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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 ..... es functionally dissimilar with that of assessee need to be deselected from final list. Seven comparables have to treated as invalid comparables for the year under consideration, as stated earlier. We find that if the above referred seven comparables are not included in the final list, then the average margin of the assessee is within the range of (+/-)5%. Therefore, we hold that adjustment made by the TPO and confirmed by the FAA have to be deleted. - Decided in favour of the assessee. - I.T.A. No. 2392/Mum/2013 And I.T.A. No. 336/Bang./2013 - - - Dated:- 1-3-2018 - Sh. Rajendra, Accountant Member And Amarjit Singh, Judicial Member For The Revenue : Shri Jayant Kumar, Saurabh Deshpande For The Assessee : Shri Kartik Natarajan, H.P. Mahajani Order u/s. 254(1)of the Income- tax Act, 1961(Act ) PER RAJENDRA, AM - Challenging the order dated 22. 01. 2013 of the CIT(A)-IV, Bengaluru the Assessing Officer (AO) and the assessee have filed cross appeals for the year under consideration. Assessee-company is engaged in telecom software development services for telecom equipment manufacturers, carriers and service providers. It filed return of income on 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the issue in favour of the assessee and dismissed the appeal of the revenue. The Hon'ble High Court had followed its earlier judgement in the case of CIT v M/s Tata Elxsi Ltd. Others (2011-TIOL-684-HC-KAR-II). The Hon'ble High Court in the case of Tata Elxsi Ltd. Others had held that while computing the exemption u/s 10A, if the export turnover in the numerator is to be arrived at after excluding certain expenses, the same should also be excluded from the total turnover in the denominator. The relevant finding of the Hon'ble jurisdictional High Court reads as follows:- . . . . . . . . . . . Section 10A is enacted as an incentive to exporters to enable their products to be competitive in the global market and consequently earn precious foreign exchange for the country. This aspect has to be borne in mind. While computing the consideration received from such export turnover, the expenses incurred towards freight, telecommunication charges, or insurance attributable to the delivery of the articles or things or computer software outside India, or expenses if any incurred in foreign exchange, in providing the technical services outside India should not be inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urnover' is defined, and when the '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. Thus, there is no error committed by the Tribunal in following the judgements rendered in the context of section 80HHC in interpreting section 10A when the principle underlying both these provisions is one and the same . 3.9 The Hon'ble Mumbai High Court in the case of Gem Plus Jewellery India Ltd. (supra), in identical circumstances, held that since the export turnover forms part of the total turnover, if an item is excluded from the export turnover, the same should also be reduced from the total turnover to maintain parity between numerator and denominator while calculating deduction u/s 10A of the Act. The relevant finding of the Hon'ble Mumbai H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld lead to a situation where freight and insurance, though these have 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 turnover as a denominator in the formula. A construction of a statutory provision which would lead to an absurdity must be avoided. Moreover, a receipt such as freight and insurance which does not have any element of profit cannot be included in the total turnover. Freight and insurance charges do not have any element of turnover. For this reason in addition, these two items would have to be excluded from the total turnover particularly in the absence of a legislative prescription to the contrary - CIT v Sudarshan Chemicals Industries Ltd. (2000) 163 CTR (Bom) 596: (2000) 245 ITR 769 (Bom) applied; CIT v Lakshmi Machine Works (2007) 210 CTR (SC) 1: (2007) 290 ITR 667 (SC) and CIT v Catapharma (India) (P) Ltd. (2007) 211 CTR (SC) 83: (2007) 292 ITR 641 (SC) relied on 3.10 In the case of Sak Soft Ltd. (supra), the assessee was engaged in the business of exporting computer software and claimed deduction u/s 10B of the Act. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted that the matter could be decided on merits. AR supported the order of the ITAT. We find that in the case of IGate Global Solutions Ltd . (supra), the Tribunal has held that in a situation where a unit of the assessee company was found to be independent, its loss could not be adjusted against the profit of the other units for the purpose of computing deduction u/s. 10A of the Act. Here, we would like to refer to the case of Black and Veatch Consulting Pvt. Ltd. (348 ITR 72) and it reads as under: Section 10A of the Income-tax Act, 1961, is a provision which is in the nature of a deduction and not an exemption. The deduction under section 10A has to be given effect to at the stage of computing the profits and gains of business. This is anterior to the application of the provisions of section 72 which deals with the carry forward and set off of business losses. A distinction has been made by the Legislature while incorporating the provisions of Chapter VI-A. Section 80A(1) stipulates that in computing the total income of an assessee, there shall be allowed from his gross total income, in accordance with and subject to the provisions of the Chapter, the deductions specifie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Datamatics Ltd. 01.38 4 E-Zest Solutions Ltd. 36.12 5 Geometric Ltd. 10.71 6 Helios Matheson IT Ltd. 36.63 7 Ishir Infotech Ltd. 30.12 8 KALS Info Systems Ltd. (segment) 30.55 9 LGS Global Ltd. 15.75 10 Lucid Software Ltd. 19.37 11 Mediasoft Solutions Ltd. 03.66 12 Quintegra Solutions Ltd. 12.56 13 RS Software (India) Ltd. 13.47 14 R Systems International Ltd. (seg. ) 15.07 15 SIP Technologies Exports Ltd. 13.90 16 Thirdware Solutions Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble 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 when the search process was conducted, that it was engaged in 'e-business consulting services', which includesd web strategy services, IT Design services, technology consulting services and product development consulting services, that segmental break-up of RPT was not apparent from audited financials. The AR stated that Ishir Infotech Ltd. (IIL)had displayed business promotion expenses which worked out to 7. 