respect of the ITES and in the absence of segmental data the company cannot be selected as comparable company. Further, according to TP....
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....of assessee's Paper Book, as part of management discussion, software services have been separately discussed. From the said discussion at page 370, it is evident that this company is definitely engaged in Software Development activity. At page 372 of assessee's Paper Book, the income from operations is disclosed at Rs. 8.66 crores. Here again, there is no breakup of the same into IT Software Services and ITES activity. He stated that the assessee has filed only a few pages of the Annual Report but the complete annual report of this company is available at page of 160 of the Revenue's Paper Book, to which attention was drawn. At page 197 of the revenue's Paper Book, the company's principal service is shown as computer software and not BPO activity. Further he argued that at page 192 of the Revenue's Paper Book, the details of operating expenses are disclosed and out of total operating expense of Rs. 7.86 crores, Rs. 3.46 cores is on account of outside costs on account of data entry and machinery hire. Thus, it appears that this company is essentially performing the activity through outsourcing and does not perform the work on its own. Even the ratio of salary....
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....incurred Forex losses of Rs. 10.54 lakhs during the year, which shows that the company has dealing in foreign exchange. He answers the objection of the Departmental Representative who has relied on disclosers of earning in foreign exchange on page 10 of the Annual Report to conclude that the company does not have any export earnings. He referred to the fact that the company which exports services but raises invoices for the same in INR (Indian Rupees), may or may not disclose any information under the head of disclosure of earnings in foreign exchange. Further, he argued that this company should be accepted as comparable for the simple reason that functional comparability which was accepted by the CIT(A) and not disputed by the Departmental Representative, is clear from the MDA Report under the head Key Strengths of the company and from there it is clear that the company is leading IT/BPO service provider with a clear focus on specific verticals and business process areas. He explained that industry analysis in MDA report describes about the current trends in IT/BPO Service Industry and this is clear indicator that the company operates in IT/BPO services industry and further, CS So....
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....n of Nucleus Netsoft and the CIT(A) has reintroduced Genesys only on the basis of maintaining parity with Nucleus. it is therefore, argued by the learned CIT DR that in the event Nucleus Netsoft is to be excluded, taking a consistent stand, Genesys International should also be rejected. Additionally, it is observed that, the total revenues from the relevant segment are only 16.40 crores during the relevant year. The assessee, on the other hand, has a turnover of Rs. 270 crores in the relevant segment. Therefore, it appears that even in terms of size, this company is not comparable to the assessee. It is also observed that as part of Schedule L to the P&L Account at page 389 of assessee's Paper Book, the details of operating costs are given. During the previous year, the assessee has written off significant project expenditure as part of Operating cost. This shows that part of the work is performed through outside sources. For all these reasons, this company deserved to be rejected as a comparable. 14. On the other hand, the learned Counsel for the assessee explained that CIT(A) accepted this company as comparable for the reason that the services rendered by the company quali....
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....rt of assessee's comparable that was rejected by the TPO as functionally not comparable. The CIT(A) reintroduced this comparable stating that the same is engaged only in ITES activity. The assessee has also not furnished the entire Balance Sheet but has instead filed certain papers in respect of the same downloaded from its Website. At page 403 to 406 are the details from which it is evident that these appears as downloaded much later in 2009 and in fact, does not form part of the documents filed before the TPO. Further, a reference to the annual report for F.Y 2005-06 in the same case shows that this company is engaged in many functions such as development of applications, systems software and BPO operations. The same can be referred to Revenue's Paper Book page 615. Separate details of the same are not available. Further, the total turnover of this company is only Rs. 61 lakhs during the relevant period resulting in a loss of 36.94 %. Therefore, even in terms of level of operations, this company cannot be compared to the level of assessee's activity. The ClT(A)'s decision is not supported by any material on record. Hence, the action of the CIT(A) in including this com....
