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TMI Blog2012 (2) TMI 172X X X X Extracts X X X X X X X X Extracts X X X X ..... uld be an error of judgment, but, not violation of principles of natural justice. Turnover Filter - TPO considered turnover range of ₹ 1 crore to ₹ 200 crores and ₹ 1 crore to ₹ 500 crores – Held that:- Turnover of the company is in the range of 24 crores, therefore, the companies, which have turnover of ₹ 1.00 crores to 200 crores alone should be taken into consideration for the purpose of making TP study. Therefore, this issue requires to be remitted back to the file of the TPO for fresh consideration with directions in this regard. Deduction u/s 10A - Held that:- While computing the exemption u/s 10A, 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. See CIT v. Gem Plus Jewellery India Ltd.(2010 - TMI - 76903 - Bombay High Court ) - Decided partly in favor of assessee for statistical purposes. - IT Appeal No.1413 (Bang.) of 2010 - - - Dated:- 27-1-2012 - N. BARATHVAJA SANKAR, GEORGE GEORGE K., JJ. ORDER George George K., Judicial Member This appeal instituted by the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appellant could justify the price paid/charged on the basis of any one comparable only; ( xiv ) not allowing the benefit of the +/-5% range as per the proviso to section 92C(2); ( xv ) not excluding the telecommunication charges from the total turnover while excluding the same from export turnover while computing deduction u/s 10A; ( xvi ) levying a sum of Rs. 30,51,668/- as interest under section 234B and a sum of Rs. 19,2222/- as interest under section 234D. 3. Brief facts of the case are as follows:- The assessee is an Indian Company, a subsidiary of Kodiak Networks Inc., USA. It is engaged in the business of software development service to Kodiak Networks Inc, USA. The return of income for concerned asst. year was filed on 28/11/2006 declaring an income of Rs. 11,97,597/-. The return of income was taken up for scrutiny and the case was referred to TPO u/s 92CA for determination of arm's length price. During the year, the assessee company had the following international transactions with its Associate Enterprise (i) rendering of software development services; (ii) marketing and customer support services; (iii) purchase of capital goods; (iv) sale of capital goo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eir adoption. The arithmetic mean was determined at 20.68%. After factoring a working capital adjustment of 1.55%, the adjusted arithmetic mean was determined at 19.13%. The transfer pricing adjustment for the software development services was accordingly determined at Rs. 1.74 crores. The appellant filed detailed objections with the DRP which have been rejected by DRP except for correcting an error in the margin computation of one comparable, namely, Megasoft Limited and that the Order of the DRP was brief. The AO accordingly incorporated the TP adjustment, while determining the total income. TURNOVER FILTER: (2) In its transfer pricing analysis, the appellant had adopted the lower turnover criteria to select the comparables. During the proceedings u/s 92CA, the appellant submitted that if the lower turnover filter was to be applied, then the upper turnover filter limit of Rs. 200 crores should be applied. The TPO had applied a lower turnover filter of Rs. 1 crore on the ground that there was no relationship between sales and margins to apply the upper turnover limit. The appellant submitted that size of the comparable was an important factor in comparability. This was als ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d from the comparability exercise. It is generally difficult to quantify mathematically, the impact of size on margins. Companies of dis-similar sizes therefore are not to be compared. Size as one of the selection criteria has also been approved by various benches of ITATs. The Chandigarh S. B of ITAT in the case of DCIT v. Quark Systems Pvt Ltd 38 SOT 207 has specifically rejected adoption of the turnover range of one crore on lower end and infinity on the higher end. Relies on the case laws: Egain Communications Private Limited v. ITO 118 TTJ 354 (Pune) M/s Sony India (P) Limited v. DCIT 114 ITD 448 (Delhi) DCIT v. Indo American Jewellery Ltd ITA No. 6194/Mum/2008 Agnity India Technologies Pvt. Ltd v. Income-tax Officer ITA No. 3856 (Del)/2010 Philips Software Centre Private Limited 26 SOT 226 (Bang) ACIT v. NIT 10 Taxman.com 42 DHL Express India Pvt Ltd v. ACIT [2011] 11 Taxmann.com 40 Deloitte Consulting India Pvt Ltd v. DCIT ITA No. 1084/Hyd/2010 (4) that the size as a criteria for selection of comparables is also recommended by OECD in its TP Guidelines, 2010. Para 3.43 of the Chap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... information is inappropriate for the following reasons. Arbitrary selection of