9911796707
TMI Blog2017 (11) TMI 1758X X X X Extracts X X X X X X X X Extracts X X X X ..... 6 is against the order of CIT(A) restricting the additions made by AO/Transfer Pricing Officer (in short TPO) making transfer pricing adjustments to the value of the international transactions in respect of assessee's transactions in Information Technology (in short IT) Software and IT Enabled Services (ITES). For this Revenue has raised following ground No.1: - "1. On the facts and in the circumstances of the case and in law, the ld CIT(A) erred in deleting the addition of Rs. 16,06,265,520/- made on account of Transfer Pricing adjustment by TPO to the value of the international transactions of the assessee in respect of IT enabled services and software development services." 3. The assessee has also raised the issue in its CO for AY 2005-06 regarding non-allowance of working capital adjustment and risk adjustments by the following ground Nos. 4 & 5: - "4. The learned CIT(A) has erred in not adjudicating on the contention of the Respondent that the benefit of the working capital adjustment should be allowed to the Respondent, which is required to be undertaken in its case to account for the difference in working capital levels between the comparable companies (as identified b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ational Corporation Limited -2.15% 6. Mercury Outsourcing Management Limited -36.94% 7. Nucleus Netsoft and GIS (India) Limited 41.33% 8. Spanco Telesystems and Solutions Limited 13.07% 9. Transworks Information Services Limited 2.09% 10. Vishal Information Technologies Limited 45.62% Arithmetic Mean 12.87% The TPO out of 10 comparables selected by the assessee rejected 6 comparables. The TPO also introduced 6 more additional comparables and accordingly, he selected the final set of comparables for computing the arm's length operating margin of ITES as under: - Sr. No. Name of the Company Operating Margin 1. Allsec Technologies Limited 28.58% 2. Tulsyan Technologies Limited (Cosmic Global) 18.75% 5 Saffron Global Limited 24.91% 4. Vishal Information Technologies Limited 51.26% 5. Ace Software Exports Limited 21.11% 6. Nucleus Netsoft & GIS Limited 45.31% 7. Asian Cere Information Technology Limited 37.40% 8. Airline Financial Support Services (India) 27.70% 9. Goldstone Teleservices Limited 15.95% 10. Wipro BPO Solutions Limited 23.37% Arithmetic Mean 29.43% 5. Accordingly, the TPO arrived at the arms length ope ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ples of natural justices does not require that, where the assessee is permitted to selectively review its selection process and reject comparables chosen by it initially, the revenue should also be given an opportunity to examine all the comparable particularly when assessee had rejected 192 companies On account of insufficient financial information initially and whose data are now available." It means that the above six companies are under dispute now, which we will adjudicate. 8. First we will deal with the CS Software Enterprise Limited. The TPO has rejected the company for the reason that it is engaged in providing both IT software development as well as ITES. According to TPO, the annual report of the company does not provide separate segmental data in respect of the ITES and in the absence of segmental data the company cannot be selected as comparable company. Further, according to TPO, the company is more towards engineering, design, education publications, drawing conversation, power transmission distribution. Accordingly, TPO rejected the company as comparable. The CIT(A) after going through the submissions of the assessee accepted this company as comparable vide Para 11 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns is disclosed at Rs. 8.66 crores. Here again, there is no breakup of the same into IT Software Services and ITES activity. He stated that the assessee has filed only a few pages of the Annual Report but the complete annual report of this company is available at page of 160 of the Revenue's Paper Book, to which attention was drawn. At page 197 of the revenue's Paper Book, the company's principal service is shown as computer software and not BPO activity. Further he argued that at page 192 of the Revenue's Paper Book, the details of operating expenses are disclosed and out of total operating expense of Rs. 7.86 crores, Rs. 3.46 cores is on account of outside costs on account of data entry and machinery hire. Thus, it appears that this company is essentially performing the activity through outsourcing and does not perform the work on its own. Even the ratio of salary costs to total cost is only 17%. In view of these facts, viz., the fact that the company is engaged in both IT Software Services and ITES activity and separate data relating to the same are not available as well as the fact that company fails the salary filter and has a different model, the same should b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngs. He referred to the fact that the company which exports services but raises invoices for the same in INR (Indian Rupees), may or may not disclose any information