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....ble to do so at later stage. The learned Counsel for the assessee relied on the decision of Hon'ble Delhi High Court in the case of CIT vs. Nortel Networks India A. (P.) Ltd. (ITA No. 115/2015), which was followed by Mumbai Tribunal in the case of Golawala Diamonds (2017) 78 taxmann.com 82 (Mumbai-Trib). Alternatively, the learned Counsel for the assessee argued that the TPO himself has introduce low turnover comparables in the final state of comparables i.e. Asian Cerc Information Technology Limited having turnover of Rs. 1.70 crores, Tulsyan Technoliges Ltd having a turnover of Rs. 1.90 crores, which are referred at pages 21 and 17 of the TP order. According to him, in view of the decision of the Hon'ble Bombay High Court in the case of CIT vs. Maersk Global Services Centre (India) Pvt. Ltd (ITA No: 692, 693/Mum/2012), the same should be rejected and this company should be accepted as comparable. The learned Counsel for the assessee also stated that the decision of Hon'ble Bombay High Court in the case of Pentair Water India Pvt. Ltd. vs. CIT in ITA No. 18 of 2015 dated 16-09-2015 for applying turnover filter cannot be of any assistance since in that case the applicability of the....
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....no reason why this company should not be considered as a comparable. Therefore, applying the related party transactions filter on a uniform basis, since she percentage of related party transactions in case of this company is less an 25%, this company is to be selected as a comparable." Aggrieved, Revenue came in second appeal before Tribunal. 21. Before us, the learned CIT DR argued that this company is part of assessee's set of comparables and the same was rejected by the TPO on account of RPT but the CIT(A) reintroduced the same for the reason that the RPT was less than 25%. In this connection, Ld CIT-DR argued that if the said comparable was to be included in the final set, only the margins relating to the international call centre should be considered. He stated that this company is engaged in multiple activities and segmental details are available at page 420 of assessee's Paper Book. He argued that this company provides both international call center services as well as domestic call centre services. The profitability of this company in the international call center segment alone is to be considered, as the assessee's controlled transaction on account of ITE....
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....t if it fails in related party transaction filter the Revenue should not be allowed to bring any new reason at this stage before Tribunal. On merits also the learned Counsel argued that the company is engaged in multiple activities which is not correct because the assessee has considered only the call center services related segment i.e. (international and domestic) for comparability analysis and hence, the Spanco Telesystems and Solutions Limited is engaged in other activities and separate segmental details are available for call centre activities, which are in the nature of ITES and the same alone has been considered by assessee for comparability analysis. As regards to the argument that only the margins of international call centre should be considered for the purpose of comparability, it was argued that Revenue's contention now contradicts TPO's position of applying an export earning filter of 12.5% for the reason that now DR is contending that only companies which have 100% export earnings should be considered as comparable. Finally, the learned counsel stated the factual position of export earnings of Spanco Telesystems and Solutions Limited in the call centre services segmen....
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....pany was part of assessee's comparable set and rejected by the TPO on account of history of losses but the CIT(A) has held that since the data relating to only the relevant previous year is to be considered and during the previous year, this company has earned a marginal profit, the same cannot be rejected. He stated that even if the company is to be retained in the final set for the reason that there is a profit during the year, the business model of this company is different from that of the assessee. This company is an entrepreneur and it is evident from its P&L account at page 428 of assessee's Paper Book wherein marketing and business development expenses of Rs. 2.56 crores are separately disclosed. He further explained from note no. 12 of Schedule 18 - Notes to accounts, that the payment is to its wholly owned subsidiary for rendering of marketing services. Thus this Company provides services to its end customers in US market and bears the necessary risk in this regard whereas, the subsidiary is reimbursed the costs plus a fixed mark-up for its marketing service. The business model in the case of the assessee is entirely different as the assessee is paid a service fee....
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....hich indicates that the company has to consider growth prospects for the future and he referred to page 4 of the annual report. The learned Counsel for the assessee stated that new contentions raised by Revenue before the Tribunal is for the first time and for this he placed reliance on the order of Mumbai Tribunal in the case of TPG Capital India (P.) Ltd. (supra). As regards to the argument on merits that the company underwent an amalgamation during the year, the learned counsel stated that as per notes on accounts at point No. 2(ii) the subsidiary company which merged into Transworks Information Services Limited is engaged in similar business operations as that of Transworks Information Services Limited. This merger would not have any impact on the function comparability of Transworks Information Services Limited. The learned Counsel for the assessee relied on the decision of Mumbai Tribunal in the case of Whillis Processing Services (India) Private Ltd in ITA No. 6877/Mum/2012 for Y 2008-09. Further, as regards to the software development services segments, the learned counsel argued that the TPO himself proposed to introduce one comparable i.e. Exensys Software even though the....