companies for issue of notice From the details provided, it appears that in all 154 companies were issued notices and how these companies were selected was not clear as the basis of selection of these companies for issuance of notice u/s 133(6) was not provided and that the entire process lacks in transparency and fairness. It was also not clear as to whether all the responses have been incorporated in the CD provided? The whole procedure appears to be a selective exercise which was clear from the fact that six companies did not even find place in the initial list of companies generated by the TPO. - that from the details provided along with the initial show cause notice, Megasoft Limited was rejected as a comparable on the ground that it fails RPT filter and employee cost filter. The TPO had stated that a company was not issued notice u/s 133(6), if it fails RPT filter. In case of Megasoft, a notice was nevertheless issued. What prompted the issue of notice was not spelt out. The appellant submits that the approach of TPO in issuing notices is arbitrary as also selective and hence faulty. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... public domain or at the time of Study by the appellant Rule 10D prescribes the document to be kept and maintained u/s 92D. Rule 10D (1), e, f, g, h, i, j deal with the process and the method to be adopted in making the comparability analysis. Sub-rule 4 of Rule 10D states that the information and documents specified under sub-rule (1) and (2) should as far as possible be contemporaneous. As per Rule 10D, the information and documentation prescribed therein must be kept and maintained by the appellant latest by the prescribed date i.e. for AY 2006-07 by 31-10-2006. The appellant has kept and maintained the information and documents required under Rule 10D accordingly. The TPO was collecting and compiling data two/three years after the date of the appellant's documentation. This was impermissible. There was no finding that a particular company has been rejected or ignored as comparable although the data was available in the public domain by the specified date. It was not alleged that the data in existence by the specified date and adopted was incorrect. In choosing the most appropriate method the availability of data was a relevant factor (Rule 10C(2)(c)). The power u/s 133(6) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... u/s 92CA. The assessee submits that the data as available to it may be used for determination of the ALP. Data available subsequently or obtained through notice u/s 133(6) (which data is otherwise not available in the public domain) should be rejected and, thus, the approach adopted by learned TPO is bad in law. Without prejudice that even adopting the subsequent data as used by the TPO, the assessee's margin satisfy the arm's length range if the following submissions are considered. ALP COMPUTATION - IF THE ABOVE COMPANIES ARE EXCLUDED FROM COMPARABILITY Based on all the above, the assessee has tabulated below, a list of comparables out of the TPO's comparables. Two tables have been prepared. The first table comprises of all companies falling within a turnover range of Rs. 1 crore to Rs. 200 crore (Dun Bradstreet Analysis). The operating margins before and after working capital adjustment are detailed. The margins that remain after excluding companies that do not deserve to remain as comparables for the reasons already detailed are also mentioned in the notes to the table. In second table, a similar exercise is carried out by adopting a turnover range of Rs. 1 crore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5. Persistent Systems Limited 2,09,17,76,542 24.67% 23.79% 6. R Systems International Limited(seg) 79,41,94,053 22.20% 20.21% 7. Sasken Communication Technologies Limited(seg) 2,40,03,42,000 13.90% 13.14% 8. Tata Elxsi Ltd(Seg.) 1,88,81,25,000 27.65% 27.56% 9. Lucid Software Limited 1,01,91,181 8.92% 5.36% 10. Media Soft Solutions Private Limited 1,75,77,145 6.29% 4.10% 11. R S Software (India) Limited 91,57,07,164 15.69% 15.16% 12. SIP Technologies Exports Limited 6,53,44,634 3.06% 1.00% 13. Bodhtree Consulting Ltd 5,31,89,165 15.99% 14.85% 14. Accel Transmatics Ltd(seg) 8,02,05,000 44.07% 42.23% 15. Synfosys Business Solutions Ltd 4,48,86,725 10.61% 7.27% 16. Megasoft Ltd 19,21,85,451 16.97% 10.53% 17. Lanco Global Solutions Ltd 35,62,93,560 5.27% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Persistent Systems Limited 2,091,776,542 24.67% 23.79% 5. R Systems International Limited(seg) 794,194,053 22.20% 20.21% 6. Sasken Communication Technologies Limited(seg) 2,400,342,000 13.90% 13.14% 7. Lucid Software Limited 10,191,181 8.92% 5.36% 8. Media Soft Solutions Private Limited 17,577,145 6.29% 4.10% 9. R S Software (India) Limited 915,707,164 15.69% 15.16% 10. SIP Technologies Exports Limited 65,344,634 3.06% 1.00% 