under the head of disclosure of earnings in foreign exchange. Further, he argued that this company should be accepted as comparable for the simple reason that functional comparability which was accepted by the CIT(A) and not disputed by the Departmental Representative, is clear from the MDA Report under the head Key Strengths of the company and from there it is clear that the company is leading IT/BPO service provider with a clear focus on specific verticals and business process areas. He explained that industry analysis in MDA report describes about the current trends in IT/BPO Service Industry and this is clear indicator that the company operates in IT/BPO services industry and further, CS Software Limited had laid out aggressive points for leveraging its extensive experience gained in domestic BPO sector and focused in marketing and business on the global IT/BPO market from the above factual position. 11. In view of the above facts, we are of the view that the company is into ITES and not in software development as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the relevant segment are only 16.40 crores during the relevant year. The assessee, on the other hand, has a turnover of Rs. 270 crores in the relevant segment. Therefore, it appears that even in terms of size, this company is not comparable to the assessee. It is also observed that as part of Schedule L to the P&L Account at page 389 of assessee's Paper Book, the details of operating costs are given. During the previous year, the assessee has written off significant project expenditure as part of Operating cost. This shows that part of the work is performed through outside sources. For all these reasons, this company deserved to be rejected as a comparable. 14. On the other hand, the learned Counsel for the assessee explained that CIT(A) accepted this company as comparable for the reason that the services rendered by the company qualify as ITES as per CBDT notification and further the TPO accepted another company Nucleus Netsoft which is engaged in similar services. The learned Counsel stated that the additional argument put forth by the learned DR regarding functional comparability which was accepted by the CIT(A) and new argument that the CIT(A) ought not to have retain thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the details from which it is evident that these appears as downloaded much later in 2009 and in fact, does not form part of the documents filed before the TPO. Further, a reference to the annual report for F.Y 2005-06 in the same case shows that this company is engaged in many functions such as development of applications, systems software and BPO operations. The same can be referred to Revenue's Paper Book page 615. Separate details of the same are not available. Further, the total turnover of this company is only Rs. 61 lakhs during the relevant period resulting in a loss of 36.94 %. Therefore, even in terms of level of operations, this company cannot be compared to the level of assessee's activity. The ClT(A)'s decision is not supported by any material on record. Hence, the action of the CIT(A) in including this comparable should be rejected as the facts on record are totally contrary. 17. On the other hand, the learned Counsel for the assessee argued that it is on the part of the Revenue / TPO holding the company engaged in providing system software services. He referred to the website of the company from where it is very clear that the company is engaged in ITES/ BPO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that the TPO himself has introduce low turnover comparables in the final state of comparables i.e. Asian Cerc Information Technology Limited having turnover of Rs. 1.70 crores, Tulsyan Technoliges Ltd having a turnover of Rs. 1.90 crores, which are referred at pages 21 and 17 of the TP order. According to him, in view of the decision of the Hon'ble Bombay High Court in the case of CIT vs. Maersk Global Services Centre (India) Pvt. Ltd (ITA No: 692, 693/Mum/2012), the same should be rejected and this company should be accepted as comparable. The learned Counsel for the assessee also stated that the decision of Hon'ble Bombay High Court in the case of Pentair Water India Pvt. Ltd. vs. CIT in ITA No. 18 of 2015 dated 16-09-2015 for applying turnover filter cannot be of any assistance since in that case the applicability of the turnover filter was in dispute from the TP assessment stage itself, whereas in the present case neither the assessee nor TPO / AO applied any such filter at the assessment stage and hence, Revenue cannot be aggrieved now. 18. After hearing both the sides and going through the above submissions and arguments, we are of the view that in such circumstances, when ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company is part of assessee's set of comparables and the same was rejected by the TPO on account of RPT but the CIT(A) reintroduced the same for the reason that the RPT was less than 25%. In this connection, Ld CIT-DR argued that if the said comparable was to be included in the final set, only the margins relating to the international call centre should