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TMI Blog2012 (8) TMI 257X X X X Extracts X X X X X X X X Extracts X X X X ..... arlier Bench had remitted back the issues to the TPO for fresh consideration - it is a diversified company and, therefore, cannot be considered as comparable functionally with that of the assessee. There has been no attempt made to identify and eliminate and make adjustment of the profit margins so that the difference in functional comparability can be eliminated – matter remanded to TPO - assessee is partly allowed X X X X Extracts X X X X X X X X Extracts X X X X ..... ricing Adjustment On the facts and in the circumstances of the case and in law: (8) The learned AO/Transfer Pricing Officer ("TPO") erred in making an addition of ₹ 25,423,419 and ₹ 3,962,020, to the total income of the Appellant on account of adjustment in the arm's length price of the software development and related services and customer support services transactions entered by the Appellant with its associated enterprise. (9) The learned AO/TPO erred in disregarding the economic analysis undertaken by the Appellant without proper justification and conducting a fresh economic analysis for the determination of the arm's length price in connection with the impugned international transactions and holding that the Appellant's international transactions are not at arm's length. (10) The learned AO/TPO have erred in ignoring the fact that since that Appellant is availing tax holiday u/s 10A of the Act, there is no intention to shift the profit base out of India, which is one of the basic intentions of the introduction of transfer pricing provisions. (11) The learned AO/TPO erred in determining the arm's length margin/price using only fina ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d transfer pricing matters (22) The learned AO erred in levying interest of ₹ 56,08,016 and ₹ 15,662/- u/s 234B and 234D of the Act respectively. (23) The learned AO erred, in law and in facts, in initiating penalty proceedings u/s 271(1)(c) of the Act. 3. Ground nos. 1, 2 and 8 are general in nature and no specific adjudication is called for. Hence, these grounds are dismissed. 3.1 Ground Nos.22 and 23 is consequential and hence, these grounds are also rejected. 3.2 Ground nos.3 to 7 mentioned above relates to the corporate tax matters. Ground Nos. 9 to 21 relates to transfer pricing adjustment. We shall consider the grounds chronologically. Corporate Tax Matters 4. Ground No.3 : Software Expenses Debited to P&L Account During the previous year relevant to the concerned asst. year, the assessee company had debited to the P&L account an amount of ₹ 22,94,928/- as software expenses. The details of the same are as follows:- (i) Annual Software licence fee ₹ 19,29,480 (ii) Software Purchase ₹ 3,65,511 The assessee submitted that the software expenses charged to the P&L account largely represent expenses incurred towards annual software licenc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8] 111 ITD 112 (Delhi) (SB) • CIT v. M/s Raychem RPG Limited (Bom.); • Bank of Punjab Ltd. v. Jt. CIT [2002] 122 Taxman 235 (Chd.) (Mag.); • CIT v. Mohd Ishaque, Mohd. Gulam [1994] 210 ITR 817/[1995] 78 Taxman 323 (MP); • Jt. CIT v. Citicrop Overseas Softwares Ltd. [2004] 85 TTJ 87 (Mum.); • Lubi Electricals (P.) Ltd. [IT Appeal No. 163 /Ahd/1992); • Business Information Processing Ltd. v. ACIT (Ahm.) (IT Appeal No. 163/Ahd/1992); • Media Video Ltd. v. Jt. CIT [2002] 122 Taxman 28 (Delhi)(Mag.); • Asstt. CIT v. Jasper Investments Ltd. [2007] 109 TTJ 530 (Mum.); • GE Capital Services India v. Dy. CIT [2007] 106 TTJ 65 (Delhi); • CIT v. Southern Roadways Ltd. [2009] 183 Taxman 234 (Mad.) • IBM India Ltd. v. CIT [2007] 105 ITD 1 (Bang.) 4.3 The learned DR supported the assessment order. 4.4 We have heard the rival submissions and perused the materials on record. The Hon'ble jurisdictional High Court in the case of CIT v. Toyota Kriloskar Motors (P.) Ltd. (IT Appeal No.174/2009 dated 23rd March, 2011) has considered whether the expenditure in respect of purchase of software is capital or revenue. The Hon'ble Hi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xchange loss of ₹ 58,40,841/-. The break-up of the same is as follows:- Sl. No. Particulars Amount (in Rs.) 1. Restatement of export sale proceeds, debtors & bank balances 62,04,206 2. Travel & other expenses 1,25,950 3. Trade Imports payable for assets purchased (4,89,314) TOTAL 58,40,841 It was claimed before the Assessing Officer that the loss debited to the P&L account is in accordance with Accounting Standard 11 as prescribed by the Institute of Chartered Accountants of India. It was further submitted that these were losses arises in the normal course of doing business and therefore, should be considered as revenue in nature. The Assessing Officer however disallowed the foreign exchange loss amounting to ₹ 63,30,156/- considering the same to be contingent in nature. 