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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 ..... - MR. S.J.VAZIFDAR AND MR. DEEPAK SIBAL, JJ. For The Appellant : Mr. Tejender K.Joshi, Advocate For The Respondent : Mr. Deepak Chopra, Advocate, Mr. Deepak Aggarwal, Advocate, Ms. Manasvini Bajpai, Advocate, Mr. Piyush, Advocate and Mr. Rohit Gupta, Advocate S.J.VAZIFDAR, CHIEF JUSTICE This is an appeal against the order of the Income Tax Appellate Tribunal allowing partly the respondent s appeal against the order of the Disputes Resolution Panel. The dispute pertains to the assessment year 2009-10. 2. This appeal is only in respect of the determination of the Arm s Length Price (ALP) of certain international transactions between the assessee and its associated enterprises. 3. The appeal is admitted on the following questions of law:- i) Whether the ITAT rightly held Sr. Nos. 2 and 8 to be suitable comparables and Sr. Nos. 5, 6 and 9 not to be suitable comparables? ii) Whether on the facts and in the circumstances of the case the ITAT has erred in law by excluding an amount of ₹ 57,02,875/- on account of communication charges incurred in foreign currency attributable to delivery of computer software outside India from total turnover in or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otal operating revenues. 5. Companies that did not have significant ( 25%) foreign exchange earnings. The appropriate threshold limit in this regard is 75% as your exports earning are more than 90% (infact 100%) of the total 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct of seven comparables originally relied upon. The assessee furnished the same but sought to exclude from the original list three comparables and to rely upon two other comparables. The assessee, therefore, ultimately relied upon six comparables. The TPO, however, analyzed all the nine comparables i.e. the original seven and two additional comparables. However, the TPO included only three comparables which the respondent wanted excluded. We will now deal with each of the disputed comparables. Re: Alisec Technologies Limited . 10. Filter No.5 was adopted. The TPO s qualification was that the appropriate threshold limit ought to be 75% as the assessee s export earnings were more than 90% (infact 100%) of the total income. The qualification is not in dispute. The TPO also adopted another filter, namely, the exclusion of cases with diminishing revenues. 11. Mr. Joshi, the learned counsel appearing on behalf of the appellant-department supported the second reason 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... This was one of the seven cases originally submitted by the assessee but was later sought to be excluded by the assessee itself. The TPO, however, included the same in the list of comparables. The respondent challenged the inclusion successfully before the Tribunal. 18. The outsourcing charges of the assessee constitute 57.31% of its total operating costs. The annual account of Cosmic Global Limited indicates a total revenue from operations of ₹ 7.37 crores of which ₹ 9.90 lacs were in respect of medical transcription and consultancy services, ₹ 6.99 crores were towards translation charges and only ₹ 27.76 lacs were on account of the BPO services. Thus the assessee s outsourcing activities constitute 57% of its total expenses whereas the similar activity of Cosmic Global Ltd. viz. the BPO segment was only ₹ 27.76 lacs which is but a small fraction of its total revenue from all its operations. 19. The Tribunal rightly held that the results of Cosmic Global Limited 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 co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e former was only ₹ 27.76 lacs whereas that of the assessee in the case before us is about ₹ 59 crores. 22. The Tribunal, therefore, rightly excluded Global Cosmic Ltd. from the list of comparables. Re: Genesys International Corporation Ltd. 23. This case was also initially included in the list of seven cases submitted by the assessee but was later sought to be excluded. The TPO, however, included the same. The assessee challenged the inclusion successfully before the Tribunal. 24. The assessee provides various services to the customers of its AEs in relation to human resources which relate to the employees of the prospective clients. Genesys International Corporation Ltd. on the other hand provides a full range of geospatial services to its clients. Geospatial services relate to the relative position of things on the earth s surface. This includes 3D mapping, navigation maps, image processing and cadastral mapping etc. The two services are entirely different and therefore cannot be compared 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 con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the corresponding periods, the purpose of comparables would be served. The question in each case is whether despite the financial years of the assessee and of the other enterprise being different, the financials of the corresponding period of each of them are available. If they are, the TPO must refer to the corresponding period of both the entities in determining whether the two are comparable or not for the purpose of determining the ALP. 29. As noted by the Tribunal, the audit accounts of R System International Ltd. for the year ending 31.12.2008 had been given under one column and the data for the quarter ending 31.03.2009 and 31.03.2008 (both audited) had been given in two other columns. Thus, as rightly held by the Tribunal, if from the yearly data ending 31.12.2008, the results of the quarter ending 31.03.2008 are excluded and if the results for the quarter ending 31.03.2009 are included, it is possible to obtain the data for the financial year 01.04.2008 to 31.03.2009. 