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....ected as one of the comparables. However, the TPO consider the employ cost to sales ratio at the Rate of 25% as filter for selective comparables whereas, he himself rejected the comparables Tulsyan Technologies on the basis that employee costs are only 14.73% of the sales and hence the company fails the employ cost filter of 25%. The learned counsel for the assessee explained that the employee cost to sale ratio of Vishal Information Technologies Limited, wherein data of employee cost of total revenue is Rs. 19,70,458/- by Rs. 20,82,33,000/-. He referred to the order of CIT(A), wherein he has rejected one of the TPO's comparable i.e. Tulsyan Technologies Limited on the basis that employees cost is to the extent 14.73% of sales and hence, the company fails to employees cost filter of 25%. The learned Counsel for the assessee relied on the decision of Mumbai Tribunal in the case of GlobeOp Financial Services India Pvt. Ltd in ITA No. 1610/Mum/2011 for AY 2005-06. The relevant para 27 to 28 reads as under: - "27. We have considered the submissions of the parties and perused the material available on record. On analysis of facts placed on record, it is noticed that personnel c....
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.... Technology Limited 19.40% 3. Compucom Software Limited 18.83% 4. Datamatics Limited -5.87% 5. Gebbs Infotech Limited 16.52% 6. Goldstone Technologies Limited 4.65% 7. Infosys Technologies Limited 43.87% 8. KPIT Cummins Infosystems Limited 13.42% 9. Lanco Global Systems Limited 12.01% 10. Larsen & Turbo Infotech Limited 10.59% 11. Maars Software International Limited 3.25% 12. Orient Information Technologies Limited 14.90% 13. Quintegra Solutions Limited 6.93% 14. RS Software (India) Limited 7.92% 15. Sasken Communication Technologies Limited 16.16% 16. Sasken Networks Systems Limited 16.19% 17. Satyam Computer Services Limited 28.79% 18. SIP Technologies an Exports Limited 31.74% 19. VJIL Comsulting Limited 6.68% 20. VMF Softech Limited 36.51% Arithmetic Mean 15.92% 32. Out of the comparables selected by the assessee, the TPO rejected 12 comparables for various reasons and introduce 8 additional comparable companies and finally selected the following 19 comparables. Sr. No. Name of the Company ....
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....sions made by the learned AR of the appellant. The filters adopted by the TPO for comparability analysis should be applied on a consistent basis. In his order, the TPO has used a threshold of 25% for the related party transactions filter in case of various companies such as Aztec Software Limited, ITC Infotech Limited, Bluestar Infotech Limited etc. Accordingly, to ensure consistency in the comparability analysis, since the percentage of related party transactions in the case of this company is less than 25%, this company should be accepted." Aggrieved, now Revenue is in second appeal before Tribunal against acceptance of this company as comparable by CIT(A). 35. The learned CIT Departmental Representative argued that this comparable was rejected by TPO but wrongly accepted by CIT(A) even though related party transaction was found to be less than 25%. In this connection, he stated that the margin of this comparable has been wrongly considered by the CIT(A) and the assessee at 18.83%. The actual margin in the software segment is 28.62%. The detailed working in this regard can be referred to at page 687 of Revenue's paper book. Hence, he stated that the corrected margin of 28.6....
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....were less than 25% of the total Revenue and he brought out the fact that companies total sale in FY 2004-05 at 41.22 crores as against the foreign exchange earnings only at Rs. 7.95 crores. Accordingly, the TPO rejected this company as comparable. Aggrieved, assessee preferred the appeal before CIT(A), who accepted this as comparable by observing in Para 29.3 as under: - "29.3 I have gone through the submissions made by the learned AR of the appellant and the Annual Report of the company. On review of the annual report of the company, it is obvious that the company has earned its entire revenues for the year from export of software services. The foreign exchange earnings information provided in the notes to accounts is provided on receipt basis and not on accrual basis. Since the company has earned its entire revenues for the year from export activities, this company should be selected as comparable." Aggrieved, Revenue is in second appeal before Tribunal. 39. Before us, the learned CIT Departmental Representative argued that this comparable was rejected by the TPO but reinstated by the CIT(A) for the reason that it had adequate foreign exchange income. The Balance S....