5.1 Aggrieved, the assessee is in appeal before us. 5.2 It was submitted that the foreign exchange loss was on account of restatement of export sale proceeds, debtors and bank balances and towards travelling expenses, which have arisen in the normal course of business and therefore should be considered as revenue in nature. Further it was submitted that the loss on account of exchange ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cation expenses and a sum of ₹ 1,24,78,919/- being traveling expenses incurred in foreign currency. The Assessing Officer however did not reduce the above said expenses from the total turnover while computing deduction under section 10A of the Act. 6.1 Aggrieved by the re-computation of deduction under section 10A of the Act, the assessee is in appeal before us. 6.2 It was submitted that the telecommunication expenses and the expenses incurred in foreign exchange for travel ought not to be excluded from the export turnover. Alternatively, it was contended that if the expenses are reduced from the export turnover, the same ought to be reduced also from the total turnover in the process of deduction under section 10A of the Act. It was submitted that the assessee's turnover is exclusively from the exports and hence, the assessee is only pressing for the alternative ground, namely, ground no.7. It was submitted that the alternative submission, namely, when the expenses are reduced from the export turnover, the same should also be reduced from the total turnover is covered by the judgement of the Hon'ble jurisdictional High Court in the case of CIT v. Tata Elxsi Ltd. [2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich intends to provide incentives to promote exports. In the case of combined business of an assessee, having export business and domestic business, the legislature intended to have a formula to ascertain the profits from export business by apportioning the total profits of the business on the basis of turnovers. Apportionment of profits on the basis of turnover was accepted as a method of arriving at export profits. In the case of section 80HHC, the export profit is to be derived from the total business income of the assessee, whereas in section 10-A, the export profit is to be derived from the total business of the undertaking. Even in the case of business of an undertaking, it may include export business and domestic business, in other words, export turnover and domestic turnover. To the extent of export turnover, there would be a commonality between the numerator and the denominator of the formula. 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 comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icles, things or computer software received in or brought into India by the assessee in convertible foreign exchange but so as not to include inter alia freight, telecommunication charges or insurance attributable to the delivery of the articles, things or software outside India. Therefore in computing the export turnover the legislature has made a specific exclusion of freight and insurance charges. The submission which has been urged on behalf of the revenue is that while freight and insurance charges are liable to be excluded in computing export turnover, a similar exclusion has not been provided in regard to total turnover. The submission of the revenue, however, misses the point that the expression "total turnover" has not been defined at all by Parliament for the purposes of s.10A. However, the expression "export turnover" has been defined. The definition of "export turnover" excludes freight and insurance. Since export turnover has been defined by 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s outside India are to be excluded both from the export turnover and from the total turnover, which are the numerator and the denominator respectively in the formula. The appeals filed by the department are thus dismissed". 6.8 In the light of the above judgements and the order of the Special Bench (Supra), we direct the AO to exclude the above mentioned expenses both from the export turnover as well as from the total turnover while calculating deduction u/s 10A of the Act. It is ordered accordingly. Hence, the ground No. 7 is allowed. Since the alternative plea of the assessee is allowed, the ground nos. 5 & 6 raised by the assessee is not adjudicated. 