11. Bodhtree Consulting Ltd 53,189,165 15.99% 14.85% 12. Synfosys Business Solutions Ltd 44,886,725 10.61% 7.27% 13. Megasoft Ltd 192,185,451 16.97% 10.53% 14. Lanco Global Solutions Ltd 356,293,560 5.27% 4.78% 15. Flextronics Software Systems Ltd 5,951,198,183 27.24% 26.78% Arithmetic Mean 14.08% 12.32% The differential betw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder section 28 to 44 not envisaging a reference to or incorporation of an adjustment proposed under Chapter X. DEDUCTION UNDER SECTION 10A While computing deduction u/s 10A, the AO reduced Rs. 527,929 from the export turnover. However the same has not been reduced from the total turnover. In this regard, the appellant submits that what is reduced from export turnover should also be reduced from total turnover. The appellant's contention is supported by the Special Bench decision in the case of ITO v. Sak Soft [2009] 313 ITR (AT) 353 and plethora of decisions listed on pages 373 to 375 of PB-I. The appellant submits that amount reduced from export turnover should also be reduced from total turnover. 6. On the other hand, the Ld. D.R came up with a spirited refutation of the Ld. A R's contentions. The learned DR also filed written submissions, essences of which are summarized, chronologically, as under: (1) During the proceedings u/s 144C of the Act, the DRP had given opportunities twice to the assessee. Relies on the case laws: ( a ) Messe Dusseldorf v. DCIT [2010] 320 ITR 565 (Del.) ( b ) Intimate Fashion (India) (P) Ltd v. JCIT [2010] 321 ITR 26 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therefore, while computing the income of the assessee the provisions of Ch. X are clearly applicable. Ground No.6 In regard to the issue of notices u/s 133(6), it was stated that the TPO discussed in detail in para 14.5 to 14.5.1, which reveals that copies of notices u/s 133(6) issued to the companies as well as the copies of the replies received from companies were in fact given to the assessee in a soft copy for its comments. The decision of the TPO based on information collected was also duly communicated to the assessee. The DRP have upheld the AO's action and after considering the assessee's objection and held that TPO is empowered to collect the details relevant to the transfer pricing proceedings and the TPO used his power to collect relevant information requiring for better comparability analysis. The TPO used the data for information that was available to him in the public domain whenever a company did not submit the information or wherever the notice u/s 133(6) not served at the latest address available even after repeated attempts. The TP order transpires that the assessee had furnished its reply vide letter dated 21-09-2009 and no issue was raised in regard to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ote and NASSCOM categorisation are only certain opinion formed by the agencies and general in nature. Against the assessee's argument, it was submitted that the TPO in his order stated that the tax payer's argument of size, scale and nature of operation was also raised during the proceeding U/s 92CA of the Act and the same has been dealt with in detail in the order (in para 9.2). Further it also held that lesser known companies like Mega Soft Ltd, Accel Transmatic Ltd, KALS Info Systems Ltd etc are having almost the profit margin equivalent to the margin of Infosys Technology Ltd. which means that brand per se does not effect the margins. Thus brand name may get higher turnover but it does not necessarily mean that it would generate higher margin. It was stated that the observation of the TPO has also supported by the decision of Hon'ble ITAT, Mumbai 'E' Bench in u/s Symantec software solutions private Limited v. ACIT in ITA No 7894/MUM/2010. Submission of learned DR relating to use of information received in pursuance to notice u/s133 (6). For the comparability analysis, the TPO conducted enquiries from certain companies by exercising power conferred by law u/s 133(6) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the notice issued u/s 133(6) which is given below: Financial statement for year ending 31-03-2006 operating Revenue (excluding non operating Revenue) are: Particulars Blue ally(consulting Division) in Rs. XIUS-Bcits Division (product Division) in Rs. Total in Rs. Sale/service Export 17,07,45,151 24,32,21,163 41,39,66,314 Domestic 2,14,40,300 12,60,56,269 14,74,96,569 Total 19,21,85,451 36,92,77,432 56,14,62,883 As per TPO 56,14,62,883 Expenditures Personnel Cost 9,66,62,247 9,11,68,236 18,78,30,483 Increase/Decrease in work-in-progress 98,62,642 49,62,180 1,48,24,822 Operating Expenses (excluding net loss on foreign exchange , loss on sale of assets, finance changes and provision made on debtors) 4,18,62,533 9,61,41,392 13,80,03,925 Depreciation 1,59,14,244 1,68,55,710 3,27,69,954 Total 16,43,01,666 20,91,27,519 