9911796707
TMI Blog2016 (2) TMI 1123X X X X Extracts X X X X X X X X Extracts X X X X ..... ts group EFI. Companies functinally dissimilar with that of assessee need to be deselected from final list of comparables. X X X X Extracts X X X X X X X X Extracts X X X X ..... ctions of the Dispute Resolution Panel in so far as it relates to the above grounds may be reversed. 9. The appellant craves leave to add, alter, amend and/or delete any of the grounds mentioned above." 3. Ground No.1 is general in nature and does not require adjudication. 4. Ground Nos. 2 & 3 are regarding exclusion of expenditure incurred in foreign exchange from export turnover as well as from total turnover. 5. We have heard the ld. DR and the ld. AR as well as considered the material on record. At the outset, we note that this issue is covered by the Hon'ble jurisdictional High Court in the case of ACIT v. Tata Elxsi Ltd., 349 ITR 49 [Karn], wherein the Hon'ble High Court has held as under:- "10. The Bombay High Court had an occasion to consider the meaning of the word 'total turnover' in the context of Section 10-A, in the case of CIT v. Gem Plus Jewellery India Ltd. [2011] 330 ITR 175 [2010] 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 turnove ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he expression "export turnover" has been defined. The definition of "export turnover" excludes freight and insurance. Since export turnover has been defined be 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 expression viz. "export turnover" would have a different connotation in the application of the same formula. The submission of the Revenue 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 turnove ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... between the numerator and the denominator of the formula. In view of the commonality, the understanding should also be the same. In other words, if the export turnover in the numerator is to be arrived at after excluding certain expenses, the same should also be excluded in computing the export turnover as a component of total turnover in the denominator. The reason being the total turnover includes export turnover. The components of the export turnover in the numerator and the denominator cannot be different. Therefore, though there is no definition of the term 'total turnover' in Section 10-A, there is nothing in the said Section to mandate that, what is excluded from the numerator that is export turnover would nevertheless form part of the denominator. Though when a particular word is not defined by the legislature and an ordinary meaning is to be attributed to the same, the said ordinary meaning to be 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ear under consideration, which are reproduced by the TPO in para 3 page 2 as under:- Financial results for the FY 2009-10 as per the P&L A/C Service income (excld other income) 478,078,605 Total Expenditure 417,751,509 Less: Finance expenses 2,021,113 Operating Expenditure 415,730,396 Operating Profit 62,348,209 OP/OC 15.00% Segmental financials as per TP document Description Software Development Services Sales and Marketing Services Revenue 454,764,558 23,314,047 Exchange fluctuation gain 2,394,282 116,760 Total 457,158,840 23,430,807 Total Operating Cost 396,424,459 21,822,966 Operating Profit 60,734,381 1,607,841 OP/OC 15.32% 7.37% 9. The TPO has recalculated the margins of the assessee by excluding the forex gain as the same is treated as non-operating revenue. The revised margins computed by the TPO are at 14.72% and 6.83% for software development services and sales & marketing services respectively. The assessee has reported international transactions during the year under consideration as per its report as under:- Description Amount Software development services 454,764,558 Sales and marketing services 23,314,047 Interest pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to be excluded from the set of comparables. 13. We shall deal with each comparable which has been disputed by the Revenue one by one as under:- (1) ICRA Techno Analytics Ltd. (seg) 14. At the outset, we note that apart from having the related party revenue at 20.94% of the total revenue, this company was also found to be functionally not comparable with software development services segment of the assessee. The DRP has given its finding at pages 13 to 14 as under:- "Having heard the contention, on perusal of the annual report, it is noticed by us that the segmental information is available for two segments i.e., services and sales. However, it is evident from the annual report that the service segment comprises of software development, software consultancy, engineering services, web development, web hosting, etc. for which no segmental information is available and therefore, the objection of the assessee is found acceptable. Accordingly, Assessing Officer is directed to exclude the above company from the comparables." 