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TMI Blog2016 (8) TMI 1163X X X X Extracts X X X X X X X X Extracts X X X X ..... e plain language certainly militates against such a construction. X X X X Extracts X X X X X X X X Extracts X X X X ..... l income. 6. Companies that had substantial (>25%) transactions with related parties. This is an appropriate filter. 7. Companies which had been incurring persistent operating losses. This is an appropriate filter. 8. Companies that had exceptional year(s) of operation. This is an appropriate filter. 7. The comparables furnished by the assessee and the TPO's response thereto are tabulated below:- Sr. No. Name of the company Remarks of this office 1. Aditya Birla Minacs Worldwide Limited. This is a suitable comparable. 2. Allsec Technologies Limited. Diminishing sales for the last three years. The export revenues are less than 75% of total turnover, hence not a suitable comparable. 3. C G-VAK software & Exports Ltd. Significant income of the company is from software development. The income from BPO operations is only ₹ 86 lakhs. This will not be a good comparable. 4. Cepha Imaging Private Limited. The annual report of the company has been perused. The company is in the business of E-Publishing Services. EPublishing services include Typesetting, Composition, Art work, proof reading, project management, XML conversions and multimedia services, provided t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... son given by the TPO for discarding this comparable, namely, that the export was less than 75% of the total turn over. The decision of the Tribunal to include this case is entirely justified. The TPO had rejected it merely because the actual ratio of export revenue to total turnover was 74.45% and not 75% which was the qualification adopted by the TPO. We are entirely in agreement with the Tribunal that the case could not have been rejected merely because there was a deviation of 0.55%. Mr. Joshi's submission that there can be no deviation to any extent whatsoever is erroneous. 12. There is nothing sacrosanct about the figure of 75%. A deviation that does not affect the result is acceptable. Transfer pricing is not an exact science. It is not capable of arithmetical precision. 13. Mr. Joshi's apprehension is that the acceptance of any deviation however insignificant would bring about uncertainty and confusion. He submitted that once a filter is chosen, it must be rigidly followed and there cannot be any deviation at all. He submitted that if deviations were permissible, the TPO could have relied upon other comparables. He further contended that in that case there would be uncerta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed on account of its activities other than those relating to the accounts BPO segment cannot be examined. The financial results of enterprises involved in dissimilar activities cannot be compared. Similarly the financial aspects of dissimilar activities of two enterprises cannot be compared. Only the similar activities of the two can be considered provided however they are financially comparable. 20. Before dealing with this case further, it is important to note that the Tribunal excluded Cosmic Global Ltd. from the list of comparables for the same reason that it excluded CG-VAK Software & Exports Ltd. from the list of comparables. The assessee has not challenged the exclusion of CGVAK Software & Exports Ltd. from the list of comparables by the Tribunal. It is necessary nevertheless for us to consider the correctness of the exclusion for it is on the basis thereof that the Tribunal has also excluded Cosmic Global Ltd. from the list of comparables. While dealing with the case of CG-VAK Software & Exports Ltd. the Tribunal noted that the BPO segment which is a relevant segment of CG-VAK Software & Exports Ltd. was only ₹ 86.10 lacs. as against the assessee's revenue in the sam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpared for the purpose of determining the ALP. 25. The TPO relied upon a CBDT circular dated 26.09.2000 which furnishes a list of products or services that may be considered as Information Technology Enabled Products/Services (ITES) for the purpose of sections 10-A and 10-B of the Income Tax Act, 1961. The circular enumerates fifteen categories. As rightly observed by the Tribunal these categories refer to products and services which are entirely different in description and functions. The manufacture of such products and the provision of such services also have entirely different financial requirements and consequences. The instances cited by the Tribunal are apposite. Geographical Information Systems Services and the assessee's services are included in the circular and therefore, fall within the category of ITES. It does not follow that they are comparable to each other for the purpose of determining the ALP in respect of the assessee's international transactions. The circular is issued for entirely different reasons viz to enable an assessee to avail deductions in respect of certain activities. The sections do not contemplate or even remotely indicate that the activities referr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reads as under:- "10B(4) The data to be used in analysing the comparability of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction has been entered into". 31. The Rule does not exclude from consideration the data of an entity merely because its financial year is different from the financial year of the assessee. What the Rule requires is that the data to be used in analyzing the financial results of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction has been entered into. Thus so long as the data relating to the financial year is available, it matters not, if the financial year followed is different. In the case before us the data relating to the relevant financial year of R.Systems International Limited is available. 32. We are, therefore, entirely in agreement with the decision of the Tribunal that if the data relating to the financial year in which the international transaction has been entered into is directly available from the annual accounts of that comparable, then it cannot b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sources most of its work is not required to maintain a large establishment. For instance, it would be necessary for such an enterprise to have large premises and a large number of employees. Even the material it uses and the equipment that it installs from minor items such as stationery and telephones to electrical fittings and even machinery are bound to be far less than the material and equipment that an enterprise which conducts its activities itself would of necessity be required to maintain. 38. This in turn would also have consequences upon the legal requirements to be fulfilled by the two enterprises. There are several enactments that bring within its ambit, establishments or undertakings that employ a certain number of persons. There are enactments that also bring within their ambit enterprises that use power. This in turn would require an enterprise carrying on its own activities to maintain staff alongwith attendant facilities to ensure compliance with such legislation. The financial difference between such enterprises is bound to be enormous. 39. We are in respectful agreement with the following observations of the Division Bench of Delhi High Court in Rampgreen Soluti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bombay High Court. As the Delhi and the Karnataka High Courts followed the judgment of Bombay High Court in the case of CIT v. Gem Plus Jewellery India Ltd. (supra) we will refer to the judgment of Bombay High Court. The Bombay High Court held as under:- "7. The export turnover, in the numerator must have the same meaning as the export turnover which is a constituent element of the total turnover in the denominator. The legislature has provided a definition of the expression "export turnover" in Explanation (2) to Section 10A by which the expression is defined to mean the consideration in respect of export by the undertaking of articles, 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. 8. The submission which has been urged on behalf of the Revenue is that while freight and insurance charges are liable to be excluded in computi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , shall be allowed from the total income of the assessee: (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 on by the undertaking. Explanation 2.-For the purposes of this section,- (i) to (iii) xx xx xx (iv) "export turnover" means the consideration in respect of export by the undertaking of articles or things or computer software received in, or brought into, India by the assessee in convertible foreign exchange in accordance with subsection (3), but does not include freight, telecommunication charges or insurance attributable to the delivery of the articles or things or computer software outside India or expenses, if any, incurred in foreign exchange in providing the technical services outside India; ….emphasis supplied." (B) Section 10AA which falls for consideration before us, in so far as it is relevant, reads as under:- "Special provisions in re ..... X X X X Extracts X X X X X X X X Extracts X X X X
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