be considered. He stated that this company is engaged in multiple activities and segmental details are available at page 420 of assessee's Paper Book. He argued that this company provides both international call center services as well as domestic call centre services. The profitability of this company in the international call center segment alone is to be considered, as the assessee's controlled transaction on account of ITES services are cross border transactions. It appears that the assessee has taken the combined margins of this Company pertaining to both the international and domestic segment. Profitability in the domestic segment is not comparable to the assessee's activity on account of different in the geographic market and the consequent differences in the economic circumstances. Hence, according to Ld CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce, the Spanco Telesystems and Solutions Limited is engaged in other activities and separate segmental details are available for call centre activities, which are in the nature of ITES and the same alone has been considered by assessee for comparability analysis. As regards to the argument that only the margins of international call centre should be considered for the purpose of comparability, it was argued that Revenue's contention now contradicts TPO's position of applying an export earning filter of 12.5% for the reason that now DR is contending that only companies which have 100% export earnings should be considered as comparable. Finally, the learned counsel stated the factual position of export earnings of Spanco Telesystems and Solutions Limited in the call centre services segment (international/domestic) which is at 47% of Revenue i.e. Rs. 488542,675/-. 23. We have gone through the facts in entirety and notice that the Spanco Telecystems and Solutions Limited made the export earning filter of 12.5% for call centre activities. DR now, could not be allowed to argue that within the call centre segment only the international centre segment should considered. According to us, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it during the year, the business model of this company is different from that of the assessee. This company is an entrepreneur and it is evident from its P&L account at page 428 of assessee's Paper Book wherein marketing and business development expenses of Rs. 2.56 crores are separately disclosed. He further explained from note no. 12 of Schedule 18 - Notes to accounts, that the payment is to its wholly owned subsidiary for rendering of marketing services. Thus this Company provides services to its end customers in US market and bears the necessary risk in this regard whereas, the subsidiary is reimbursed the costs plus a fixed mark-up for its marketing service. The business model in the case of the assessee is entirely different as the assessee is paid a service fee whereas the AE retains the balance profits earned. Therefore, in terms of business model, this company is not comparable to the assessee. He also pointed out that there has been an amalgamation of this company with its subsidiary during the year. The relevant facts are disclosed at Note 2 to Schedule 18 - Refer page 437 of assessee's Paper Book. As the amalgamation has taken effect during the year and the same ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny underwent an amalgamation during the year, the learned counsel stated that as per notes on accounts at point No. 2(ii) the subsidiary company which merged into Transworks Information Services Limited is engaged in similar business operations as that of Transworks Information Services Limited. This merger would not have any impact on the function comparability of Transworks Information Services Limited. The learned Counsel for the assessee relied on the decision of Mumbai Tribunal in the case of Whillis Processing Services (India) Private Ltd in ITA No. 6877/Mum/2012 for Y 2008-09. Further, as regards to the software development services segments, the learned counsel argued that the TPO himself proposed to introduce one comparable i.e. Exensys Software even though there was an amalgamation of another company Holool India with the company during the year under consideration. To support this, he argued that while this company has eventually rejected by the CIT(A), primarily on the basis that it was engaged in BPO activities and software product, the above Act of the TPO shows that he did not consider merger as reason to reject the comparable. The second contention that the company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Information Technologies Limited, wherein data of employee cost of total revenue is Rs. 19,70,458/- by Rs. 20,82,33,000/-. He referred to the order of CIT(A), wherein he has rejected one of the TPO's comparable i.e. Tulsyan Technologies Limited on the basis that employees cost is to the extent 14.73% of sales and hence, the company fails to employees cost filter of 25%. The learned Counsel for the assessee relied on the decision of Mumbai Tribunal in the case of GlobeOp Financial Services India Pvt. Ltd in ITA No. 1610/Mum/2011 for AY 2005-06. The