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TMI Blog2018 (3) TMI 299X X X X Extracts X X X X X X X X Extracts X X X X ..... 392/Mum/2013: 2. First ground of appeal raised by the AO, is about adjustment made to export turnover on account of freight, telecommunication and insurance, on-site fees and marketing fees. During the assessment proceedings, the AO reduced the following items of expenditure from the export turnover: i) Freight, telecommunication and insurance expenditure of Bangalore Exempt Unit (Rs. 58. 28 lacs) ii) Bangalore Exempt Unit in Foreign exchange on providing technical services outside India (Rs. 12. 77 crores) iii) Chennai Exempt Unit on freight, telecommunication and insurance (Rs. 29. 32 lacs) iv) Chennai Exempt Unit on providing technical services outside India (Rs. 5. 30 crores) Aggrieved by the order of the A. O. the assessee preferred an appeal before the first appellate authority(FAA) and made the detailed submissions. After considering the assessment order and the submissions of the assessee, the FAA referred to the judgment of the Hon'ble High Court delivered in the case of Tata Elxsi Ltd. (2011-TIOL-684-HC-KAR-IT)and other cases relied on before him by the assessee. He held that assessee's case was squarely covered by the matter of Tata Elxsi Ltd. (supra). Accordi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... regarding what is to be excluded while arriving at the total turnover. However, while interpreting the provisions of section 80HHC, the courts have laid down various principles, which are independent of the statutory provisions. There should be uniformity in the ingredients of both the numerator and the denominator of the formula, since otherwise it would produce anomalies or absurd results. Section 10A is a beneficial section which intends to provide incentives to promote 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 section 80HHC, the export profit is to be derived from the total business income of the assxcessee, whereas in section 10-A, 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s the export turnover is a part of the total turnover. The export turnover, in the numerator must have the same meaning as the export turnover which is constituent element of the total turnover in the denominator. The legislature has provided a definition of the expression "export turnover" in Expln. 2 to s. 10A which the expression is defined to mean the consideration in respect of export by the undertaking of articles, things or computer software received in or brought into India by the assessee in convertible foreign exchange but so as not to include inter alia freight, telecommunication charges or insurance attributable to the delivery of the articles, things or software outside India. Therefore in computing the export turnover the legislature has made a specific exclusion of freight and insurance charges. 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 pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, the Special Bench held as under:- "For the above reasons, we hold that for the purpose of applying the formula under subsection (4) of section 10B, 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 appeals filed by the department are thus dismissed". 3. 12 In the light of the above judgements of the Hon'ble High Courts and the order of the Special Bench, we are of the view that the CIT(A) is justified in directing the Assessing Officer to exclude the above mentioned expenditure both from the export turnover as well as from the total turnover while calculating deduction under section 10A of the Act. Therefore, the order of the CIT(A) is correct and in accordance with law and no interference is called for. Respectfully following the judgements of the Karnataka and Bombay High Court and the orders of the Tribunal mentioned above, we dismiss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unal was right in holding that the deduction under section 10A in respect of the allowable unit under section 10A has to be allowed before setting off brought forwarded losses of a non-section 10A unit. " Considering the above, we dismiss ground nos. 3(i) and 3(ii) raised by the AO. ITA/336/Mum/2013: 4. The assessee has raised 8 grounds of appeal. Before us, the AR stated that the ground nos. 4 and 4. 1 only were to be adjudicated, pertaining to the transfer pricing (TP)adjustments. During the assessment proceedings, the AO found that the assessee entered into International Taxations (IT. s)with its Associated Enterprises (AE). He made a reference to the Transfer Pricing Officer (TPO) to determine the Arms Length Price (ALP) of the IT. s. 4.1. During the TP proceedings, the TPO found that assessee had selected 50 comparables and had used TNMM as the most appropriate method. The PLI adopted was operating profit/ operating cost. The arithmetic margin of the IT. s was 9. 95% as against the margin of 12. 