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TMI Blog2016 (3) TMI 1138X X X X Extracts X X X X X X X X Extracts X X X X ..... limit of RPT, we modify the impugned order of the CIT(A) and direct the AO/TPO to apply 15% RPT as threshold limit for the purpose of selecting comparables. This ground of the Revenue’s appeal is partly allowed. Exclusion of comparable companies having abnormal/high profit margin - Held that:- Merely a company or entity having a high profit margin or high loss cannot be a reason for exclusion or inclusion in the list of comparables. However, if the high profit or high loss is as a result of some abnormal event or circumstances in a particular comparable company, the same is to be investigated and examined, and if it is found that due to the said particular extra-ordinary or abnormal circumstances the said company cannot be regarded as functionally comparable to that of assessee, then only it is to be excluded from the list of comparables. Accordingly, we direct the AO/TPO to further verify and investigate the actual reason of the high profit margin of the company and then decide the issue in the light of the finding of the Special Bench in the case of Maersk Global Centres (India) (P.) Ltd. (2014 (3) TMI 891 - ITAT MUMBAI ). Exclusion of certain comparable companies by the CIT(A) b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on cost of more than 50% of the comparable company(ies) is abnormal without giving reasons how functions discharged, assets deployed and risks assumed of such companies were different from that of the appellant company. 4. The learned CIT(A) erred in holding that the size, turnover and brand of the company are deciding factors for treating a company as a comparable, and accordingly erred in excluding M/s Infosys Technologies Ltd., M/s iGate Global Solutions Ltd., Flextronics Software System Ltd., L & T Infotech Ltd., Satyam Software Services Ltd., and Infosys Technologies Ltd., as comparables. 5. The Id. CIT(A) erred in holding that expenditure of ₹ 11,44,740/- towards telecommunication expenses and other expenses of ₹ 1,31,528/- incurred in foreign currency are to be excluded from total turnover as well whereas such exclusion is permitted to arrive at the export turnover only as per the definitions given in Sec.10A of the Act and total turnover has not been defined in the section. 6. For these and other grounds that may be urged at the time of hearing, it is prayed that the order of the CIT(A) in so far as it relates to the above grounds may be reversed and that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rability and there is deviation in this respect in T.P. Regulations in India which specify the Arithmetic Mean for determining the ALP. Nevertheless, the OECD TP Guidelines have considered and dealt with the situation of extreme results in the context of comparability consideration in section A.7.3 of chapter III and it is suggested in para 2.63 that where one or more of potential comparables have extreme results consisting loss or unusual high profits, further examination would be needed to understand the reasons for extreme results. After taking into consideration this guidance provided in OECD Transfer Pricing Guidelines and on analyzing the decisions rendered by the Division benches of this Tribunal on this issue after taking into consideration inter alia the T.P. Regulations in India as discussed above, we are of the view that the potential comparables cannot be excluded merely on the ground that their profit is abnormally high. In our opinion, the matter in such case would require further investigation to ascertain the reasons for unusual high profit and in order to establish whether the entities with such high profit can be taken as comparables or not. 99. The question No. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is found that due to the said particular extra-ordinary or abnormal circumstances the said company cannot be regarded as functionally comparable to that of assessee, then only it is to be excluded from the list of comparables. Accordingly, we direct the AO/TPO to further verify and investigate the actual reason of the high profit margin of the company and then decide the issue in the light of the finding of the Special Bench in the case of Maersk Global Centres (India) (P.) Ltd. (supra). 10. Ground No.4 is regarding exclusion of certain comparable companies by the CIT(A) by applying the turnover filter. 11. We have heard the ld. DR and carefully considered the relevant material on record. The CIT(A) has directed the AO/TPO to exclude 5 comparable companies on the ground that their turnover exceeds ₹ 200 crores. The details of the companies are as under:- Sr No. Name of the company Turnover (Rs. in crores) 1 iGate Solutions Ltd. 406 2 Flextronics Software System Ltd. 457.45 3 L&T Infotech Ltd. 562.45 4 Satyam Computer Services Ltd. 3462.2 5 Infosys Technologies Ltd. 6859.7 12. It is pertinent to note that the CIT(A) has applied turnover slab of ₹ 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10] 194 Taxman 192 (Bom.). Interpreting sub-Section (4) of Section 10-A, it is held as under: "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 the profits of the business of the undertaking in computing the profits of the business of the undertaking in computing the profits derived from export. In other words, the profits of the business of the undertaking are multiplied by the export turnover in respect of the articles, things or, as the case may be, computer software and divided by the total turnover of the business carried or by the undertaking. The formula which is prescribed by sub-section (4) of section 10A is as follows: The total turnover of the business carried on by the undertaking would consist of the turnover from export and the turnover from local sales. The export turnover constitutes the numerator in the formula prescribed by sub-section (4). Export turnover also forms a constituent element of the denominator inasmuch as the export turnover is a part of the total turnove ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue 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 statutory provision which would lead to an absurdity must be avoided." The special bench of the Tribunal, in the case of ITO v. Sak Soft Ltd. [2009] 313 ITR (AT) 353/ 30 SOT 55 (Chennai) also had an occasion to consider the meaning of the word 'total turnover'. After referring to the various judgments of the High Court as well as the Supreme Court held as under: "53. For the above reasons, we hold that for the purpose of applying the formula under sub-section (4) of Section 10-B, the freight telecom charges or insurance attributable to the delivery of articles or things or computer software outside India or the expenses, if any, incurred in foreign exchange in providing the technical services outside India are to be excluded both from the export turnover and from the total turnover, which are the numerator and the denominator respectively ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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' 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. If that were the intention of the legislature, they would have expressly stated so. If they have not chosen to expressly define what the total turnover means, then, when the total turnover includes export turnover, the meaning assigned by the legislature to the export turnover is to be respected and given effect to, while interpreting the total turnover which is inclusive of the export turnover. Therefore, the formula for computation of the deduction under Section 10-A, would be as under: Profits of the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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