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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 ..... RAMA RAO, ACCOUNTANT MEMBER For The Appellant : Shri P.Chandrashekar, CIT(DR) For The Respondent : Shri Sharath Rao, CA. ORDER Per INTURI RAMA RAO, AM : This is an appeal filed by the revenue directed against the order of the assessment order passed u/s 143(3) r.w.s. 144C of the Income-tax Act,1961 ['the Act' for short] for the assessment year 2010-11. 2. The revenue raised the following grounds of appeal: 1. "The directions of the Dispute Resolution Panel are opposed to law and facts of the case. 2. On the facts and in the circumstances of the case the Dispute Resolution Panel erred in law in directing the AG to exclude the expenditure incurred in foreign currency both from the export turnover as well as from total turnover for the purpose of computation of deduction u/s 10A, 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 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 di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me of hearing, it is prayed that the directions of the Dispute Resolution Panel in so far as it relates to the above grounds may be reversed. 13.The appellant craves leave to add, alter, amend and/or delete any of the grounds mentioned above." 3. Briefly, facts of the case are that the respondent-assessee is a company duly incorporated under the provisions of the Companies Act, 1956. The assessee-company is a wholly owned subsidiary of M/s.Broadcom Netherlands BV. The assessee- company is engaged in providing chip design, software development and system design constituting research and development activities and exporting the results of such R&D activities in the form of customized electronic data, computer hardware and computer software to its associated enterprises i.e. Broadcom International Ltd. Cayman Island. 4. Return of income for the assessment year 2010-11 was filed on 29/09/2010 declaring a total income of ₹ 83,87,525/- after claiming deduction u/s 10A to the extent of ₹ 11,61,21,985/-. The assessee-company also reported the following international transactions with its Associated Enterprises (AE): Descriptions Paid Received Purchases 326,743 - P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nies who have export sales less than 75% of the sales were excluded. • Companies with employee cost less than 25% of turnover were excluded. • Companies who have persistent losses for the last three years up-to and including FY 2009-10 were excluded. • Companies having different financial year ending (i.e. not March 31, 2010) or data of the company does not fall within 12 month period i.e. 01/04/2009 to 31/3/2010 were rejected. • Companies that are functionally different from the taxpayer were excluded. • Companies that are having peculiar economic circumstances were excluded. Appling the above filters, the TPO had rejected 11 out of 15 comparables selected by the respondent-assessee-company; accepted/rejected matrix of the comparables selected by assessee-company as under: Sl No Comparables Selected by the Taxpayer Remarks 1 Accel 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 empl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... LP) 120.73% of Operating cost 939,413,641 Price Received 863,235,687 Shortfall 76,177,954 Less: Sou moto TP Adjustment 8,291,511 Shortfall being adjustment u/s. 92CA: 67,886,443 The AO, after receipt of the TPO order passed the draft assessment order 07/03/2014 after incorporating the TP adjustment of ₹ 6,78,86,443/- and disallowing excess claim of ₹ 34,12,149/- u/s 10A on account of reducing telecommunication expenditure from export turnover. 7. The AO passed draft assessment order u/s 143(3) r.w.s.144C of the Act dated 7th March 2014 proposing the above addition of ₹ 6,78,86,443/- u/s 92CA and disallowing excess claim of ₹ 34,12,149/- u/s 10A of the Act. 8. Being aggrieved, objections were filed before the Hon'ble DRP. It was contended inter alia before DRP that the TPO was not justified in reducing 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 n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irected the TPO to re-compute margins of the comparables finally retained after giving effect to working capital adjustment. 9. The AO had passed the final assessment order u/s 143(3) r.w.s.144C(13) of the Act, dated 27/01/2015 giving effect to the directions of the Hon'ble DRP and thereby accepted the returned income. Being aggrieved, revenue is in appeal before us in the present appeal. 10. The revenue had raised 13 grounds of appeal. Grounds No.1, 11, 12 and 13 are general in nature and do not require specific adjudication. 11. Grounds No.2 and 3 challenge the direction of the DRP to exclude telecommunication expenses from the total turnover as well as export turnover. This issue is squarely covered in favour of the assessee-company by the jurisdictional High Court in the case of ACIT vs. Tata Elxsi (349 ITR 98) wherein it is held as follows: "From the aforesaid 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 pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 s. 10A, would be as under : Profits of the business of the undertaking x Export turnover (Export turnover + domestic turnover) total turnover 11. In that view of the matter, we do not see any error committed by the Tribunal in following the judgments 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 consonanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 acts, 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." Similar finding was recorded by the co-ordinate bench in the case of Ikanos Communication India Pvt. Ltd. in IT(TP)A No.137/2015 dated 10/11/2015. Respectfully following the decisions of the coordinate bench, we hold that this company cannot be included in the list of comparable and uphold the order of the DRP in deleting this company. 13.2 Persistent Systems & Solutions Ltd., The DRP deleted this company from the list of comparable 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that no segmental information was available. The relevant finding of the DRP is as under: 3.3.5 Having heard the objection, on perusal of the annual report, we find that no segmental information is available in respect of three segments. Hence, the TPO was not justified in retaining the above company as comparable. The company also need to be excluded other functional difference mentioned by the assessee, The Assessing Officer, is therefore directed to exclude the above company from comparable. The revenue had not brought any evidence on record rebutting the above factual findings of the Hon'ble DRP. Therefore, we have no option but to confirm the findings of the Hon'ble DRP. 13.4 Persistent Systems Ltd. and R S Software Ltd: The DRP deleted these companies from the list of comparables on the ground that no segmental information was available. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vs. ACIT - ITA No.7821/Mum/201; • Logica Pvt. Ltd. vs. ACIT - IT(TP)A No.1129/Bang/2011/TS-131-ITAT-2013-BANG-TP; • Sonata Software Ltd. ITA No.3514/Mum/2010-ITATMumbai; • Meritor LVS India P Ltd. ITA No.405 & 523/B/11 - ITAT Bengalure; • Bearing Point Business Consulting Pvt. Ltd. - ITA No.1124/Bang/2011-ITAT-Bengalure. The co-ordinate bench in the case of DCIT vs. M/s.Electronics for Imaging India Pvt. Ltd., [IT(TP)A No.212/Bang/2015 dated 24/2/2016] to which one of us viz., the Judicial Member was a party, also considered this company and held as follows: "19. We have heard the ld.DR as well as ld. AR and considered the relevant material on record. We note that in the case of Agnity India Pvt. Ltd Ltd. (supra), the Delhi Bench of the Tribunal has considered the comparability of this company and the findings of the Delhi Bench of the Tribunal has been 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 lev ..... X X X X Extracts X X X X X X X X Extracts X X X X
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