9911796707
TMI Blog2015 (8) TMI 1447X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 learned CIT(A) erred in directing the AO to compute deduction u/s 1OA 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. These grounds are with regard to exclusion of internet charges and travelling expenses incurred in foreign currency from export turnover without reducing the same from the total turnover, while computing deduction u/s. 10A of the Act. 5. According to the AO, as per the definition of export turnover given in clause (iv) to Explanation 2, the expenses incurred for freight expenses attributable to the delivery of the product or software outside India should be reduced from the export turnover. However, the provisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rated into a variety of platforms, including consumer and enterprise PCs, notebooks, workstations, mobile phones and game consoles. The assessee provides research and development services to NVIDIA International, from its Bangalore, Pune and Hyderabad facilities. It also provides marketing support services to NVIDA Singapore Pte. Ltd. NVIDIA India is compensated on a cost plus mark-up basis for the provision of research and development services to NVIDA International and marketing support services provided to NVIDIA Singapore. The details of segmental financials are as follows:- Description Research & Development Services (Software) (Rs.) Operating Revenues 208,44,86,068 Operating Expenses 183,33,97,561 Operating Profit/Loss 25,10,88,507 Op Profit on cost 13.70% 14. The issue raised by the Assessee in Grounds No.2 to 9 relates to the determination of Arm's Length Price (ALP) in respect of receipts by the Assessee from it's AE in respect of transaction of rendering software development services. In support of the claim of the Assessee that the price paid as above was at Arm's Length, the Assessee filed a Transfer Pricing analysis. The Assessee adopted TNMM ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... operating in nature and has to be considered as part of the operating profits for the purpose of computing profit margin of the Assessee. The AO passed fair assessment order in which the addition proposed by the TPO was added to the total income of the assessee. Aggrieved by the order of the CIT(A), the Assessee as well as the Revenue are in appeal before the Tribunal. 17. The first aspect that needs consideration is the computation of revenues from software development services. In ground No. 3 raised by the revenue, the revenue has challenged the order of the CIT(A) whereby he held that forex loss/gain is operating in nature and therefore has to be regarded as part of the operative income for the purpose of determining the profit margins of the Assessee as well as that of the comparable companies. It was the plea of the assessee before the CIT(A) that the TPO erred in not treating the foreign exchange fluctuation as part of the operating profits and adding the same to the income from software development services. The assessee specifically brought to the notice of the CIT(A) that the TPO while computing the operating margin, has not included the income from foreign exchange fluc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... H THE ASSESSEE WANTS TO BE EXCLUDED:- 22. Bodhtree Consulting Ltd.:- As far as this company is concerned, it is not in dispute that in the list of comparables chosen by the assessee, this company was also included by the assessee. The assessee, however, submits before us that later on it came to the assessee's notice that this company is not being considered as a comparable company in the case of companies rendering software development services. In this regard, the ld. counsel for the assessee has brought to our notice the decision of the Mumbai Bench of the Tribunal in the case of Nethawk Networks Pvt. Ltd. v. ITO, ITA No.7633/Mum/2012, order dated 6.11.2013. In this case, the Tribunal followed the decision rendered by the Mumbai Bench of the Tribunal in the case of Wills Processing Services (I) P. Ltd., ITA No.4547/Mum/2012. In the aforesaid decisions, the Tribunal has taken the view that Bodhtree Consulting Ltd. is in the business of software products and was engaged in providing open & end to end web solutions software consultancy and design & development of software using latest technology. The decision rendered by the Mumbai Bench of the Tribunal in the case of Nethawk Netw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tive that :- (i) the co-ordinate bench of this Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. in ITA No.227/Bang/2010 has held that a company owning intangibles cannot be compared to a low risk captive service provider who does not own any intangible and hence does not have an additional advantage in the market. It is submitted that this decision is applicable to the assessee's case, as the assessee does not own any intangibles and hence Infosys Technologies Ltd. cannot be comparable to the assessee ; (ii) the observation of the ITAT, Delhi Bench in the case of Agnity India Technologies Pvt. Ltd. in ITA No.3856 (Del)/2010 at para 5.2 thereof, that Infosys Technologies Ltd. being a giant company and market leader assuming all risks leading to higher profits cannot be considered as comparable to captive service providers assuming limited risk ; (iii) the company has generated several inventions and filed for many patents in India and USA ; (iv) the company has substantial revenues from software products and the break up of such revenues is not available ; (v) the company has incurred huge expenditure for research and development; (vi) the company has made arrange ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ia Pvt. Ltd. (supra). The following were the relevant observations of the Tribunal:- "(d) KALS Information Systems Ltd. 46. As far as this company is concerned, the contention of the assessee is that the aforesaid company has revenues from both software development and software products. Besides the above, it was also pointed out that this company is engaged in providing training. It was also submitted that as per the annual repot, the salary cost debited under the software development expenditure was Rs. 45,93,351. The same was less than 25% of the software services revenue and therefore the salary cost filter test fails in this case. Reference was made to the Pune Bench Tribunal's decision of the ITAT in the case of Bindview India Private Limited Vs. DCI, ITA No. ITA No 1386/PN/1O wherein KALS as comparable was rejected for AY 2006-07 on account