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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 ..... in law and based on the directions of DRP, the learned Assessing Officer erred in assessing the total income at Rs. 3,25,93,235/- as against returned income of Rs. 13,60,601/- computed by the appellant. (3) On the facts and in the circumstances of the case and in law and based on the directions of Hon'ble DRP, the learned AO erred in disallowing the software expenses amounting to Rs. 22,94,928 incurred by the Appellant towards annual software license fees which was charged off as software expenses to the Profit and Loss account as it does not result in any enduring benefit to the company. (4) On the facts and in the circumstances of the case and in law and based on the directions of Hon'ble DRP, the learned AO erred in disallowing the foreign exchange loss amounting to Rs. 63,30,156 incurred by the Appellant on restatement of export proceeds, import payables, travelling expenses, etc., which is revenue in nature and which has arisen in the normal course of business. (5) On the facts and in the circumstances of the case and in law and based on the directions of Hon'ble DRP, the learned AO erred in holding that the telecommunication expenses amounting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irements. (12) The learned Assessing Officer/TPO erred in rejecting certain comparables considered by the Appellant in the comparability analysis by applying different quantitative and qualitative filters: a. the learned AO/TPO erred in rejecting certain comparable companies identified by the Appellant using turnover < Rs. 1 Crore as a comparability criterion; and b. the learned Assessing Officer/TPO erred in rejecting certain comparable companies identified by the Appellant as having economic performance contrary to the industry behavior (e.g. companies which showed a diminishing revenue trend); and (13) The learned TPO erred in obtaining information which was not available in public domain by exercising powers u/s 133(6) of the Act and relying on the information for comparability analysis. (14) The learned AO/TPO erred in not considering the foreign exchange fluctuation gain (loss) as part of the operating income while computing the operating margin. (15) The learned AO/TPO erred in not making suitable adjustments on account of differences in the risk profile of the Appellant vis-a-vis the comparables, while conducting compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce charges (AMC) and purchase of other application software. It was submitted before the Assessing Officer that by incurring these expenses, there was no enduring benefit to the assessee and the same is allowable expenditure under section 37 of the Act. The Assessing Officer however disallowed the software expenses of Rs. 22,94,928/- paid towards the purchase of application software and annual licence fee, considering the same to be capital in nature. The Assessing Officer held that since the assessee has used the words "software worth Rs. 3,65,511/- has been purchased", it has been definitely brought in enduring benefit in perpetuity and hence, the same is to be capitalized. Further, the Assessing Officer held that the remaining part of the software expenditure amounting to Rs. 19,29,418/- was expended to obtain continuous uninterrupted usage of the software and hence, it is nothing but an enduring benefit obtained by the assessee. 4.1 Aggrieved, the assessee is in appeal before us. 4.2 It was submitted that the said expenditure is an allowable expenditure under section 37 of the Act on account of the following reasons:- * These expenses were incurred for acquiring licens ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "As rightly pointed out by the authorities, when the life of a computer or software is less than two years and as such, the right to use it is for a limited period, the fee paid for acquisition of the said right is allowable as revenue expenditure and these software if they are licenced for a particular period, for utilising the same for the subsequent years fresh licence fee is to be paid. Therefore, without renewing the licence or without paying the fee on such renewal, it is not possible to use those software. In those circumstances, the findings recorded by the authorities that the fee paid for obtaining the software and the licence and for renewing the same is to be construed as only revenue expenditure do not call for interference by this Court." 