15. We find that the facts recorded by the DRP in respect of business activity of this company are not in dispute. Therefore, when this company is engaged in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w of the above facts that Infosys Ltd. having a huge brand value and intangibles as well as having bargaining power, the same cannot be compared with the assessee who is providing services to its AE. (3) KALS Information Systems Ltd. 21. The assessee raised objections against this company on the ground that this company is engaged in the development of software and software products. Further, this company consists of STPI unit and also having a training centre engaged in training of software professionals on online products. Thus, when this company is having revenue from software services as well as software product, the same cannot be considered as comparable with software development service providing company. 22. The DRP has directed the AO to exclude this company from the list of comparables by taking note of the fact that there were inventories in the books of accounts of this company which shows that this company is in the software product business. Further, by following the decision of this Tribunal in the case of Trilogy e-business Software India Ltd. v. DCIT, ITA No.1054/Bang/2011 dated 23.11.2012, this company was found to be not comparable with that of the assessee. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... echnologies Ltd. 27. The assessee raised objection that this company has revenue from software services, software products and other services. The DRP has come to the conclusion that this company earned revenue from 3 segments. However, no segmental information is available. Accordingly, the DRP directed the AO to exclude this company from the comparables. 28. We have heard the ld. DR as well as ld. AR and considered the relevant material on record. The DRP has reproduced the break-up of revenue in the impugned order as under:- Amount in Rs. lakhs Year ended March 31, 2010 Year ended March 31, 2019 Software Services 37,736.22 40,531.20 Software products 2,041.00 6,146.43 Other services 372.77 1,297.05 Total revenues 40,150.89 47,974.68 29. Thus, there is no dispute that this company earns revenue from 3 segments. However, the segmental operating margins are not available. Therefore, in the absence of segmental relevant data and particularly operating margins, this composite data cannot be considered as comparable with the assessee for software development services segment. Accordingly, we do not find any error or illegality in the findings of the DRP. (6) Tata ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ength price for the assessee, hence, should be excluded from the list of comparable parties." 33. No contrary view has been brought to our notice regarding comparability of this company with that of a pure software development service provider. Accordingly, in view of the decision of the Mumbai Bench of the Tribunal in the case of Telcordia Technologies Pvt. Ltd. (supra), we do not find any reason to interfere with the finding of the DRP. 34. Ground Nos. 6 & 7 are regarding foreign exchange loss/gain treated as operating revenue for the purpose of determining the ALP. The TPO has accepted foreign exchange gain/loss while computing operating margin of comparable companies. However, in the case of assessee, foreign exchange loss has been considered as non-operating in nature. Thus, the assessee raised an objection before the DRP that exchange gain/loss arises on account of factors like realization of sales, payment to suppliers and restatement of value of assets & liability are operating in nature. The assessee placed reliance on the decision of coordinate Bench of this Tribunal in the case of SAP Labs India Pvt. Ltd. v. ACIT (2010-TII-44-ITATBANG-TP) wherein it has been held that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... K Consultants Ltd. 38. The TPO has carried out a fresh search and determined the ALP by considering 6 comparables as under:- Sl No. Name of the Company OP/Cost (%) 1 Asian Business Exhibition & Conferences Ltd. 58.64 2 Cyber Media Research Ltd. 19.52 3 H C C A Business Services Pvt. Ltd. 19.11 4 Hindustan Housing Co. Ltd. 19.59 5 ICC International Agencies Ltd. 13.27 6 Killick Agencies & Mktg. Ltd. 16.77 Average 24.48 39. Thus, the TPO has arrived at the mean margin of 24.48% as against the assessee's margin in this segment at 6.83%. Accordingly the TPO proposed an upward adjustment of ₹ 38,51,181 as per provisions of section 92CA. 40. The assessee challenged the action of TPO before the DRP. The DRP excluded 3 out of 6 comparable companies selected by the TPO against which Revenue has filed appeal before us. We will discuss comparability of two companies which are excluded by the DRP and challenged by the Revenue as under:- (1) HCCA Business Services Pvt. Ltd. 41. The assessee objected against inclusion of this company in the list of comparables on the ground that this company is engaged in providing payroll process services and therefore it i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for various foreign principals for sale of dredgers, dredging equipment and also offers after sales service. Therefore, this company was found to be in the business of marketing support services which is similar to the assessee. 