37,34,29,185 As per TPO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is figures nowhere appears in the financial statement furnished in the company. In fact operating profit of the comparable company is Rs. 18,80,33,698. Arm's length price is the basic foundations for determinations of income from international transactional. It is provided that any income arising from an international transaction would be determined by adopting the arm's length price as the basis disregarding transfer price recorded by the eternises concerned. The AR of the assessee stated that M/s Megasoft limited owns intellectual property right and patents is however how far these influenced the International Transactions, no explanation has been furnished. Further it is also stated that company hold opening invention of Rs. 3,20,26,000/- as on 31-12-2005 however no such figures appears at page 212 of the assessee's paper books. It is pertinent to note that in the annual report it is mentioned that (please refer column 12, page 215 of the assessee's paper book) Quantitative details: The company is in the business of development and maintenance of computer software. The development and sale of such software cannot be expressed in any generic unit. Hence it is not possible ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... port receipt and other receipts disclosed as below: Rs. Application Software 1,93,29,198 97.54% Other Receipts 3,61,192 1.82% Training 1,25,949 64% Total 1,98,16,339 100% Thus operating revenue consist software application, other receipts and training, same also appears in segmental information (please refer col-9 of notes on account). Further it also observed that auditors has not given quantitative details and corresponding amount in regard to purchase, production and sale of software products made during the year which requires as per part II of schedule VI to companies Act 1956. This clearly indicates that major revenue consist software development services. The auditor put remarks that "The Company is engaged in development of software and software products since its inception." This is general remarks put by the auditors in fact revenue for the year order consideration mainly from software development segment which constitute 97.54% of the total income . The A.R stated that the total turnover of KAL is Rs. 2.15 crores, and holds an inventory of Rs. 1.27 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by issue of notice u/s 133(6) of the Income Tax Act and in compliance, M/s Tata Elxsi Limited clarified that product development services mainly develops software for customers who look for solution through embedded software. Innovations design engineering provides products, design and engineering for automotive consumer goods and electronics enclosures. It delivers concept of now products though computers models, using a team of highly specialised industrial designers and graphics specialists and generals 3D CAD models and specification for products. Visual computing labs order takes contests development and animation services using commercial and proprietary high end software for graphics, animation and image/video editing content or edit existing content to add special effects as specified by customers, using very high end computers and software. As per financial statement segmental revenues disclosed as under: Particulars System integration and support (Rs. 000) Software development and services (Rs. 000) Revenues 4,733.42 18,882.42 Identifiable operating expenses 4,032.86 14,835.21 Segment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mission contended that:- 4.3 On careful perusal of the business activities of Accel Transmatic Ltd. DRP agreed with the assessee that the company was functionally different form the assessee company as it was engaged in the services in the form of ACCEL IT and ACCEL animation services for 2D and 3D animation and therefore directed the Assessing Officer to exclude ACCEL Transmatic Ltd., form the final list of comparables for the purpose of determining TNMM margin." Based on the above, the appellant submits that Accel Transmatic Limited should be rejected as comparable. To refute the assessee's contentions, the Revenue has contended that on verification of relevant details reveal that the financial statement for the year 31-03-2006. Sales income-income from operation:- Rs. Rs. Manufacture sales 43,143,255 Trading Sales 71,758,548 Total 114,901,803 Service income Maintenance and repairs services 25,341,956 Training and education services 76,302,823 Software services Dome ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... engaged in software development services and qualifies all the filters applied by her. As per final list of TPO's comparable M/s Megasoft having a turn over Just Rs. 56 crores and profit margin of 52.74%. Similarly M/s I Gate Global