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TMI Blog2016 (2) TMI 1123X X X X Extracts X X X X X X X X Extracts X X X X ..... on of deduction u/s 1OA, without appreciating the fact that the statute allows exclusion of such expenditure only from export turnover by way of specific definition of export turnover as envisaged by Sub- clause (4) of Explanation 2 below Subsection (8) of Section 10A and the total turnover has not been defined in this Section. 3. On the facts and in the circumstances of the case the Dispute Resolution Panel erred in directing the AO to compute deduction u/s 10A in the above manner by placing reliance on the decision of Hon'ble High Court of Karnataka in the case of M/s Tata Elxsi Ltd., which has not become final since the same has not been accepted by the Department and SLPs are pending before the Hon'ble Supreme Court. 4. On the facts and in the circumstances of the case, the Dispute Resolution Panel erred in directing the TPO/AO to exclude the comparable M/s ICRA Techno Analytics Ltd., M/s Infosys Ltd., M/s KALS Information Systems Ltd., M/s Persistent System Ltd., M/s Sasken Communication Technologies Ltd., M/s HCCA Business Services Pvt. Ltd. & M/s Killick Agencies & Marketing Ltd. without considering the facts discussed by the TPO for selection of the comparables in the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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: Profits derived from export of articles or things or Computer software = Profits of the business of the undertaking X Export turnover in respect of the articles or things or computer software Total turnover of the business carried on by the undertaking 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 s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ght 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 in the formula." The formula for computation of the deduction under Section 10-A would be as under: Profits of the business X export turnover Total turnover From the aforesaid judgments, what ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9;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 business of the undertaking X Export turn over (Export turnover + domestic turn over) Total Turn Over 11. In that view of the matter, we do not see any error committed by the Tribun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... velopment services 454,764,558 Sales and marketing services 23,314,047 Interest paid on ECB loan 2,021,113 Cross charge of language translation fees, sales promotion and options cash payout (received) 8,259,293 Cross charge of employee deputation expresses (payment) 75,413 Purchase of fixed assets 6,983,240 Remittance of money collected from employee towards purchase of ESOP/ESPP 6,398,105 10. The assessee has bench-marked its international transactions in software development services segment by selecting 16 comparables. The TPO rejected the TP analysis study of the assessee on the ground that assessee has used multiple year data instead of current financial year data and further applied the filter of less than 25% of revenue from exports as well as related party transactions. The TPO therefore rejected 14 comparables out of 16 selected by the assessee and retained only 2 comparables, though the margins were taken as per current financial year data. The TPO has carried out fresh search and selected total 11 comparables including 2 comparables from the list of the assessee. The final set of comparables selected by the TPO for determining the ALP is as under:- Sl. No. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s activity of this company are not in dispute. Therefore, when this company is engaged in diversified activities of software development and consultancy, engineering services, web development & hosting and substantially diversified itself into domain of business analysis and business process outsourcing, then the same cannot be regarded as functionally comparable with that of the assessee who is rendering software development services to its AE. 16. In view of the above facts, we do not find any error or illegality in the findings of the DRP that this company is functionally not comparable with that of a pure software development service provider. (2) Infosys Ltd. 17. The assessee objected against the selection of this company on the ground that this company has a big name and brand value and therefore it has a bargaining power. It also contended that the turnover of this company is Rs. 21,140 crores, which is 442 times higher than the assessee. 18. The DRP accepted the objections of the assessee and by following the decision of the Delhi Benches of the Tribunal in the case of Agnity India Pvt. Ltd. v. ITO [2015] 58 taxmann.com 167 (Delhi - Trib), directed the TPO to exclude th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 23.11.2012, this company was found to be not comparable with that of the assessee. 23. We have heard the ld. DR as well as ld. AR and considered the relevant material on record. The ld. DR has not disputed the fact that comparability of this company has been examined by this Tribunal in a series of decisions including in the case of Trilogy e-business Software India Ltd. (supra). We further note that in the balance sheet of this company as on 31.3.2010, there are inventories of Rs. 60,47,977. Therefore, when this company is in the business of software products, the same cannot be compared with a pure software development services provider. Accordingly, we do not find any error or illegality in the impugned findings of the DRP. (4) Persistent Systems Ltd. 24. We have heard the ld. DR as well as ld. AR and considered the relevant material on record. The assessee raised objections against selection of this company on the ground that this company is functionally not comparable as engaged in the product development. The segmental information for services and product is not available. Further, the assessee has also pointed out that there was an acquisition and restructuring during t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvices segment. Accordingly, we do not find any error or illegality in the findings of the DRP. (6) Tata Elxsi Ltd. 30. The assessee has raised objections against this company on the ground that the company is functionally different from the assessee. Though the TPO has considered the software development and services segment of this company as comparable to that of assessee, however, the assessee contended that even within the software segment, this company is engaged in diverse activities. The assessee placed reliance on the information in the annual report under the Directors Report and submitted before the DRP that even under the software development services segment, this company is engaged in various diversified activities including product design service, innovation design, engineering service, visual computing labs, etc. The assessee also placed reliance on the decision of Mumbai Bench of the Tribunal in the case of Telcordia Technologies Pvt. Ltd. v. ACIT, 137 ITD 1 (Mum). 