7. Ground Nos. 9 to 21 : Transfer Pricing Adjustment Briefly stated the facts in relation to transfer pricing adjustment are as follows:- According to the assessee, it is a captive service provider engaged in providing software development and related services (software services), sales and marketing support and customer support services (CSS or ITES) to its Associated Enterprises (AE). For the assessment year 2007-08, the impugned international transactions of the assessee company with its Associated Enterprises was as und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n-operating in nature; • The TPO was of the view that some of the comparable companies identified by the assessee company and the approach adopted for undertaking the economic analysis were not appropriate. The TPO applied certain filters for the selection of comparable companies. In arriving at the ALP, the TPO rejected certain comparables identified by the assessee company on the following filters:- ■ Companies having turnover less than 1 crore were rejected for software services and ITES; ■ Companies having economic performance contrary to the industry behavior (e.g. companies which showed a diminishing revenue trend); ■ Companies having onsite revenues greater than 75% of the export revenues' were rejected for software services. • The TPO obtained information by exercising his power vested under section 133(6) of the Act and used the same for judging comparability with the assessee company; • The TPO provided an adjustment towards capital of 2.23% and 2.89% for software services and ITES respectively. The adjusted net margins of comparable companies after providing the working capital adjustment was determined at 22.91% and 27.66 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .58% 8. Caliber Point Business Solutions Limited 39.30 21.26% 9. Cosmic Global Limited 4.28 12.40% 10. Datanmatics Finbancial Services Limited (Seg.) 2.92 5.07% 11. Ecerx Services Limited 86.12 89.33% 12. Flextronics Software Systems Limited (Seg.) 12.93 8.62% 13. Gensys International Corporation Limited 19.17 13.35% 14. HCL Comnet Systems & Services Limited (Seg) 260.18 44.99% 15. ICRA Techno Analytics Limited (Seg) 7.23 12.24% 16. Informed Technologies India Limited 4.08 35.56% 17. Infosys BPO Limited 649.56 28.78% 18. Iservices India Private Limited 16.29 49.27% 19. Maple Esolutions Limited 12.21 34.05% 20. Mold Tek Technologies Limited (Seg) 11.40 113.49% 21. R Systems International Limited (seg) 17.34 20.18% 22. Spanco Limited (seg) 17.34 25.81% 23. Triton Corp Limited 35.00 34.93% 24. Vishal Information Technologies Limited 30.60 51.19% 25. Wipro Limited (seg) 939.78 29.70% 26. Nittany Outsourcing Services Pvt. Ltd. 23.23 11.50% 27. Accurate Data Converters 4.33 50.68% 28. Apex Advanced Technology Pvt. Limited 7.93 39.89% ARITHMETIC MEAN BEFORE WORKING CAPITAL AND RISK ADJUSTMENT 30.55% Les ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee has the right to exercise this option under the proviso to section 92C(2) of the Act. 7.5.2 The Ld. A R finally stated that most of the above issues raised in the present appeal under consideration have since been covered in the assessee's own case in Kodiak Networks (India) (P.) Ltd. v. Asstt. CIT [2012] 8 taxmann.com 32 (Bang.) for the AY 2006-07, such of the issues, namely: (i) the comparable having the turnover of more than ₹ 1 crore, but, less than ₹ 200 crores; (ii) all the information relating to comparables which were sought to be used against the appellant to be furnished to the appellant; (iii) the appellant has to be extended an opportunity to cross-examine the parties whose replies sought to be used against the appellant; (iv) to give the benefit of +/- 5 per cent under the proviso to s.92C(2) of the Act; (v) with regard to deduction u/s 10A of the Act, etc., 7.5.3 The Ld. A. R., however, again put stress on the following three issues, namely: (1) The AO/TPO erred in not considering the foreign exchange fluctuation gain (loss) as part of the operating income while computing the operational margin. In this connection, it was argued that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the realized/unrealized foreign exchange gain/loss as operating in nature. In conclusion, it was submitted that as the same was normal expenditure incurred in the ordinary course of business and, therefore, should not have been excluded by treating them as non-recurring item of expenditure while computing the operating margin. (2) With regard to difference in the risk