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.... Book. These expenses debited in the P&L account show that the assessee also gets part of the work done through third parties both in respect of consultancy ad well as onsite project work which is different from the assessee's business model. On account of these numbers of reason it is submitted that this company should be rejected as a comparable. 40. On the other hand, the learned Counsel for the assessee argued that the TPO rejected this company only on the basis that it fails to export earning filter of 25% to sales but as per Annual Report the company derives its entire Revenue from exports and he particularly referred to schedule 12 of the profit and loss account, which is given at Page 245 of assessee's paper book, wherein it is clearly stated that the company has earned hundred percent of its Revenue from export of software services. Even the management discussion and analysis under the head risks and in exports software services states the same. This is given at page 242 of the assessee's paper book. Further, according to the learned Counsel under the head Revenue and explained it is clearly stated that the company's revenue is generated principally from offshore te....
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....any, it was submitted that the company earns 100% of its service revenue from export, therefore, functional comparability should take precedence. The learned Commissioner (Appeals), after considering the submissions of the assessee, found that the entire software and service income is earned through exports. Therefore, finding that observation made by the Transfer Pricing Officer is factually incorrect, he included the company as a comparable. 37. Learned Departmental Representative while upon the observations of the Transfer Pricing Officer, learned Authorised Representative relied upon the observations of the learned Commissioner (Appeals). 38. Having considered the submissions of the parties and perusing the material on record, we are of the view that Goldstone Technologies Ltd. is comparable to the assessee. As could be seen, the Transfer Pricing Officer had rejected this company solely for the reason that its foreign exchange earning is less than 25%. However, the learned Commissioner (Appeals) has given a factual finding by referring to the annual report of the company that the entire software and service income is earned through exports. As the aforesaid fa....
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....tent that the same is negative, cannot be compared with a healthy thriving company like the assessee. The Balance Sheet of this company can be referred to at page 389 of Revenue Paper Book. The details of the net worth of the company are as under: Amt(Rs. in Crs.) Net Fixed Assets 13.09 Net current assets 11.39 Total 24.48 Less Outside funds 32.58 Net worth (8.10) The position is similar during the earlier year also. The ITAT has in the case of Michael Aram Exports Pvt. Ltd. vs. ITO [2013) 40 taxmann.com.21 (Del) held that a company with negative net worth that does not have sufficient funds to carry on its business cannot be compared with other companies having sufficient funds. In fact, the case of RS Software will clearly fail the test of asset employed that is a mandatory requirement under Rule 10B(2) of the IT Rules 1962. A company whose net worth is eroded cannot be considered as a comparable to a company having sufficient capital base. Hence, this case deserves to be rejected. 44. On the other hand, the learned Counsel for the assessee argued that the TPO has not applied any....
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.... utlized for the international transaction and has not and cannot be considered the debit balance of profit and loss account which is on account of brought forward losses of earlier years as a criteria for rejection. He submitted further that the company having more than 99% of the total revenue from comparable activity of software development services. The Ld. DR on the contrary reiterated the observations made by the Ld. TPO about the company. We find substance in the above contentions of the Ld. AR that negative net worth cannot be a criteria for evaluating the current profitability of the comparable as the negative net worth is on account of huge brought forward losses of earlier years. On perusal of the profit and loss account of the Co. for the asstt. year under consideration, we find that during the year the company has made exports of computer software development with Rs. 87,31,45,219/- computer software development (domestic) worth Rs. 4,11,26,112/- and from computer software maintenance and others at Rs. 14,35,833/-. Hence we find that the company has more than 99% of the total revenue from comparable activity of software development services. The Ld. A.O/TPO was thus no....