82% of the comparables. The TPO rejected 42 comparables, out of the comparables selected by the assessee. He added new 8 comparables. The arithmetic mean of the 26 comparables of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ltancy services, that QSL incurred R&D expenses which worked out to 2. 18% of operating revenue for the year under appeal, that segmental break-up of RPT was not apparent from audited financials. Referring to the annual report of Thirdware Solutions Ltd. (TSL), he argued that apart from providing software development services TSL was involved in product development, trading in software and giving licenses for use of software, that it was difficult to bifurcate operating profits between product development and software development services. About Accel Transmatic Ltd. (Segmental)(ATL), he contended that it was not a pure software development services provider, that it had reported Manufacturing and Trading sales income, that it was also providing training and educational services, that it did not appear in databases when the search process was conducted, that segmental break-up of RPT was not apparent from audited financials, that the TPO had selected the comparable purely on the basis of information collected u/s 133(6); otherwise information was not available in public domain. With regard to E-Zest Solutions Ltd. (EZSL). EZSL, the AR argued that it did not appear in databases w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee in engaged in the business of software development, that it had adopted TNMM for benchmarking the IT. s, that the it had selected 50 comparables, that the margin shown by it was 9. 95%, that the average margin of the comparables was 12. 82%, that it claimed that the IT. s entered into by it were at Arm's Length, that the TPO rejected 42 of the comparables and added 18 new comparables while recommending TP adjustments, that the FAA excluded one comparable selected by the TPO, that he partly allowed the appeal of the assessee. The AR had stated that if seven of the comparables were taken out of the final list the assessee would be in safe zone. We would like to discuss the validity of each of the comparables that was objected to by the assessee. 6.1. We find that QSL is engaged in software services, that as per its Annual Report QSL was engaged in providing of computer hardware, software and business solutions, that the assessee had not incurred any R&D expenses, that it is not possible to deduce the break-up between hardware, software & consulting income of the comparable company(Ref. Pg. 290 of PB). We are of the opinion that services provided by EZSL were high-end ITES ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the software development services rendered by the assessee as proposed by the TPO in the order under Section 92CA of the Act. 3.1. Aggrieved by the order of assessment for Assessment Year 2008-09 dt. 27. 9. 2012, the assessee has preferred this appeal raising the following grounds :- xxxx 4. The learned AO / Transfer Pricing Officer ("TPO") have erred, in law and in facts, in making an addition of Rs. 20, 53, 68, 934 to the total income of the Appellant on account of adjustment in the arm's length price of the software development services transaction entered by the Appellant with its associated enterprise. xxxx 7. The learned AO / TPO have erred, in law and in facts, in rejecting certain comparables considered by the Appellant in the comparability analysis by applying different quantitative and qualitative filters: a. the learned AO / TPO erred in rejecting certain comparable companies identified by the Appellant where consolidated results had been used for analysis. b. the learned AO / TPO erred in rejecting certain comparables identified by the Appellant using 'onsite revenues greater than 75% of the export revenues' as a comparability criterion. c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns in the cited cases. xxxx 7.1 As per the T. P. Study carried out by the assessee, for the software development service segment, adopting TNMM as the Most Appropriate Method ('MAM') and taking itself as the tested party, the assessee selected a set of 23 companies as comparables with an average profit margin of 14. 84% on cost. The assessee's list of comparables, as per its T. P. Study, are as under :- xxxx Since the average profit margin of the assessee was 12. 64% on total cost, the assessee held its international transactions in the software development services segment to be at arm's length. 7. 2 The TPO, while accepting TNMM as the MAM, as adopted by the assessee, rejected the assessee's T. P. Study for various reasons and embarked on a fresh search, using the data bases, 'Prowess' and 'Capitaline. ' After issuing a show cause notice to the assessee proposing to adopt a fresh set of comparable companies and considering the objections of the assessee, the TPO selected the final list of 20 comparables, which are as under :- xxxx The average mean margin of the 20 comparable companies selected by the TPO was 23. 