profile, it was the submission of the Ld. A R that the authorities below have erred by not making suitable adjustments to account for differences in the risk profile of the assessee vis-à-vis the comparables; that the assessee undertakes functions under a limited risk environment vis-à-vis comparable companies who bear entrepreneurial risk being independent service providers and, accordingly, an adjustment for risk level differences was warranted. It was, further, contended that the assessee had used the TNMM in determining the ALP for the international transaction entered into during the FY 2006-07; that the provisions of rule 10B of the Rules prescribes the methods to be used and manner in which it was to be used in determining the ALP relating to any international transaction. Extensively quoting th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fitability, the pricing policy can have the effect of removing virtually all business risk from the controlled entity. When analyzing controlled entities that bear such a low level of risk by reference to a set of broadly comparable independent firms - as is the case under TNMM - it is a challenge to identify independent firms that are sufficiently comparable to the controlled entities in terms of risks assumed. In circumstances where the appellant has been effectively guaranteed a fixed return, functional similarity does not adequately address this risk differential. In such cases, an adjustment to the comparables for this risk differential seems warranted under the rules and would provide a more precise pricing of the true risk borne by the appellant. To buttress its claim, the assessee placed reliance on the following case laws: (a) Westreco Inc. v. Commissioner 64 T.C.M. (CCH) 849; (1992) (b) Mentor Graphics (Noida) (P.) Ltd. v. Dy. CIT [2007] 109 ITD 101 (Delhi); (c) Philips Software Centre (P.) Ltd. v. Asstt. CIT [2008] 26 SOT 226 (Bang.) (d) E-gain Communication (P.) Ltd. v. ITO [2008] 23 SOT 385 (Pune) In respect of single customer risk, it was submitted that - Thoug ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he benefit of a risk adjustment be extended to the assessee. (3) Another grievance of the assessee was that Celestial Lab Limited (Celestial Labs) ought not to have been selected as a comparable. In this connection, the Ld. AR had submitted that Celestial Labs was a diversified company operating in varied fields such as rendering IT Services encompassing application development and maintenance production support, EERP, data ware-housing SAP implementation. Celestial Labs was also is into manufacturing and trading of products such as ERP package for manufacturing and had a product 'Sanjivani' which was a portal for live ayurvedic consultation. The company was also engaged in the distribution of herbal ayurvedic products. Further illustrating, it was explained that - SAP Services: Celestial delivers SAP consulting, SAP implementation and post-SAP implementation services for its customers. Celestial was engaged in implementing SAP for customers from initial planning, design and implementation to maintenance and on going optimization. Celestial helps the company align IT Solutions with business strategies. Cel Sanjivani products: Cel Sanjivani was a part of Celestial Labs L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... directions of the earlier Bench contained its findings in the assessee's own case for the AY 2006-07 hold-good for this assessment year under consideration also. The specific directions in assessee's case for assessment year 2006-07, for ready reference reproduced below :- (i) the operating revenue and the operating cost of the transactions relating to associated enterprises only shall be considered; (ii) the comparables having the turnover of more than ₹ 1 crore, but, less than ₹ 200 crores only shall be taken into consideration; (iii) all the information relating to comparables which were sought to be used against the appellant shall be furnished to the appellant; (iv) the appellant shall also be extended an opportunity to cross-examine the parties whose replies were sought to be used against the appellant; (v) to consider the objections of the appellant that relate to additional comparables sought to be adopted by the TPO and to pass a detailed order; and (vi) to give the standard deduction of 5% under the proviso to s.92C(2) of the Act. The TPO shall also keep in view the findings handed down in the case of Genisys Integrating Systems (India) (P.) Lt ..... X X X X Extracts X X X X X X X X Extracts X X X X
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