relevant para 27 to 28 reads as under: - "27. We have considered the submissions of the parties and perused the material available on record. On analysis of facts placed on record, it is noticed that personnel cost incurred by Vishal Information Technologies Ltd. during the year constitutes 1.38% of the total cost. Whereas, the personnel cost incurred by the assessee constitutes 56.94% of the total cost. This fact proves that this company is not carrying out the ITES activities on its own but is employing third party vendors to carry out the work on behalf of the customers, thus, this company is acting as a mere intermediary between its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns Limited 6.93% 14. RS Software (India) Limited 7.92% 15. Sasken Communication Technologies Limited 16.16% 16. Sasken Networks Systems Limited 16.19% 17. Satyam Computer Services Limited 28.79% 18. SIP Technologies an Exports Limited 31.74% 19. VJIL Comsulting Limited 6.68% 20. VMF Softech Limited 36.51% Arithmetic Mean 15.92% 32. Out of the comparables selected by the assessee, the TPO rejected 12 comparables for various reasons and introduce 8 additional comparable companies and finally selected the following 19 comparables. Sr. No. Name of the Company Operating Margin 1. Bodhtree Consulting Limited 24.85 2. Akshay Software Technology Limtied 7.72 3. Lanco Global Systems Limited 13.78 4. Exensys Software Solutions Limited 70.68 5. Sankhay Infotech Limited 27.35 6. Sasken Networks Systems Limited 16.64 7. Gebbs Infotech Limited 16.52 8. VJIL Consulting Limited 6.68 9. Foursoft Limited 24.70 10. Thirdware Solutions Limited 66.11 11. Geometric Software Solutions Limited 20.34 12. Tata Elxsi Limited (Segmental) 24.35 13. Visulsoft Technologies Limite (segmental) 23.52 14. Sasken Communication Technologies L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cted by TPO but wrongly accepted by CIT(A) even though related party transaction was found to be less than 25%. In this connection, he stated that the margin of this comparable has been wrongly considered by the CIT(A) and the assessee at 18.83%. The actual margin in the software segment is 28.62%. The detailed working in this regard can be referred to at page 687 of Revenue's paper book. Hence, he stated that the corrected margin of 28.62% alone may be considered for the purpose of benchmarking the transactions. 36. The learned Counsel for the assessee argued that the filters adopted by TPO should be applied consistently and since the percentage of related party transactions of the company is only 21.64%, the CIT(A) has rightly accepted this company as comparable for the reason that this company does not fail to 25% related party transaction filter applied by TPO. The learned Counsel stated that Departmental Representative has only made contentions that the operating margin of the company has to be taken at 28.62% instead 18.83 as considered by the assessee and accepted by CIT(A). The learned Counsel for the assessee referred to Revenue's paper book at page 687. He argued that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on accrual basis. Since the company has earned its entire revenues for the year from export activities, this company should be selected as comparable." Aggrieved, Revenue is in second appeal before Tribunal. 39. Before us, the learned CIT Departmental Representative argued that this comparable was rejected by the TPO but reinstated by the CIT(A) for the reason that it had adequate foreign exchange income. The Balance Sheet of this company can be referred from page 2 onwards of the Revenue's Paper Book. A reference to the same indicates that during the previous year, there has been an extraordinary event in the form of Acquisition. This company has acquired a subsidiary in US and the effective date of acquisition of the same is 101h February 2005. Since the CIT(A) has rejected other companies for similar reason, it is submitted that for this reason alone the comparable ought to be rejected. Further, details of its revenue and expenditure are discussed at page 13 of Revenue's Paper Book as part of management discussion. It is stated that the revenues are generated from offshore technical solutions as well as consultancy services. Though the CIT(A) states that the entire re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company has earned hundred percent of its Revenue from export of software services. Even the management discussion and analysis under the head risks and in exports software services states the same. This is given at page 242 of the assessee's paper book. Further, according to the learned Counsel under the head Revenue and explained it is clearly stated that the company's revenue is generated principally from offshore technical solutions limited and consulting services, which are given at page 244 of the assessee's paper book. The learned Counsel for the assessee argued that the TPO / Revenue himself mis-understood by placing reliance only on disclosure of earnings in foreign currency in Para 12 (C of the notes to accounts), which are given at page 245 of the assessee's paper books. On this portion