30. This view is not contrary to Rule 10(B)(4) which reads as under:- 10B(4) The data to be used in analysing the comparability of an uncontrolled transaction with an international transaction sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee. Indeed if the case is comparable the TPO is not bound to reject it merely because the assessee applies to have it excluded. Whether or not to exclude the case from the list of comparables depends upon the relevance of the case and not the desire of the parties. 37. The next question is whether Coral Hub Limited ought to be included in the list of comparables. The ground on which the assessee contends that Coral Hub Limited ought to be excluded from the list of comparables is also well founded. Coral Hub Limited outsources a significant portion of its work. The finding is that the outsourcing charges constitute 90% of the total operating costs. It is admitted by the department that the assessee on the other hand conducts its activities itself without outsourcing any part of it. There can be no comparison between an enterprise that conducts its business activities itself with one that outsources its activities although the activities pertain to the same field. The entire administrative set up of such enterprises would be different. An entity that outsources most of its work is not required to maintain a large establishment. For instance, it would be necessary for such an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he first, namely, the denial of a deduction on interest income of about ₹ 8.84 lacs. This appeal is only in respect of the other component, namely, reduction of communication expenses incurred in foreign currency for the purposes of computing the export turnover. 42. As recorded in the order of the Tribunal, on behalf of the assessee the action of the Assessing Officer in reducing the amount of telecommunication charges from the export turn over was not challenged. However, it was contended that the amount ought to be reduced from the total turnover as well. The submission was accepted in view of the judgment of a Division Bench of Delhi High Court (wrongly referred to in the order of Tribunal as the jurisdictional High Court) in the case of Commissioner of Income Tax v. Genpact India 2011(203) Taxman 632 (Delhi). The Delhi High Court followed the judgment of the Bombay High Court in CIT v. Gem Plus Jewellery India Ltd. (2011) 330 ITR 175 and of the Karnataka High Court in the case of CIT v. Tata Elxsi Ltd. (2012) 349 ITR 98 (Karnataka) which had also followed the judgment of Bombay High Court. As the Delhi and the Karnataka High Courts followed the judgment of Bomba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oses 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. 43. We are in respectful agreement with the judgment of Bombay High Court. Although the judgment is under section 10A of the Act, the ratio applies equally to the issue under consideration under section 10AA of the Act. (A) Section 10A(1) and (4) and Explanation 2(iv) read as under:- Special provision in respect of newly established undertakings in free trade zone, etc. 10A. (1) Subject to the provisions of this section, a deduction of such profits and gains as are derived by an undertaking from the export of articles or things or computer software for a period of ten consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce such articles or things or computer software, as the case may be, 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oreign exchange in rendering of services (including computer software) outside India; 44. For all practical purposes relevant to the case before us the definition of export turn over in sections 10A and 10AA are similar. The formula for computation under section 10AA(7) is also the same, namely:- Profits derived from export of articles or things or computer software = Profits of the business of the undertaking Export turnover in respect of the articles or things or computer software. Total turnover of the business carried on by the undertaking. As in the case of section 10A, so also in the case of section 10AA of the Act, the expression total turnover has not been defined. The export turnover is a part of the total turnover. There is nothing in the section or any other provision of the Act that warrants the exclusion of export turnover from the numerator but not from the denominator i.e. from the total turnover. The plain language certainly militates against such a construction. 45. In the circumstances, both the questions are answered in favour of th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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