31. The DRP found that this company is not functionally comparable with assessee company as it is engaged in diversified activities even in the software development services. The DRP has followed the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l in the case of SAP Labs India Pvt. Ltd. v. ACIT (2010-TII-44-ITATBANG-TP) wherein it has been held that foreign exchange gain need to be considered as operating in nature, if it arises on realization of sale proceeds or on payment against supplies. The DRP has accepted the contention of the assessee by following the decision in the case of SAP Labs India Pvt. Ltd. (supra) and accordingly directed the AO to consider the foreign exchange fluctuation in respect of assessee company as well as comparables as operating in nature. 35. We have considered the rival submissions as well as the relevant material on record. There is no quarrel on the point that if the foreign exchange fluctuation gain/loss arises in relation to the realization of sale proceeds or payment against supplies, then it will be in the nature of operating gain/loss. Only in the case where the foreign exchange gain/loss pertains to non-trading receipts or payment, the same cannot be considered as part of the operating margins. Similar view has been taken by the coordinate Bench of this Tribunal in the case of Obopay Mobile Technology India Pvt. Ltd. in IT(TP)A No.469/Bang/2015 vide order dated 8.1.2016. Accordingly, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es on the ground that this company is engaged in providing payroll process services and therefore it is functionally different. In support of its contention, the assessee referred to Notes to the Accounts wherein the company's operations comprise of payroll processing services is mentioned and hence it is not possible to give the quantitative details of sales and certain information separately. 42. The DRP after considering the annual report noted that except the Note 2.14, there is no other observation in the annual report from which it can be established that the company is engaged in marketing and sales support services comparable to the assessee. Accordingly, the DRP directed the AO to exclude the said company from the comparables. 43. We have heard the ld. DR as well as ld. AR and considered the relevant material on record. The DRP has considered the fact that payroll processing services was main part of the operations of the company and quantitative details of sales and certain information as required under Part II of Schedule VI to Companies Act was not possible. Thus, in the absence of any contrary fact on record brought before us, we do not find any reason to interfere w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gent for various foreign principals for sale of dredgers, dredging equipment, steerable rudder propulsions and other equipments and machineries. Accordingly, we do not find any error or illegality in the findings of the DRP and direct the AO to exclude this company from the comparables. CO No.94/B/15 (By assessee) 50. The assessee has raised various objections in the CO. However, we find that the only effective ground raised by the assessee in the marketing support segment is regarding Asian Business Exhibition & Conference Ltd., a comparable selected by the TPO and retained by the DRP. 51. The assessee objected against this company on the ground that this company is functionally different as it is engaged in organizing exhibitions and conferences. The DRP did not accept the contention of the assessee and held that this company received income in the nature of consultancy for organizing exhibitions and events. Therefore this company is functionally similar to the functions carried out by the assessee. 52. Before us, the ld. AR of the assessee has submitted that functional comparability of this company has been examined by the Mumbai Bench of the Tribunal in the case of RGA Serv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ale of stall place etc. 12. Thus, on overall analysis of facts and materials placed on record it is very much clear that the business model of the assessee and Asian Business Exhibition and Conferences Limited are totally different. While assessee undoubtedly is providing support services to its overseas AE's, Asian Business Exhibition and Conferences Limited is primarily and fundamentally engaged in event management. Thus, under no circumstances it can be considered as a comparable to the assessee. Therefore, for the aforestated reasons the DRP, in our view, was justified in excluding this company as a comparable. As far as the contention of learned DR that reasons on which this company was excluded equally applies to other comparables retained by the DRP, we may observe, such argument of learned DR is not at all relevant as the issue raised by the department in the present appeal is confined to exclusion of Asian Business Exhibition and Conferences Limited as a comparable. As far as objection of learned departmental representative that assessee itself has selected this company as a comparable, we may observe, that cannot be the sole criteria to reject assessee's objection with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In view of the above fact, we do not find any error or illegality in the finding of the DRP in excluding this company from the list of comparables. This ground is dismissed. Persistent Systems & Solutions Ltd. 60. The assessee has the grievance against rejection of this company by the DRP. The ld. AR has submitted that assessee did not raise any objection against this company, however, the DRP has rejected the said company. Therefore, the said company should be retained in the list of comparables. 61. Having considered the rival submissions as well as relevant material on record, at the outset, we note that the DRP has examined the functional comparability of this company by considering the relevant details as given in the annual report of this company. The DRP has given the finding that the entire revenue has been earned by this company from the sale of software services and products and in the absence of segmental details, it cannot be considered as comparable with software services segment. We find that this company has shown the income from sale of software services and products to the tune of Rs. 6.67 crores. We further note that as per Schedule 11, the entire revenue has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the coordinate Benches of the Tribunal that the threshold limit of tolerance range should not exceed 15% as far as RPT revenue is concerned. Therefore, we direct the AO/TPO to apply 15% RPT filter in respect of all the comparables. 66. As regards the functional comparability of this company is concerned, the assessee has referred to the income under the head software development services and products. However, it is not clear from the details whether any revenue is earned from products or entire revenue is from the software development services. Therefore, in the facts and circumstances of the case, we direct the AO/TPO to verify the details of the revenue earned by this company and if the revenue earned of this company during the year consists of software development services as well as product, then in the absence of segmental data, this company cannot be considered as functionally comparable to the software development services segment of the assessee. Mindtree Ltd. 67. The TPO stated in the order that assessee has accepted this company as comparable, however, the assessee raised objection before the DRP against comparability of this company. The assessee has raised objecti ..... 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