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....oviding both software service and IT enabled services and since separate segmental data for software services is not available, the company should not be selected as a comparable." Aggrieved, now Revenue is in appeal before the Tribunal. 47. We have heard the rival contentions and gone through the facts and circumstances of the case. The learned Departmental Representative before us, stated that as per segmental information provided at point 26 of schedule 16 i.e. notes to accounts at pages 338 of assessee's paper book, the company operates in two segments i.e. (a) Software Development and Services (b) System Integration. The learned Counsel clearly stated that the TPO has considered the software development and services segment for comparability purposes but there are several disclosures in the Annual Report of the company which indicates that the Software Development and Services segment comprises of following three segments: - "1. Product Design services 2. Design engineering services and 3. Visual computing labs. " For this the learned Counsel for the assessee referred to pages 339 and 343 of the assessee's paper book. The learned Counsel for....
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....case, we are of the view that the CIT(A) rightly excluded Exensys Software Solutions Ltd., Infosys Technologies Ltd., and Satyam Computers Ltd., from the list of comparable companies. 15. As regards ground No.4 raised by the revenue, the CIT(A) followed the decision of the ITAT Delhi in the case of Agnity India Technologies v. ITO (ITA 3856/DeI/2010) in coming to the conclusion that Infosys Technologies Ltd., is not comparable for the reason of its size, turnover and brand. The decision of the Tribunal in the case of Agnity India Technologies (supra) has since been confirmed by the Hon'ble Delhi High Court. Therefore the grievance projected by the Revenue in this regard is without any merit." In view of the above, we are confirming the order of CIT(A) and this issue of Revenue's appeal is dismissed. 48. The next comparable is Geometric Software Solutions Company Limited. The TPO considered this company in a set of comparable for the software services segment of the assessee for the reason that this company is engaged in providing software services. The assessee contested that in view of the annual report of the company, it is engaged in the business of software servi....
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.... clearly shows that this company is comparable to the assessee in terms of nature of services offered. Accordingly, it is submitted that the same is accepted as a comparable. 50. The learned Counsel for the assessee argued that standalone financial statement of the company did not provide any segmental breakup between the software services and this point has not been objected by the learned CIT DR. The learned counsel replied to the argument of the learned CIT DR that the Revenue breakup relied upon by the learned CIT DR to support his contention that sale of products states that only 12% of the total Revenue is provide only in the consolidated Financial statement of the company. According to him, reliance on details provided in such consolidated financial statement is not an appropriate for reason that the consolidated financial statement contains combined decision of the group which wholly includes operation of multiple group entities including oversee subsidiaries based in USA, Singapore, etc. He referred to page 266 to 326 of Revenue's paper book. Further the learned counsel stated that the consolidated financial have been prepared based on USA GAAP accounting principles and....
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.... this company as comparable. We find no infirmity in the order of CIT(A) and this issue of Revenue's appeal is dismissed. 52. The next comparable selected by TPO Four Soft Ltd. in the and the list of comparables for the software services segmented for the reason that the company has engaged in providing software services. The assessee objected on the basis of the annual report of the company that this company is engaged in the business of software services and software products. But the TPO's selected this as comparable. Aggrieved, assessee preferred the appeal before CIT(A), who rejected this as comparable by observing in Para 37.3 as under: - "37.3 I have gone through the submissions made by the AR of the appellant and the Annual report of the company. Mstudy of the annual report of the company, it is evident that the company is engaged in the business of both 'software products' and 'software services'. Further, no break up is available of the income earned by the company from the software services alone. The TPO has himself rejected companies where separate segmental data is not available in respect of the software development services and software p....
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....ave to be excluded. We also hold that the FAA had rightly excluded four comparable i.e. Infosys Technologies Ltd. and Satyam Computer Services Ltd., Sankhya Infotech Ltd. and Geometric Software Solutions from the final list of valid comparables. Accordingly, effective ground of appeal, raised by the assessee with regard to comparables is allowed and ground raised by the AO, against the order of the FAA about excluding four comparables, is dismissed. 55. Following the case law and going through the facts and circumstances of the case, we are of the view that this company cannot be selected as comparable for the reason that this company is engaged in both software services as well as sale of software products and separate segmental data is not available. Hence, we confirm the order of CIT(A) and this issue of Revenue's appeal is dismissed. 56. On the issue of working capital adjustment and Risk adjustment, the grounds raised by assessee in its CO No. 132/Mum/2010 for AY 2005-06 vide ground No. 4 and 5, reproduced above, before us, both the parties conceded that the issue can be remitted back to the file of the AO in term of the Tribunal's decision in the case of Qualco....