72% of operating revenue, that it was out sourcing its work, that it had not satisfied the 25% employee cost filter, that that the profit margin of the comparable company was abnormally high. About Lucid Software Ltd. (LSL), he argued that from the website of comparable it was clear it was involved in development and sale of software products, that Segmental break-up of RPT was not apparent from audited financials. 5.1. He referred to the cases of NXP Semiconductors India Pvt. Ltd. (IT-TP-/1174/Bang/2011- AY. 07-08), 3DPLM Software S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 services or KPO, which are different from services provided by the assessee i. e. basic software development services. We have already held that the assessee was engaged in to software development services only. TSL was earning revenue from sale of licenses and subscription, that segmental break-up was not apparent from audited financials. As far as ATL is concerned it is found that it had reported Manufacturing and Trading sales income, that it was also providing training and educational services. We find that IIL had incurred business promotion expenses which worked out to 7. 72% of operating revenue and that it was out sourcing its work. The remaining comparables that have been objected to by the assessee are also functionally different from the assessee. They are not in the pure software development like the appellant. Therefore, we hold that above referred seven comparables should be excluded from the final list of the valid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omparable 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. the learned AO / TPO erred in rejecting certain comparables identified by the Appellant using 'employee cost greater than 25% of the total revenues' as a comparability criterion; d. the learned AO / TPO erred in rejecting certain comparable companies identified by the Appellant using turnover ₹ 1 Crore as a comparability criterion; e. the learned AO / TPO erred in rejecting certain comparable companies identified by the Appellant as having economic performance contrary to the industry behavior (e. g. companies which showed a diminishing revenue trend); and f. the learned AO / TPO erred in rejecting certain comparable companies identified by the Appellant on the ground that the comparables were having different accounting year (other than March 31 or companies whose financial statements were for a period other than 12 months). 8. The learned TPO erred in obta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 average mean margin of the software development services segment of the assessee was 12. 64% on total cost. After granting working capital adjustment of 2. 05%, the TPO computed the T. P. Adjustment of ₹ 20, 53, 68, 934 to the ALP of international transactions entered into by the assessee in the period relevant to Assessment Year 2008-09. 8.3 It was also submitted by the learned Authorised Representative that the following 7 companies are liable to be rejected as comparables as they are functionally different from the assessee, based on the decision of a co-ordinate bench of the ITAT, Bangalore in the case of 3DPLM Software Solutions Ltd. (supra);- i) Bodhtree Consulting Ltd; ii) e-Zest Solutions Ltd. iii) Persistent Systems Ltd. iv) Quintegra Solutions Ltd. v) Thirdware Solutions Ltd. vi) Softsol India L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 decision of the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra), we direct the Assessing Officer / TPO to omit this company from the final set of comparables as it is functionally different from the assessee in the case on hand, who is purely a software service provider. xxxx E-Zest Solutions Ltd. 16.1 This company was selected by the TPO as a comparable. Before the TPO, the assessee objected to the inclusion of this company as a comparable on the ground that it was functionally different from the assessee. The TPO rejected the assessee's objections on the ground that as per the information received in response to notice under Section 133(6) of the Act, this company is engaged in software development services and satisfies all the filters ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is 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 ₹ 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. xxxx 17.3. 1 We have heard both parties and perused and carefully considered the material on record. We find that a co-ordinate bench of ITAT, Bangalore in the case of 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09 has excluded this company from the set of comparables to a pure software development service provider since this company is functionally different as it is engaged in product development and earns revenue from sale of licenses and subscription. The relevant portion of the above order at para 15. 3 thereof is extracted hereunder :- 15. 3 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the material on record that the company is engaged in product developmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 product development and not software development services, it is functionally different and dis-similar and is therefore to be omitted from the list of comparables for software development service providers. The assessee has also brought on record details to demonstrate that the factual and other circumstances pertaining to this company have not changed materially from the earlier year i. e. Assessment Year 2007-08 to the period under consideration i. e. Assessment Year 2008-09. In this factual matrix and following the afore cited decisions of the co-ordinate benches of this Tribunal and of the ITAT, Mumbai and Delhi Benches (supra), we direct that this company be omitted from the list of comparables for the period under consideration ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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. Quintegra Solutions Ltd. be excluded from the list of comparables in the case on hand since it is engaged in proprietary software products and owns its own intangibles unlike the assessee in the case on hand who is a software service provider. 20.4.2 Following the decision of the co-ordinate bench of this Tribunal in the case of M/s. 3DPLM Software Solutions Ltd. (supra) for Assessment Year 2008-09, we direct the TPO to exclude this company from the list of comparables as it is functionally different being engaged in product engineering services and in R D activities which has resulted in the creation of its own IPRs, etc. whereas the assessee in the case on hand is a software development service provider. It ..... X X X X Extracts X X X X X X X X Extracts X X X X
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