it was concluded by Revenue that the company fails on the export earning filter. It was explained by the learned Counsel that it is clearly stated in the disclosure that the amounts have been reported on receipt basis and hence, the said disclosure does not reflected totally on foreign exchange earnings reported by the company during the year. As regards to the new argument raised by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... td. is comparable to the assessee. As could be seen, the Transfer Pricing Officer had rejected this company solely for the reason that its foreign exchange earning is less than 25%. However, the learned Commissioner (Appeals) has given a factual finding by referring to the annual report of the company that the entire software and service income is earned through exports. As the aforesaid factual finding of the learned Commissioner (Appeals) has not been controverted by bringing cogent evidence on record, we are unable to disturb the findings of the learned Commissioner (Appeals)." In view of the above, we are of the view that CIT(A) has rightly accepted this as comparable and hence, this issue of Revenue's appeal is dismissed. 42. The next comparable is RS Software (India) Limited. The facts relating to the issue are that the TPO rejected this company only for the reason that the entire net worth of the company is negative. Aggrieved, assessee preferred the appeal before CIT(A). The CIT(A) after considering the submissions of the assessee accepted this as comparable by observing as under: - " view of the above, the appellant submitted that R S Software should be considered as a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that is a mandatory requirement under Rule 10B(2) of the IT Rules 1962. A company whose net worth is eroded cannot be considered as a comparable to a company having sufficient capital base. Hence, this case deserves to be rejected. 44. On the other hand, the learned Counsel for the assessee argued that the TPO has not applied any filter for rejecting the companies having negative net worth, but has only applied persistent losses filter for selection of comparables. He argued that this company RS Software (India) Limited has earned positive operating profits of 7.95% in the year under consideration and the company is not a persistent loss making company. Learned Counsel for the assessee distinguished the case law of the Hon'ble Delhi High Court referred by the learned CIT Departmental Representative in the case of Michael Aram Exports Pvt. Ltd. Vs ITO (2013) 40 taxmann.com 21 (Del) and argue that the dispute in the case before Hon'ble High Court, there was persistent loss making at had incurred losses in the current years as well as in earlier years. The learned Counsel for the assessee also relied on the decision of Delhi Tribunal in the case of Qualcomm India Pvt. Ltd (ITA No. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... development with Rs. 87,31,45,219/- computer software development (domestic) worth Rs. 4,11,26,112/- and from computer software maintenance and others at Rs. 14,35,833/-. Hence we find that the company has more than 99% of the total revenue from comparable activity of software development services. The Ld. A.O/TPO was thus not justified in rejecting R.S. Software as comparable. While setting aside this action of the A.O/T.P.O we direct them to consider R.S. Software as comparable for F.Y. 2005-06 to determine ALP in the case of assessee. " 45. In view of the above facts and circumstances, we are of the view that in these year RS Software (India) Pvt. Limited has earned positive profits of 7.92% in the year under consideration and company is not persistent loss making company and hence, we direct the AO to consider this as comparable as accepted by CIT(A). We find no infirmity in the order of CIT(A). 46. The first inclusion asked by the Revenue in the software development segment is Tata Elxsi Limited. The TPO included the company in the set of comparables for the software services segment for the reason that this company is engaged in providing software services. The assessee ob ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and Services segment comprises of following three segments: - "1. Product Design services 2. Design engineering services and 3. Visual computing labs. " For this the learned Counsel for the assessee referred to pages 339 and 343 of the assessee's paper book. The learned Counsel for the assessee explained that the description of design and engineering services provided by the company, which mentioned that the company applies latest digital styling and CAD / CAM tools to enable manufacturer to optimize product concepts, which are given at pages 341 of the assessee's paper book. Further, the description of visual compute lab services provided by the company states that it provides animation (3D/2D) special effects and games services to its customers worldwide. This is given at page 343 of the assessee's paper book. From the above argument of the learned Counsel for the assessee it is clear that software development and services segment of the company includes both software