4.5 The Special Bench in the case of Amway India Enterprises (supra) had laid down various tests to determine whether the expenditure incurred for purchase of computer software is capital or revenue. In the instant case, the Assessing Officer did have the benefit of the judgement of Hon'ble jurisdictional High Court in the case of Toyota Kriloskar Motors (P.) Ltd. (supra) when she passed the impugned assessment order. The Assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts during the assessment year 2007-08 as : (i) Such loss/gain has arisen on trading account, during the course of business operations and is incidental to the same. (ii) Since Kodiak India is following mercantile system of accounting, exchange loss incurred by Kodiak India cannot be considered as contingent in nature. The assessee also placed reliance on the judgement of the Hon'ble Apex Court in the case of CIT v. Woodward Governor India (P.) Ltd. [2009] 312 ITR 254/179 Taxman 326, Sutlej Cotton Mills Ltd. v. CIT [1979] 116 ITR 1 (SC), Oil & Natural Gas Corpn. Ltd. v. Dy. CIT [2002] 83 ITD 151 (Delhi) (SB) and Smt. Sujata Grover v. Dy. CIT [2002] 74 TTJ 347 (Delhi). 5.3 The learned DR present was duly heard. 5.4 We have heard the rival submissions and perused the materials on record. In the case of Woodward Governor India (P.) Ltd. (supra), the Hon'ble Supreme Court analysed various issues relating to treatment of exchange gain/loss arising on account of the increase or decrease in the value of the foreign currency held on revenue account and upheld the contentions of assessee that market loss was allowable in the year in which it was recognized and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 39;ble Mumbai High Court in the case of CIT v. Gem Plus Jewellery India Ltd. [2011] 330 ITR 175/[2010] 194 Taxman 192 and the order of the Special Bench in the case of ITO v. Sak Soft Ltd. [2009] 30 SOT 55 (Chennai), in which it has been held the following :- "that the expenses should be reduced not only from export turnover but also from the total turnover while computing deduction under section 10A of the Act". 6.3 The learned DR unable to controvert the submissions made by the learned AR. 6.4 We have heard the rival submission and perused the material on record. The Hon'ble Karnataka High Court in the case of Tata Elxsi Ltd. (supra) 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 from the 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 comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efore, 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. When the statute prescribed 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 as 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". 6.5 The Hon'ble Mumbai High Court in the case of Gem Plus Jewellery India Ltd. (supra), in identical circumstance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evail 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 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. Laks ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8,896 For the purpose of establishing the Arm's Length Price (ALP) of its international transactions with its AEs, the assessee had undertaken a Transfer Pricing (TP) study, carried out by an independent external consultant. Based on the TP study, the independent external consultant concluded that the price received by the assessee in respect of its transactions with AEs is at arm's length. The key features of the TP study undertaken by the assessee for software services and ITES are summarized below:- (i) As per the functional analysis, the assessee was selected as the tested party; (ii) Transactional Net Margin Method (TNMM) was determined as the most appropriate method to determine the ALP; (iii) The search was conducted on Prowess database for obtaining publicly available financial information of companies in India engaged in similar business activity as that of the assessee to select comparable companies. (iv) Given the nature of the international transactions under review, economic conditions, differences in business or product life cycles and other relevant factors, financial data for FY 2004-05, FY 2005-06 and FY 2006-07 was cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITES respectively. 7.2 The details of the comparable companies as per TPO in software development and related services and the customer support services are as follows:- Software development and related services Sl. No. Name of the Company As per Order of TPO Sales in Rs. Crore Operating Margin 1. Accel Transmatics Limited (Seg.) 9.68 21.11% 2. Avani Cimcon Technologies Limited 3.55 52.59% 3. Celestial Labs Limited 14.13 58.35% 4. Datamatics Limited 54.51 1.38% 5. E-zest Solutions Limited 6.26 36.12% 6. Flextronics Software Systems Limited 848.66 25.31% 7. Geometric Limited (Seg.) 158.38 10.71% 8. Helios & Matheson Information Technology Limited 178.63 36.63% 9. iGate Global Solutions Limited (Seg.) 747.27 7.49% 10. Infosys Technologies Limited 13,149.00 40.30% 11. Ishir Infotech Limited 7.42 30.12% 12. KALS Infosystems Limited 2.00 30.55% 13. Lanco Global Systems Limited 45.39 15.75% 14. Lucid Software Limited 1.70 19.37% 15. Mediasoft Solutions (P) Limited 1.85 3.66% 16. Megasoft Limited 139.33 60.23% 17. Mindtree Consulting Limited 590.35 16.90% 18. Persistent Systems Limited 293.75 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rters 4.33 50.68% 28. Apex Advanced Technology Pvt. Limited 7.93 39.89% ARITHMETIC MEAN BEFORE WORKING CAPITAL AND RISK ADJUSTMENT 30.55% Less : Working capital adjustment 2.89% ARITHMETIC MEAN AFTER WORKING CAPITAL ADJUSTMENT 27.66% Margin earned by Kodiak India as per TP order 10.62% 7.3 The Assessing Officer issued Draft Assessment Order dated 18th November, 2010 proposing an addition of Rs. 2,93,85,439/- on account of TP adjustment. The assessee company objected against the draft assessment order issued by the Assessing Officer under section 143(3) rws 144C(1) of the Act before the DRP. The DRP agreed with the views of the Assessing Officer/TPO and rejected the contentions raised by the assessee company. 