Solution Ltd having a turnover of Rs. 527 crores and profit margin only 15.61% even M/s Mindtree consulting Ltd. Having turnover of Rs. 448 crores has a profit margin only 14.67%, thus the TPO held that there is no relationship between margin and turnover and, hence considered as a comparable. In written argument the assessee stated that:- "As per the notes the Account (extract in page 87 of PB-II) Mindtree has entered into an agreement with the customers in December 2003 where by the warrant have been issued to the customer. The warrant can be converted into equity shares at an exercise price of Rs. 2 per share. A total of 8,266,777 warrants had been issued under this agreement. The customer can convert these warrants into equity shares based on revenue generated by the customers during the defined period and on fulfilling the conditions specified in the agreement. The issue price of Mindtree share was fixed at Rs. 425 per share as on the listin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee did not produced any evidence except making statement that it charges premium over market for its services. Holding thus the TPO retained this company as a comparable. The AR of the assessee argued in writing and the same is reproduced below: "Infosys Technologies Limited is 443 times bigger than the appellant and is thus significantly dissimilar in size. For the reasons already detailed, Infosys Technologies Limited should not be accepted as a comparable. The Delhi Tribunal decision in the case of Agnity India Technologies Pvt. Ltd v. Income-tax Officer ITA No. 3856 (Del)/2010 has held that Infosys Technologies limited cannot be compared with small companies having nominal turnover and bearing minimal risks". Against the assessee's argument it was submitted that the observation of the TPO is that Infosys Technologies Limited engaged n software development services and brand name may get higher turnover but it does not necessarily would generate higher margin. The assessee has not demonstrated as to how the difference in turnover has influenced the result of the comparables it is accepted economic principle and commercial practice that highly competitive market condi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee listed 17 comparables based on turnover range Rs. 1 crore to 500 crores and in Table B 15 comparables after excluding KALS, Tata Elxsi, Accel, Infosys Technologies and Mindtree also not acceptable as discussed in preceding paragraphs. Relies on the case laws: ( i ) Exxon Mobil Company India Pvt. Ltd v. DCIT ITA No. 8311/mum/2010; ( ii ) Symantec Software Solution Pvt. Ltd v. ACIT ITA No. 7894/mum/2010 As held by the Hon'ble ITAT, Mumbai in the case of Symantec Software Solution Pvt. Ltd ( supra ) that in the case of hand, the assessee raised objections only because some of the comparables are having profit and also high difference in the turnover and not because of high or low turnover has influenced the operating margin of the comparables. All the objectives and contentions raised by the assessee are discussed above and the TPO as well as the DRP were justified in retaining as comparables. APPELLANT'S COMPATEBLES :- In the written submission the assessee submitted that certain comparables proposed by the appellant have been rejected by the lower authorities. The proposed comparables are:- (1) Goldstone Technologies Pvt. Ltd. (2) TVS Infotec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he nature of expense or reasons for treating this as "extraordinary expenses" are forthcoming. Further, from the audited financial statements of iGate it is clear that it has not treated any expense as "extraordinary expenses". Possibly, iGate has during the course of its own TP assessment claimed these expenses "extraordinary expenses". The TPO has possibly taken those margins for comparability purposes without detailing the reasons for treating the expenses as "extraordinary expenses". Accordingly, the assessee submits that these expenses should be considered as normal operating expenses. The revised operating margin of iGate would then be as follows: Description Amount (Rs. In 000s) Operating Revenues 5,279,075 Expenses debited to P L Account 5,135,006 Less: Non-operating items - Operating Expenses 5,135,006 Operating Profit 144,069 Op Margin 2.81% The assessee submitted that the revised operating margin of 2.81% percent on cost as computed above be considered for comparability purpose. In this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as is being prescribed under rule 10D (I) of IT Rules. This rules required maintenance of a record of the analysis performed to evaluate comparable as well as a record of the actual working carried out for determining the ALP. Under rule 10D (4) of the I.T. rules requires that the information and documentation to be maintained. Under rule 10D(1) should be