AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2016 (10) TMI 1286
X X X X Extracts X X X X
X X X X Extracts X X X X
....e AO to exclude the expenditure incurred in foreign currency both from the export turnover as well as from total turnover for the purpose of computation 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 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, whether the Hon'ble Dispute Resolution Panel can make adjustment on the basis of advance received from AEs in absence of debtors and inventory in the case of assessee for calculating the cost of working capital built in the profit marg....
X X X X Extracts X X X X
X X X X Extracts X X X X
....pital goods 7,84,793/- Accepted to be at arm's length Recovery of expenses 10,24,08,932/- Accepted to be at arm's length Payment of technical service fees 2,21,10,725/- Accepted to be at arm's length 5. The assessee-company sought to justify the consideration received for the international transaction entered with its AE to be at arm's length price [ALP]. The assessee-company had also submitted transfer pricing study report adopting TNMM as most appropriate method and operating profit by total cost as a profit level indicator for the transferring pricing study. The assesseecompany applied Transactional Net Margin Method [TNMM] which was considered to be the most appropriate method for purposes of bench marking the international transactions. The assesseecompany's profit margin was computed at 14.41% in respect of software services segment. The assessee-company claimed that the same was comparable with other companies rendering software development services. For the purpose of transfer pricing study, the assessee-company had chosen 16 companies as comparable entities in respect of software development services and arithmetic average of operating profit mar....
X X X X Extracts X X X X
X X X X Extracts X X X X
....olutions Ltd., 15.38 15.15 7. Persistent systems Ltd., 30.35 28.11 8. R S Software (India) Ltd., 10.29 10.45 9. Sasken Communication Technologies Ltd., 17.36 16.41 10. Tata Elxsi Ltd., (Seg) 20.93 17.20 11. Thinksoft Global Services Ltd., 17.05 13.96 AVERAGE MARGIN 22.71 21.21 8. The TPO computed average profit margin of the comparables at 22.71% and after giving working capital adjustment of 1.5%, adjusted arithmetical mean of PLI was determined at 21.21%. On the above basis, the TPO computed the transfer pricing adjustment in respect of software segment as follows: Arm's Length Mean Margin 22.71% Less: Working Capital Adjustment 1.50% Adjusted mean margin of the comparables 21.21% Operating Cost ('OC') Rs. 312,44,36,534/- Arm's Length Price ('ALP') = 121.21% of OC Rs. 378,81,29,523/- Price Received Rs. 357,45,58,538/- Short fall being adjustment u/s. 92CA Rs. 21,25,70,985/- 9. The AO passed draft assessment order u/s 144C(3) 24/02/2014 incorporating the above adjustment and also addition of Rs. 19,34,512/- u/s 10A of the Act. The AO also held that t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....form part of total income. Section 10-A is a Special provision in respect of newly established Undertakings in free trade zone, etc. The said provision is enacted as an incentive to exporters to enable their products to be competitive in the global market and, consequently, earn precious foreign exchange for the country. Therefore, while interpreting these provisions, this aspect has to be borne in mind. Section 10-A(1) provides for a deduction of profits and gains as are derived by an undertaking from the export of articles or things or computer software for a period of ten consecutive assessment years and the same is excluded from the total income of the assessee. Sub-section (4) is the provision which provides for the manner in which the said profits and gains have to be arrived at. It reads as under: 4. "For the purposes of sub-sections (1) and (1A), the profits derived from export of articles or things or computer software shall be the amount which bears to the profits of the business of the undertaking, the same proportion as the export turnover in respect of such articles or things or computer software bears to the total turnover of the business carried en by the un....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tion 10-A, 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 aforesaid provisions of Section 80HHC, the Courts have laid down various principles, which are independent of the statutory provisions. The question is, whether those independent principles can be adopted while defining 'total turnover' in the absence of a definition in Section 10-A. The Apex Court, in the case ofLakshmi Machine Works (supra) held at para. 15 as under: 12. "15. It is important to note that tax under the Act is upon income, profits and gains. It is not a tax on gross receipts. Under Section 2(24) of the Act the word "income" includes profits and gains. The charge is not on gross receipts but on profits and gains. The charge is not on gross receipts but on profits and gains properly socalled. Gross receipts or sale proceeds, however, include profits. According to "The Law and Practice of Income Tax" by Kanga and Palkhivala, the word "profits" in section 28 should be understood in normal and proper sense. However, subject to special requirements of the inc....