65% whereas the aver ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he same is contrary to the Annual Report of the company, as pointed out by the learned Authorised Representative. We also find that the co-ordinate benches of this Tribunal in the assessee's own case for Assessment Year 2007-08 (supra) and in the case of Triology E-Business Software India Pvt. Ltd. (supra) have held that this company was developing software products and was not purely or mainly a software service provider. Apart from relying of the above cited decisions of co-ordinate benches of the Tribunal (supra), the assessee has also brought on record evidence from various portions of the company's Annual Report to establish that this company is functionally dis-similar and different form the assessee and that since the findings rendered in the decisions of the coordinate benches of the Tribunal for Assessment Year 2007-08 (cited supra) are applicable for this year i. e. Assessment Year 2008-09 also, this company ought to be excluded from the list of comparables. In this view of the matter, we hold that this company i. e. KALS Information Systems Ltd. , is to be omitted from the list of comparable companies. It is ordered accordingly. " 11.4.2 Following the above dec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble to software development services and are therefore not comparable. Following the aforesaid decision of the co-ordinate bench of the Hyderabad Tribunal in the aforesaid case, we hold that this company, i. e. e-Zest Solutions Ltd. be omitted from the set of comparables for the period under consideration in the case on hand. The A. O. /TPO is accordingly directed. " 16.4.2 Following the above decision of the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra), we direct the A. O. / TPO to exclude this company from the list of comparables as it is functionally different from the assessee in the case on hand who is rendering purely software development services. It is ordered accordingly. 17. Thirdware Solutions Ltd. 17.1 This company was included in the list of comparables by the TPO in spite of the assessee's objections on the ground that its turnover was in excess of Rs. 500 Crores. Before us, the assessee objected to the inclusion of this company as a comparable for the reason that apart from software development services, it is in the business of product development and trading in software and licenses for the use of software. x ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion cited and placed reliance upon. We find that the coordinate bench of this Tribunal in the case of M/s. 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09 has held that this company has to be excluded from the list of comparables for software development service providers as it is engaged in software product development and the relevant observations of the order at para 16. 3 thereof is extracted hereunder :- "16.3 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the details on record that the company i. e. Lucid Software Ltd. , is engaged in the development of software products whereas the assessee, in the case on hand, is in the business of providing software development services. We also find that, co-ordinate benches of the Tribunal in the assessee's own case for Assessment Year 2007-08 (IT(TP)A No. 845/Bang/2011), LG Soft India Pvt. Ltd. (supra), CSR India Pvt. Ltd. (supra); the ITAT, Mumbai Bench in the case of Telecordia Technologies India Pvt. Ltd. (supra) and the Delhi ITAT in the case of Transwitch India Pvt. Ltd. (supra) have held, that since this company, is engaged in the software ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee in the case on hand. It is also seen that this company is also engaged in proprietary software products and has substantial R&D activity which has resulted in creation of its IPRs. Having applied for trade mark registration of its products, it evidences the fact that this company owns intangible assets. The co-ordinate bench of this Tribunal in the case of 24/7 Customer. Com Pvt. Ltd. (ITA No. 227/Bang/2010 dt. 9. 11. 2012) has held that if a company possesses or owns intangibles or IPRs, then it cannot be considered as a comparable company to one that does not own intangibles and requires to be omitted form the list of comparables, as in the case on hand. 18.3.2 We also find from the Annual Report of Quintegra Solutions Ltd. that there have been acquisitions made by it in the period under consideration. It is settled principle that where extraordinary events have taken place, which has an effect on the performance of the company, then that company shall be removed from the list of comparables. 18.3.3 Respectfully following the decision of the co-ordinate bench of the Tribunal in the case of 24/7 Customer. Com Pvt. Ltd. (supra), we direct that this company i. e. Qu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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