contemporaneous as for as possible and should exist latest by the due date of filing of the return. The assessee admitted that they did not undertake any risk adjustment in the TP document report. In the absence of that comparability, it is difficult to make adjustment. As for as the decision of the ITAT is concerned, that relates to facts of the relevant cases. In a given circumstance, some estimate mark upon may not be applied for risk adjustment. The assessee ought to have demonstrated this factor before the TPO as well as before the DRP. Rely on the following case laws. M/s. Marubeni India Private Limited v. Addl. CIT ITA No 945/Del/2009. Symantec Software Solution Private Limited v. ACIT ITA No/7894/Mum/2010 Exxon Mobil Company India Pvt. Ltd v. DCIT ITA No 8311/Mum/2010 ADP (P) Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Wrigley India (P) Ltd v. Addl. CIT ITA No 5224/Del/2010, (2011) 62 DTR (Del) (Trib) 201 The decisions cited above, support the TPO's view. Therefore the claim of the assessee on this issue deserves for rejection. In conclusion, the Ld. D R forcefully pleaded that the stand of the TPO and the DRP requires to be sustained. In the rejoinder, it was submitted by the learned counsel for the assessee that on page 4 of the Note filed by the Ld. D.R, it is stated that the appellant did not raise the issue of cross examination before TPO/DRP. In this regard, the appellant submitted that it made specific request for cross examination before the TPO as well as DRP. It was submitted that the appellant's contention was also supported the Note of the Ld. DR (page 26) wherein the Ld. DR had extracted the submission of the appellant and acknowledged therein that appellant had requested for cross examination. The Ld. D R (on pages 27 28 of the Note), it was stated that in case of KALS, Rs.1.27 crores which was contended by the appellant as inventory was actually receivable from customers. It was, further, contended by the Ld. D.R that the appellant was giving misleading facts. To coun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ht for to cross-examine in cases where replies u/s 133(6) of the Act have been relied upon; The DRP in its impugned order stated that the office of the TPO cannot be converted into an office granting opportunity of cross -examination to the appellant; ( viii ) The appellant had made detailed submissions for rejection of KALS as comparable, however, the appellants submissions have not been commented either by the TPO or the DRP; ( ix ) In the case of Megasoft, the TPO and the DRP have considered entity-wide margins on the ground that software product segment also consists software services and, therefore, at entity level software services were more than 75% of operating revenues. However, similar situation in the case of other comparables have been ignored. If at all Megasoft was to be adopted as a comparable, the margin of the software segment may be used; ( x ) Benefit of 5% deduction in determining the arm's length price in accordance with proviso to s. 92C of the Act not given. 7.1 After analyzing the submissions of rival parties and also deliberating the specific apprehensions of the appellant as narrated above, the matter has now been narrowed down for considera ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cified date' to have the same meaning as assigned to 'due date' in Expln. 2 below sub-section 1 of s. 139. Explanation 2 to s. 139 defines 'due date' in a case of a company to be 30th of September of the relevant assessment year, the assessee is supposed to maintain information and documents. After going through the above provisions of law, it is clear that the Act has not provided for any cut off date up-to which only the information available in public domain has to be taken into consideration by the TPO, while making the transfer pricing adjustments and arriving at arm's length price. The assessee as well as the Revenue is both bound by the Act and the rules there-under and, therefore, as provided under the Act and rules, they are supposed to be taking into consideration, the contemporaneous data relevant to the previous year in which the transaction has taken place. The assessee had strenuously argued that the provisions of s. 92D and Rule 10D is defeated, if the TPO takes the data which is available in the public domain after the specified date and the ALP would be fluid and there would be no certainty for the same. We are, however, not in agreement with the arguments put-fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consideration by the TPO as comparables without affording the appellant an opportunity of furnishing its objections, if any, and also with regard to certain other companies, it had sought opportunity to cross-examine them, but, it has been observed that no such an opportunity has been extended to the appellant. 