X X X X Extracts X X X X
X X X X Extracts X X X X
....word "turnover" in other laws like Central Sales tax or as defined in accounting principles. Goods for export do not incur excise duty liability. As stated, above, even commission and interest formed a part of the profit and loss account, however, they were not eligible for deduction under section 80HHC. They were not eligible even without the clarification introduced by the Legislature by various amendments because they did not involve any element of turnover. Further, in all other provisions of the income-tax, profits and gains were required to be computed with reference to the books of account of the assessee. However, as can be seen from the Income-tax Rules and from the above Form No. 10CCAC in the case of deduction under section 80HHC a report of the auditor certifying deduction based on export turnover was sufficient. This is because the very basis for computing section 80HHC deduction was "business profits" as computed under section 28, a portion of which had to be apportioned in terms of the above ratio of export turnover to total turnover. Section 80HHC(3) was a beneficial section. It was intended to provide incentives to promote exports. The incentive was to exempt profi....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... do not have any element of "turnover" which is the position even in the case of rent, commission, interest etc. It is important to bear in mind that excise duty and sales tax are indirect taxes. They are recovered by the assessee on behalf of the Government Therefore, if they are made relatable to exports, the formula under section 80HHC would become unworkable. The view which we have taken is in the light of amendments made to section 80HHC from time-to-time." 13. The said judgment has been re-affirmed by the Apex Court, in the ease of CIT v. Catapharma (India) (P.) Ltd. [2007] 292 ITR 641/ 162 Taxman 455. 14. The Bombay High Court had an occasion to consider the meaning of the word 'total turnover' in the context of Section 10-A, in the case of CIT v.Gem Plus Jewellery India Ltd. [2011] 330 ITR 175 [2010] 194 Taxman 192 (Bom.). Interpreting sub-Section (4) of Section 10-A, it is held as under: 15. "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 t....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the expression "export turnover" has been defined. The definition of "export turnover" excludes freight and insurance. Since export turnover has been defined be Parliament and there is a specific exclusion of freight and insurance, the expression "export turnover" cannot have a different meaning when it forms a constituent part of the total turnover for the purposes of the application of the formula. Undoubtedly, it was open to Parliament to make a provision to the contrary. However, no such provision having been made, the principle which has been enunciated earlier must prevail as a matter of correct statutory interpretation. Any other interpretation would lead to an absurdity. If the contention of the Revenue were to be accepted, the same expression viz. "export turnover" would have a different connotation in the application of the same formula. The submission of the Revenue would lead 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 sta....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... of export turnover, there would be a commonality between the numerator and the denominator of the formula. In view of the commonality, the understanding should also be the same. In other words, if the export turnover in the numerator is to be arrived at after excluding certain expenses, the same should also be excluded in computing the export turnover as a component of total turnover in the denominator. The reason being the total turnover includes export turnover. The components of the export turnover in the numerator and the denominator cannot be different. Therefore, though there is no definition of the term 'total turnover' in Section 10A, there is nothing in the said Section to mandate that, what is excluded from the numerator that is export turnover would nevertheless form part of the denominator. Though when a particular word is not defined by the legislature and an ordinary meaning is to be attributed to the same, the said ordinary meaning to be attributed to 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' ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... by the revenue. 15. Ground Nos. 4 and 5 challenges the direction of the Hon'ble DRP to consider the advances received from AEs as a part of payables for the purpose of computing the working capital adjustment. 16. The ld. DR argued that in the absence of debtors and inventory, the question of considering the advance received from AE as a part of trade payables does not arise. 17. On other hand, the learned counsel submitted that the advances received from AE so long as they are utilized for the purpose of business would have direct bearing on its working capital position and thus it must have been considered as a part of trade payables. The mere fact that there are no debtors and inventory is not a relevant for the purpose of considering trade payables while working out the working capital adjustment. He also placed reliance on the decision of the coordinate bench in ARM Embedded Technologies India Pvt. Ltd., V. DCIT [Common order dated 01.12.2015 in ITA Nos. 1112/Bang/2010 and 1161/Bang/2011. 18. We have heard the rival submissions. The issue in this ground of appeal is whether the advance received from AE should be considered as a trade payable for the purpose of wor....
X X X X Extracts X X X X
X X X X Extracts X X X X
....y 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." Respectfully following the decision of the coordinate bench, we do not find any reason to interfere with the findings of the DRP that this company is not comparable with that of a software development service provider. Persistent Systems Ltd: The Hon'ble DRP deleted the company from the list of comparables on noticing that the software segment consisted both of sale of software services and products and no segmental information was available and it further noticed that the company was predominantly outsourcing software product development services. Even the coordinate bench in the case of Electronics for Imaging India P. Ltd., (supra) has recorded similar finding vide para 26 of order: "Therefore, when this company is engaged in diversified activities and earning revenue from various activities in....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Thus, the grounds of appeal on this issue are dismissed. 21. In the result, the appeal filed by the revenue is dismissed. C.O. No. 110/B/2015 22. The Cross-objection is filed by the assessee company seeking the inclusion of Akshay Software Technologies Ltd., and exclusion of Kals Information Systems and Tata Elxsi Ltd. 23. The ld. Counsel submitted that this company was excluded from the list of comparables by the TPO on the ground that the information as to the related party transaction was not available. In the objections filed before the Hon'ble DRP, the attention was drawn to the Annual Report wherein the related party transactions were reported. The DRP had upheld the exclusion of this company on altogether different reason i.e., the expenditures in foreign currency are more indicating that it was predominantly engaged in the onsite development of software. The ld. Counsel submitted that the TPO never applied this filter and therefore the DRP ought not have excluded this company from the list of comparables and reliance also placed on the decision of the coordinate bench in the case of Arowana Consulting Ltd., V. ITO in IT(TP)A NO. 235/Bang/2015. 24. We heard th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....DCIT v. Electronics for Imaging India P. Ltd., [(2016) 70 taxmann.com 299 (Bang - Trib)] is squarely applicable and the relevant paragraph is reproduced below: "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 ebusiness Software India (P.) 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." 26. Thus respectfully following the decision of the coordinate bench we direct the AO/TPO to exclude this company from the list of comparables. 27. As regards Tata Elxsi, the learned counsel for the assessee company submitted that the segment selected by the TPO for the purpose of comparability, comprising of services such as product design, engineering and visual....