9911796707
TMI Blog2016 (8) TMI 1163X X X X Extracts X X X X X X X X Extracts X X X X ..... Whether on the facts and in the circumstances of the case the ITAT has erred in law by excluding an amount of Rs. 57,02,875/- on account of communication charges incurred in foreign currency attributable to delivery of computer software outside India from total turnover in order to compute deduction under section 10AA of the Income Tax Act, 1961? Re: Question No. (i) 4. The assessee is a wholly owned subsidiary of Mercer Mauritius Limited, Mauritius. It is engaged in rendering to its various associated enterprises (AEs') IT and IT enabled services such as in the nature of applicant development, quality assurance and application maintenance. The services were rendered to the clients of and for and on behalf of the assessees for which it was compensated on a cost plus basis. 5. The assessee reported three types of international transactions in its audit report in Form 3CEB. The Assessing Officer referred the same to the Transfer Pricing Officer (TPO) for the determination of the arm's length price thereof. The assessee submitted a transfer pricing study. Two types of transactions were accepted by the TPO to be at an arm's length price. The TPO by his order under section 92(A)(3) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 to publishers of books and journals. This is quite different from your functional profile that has been described earlier. That apart, this company cannot be classified as an ITES entity simply because it is using computer based technology for its publishing activities. This is not a suitable comparable. 5. Cosmic Global Limited. This is a suitable comparable. 6. Genesys International Corporation Ltd. This is a suitable comparable. 7. Infored Technologies Limited. This is a suitable comparable. 8. R Systems International Limited. This company has year ending other than March. Reliable financial data will not be available for a 12 month period. This cannot be used as a comparable. 9. Vishal Information Technologies Limited (Now known as Coral Hub Ltd.) This is a suitable comparable. 8. There is no dispute regarding the filters as suggested by the assessee and as qualified by the TPO. It is the application of the filters that requ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 uncertainty as to the extent of the permissible deviation. 14. A minuscule difference cannot result in the rejection of the case if it is otherwise comparable. There is no difficulty in permitting reasonable deviation so long as the deviation does not render the case incomparable to the one in question. The extent of deviation that ought to be accepted would of necessity vary from case to case. In a given case a minor deviation may render the case incomparable. In another case a larger deviation may not affect the comparison and relevance of the case. The TPO must take all the factors into consideration and decide whether the deviation renders the case comparable to the one in question or not. 15. The submission that by permitting a deviation the TPO is deprived of the opportunity of relying upon other comparables within that deviation is also not well founded. Indeed even the TPO would be entitled to refer to cases which deviate from the filter. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Rs. 86.10 lacs. as against the assessee's revenue in the same segment at about Rs. 59 crores. We are entirely in agreement with the decision of the Tribunal in this regard. The Tribunal rightly relied upon the judgment of a Division Bench of Delhi High Court in case of CIT v. Agnity India Technologies Pvt. Ltd. (2013) 219 Taxman 26 (Delhi) where the TPO included Satyam Computer Services Ltd., L&T Infotech Ltd. and Infosys Technologies Ltd. in the list of comparables for working out the ALP of the international transactions of the assessee's in that case. The Tribunal upheld the decision of the DRP on the ground that a giant company cannot be compared with the assessee which was a captive unit of a parent company assuming only limited risks. The High Court upheld the decision of the Tribunal. 21. This brings us back to the case under consideration of Cosmic Global Ltd. The total revenue of Cosmic Global Ltd. of Rs. 7.37 crores is divided into three segments of which only Rs. 27.76 lacs pertained to the accounts BPO which is t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 referred to therein are comparable to each other. Much less do these provisions indicate that the activities included therein have any relevance to the transfer pricing mechanism for the purpose of determination of the ALP of international transactions. 26. The Tribunal rightly rejected this case from the list of comparables. Re: R.Systems International Limited. 27. The TPO excluded the case of R. Systems International Limited from the list of comparables. The ITAT included the same. The TPO excluded the case of R.Systems International Limited on the ground that it follows the calendar year i.e. Ist January to 31st December for maintaining its annual account whereas the accounting year of the assessee is 1st April to 31st March. The TPO followed an order passed by the Mumbai Bench of the Tribunal in ACIT v. Hapag Lloyd Global Services Ltd. 2013-TII-68-ITATMUM- TP in which it had been held that a company with a different financial year ending cannot be compared. 28. We are unable to agree with th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat 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 be held as not passing the test of sub-rule(4) of rule 10B. Re: Coral Hub Ltd. 33. Coral Hub Ltd. was earlier known as Vishal Information Technology Limited and was so referred to in the order of the Tribunal. We will, therefore, continue to refer to the name-Coral Hub Limited. 34. Coral Hub Limited was included by the assessee in the list of the comparables. The TPO required it to furnish the data of Coral Hub Limited for the then current year alone. The assessee thereafter requested the TPO to exclude the case from the list of comparables. The TPO refused to do so. The Tribunal, however, rightly excluded the Coral Hub Limited from the list of comparables. 35. Mr. Joshi firstly contended that once an assessee seeks the inclusion of a case in the list of comparables, it cannot subsequently insist the same on being excluded. 36. There is nothing to support this view either in law or in principle. The aim is to determine the ALP. The exercise requires the assessment of the relevant data. If ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Solutions Pvt. Ltd. v. Commissioner of Income Tax (2015) 377 ITR 533:- "39. In our view, even Vishal could not be considered as a comparable, as admittedly, its business model was completely different. Admittedly, Vishal's expenditure on employment cost during the relevant period was a small fraction of the proportionate cost incurred by the Assessee, apparently, for the reason that most of its work was outsourced to other vendors/service providers. The DRP and the Tribunal erred in brushing aside this vital difference by observing that outsourcing was common in ITeS industry and the same would not have a bearing on profitability. Plainly, a business model where services are rendered by employing own employees and using one's own infrastructure would have a different cost structure as compared to a business model where services are outsourced. There was no material for the Tribunal to conclude that the outsourcing of services by Vishal would have no bearing on the profitability of the said ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 Section 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 for the purposes of the application of the formula.Undoubtedly, it was open to Parliament to make a provision to the contrary. However, no such provision having been made, the principle which has been enunciated earlier must prevail 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 expr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for consideration before us, in so far as it is relevant, reads as under:- "Special provisions in respect of newly established Units in Special Economic Zones. 10AA. (1) Subject to the provisions of this section, in computing the total income of an assessee, being an entrepreneur as referred to in clause (j) of section 2 of the Special Economic Zones Act, 2005, from his Unit, who begins to manufacture or produce articles or things or provide any services during the previous year relevant to any assessment year commencing on or after the 1st day of [April, 2006, a deduction of]-.................... (7) For the purposes of sub-section (1), the profits derived from the export of articles or things or services (including computer software) shall be the amount which bears to the profits of the business of the undertaking, being the Unit, the same proportion as the export turnover in respect of such articles or things or services bears to the total turnover of the business carried on by the undertaking: Explanation 1.-For the purposes of this section,- (i) "export turnover" means the consideration in respect of export by the undertaking, being the Unit of articles or things or ser ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
