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TMI Blog2016 (7) TMI 1409X X X X Extracts X X X X X X X X Extracts X X X X ..... act 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 Sub-section (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, whether the Hon'ble Dispute Resolution Panel can make adjustment on the basis of advance received from AEs in absence of debtors and inventory in the case of assessee for calculating the cost of working capital built in the profit margin. 5. On the facts and in the circumstances of the case, whether the Hon'ble Dispute Resolution Panel were justified in directing the TPO to adjust the profit margin of the assessee for the entire amount of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd. 4. Return of income for the assessment year 2010-11 was filed on 29/09/2010 declaring a total income of Rs. 83,87,525/- after claiming deduction u/s 10A to the extent of Rs. 11,61,21,985/-. The assessee-company also reported the following international transactions with its Associated Enterprises (AE): Descriptions Paid Received Purchases 326,743 - Provision for research and development services - 863,139,674 Interest on CEB 822,249 - Repayment of loan 25,475,000 - Reimbursement of expenses 549,949 - Remittance of ESPP contributions 33,323,341 - The assessee-company sought to justify the consideration received for the international transaction entered with its AE to be at arm's length price [ALP]. The assessee-company had also submitted transfer pricing study report adopting TNMM as the most appropriate method and operating margin by the operating cost as the profit level indicator for the transferring pricing study. The assessee-company applied TNMM which was considered to be the most appropriate method for purposes of bench marking the international transactions. The assessee-company's profit margin was computed at 12.01% in respect of s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccel Transmatic Ltd. Rejected: disqualifies RPT filter 2 Akshay Software Technologies Ltd Rejected: No RPT details reported 3 Aztecksoft Ltd Rejected: No data available for the FY 2009-10 in public domain 4 Bells softech Ltd Rejected: Sakescr. 5 CG-VaK software & Exports Ltd Rejected: Fails compensation to employees filter 6 Goldstonet Technologies Ltd Rejected: Fails compensation to employees filter 7 LGS Global Ltd Rejected: No data available for the FY 2009-10 in public domain 8 Maars Software International Ltd. Rejected Different accounting year ending 9 Mascon global Ltd Rejected: Fails compensation to employees filter 10 Mindtree Ltd Accepted: It qualifies all the filtes applied by the TPO 11 RS Software (India) Ltd Accepted: It qualifies all the filtes applied by the TPO. 12 Saskent Communication Technologies Ltd Accepted: It qualifies all the filtes applied by the 13 Sonata Software Ltd. Rejected: fails RPT filter 14 Tata elxsi Ltd Accepted: It qualifies all the filtes applied by the TPO 15 Techprocess Solutions Ltd Rejected: Fails Foreign earnings filter Thus, the TPO rejected 11 of 15 comparables selected by the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ucing telecommunication expenditure from export turnover and also in respect of TP adjustment. It was contended that the TPO was not justified in rejecting the TP study undertaken by the assessee-company and also not using the multiple years' data for selecting or rejecting companies as comparables. The assessee-company also contended that the TPO ought not to have applied the filter of 25% of relatable party transaction. All these contentions were overruled by the DRP. However, the DRP accepted the contention of the assessee that company ICRA Techno Analytics Ltd., is not comparable as no segmental information of software development, software consultancy, engineering services, web development, web hosting, etc. were available. As regards Infosys Technologies Ltd., the DRP held that the same is not comparable as it is having high brand value and high intangible etc. To come to this conclusion, the DRP relied on the decision of the co-ordinate bench in the case of: * Agnity india Technologies Vs. ITO - ITA No.3856/Del/2010 * Telcordia Technologies Pvt. Ltd. vs. ACIT - ITA No.7821/Mum/2011 * Logica Pvt. Ltd. vs. ACIT - IT(TP)A No.1129/Bang/2011/TS-131-ITAT-2013-BANG-TP * Sonata ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... foresaid judgments, what emerges is that there should be uniformity in the ingredients of both the numerator and she denominator of the formula, since otherwise it would produce anomalies or absurd results. Sec. 10A is a beneficial section. It is intended to provide incentives to promote exports. The incentive is to exempt profits relatable to exports. In the case of combined business of an assessee, having export business and domestic business, the legislature intended to have a formula to ascertain the profits from export business by apportioning the total profits of the business on the basis of turnovers. Apportionment of profits on the basis of turnover was accepted as a method of arriving at export profits. In the case of s. 80HHC, the export profit is to be derived from the total business income of the assessee, whereas in s. 10A, the export