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....djustment and risk adjustment as narrated in above Tribunal's order. This issue is set aside to the file of the AO. 58. Coming to ITA No. 4099/Mum/2009 for AY 2004-05. The first issue in this appeal of Revenue is against the order of CIT(A) allowing deduction under section 10A of the Act on receipts from reimbursable expenses amounting to Rs. 86,69,49,641/-. For this Revenue has raised following ground No. 1: - "1. On the facts and in the circumstances of the case and in law, the Id ClT(A) erred in allowing deduction u/s. 10A of the IT Acton receipts from reimbursable expenses amount Rs. 86,69,49,641/-." 59. The second issue is regarding inclusion of amount of reimbursement expenses (except the telecommunication charges of Rs. 17,56,42,618/-) in the export turnover for the purpose of computing the deduction under section 10A of the Act. For this Revenue has raised following ground No.2 :- "2. On the facts and in the circumstances of the case and in law, the Id CIT (Appeals) has Also erred in holding that the amount of reimbursement expenses (except the telecommunication charges of Rs. 17,56,42,618/-) should not be excluded from the export turn over for the p....
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.... In the case under consideration the assessee has followed second method of accounting that is when the assessee incurred such reimbursable expenses and accounted for in profit and loss account the eligible profit was reduced as total expenses including reimbursement part of expenses were debited to profit & loss account. At that time if profit is not increased then the same cannot be reduced when the amount of expenditure is reimbursed. The CIT (A) has appreciated the accounting method followed by the assessee and deleted disallowance of claim made by the AO except in respect of Reimbursement of telecommunication charges (amounting to Rs. 18,382,911).The CIT(A) invoked Explanation 2(iv) to section 10A of the Act in respect of Reimbursement of telecommunication charges. In principle we agree with finding of the CIT (A) in respect of reimbursement of expenses. We also find force in alternate submission of the learned AR that if it is held that the receipts for the reimbursable expenses are not eligible for deduction u/s 10A of the Act, only profits, if any, relating to such reimbursable expenses should be considered as being not eligible for deduction u/s 10A of the Act. Further, sa....
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....E is similar to clause (iv) of Explanation 2 of section 10A. 29.4 On an analysis of definition of 'export turnover' as provided in clause (iv) of the Explanation 2 to section 10A, we notice that for the purpose of not including in the consideration received in or brought into India in convertible foreign exchange there are two types of expenditures. The first type of expenditure is freight, telecommunication charges, or insurance attributable to the delivery of article or thing or computer software out of India. The second type of expenditure is expenditure, if any, incurred in foreign exchange in providing technical services outside India. The basic idea or intention for deducting the first type of expenditure, i.e., freight, telecommunication charges, or insurance charges is that delivery of goods should be Free on Board (FoB). The C.B.D.T. vide its Circular No. 564, dated 5-7-1990 (184 ITR (St.) 137 clarified this aspect in respect of deduction under section 80HHC, the relevant portion of the circular is reproduced as below: "The term "export turnover" under the existing provisions, means the sale proceeds (excluding freight and insurance), receivable by the as....
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....rpose of arriving all the export turnover. The logic and reason behind this have been explained by the CBDT vide its Circular No. 564, dated 5-7-1990 quoted above that the delivery of the goods should be Free on Board (FoB). Both the situations can be explained by a simple example. Mr. X exported goods out of India and received consideration Rs. 1,000 in convertible foreign exchange which is only in respect of goods. Mr. Y in a similar type of transaction charged Rs. 1,000 for goods and Rs. 100 for such expenses. Total convertible foreign exchange received in case of X is Rs. 1,000 and in case of Y is Rs. 1,100. In case of Mr. Y Rs. 100 is required to be deducted from consideration received as he is getting Rs. 100 attributable to delivery of the goods. In case of X no deduction is required from consideration received in convertible foreign exchange. Thus by reduction of Rs. 100 in case of Y the goods exported is FoB. The goods exported at FoB is important in the sense that deduction under section 10A is permissible only in respect of consideration received against goods and not for the consideration received against freight etc. All the assessee should get deduction under section ....