48. On the other hand, the ld. AR has submitted that this company is engaged in the business of construction equipments and earth moving machinery and is not into marketing support services. 49. Having considered the rival submissions as well as relevant material on record, we note that in the profit & loss account for the year under consideration, this company has shown sales (export of ₹ 1,18,00,000 and commission/service charges of ₹ 2,19,00,000. Therefore, export income revenue of this company is less than 75% of the total revenue, a filter applied by the TPO. Once the TPO has applied a filter of 75% of export sale, then this company which fails the filter applied by the TPO cannot be considered as a good comparable. Further, we note that this company is entirely in a different activity with that of the assessee. Undisputedly, this company is acting as agent for various foreign principals for sale of dredgers, dredging equipment, steerabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt from the assessee who is providing sales and marketing support services to its AE for software/IT products. The Mumbai Bench of the Tribunal in the case of RGA Services India Pvt. Ltd. (supra) while considering the functional comparability of this company has held at paras 11 and 12 as under:- "11. We have considered the submission of the parties and perused the relevant material on record. On perusal of the order passed by the TPO it is noticed that the TPO while dealing with assessee's objection with regard to selection of Asian Business Exhibition and Conferences Limited as a comparable has admitted that the nature of function performed by this company is event management. It is further relevant to observe, on perusal of annual report of this company it is seen that as per directors report, the main operation is organizing exhibition and events. Further, schedule 12 of the profit and loss account as well as notes to the accounts reveals, revenue earned by the company is from sponsorship, delegates attending conferences, events and entry fees charged from visitors for visiting exhibition, sale of stall place etc. 12. Thus, on overall analysis of facts and materials placed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Infotech Ltd., Mindtree Ltd. and rejection of R.S. Software (India) Ltd. and Persistent Systems & Solutions Ltd. by the DRP. 57. The ld. AR has submitted that the assessee did not raise any objection against R.S. Software (India) Ltd., however, the DRP on its own rejected this comparable. 58. The DRP has taken note of the fact that expenses of foreign branches incurred is to the extent of ₹ 12.42 crores which is 82% of the expenses of ₹ 15 crores debited in the profit & loss account. Thus, it was concluded by the DRP that this company is predominantly onsite software development company and therefore cannot be retained as comparable. 59. We have heard the ld. AR as well as ld. DR and considered the relevant material on record. At the outset, we note that this company has reported expenditure in foreign currency at ₹ 124.2 crores as against earning in foreign currency at ₹ 158.3 crores. Therefore, it is clear that more than 80% of the expenditure has been incurred by this company in foreign branch expenditure, which shows that the company has main activity of onsite software development. In view of the above fact, we do not find any error or illegality in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idered the relevant material on record. The ld. AR has submitted that this company is having 18.66% RPT and further this company earns revenue from both services and products. Thus, the ld. AR submitted this company is also in the software products and therefore cannot be considered as good comparable. He has further contended that in a series of decisions, the Tribunal has applied 15% RPT filter and since this company is having more than 15% RPT, the same cannot be considered as a good comparable. 64. On the other hand, the ld. DR has submitted that TPO has applied RPT filter of 25% and therefore only for this company, the RPT cannot be reduced to 15%. Further, the DRP has examined annual report of this company and found that this company earns revenue from software development services and accordingly is comparable. 65. We have considered the rival submissions and relevant material on record. We find that in the normal circumstances the tolerance range of RPT should not be more than 15%. In the case of the assessee, the availability of the comparable is not an issue and therefore we do agree with the view taken by the coordinate Benches of the Tribunal that the threshold limit ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