profit is to be derived from the total business of the undertaking. Even in the case of business of an undertaking, it may include export business and domestic business, in other words, export turnover and domestic turnover. The export turnover would be a component, or part of a denominator, the other component being the domestic turnover ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rendered in the context of s. 80HHC in interpreting s. 10A when the principle underlying both these provisions is one and the same. Therefore, we do not see any merit in these appeals. The substantial question of law framed is answered in favour of the assessee and against the Revenue." The directions of the Hon'ble DRP are in consonance with the law laid down by the Hon'ble Jurisdictional High Court in the above case. Therefore, we do not see any reason to interfere with the direction of the Hon'ble DRP. Hence, we dismiss the grounds of appeal Nos.2 & 3 raised by the revenue. 12. Ground No.4, 5 & 6 relates to the grant of working capital adjustment. From the perusal of the order of the DRP, it is clear that the DRP only directed to re-work the margins of the comparable finally selected after the adjustment of working capital adjustment. The DRP had not rendered any finding as to the quantum of eligible working capital adjustment. Hence, the grounds of appeal raised by the revenue and do not survive and hence, dismissed as such. 13. Ground Nos.7, 8, 9 & 10 challenge the direction of the DRP to exclude the companies viz. IRCA Techno Analytics Ltd., Persistent Systems & Solutions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omparable on the ground that no segmental information was available. The relevant finding of the DRP is as under: "3.3.4 Having heard the assessee, we examined the annual report from which it is noticed that the entire receipt of Z504 crores are shown from 'Sale of software services & Product'. There is no segmental information available for sale of software services & product. It is also noticed from Note-1 of Schedule- 15 that the company is predominantly engaged in outsourced software product development services. The company offers complete product life cycle servi es.: It is also noticed from the Note H to Schedule 15 in regard to revenue recognition that the company in addition to software services also earns income from licensing of products, Royalty on sale of products, income from maintenance contract etc., In the annual report, the difference between the OPD (Outsource Product Development) has been highlighted according to which, in IT services, projects starts with well defined requirements, and vendors use time and money as variables to arrive at a reasonable cost estimate for the project. After completion, the project goes into maintenance mode. In product dev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le. The relevant finding of the DRP is as under: "Considering the fact that the objections were raised by the assessee in respect of all higher margin comparables, it was found appropriate by us to examine other companies selected by the TPO as comparable in regard to their comparability. From the perusal of annual reports :- (i) It is noticed from the perusal of the Page 45 of annual reports in the case of R.S Software (India) Limited, the expenses on foreign branches are'incurred to the extent of T 12.42 crores (82%) of total expenses of 15 1crores debited in P&L account, which makes it clear that it is pre1ominantly onsite software development company and therefore, canhot be retained as comparable. The Assessing Officer is accordingly directed to exclude the above company from comparables. (ii)In the case of Persistent Systems & Solutions Ltd, on perusal of the anhual report, it is noticed by us that the receipt of Z 6.67 crores has been shown from 'sale of software services and products'. However, no segmental information is available in regard to software services and product separately. Therefore, we are of the view that in absence of segmental information, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n confirmed by the Hon'ble Delhi High Court. The Hon'ble Delhi High Court has observed that this company having brand value as well as intangible assets cannot be compared with an ordinary entity provide captive service. We further note that this company provides end to end business solutions that leverage cutting edge technology thereby enabling clients to enhance business performance. This company also provides solutions that span the entire software lifecycle encompassing technical consulting, design, development, re-engineering, maintenance, systems integration, package evaluation and implementation, testing and infrastructure management service. In addition, the company offers software product for banking industry. Thus, this company is engaged in diversified services including design as well as technical consultancy, consulting. re-engineering, maintenance, systems integration as well as products for banking industry. 20. In view 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. " The direction of the Hon'ble DRP is in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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