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....nses have been excluded from export turnover." 62. But CIT(A) allowed the claim of assessee by stating that he receipts from reimbursable expenses relate to the business of the STPI units which are eligible for the deduction under Section 10A of the Act since the STPI units of Accenture are solely engaged in the business of development and export of computer software and the reimbursable expenses have been received in the course of such business, the receipts from reimbursable expenses relate to the business of development and export of computer software. He also observed that only 'profit' element is sought to be excluded from the computation of deduction under Section 10A of the Act. Since reimbursement does not have any profit element, it should be included in the profits for computation of deduction under Section 10A of the Act. He further noted that the reimbursable expenses (except the reimbursement of telecommunication charges amounting to Rs. 175,642618/- should not be excluded from export turnover of the SIPI units Those receipts are nowhere specified in Explanation 2(v) of section 10A of the Act. The CIT(A) observed that where certain items are excluded from th....
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.... of amounts payable under the ISA during the year under consideration on the basis that a similar disallowance has been made in AYs 2002-03 and AY 2003-04 and also for the reasons that the services availed by Accenture under ISA are not definite and the consideration for the same has been quantified based on the receipts of Accenture. Further, the services obtained by Accenture under ISA have not been properly defined and the relevance of such service to the business of Accenture is not justified and some expense allocation is found to be arbitrary and do not follow any logic. The CIT(A) allowed the above expenditure Incurred tinder ISA on the basis that this issue has been considered in detail during the appeal proceedings for AYs 2002-03 and 2003-04 and the facts of the case of Accenture for AY 2004-05 are exactly similar to AYs 200203 and 2003-04 and hence, there is no reason to deviate from the findings in the order paced for AY 2002-03 and 2003-04. Further, the CIT(A) held that once the arm's length price adopted by the assessee has been a subject matter of adequate review by the IPO and the AO has not placed any material on record to rebut the TPOs conclusion, the order of th....
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....payment of expenditure is at arm's length determined by the TPO u/s 92CA(3) of the Act. We do not find any substance in the case of the revenue because when an international transaction at arms length as determined by the TPO in the said transaction, it cannot be said that the assessee has paid the prices under the said transaction without obtaining any services. The contention of the revenue is baseless and under the facts and circumstances of the case, the expenditure is incurred for the purpose of business. Therefore, we are of the view that the CIT(A) has rightly allowed the claim of the assessee. Thus, ground no.1 of the revenue is dismissed." 68. We find from the above, that this issue is squarely covered in favour of assessee by Tribunal decision in assessee's own case for AY 2002-03 and 2003-04. Respectfully following the same, we dismiss this issue of Revenue's appeal. 69. Similar is the issue in Revenue's appeal in ITA No. 4100/Mum/2009 for AY 2005-06 raised by way of ground No. 3 and the facts and circumstances are exactly identical as is in AY 2004-05. The relevant reads as under: - "3. On the facts and in the circumstances of the case and in law, theld. ....
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....l expenditure and such expense is qualified business expenditure and should be allowable in computing the taxable income of Accenture. Based on the above, the CIT(A) has allowed the deduction in connection with ESOO under section 37(1) of the Act. 73. We find that the Tribunal agreeing to the findings of the CIT(A) have allowed the deduction on amounts payable in connection with ESPP to Accenture for AY 2002-03 and AY 2003-04 on the following basis: - "18. The assessee company incurred certain expenses on account of payments made by it for the shares allotted to its employees in connection with the ESPP. The AO had disallowed Rs. 9,06,788/- incurred by the assessee on the ground that this expenditure is not the expenditure of assessee company but that expenditure is of parent company and the benefit of such expenditure accrues to the parent company and not assessee. The disallowance made by the AO has been deleted by the CIT(A) by observing as under:- "I have gone through the submissions of the appellant and perused the material on record and noted that the common shares of Accenture Ltd. the parent company, have been allotted to the employees of ASPL and not t....