of it being functionally different from software companies. The relevant extract are as follows: "16. Another issue relating to selection of comparables by the TPO is regarding inclusion of Kals Information System Ltd. The assessee has objected to its inclusion on the basis that functionally the company is not comparable. With refer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd., : The company operates in the segments of software development services which comprises of embedded product design services, industrial design and engineering services and visual computing labs and system integration services segment. There is no sub-services break up/information provided in the annual report or the databases based on which the margin from software services activity only could be computed. The company has also in its response to the notice u/s.133(6) stated that it cannot be considered as comparable to any other software services company because of its complex nature. Hence, Tata Elxsi Ltd., is to be excluded from the list of comparables. (ii) Flextronics Software Systems Ltd. : The learned TPO has considered this company as a comparable based on 133(6) reply wherein this company reflected its software development services revenues to be more than 75% of the "software products and services" segment revenues. Flextronics has a hybrid revenue model and hence should be rejected as functionally different. Based on the information provided under "Revenue recognition" in its annual report, it can be inferred that the software services revenues are earned o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on why the taxpayer is objecting to it. How the company is functionally similar in the earlier FY 2005-06 but the same is not functionally similar for the subsequent FY 2006-07 even when no facts have been changed from the preceding year. Thus the taxpayer is arguing against this comparable as the company was not considered as a comparable by the taxpayer for the present FY 2006-07." 21. We have heard the rival submissions and considered the facts and materials on record. After considering the submissions, we find that Tata Elxsi and Flextronics are functionally different from that of the assessee and hence they deserve to be deleted from the list of six comparables and hence there remains only four companies as comparables, as listed below:" 26. Following the aforesaid decision of the Tribunal, we hold that M/S.Tata Elxsi Ltd. should not be regarded as a comparable. 27. As far as Persistent Systems Ltd., a comparable by the Assessee in his TP study but was objected to by the Assessee before TPO as not comparable, this Tribunal in the case of IT(TP) A.No.108(Bang) 2014 order dated 12.12.2014 in the case of Yodlee Infotech Pvt.Ltd. Vs. ITO held as follows:- "5.12 ....... ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . ["PPPL"] was amalgamated with the assessee company w.e.f. 01.04.2007. Consequently the ownership of the property being land and building at Hyderabad belonging to PPPL vested with the assessee and was shown under the head "Fixed Assets". Consequent on amalgamation, the work-in progress in the books of the amalgamating entity as on 31.03.2007 along with expenses incurred by the assessee till 22.04.2007 was capitalized as addition to the block of the building in the fixed assets and depreciation was claimed. According to the work-in progress in the books of the amalgamating entity also included building that was put to use by the amalgamating company in financial year 2006-07. The AO therefore re-worked the value of the building after reducing the depreciation for the F.Y. 2006-07 allowed to the amalgamating company and accordingly, disallowed the claim of excess depreciation. 33. Before the CIT(Appeals), it was submitted that during the F.Y. 2006- 07, the construction of the building was not complete and the value of the building was shown as "capital work-in progress" in the balance sheet of PPPL as on 31.03.2007. The construction of the building was completed in the month ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en incurred by the NVIDIA India's Non-STP unit. The AO held that all the group companies may be benefitted due to increase in popularity of the brand and Company through marketing in India. Accordingly, without providing any other justification, he apportioned 15% of whole of the expenses of the Non-STP unit (i.e. expenditure on employees and operating and other expenses) amounting to Rs. 75,027,928 to the STP unit. With this apportionment, the profit of the Non-STP unit has been increased by Rs. 11,254,190 and profit of the STP unit has decreased by an equivalent amount. 38. The Assessee submitted that the software development activity is undertaken by NVIDIA India from its STP registered units at Bangalore, Pune and Hyderabad. The STP units are not engaged in any sales and marketing activities. On the other hand, the Non - STP unit at Bangalore is engaged in providing only marketing support services to its group companies overseas. In respect of this marketing support activity, the assessee has entered into a Service Representative Agreement with its group Company, NVIDIA Singapore. For these services, the assessee is remunerated on a cost plus basis. Under the agreement with NV ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tween STPI & Non-STPI units for the purposes of deduction u/s. 10A apportionment of expenditure can be made, but on very sound basis. I have considered the facts and circumstances of the case and I find the explanation of the assessee is selfcontradictory as the STPI unit at Pune has been apportioned a part of this expenditure at Rs. 6.76 lakhs, whereas no part of this expenditure has been apportioned to the Bangalore & Hyderabad units. There is definitely some substance in the finding of the AO that such expenditure benefits all the group companies including the STPI units in India on account of increase in popularity of the brand and company via marketing, advertising and promotion of group products by way of trade shows, exhibitions and product presentations. Thus, in my view, the expenditure incurred requires to be apportioned among all units in India as debiting large part of the amount to the Non-STPI unit results in the serious distortion of profits among the STPI units. But I find that the AO has apportioned, on adhoc basis, a part, only to the Bangalore STPI unit. To add a sound basis to the apportionment the AO is directed to apportion the entire expenditure claimed by th ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