7.5 . As recorded earlier, if any information is sought to be used against the appellant, the same has to be furnished to the appellant and thereafter, taking into consideration the appellant's objections, if any, only then can the TPO proceed to take a decision. If the appellant seeks an opportunity to cross-examine the parties concerned, the appellant shall be provided such an opportunity. It is only during a cross-examination that the appellant can rebut the stand of that particular party (company). As listed out earlier, the appellant had also brought out various defects in the additional comparables selected by the TPO and had brought out the striking differences between the functions of those comparables as compared to the appellant and also as to how the entire revenue of the appellant has been taken into consideration in spite of there being income from unrelated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pper limit also. What should be upper limit is another factor to be considered. We agree with the contention of the learned counsel for the assessee that the size matters in business. A big company would be in a position to bargain the price and also attract more customers. It would also have a broad base of skilled employees who are able to give better output. A small company may not have these benefits and therefore, the turnover also would come down reducing profit margin. Thus, as held by the various benches of the Tribunal, when companies which are loss making are excluded from comparables, then the super profit making companies should also be excluded. For the purpose of classification of companies on the basis of net sales or turnover, we find that a reasonable classification has to be made. Dun Bradstreet and NASSCOM have given different ranges. Taking the Indian scenario into consideration, we feel that the classification made by Dun Bradstreet is more suitable and reasonable. In view of the same, we hold that the turnover filter is very important and the companies having a turnover of Rs. 1.00 crore to 200 crores have to be taken as a particular range and the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lus Jewellery India Ltd. 330 ITR 175 and the order of the Special Bench in the case of ITO v. M/s Sak Soft Ltd. 313 ITR 353. The learned DR was unable to controvert the submissions of the learned AR. 8.2 . We have heard the rival submission and perused the material on record. The Hon'ble Karnataka High Court in the case of CIT v. M/s Tata Elxsi Ltd. Others had held that while computing the exemption u/s 10A, 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 relevant finding of the Hon'ble jurisdictional High Court reads as follows:- " ..Section 10A 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. This aspect has to be borne in mind. While computing the consideration received from such export turnover, the expenses incurred towards freight, telecommunication charges, or insurance attributable to the delivery of the articles or things or computer software outside India, or expenses if ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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. Thus, there is no error committed by the Tribunal in following the judgements rendered in the context of section 80HHC in interpreting section 10A when the principle underlying both these provisions is one and the same". 8.3 . The Hon'ble Mumbai High Court in the case of Gem Plus Jewellery India Ltd. ( supra ), in identical circumstances, held that since the export turnover forms part of the total turnover, if an item is excluded from the export turnover, the same should also be reduced from the total turnover to maintain parity between numerator and denominator while calculating deduction u/s 10A of the Act. The relevant fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Revenue would lead to a situation where freight and insurance, though these have 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. Moreover, a receipt such as freight and insurance which does not have any element of profit cannot be included in the total turnover. Freight and insurance charges do not have any element of turnover. For this reason in addition, these two items would have to be excluded from the total turnover particularly in the absence of a legislative prescription to the contrary - CIT v. Sudarshan Chemicals Industries Ltd. [2000] 163 CTR (Bom) 596: [2000] 245 ITR 769 (Bom) applied; CIT v. Lakshmi Machine Works [2007] 210 CTR (SC) 1: [2007] 290 ITR 667 (SC) and CIT v. Catapharma (India) (P) Ltd. [2007] 211 CTR (SC) 83: (2007) 292 ITR 641 (SC) relied on" 8.4. In the case of Sak Soft Ltd. ( supra ), the assessee was engaged in the business of exporting computer software and claimed deduction ..... X X X X Extracts X X X X X X X X Extracts X X X X
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