7.4 The assessee company being aggrieved is in appeal before us. 7.5 The learned AR submitted that the TPO has erred in identifying new comparables at the time of assessment proceedings. It was submitted that the TPO failed to appreciate that such data was not available in public domain at the time of complying with the mandatory TP documentation required by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the appellant had used TNMM as the most appropriate method which provides that in applying the method, the net margin was to be computed in relation to costs incurred or sales effected or assets employed by the enterprise. However, it was argued that the TPO had excluded the foreign exchange fluctuation (income/expenses) stating that these were non-operating in nature. It was, however, argued by the Ld. A R that the foreign exchange fluctuation gain (loss) were closed linked to the business operation and did not constitute abnormal-extra-ordinary items. Those differences arise on account of number of factors, some of which, were explained as under: (i) Realized foreign exchange gain/loss: (a) Export proceeds at a rate higher/lower than the rate at which they were booked; (b) Import payables at a rate lower/higher than the rate at which they were booked; (c) Adjustment of customer ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 the provisions of rule 10B(1)(e) of I.T. Rules, it was argued that: One of the principal elements for TP purposes is the analysis of risks assumed by the respective parties. In the open market theory, the assumption of increased risk is normally compensated by an increase in the expected return. Accordingly, controlled and uncontrolled transactions are comparable only when adjustments with respect to significant differences between them in the risks assumed is made. A risk analysis begins with the identification of specific and realistic risks borne by each related party. It is also important to note that economically significant risks count for transfer pricing purposes. Non-economically significant risks are of minor importance due to their small or negligible impact on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aim, 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 - Though, the assessee (a captive service provider) did not transact with any other independent party and provided all the services only to its AE and that the single customer risk was insignificant based on the following: ■ The appellant has been providing software development and related services and ITES to its AE (i.e., single customer) for a long time. The appellant since the commencement of its operations in India has been making profits irrespective of the performance of the IT/ITES industry in India. The appellant does not bear any risk of incurring losses due to under utilization of capacity or insufficient business from its AE as it is compensated on cost plus basis i.e., all the cost incurred by the appellant are borne by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Ltd, an ISO 9001-2000 company working in this space of Bio-informatics and Gio-technology. The goal was to become a primary market place for the herbal products providing quality products to the customers and industrial community. This is an ayurvedic portal dedicated to B28 & C market with online live consulting with out ayurvedic consultants. It provides excellent platform for trading of herbal products with identification raw herbs, scientific data, market and trade data, monographs, policy, laws, good manufacturing practices, DNA finger printing etc. It facilitates contacts with suppliers, manufacturers and dealers of herbal Pharma industry. In conclusion, the essence of the Ld. A.R's submiss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (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.) Ltd v. Dy. CIT [2012] 20 taxmann.com 715 (Bang.) while considering the appellant's case afresh. 7.7.1 With regard to the submissions of the Ld. A R in respect of (1) foreign exchange fluctuation gain (loss) and (2) risk profile, we are of the considered view that there is considerable force in the arguments put forth by the Ld. A R. the contentions of the appellant have not been given due weight-age at the time of finalizing the issues by the TPO as alleged by the assessee in its submissions (supra). In the interests of principles of natural justice and fair-play and since many of the issues have already been reverted back to the file of the TPO for fresh consideration, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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