services as well as ITES enabled services and further segmental breakup is available for soft services. In our view, in the business of separate segmental data for software services, the company cannot be co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny in a set of comparable for the software services segment of the assessee for the reason that this company is engaged in providing software services. The assessee contested that in view of the annual report of the company, it is engaged in the business of software services, ITES and software products but the TPO included this company in the set of comparables. Aggrieved, assessee preferred the appeal before CIT(A). The CIT(A) excluded this company from its comparable by observing in Para 39.3 as under: - "39.3 I have gone through the submissions and made by the AR of the Appellant and the Annual report of the company. On analysis of the annual report of the company, it is evident that the company is engaged in the business of software services, IT enabled services and software products. Further, no break up is available to determine the operating margins earned from software services alone, The TPO has himself rejected companies where separate segmental data is tint avai1ihJ for the software services, software products and IT enabled services segments. Accordingly, it is not proper to select this company as comparable on the grounds of consistency." Aggrieved, Revenue came in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oup entities including oversee subsidiaries based in USA, Singapore, etc. He referred to page 266 to 326 of Revenue's paper book. Further the learned counsel stated that the consolidated financial have been prepared based on USA GAAP accounting principles and hence, cannot be consistent with the treatment prescribed under the Indian accounting standards. He also relied several references in the annual report of the company which shows that the company derives Revenue's from both the software services and sale of software products, he referred to managing directors note to the shareholders under the head of products, wherein it is stated that the company begin as product company, this is referred to page 332 of the assessee's paper book. Even in the P&L account under the head of income, the company has represented revenues from the sale of software packages and services, which are given at pages 334 of assessee's paper book. According to him, even the breakup of revenue from software services and software product is not available in the standalone financial statement of this company and hence, the company is not comparable. We find from the above facts and arguments that this compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vailable of the income earned by the company from the software services alone. The TPO has himself rejected companies where separate segmental data is not available in respect of the software development services and software products. Accordingly, this company is not fit to be selected as a comparable." Aggrieved, Revenue preferred the appeal before Tribunal. 53. The learned CIT Departmental Representative argued that this company is predominantly a software service company as its products revenues are not significant, which are approximately 15%. On the other hand, the learned senior Counsel argued that from the various disclosures made in the Annual Report which indicates for the company is more engaged in the business of software services as well as software product and no segmental bifurcation is made available. He referred to the directors referred under the head growth, it is mentioned that the company is a technology company that develops innovative software products and also provides IT consultancy services. The learned Counsel has referred to the pages 317 of the assessee's paper book. According to him, further, the directors report under the head products it is mention ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2005-06 vide ground No. 4 and 5, reproduced above, before us, both the parties conceded that the issue can be remitted back to the file of the AO in term of the Tribunal's decision in the case of Qualcomm India Pvt. Ltd. Vs. ACIT in ITA No. 5239/Del/2010 for AY 2006-07 vide order dated 10-06-2013, whereby Tribunal has remanded the matter to examine the following: - "41. Considering the above submissions we concur with the submission of the Ld. DR that the issue raised in ground No. 6 & 7 on account of working capital adjustment and risk adjustment depend upon the fact and circumstances of each case. But at the same time we are of the view that these factors are equally important to consider while selecting comparable companies. In the present case the assessee is engaged in the business of software development and providing marketing services, hence there is no dispute that appropriate adjustment to account for difference in working capital employed by the assessee vis. a vis. the comparable companies for software development services is required to be considered. Similarly making of suitable adjustments to account for differences in the risk profile of the assessee vis. a vis. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red in holding that the amount of reimbursement expenses (except the telecommunication charges of Rs. 17,56,42,618/-) should not be excluded from the export turn over for the purpose of computing the deduction u/s 10A of the IT Act 1961." 60. At the outset, it is noticed that these two interconnected issues are fully covered by Tribunal's decision in assessee's own case for AY 2002-03 and 2003-04 in 4541/Mum/2008 and ITA Nos. 5029/Mum/2008, wherein tribunal adjudicated the issues as under: - "29. We have heard the learned representatives of the parties and perused the record. The controversy in the case under consideration is in respect of method of accounting followed by the assessee in respect of reimbursement of expenses. In simple words the issue is that whether amount of reimbursement of expenses to be included in eligible business profit as well as in export turnover in the year of receipt of such amount for the purpose of computation of deduction under section 10A of the Act. To appreciate method of accounting in respect of reimbursement of expenses, we would like to go through relevant accounting entries to be passed in books of account. There are two ways of passing acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 10A of the Act, only profits, if any, relating to such reimbursable expenses should be considered as being not eligible for deduction u/s 10A of the Act. Further, same should not part of total turnover and export turnover. 29.1 The CIT (A) has decided the issue related to Reimbursement of telecommunication charges against assessee. To examine this issue we would like to refer Explanation 2 of section 10A which defines certain terms for the purpose of section 10A "Export Turnover" has been defined in the said Explanation 2 to section 10A under clause (iv) which reads as under: "(iv) "export turnover" means the consideration in respect of export (by the undertaking) of articles or things or computer software received in, or brought into, India by the assessee in convertible foreign exchange in accordance with sub-section (3), but does not include 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;" 29.2 Sub-section (4) of section 10A refers about profits of the business relating to export tur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rnover" under the existing provisions, means the sale proceeds (excluding freight and insurance), receivable by the assessee in convertible foreign exchange. In other words, FoB value of exports. The Finance Act, 1990 has restricted the definition of the term "Export turnover" to mean FoB sale proceeds actually received by the assessee in convertible foreign exchange within six months of the end of the previous year or within such further period as the Chief Commissioner/Commissioner may allow in this regard." 29.5 On the basis of the above material and discussion, it can be said that only those freight, telecommunication charges or insurance attributable to delivery of goods out of India are to be considered while reducing from consideration received in convertible foreign exchange. Thus if such expenses are not attributable to delivery of goods outside India, such expenses are not required to be deducted from the consideration. One more aspect which is required to be considered here is that the consideration received in convertible foreign exchange is including such expenses. If such expenses are not included in the consideration received in convertible foreign exchange, deduct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd not for the consideration received against freight etc. All the assessee should get deduction under section 10A on consideration received against supply of goods at FoB. Therefore, the condition of delivery of goods at FoB has been put and the definition of export turnover as provided in clause (iv) of Explanation 2 to section 10A is required to be interpreted accordingly. 29.6 The definition of 'export turnover' can be summarized in the following formula: Particulars Amount The consideration in respect of export (by undertaking) of articles or thing or computer software received in or brought in to India by the assessee in convertible foreign exchange in accordance with sub-section (3). xxxxxxxxx Less : (1) Following expenses attributable to the Delivery of articles or things or Computer software outside India (if same are included in above consideration) (i) freight x (ii) Telecommunication charges x (iii) Insurance or x xx (2) Expenses, if any, incurred in foreign Exchange in providing technical services outside India xxx Export Turnover Xxxxxxxxxx 29.7 In the light of above discussions the facts and quantum of expenditures are required to determine afte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d from the export turnover of the undertaking, the same should also be reduced from the total turnover of the undertaking on the principles of parity for the purpose of computation of deduction under section 10A of the Act. In view of these observations, the CIT(A) allowed the claim of the assessee. Aggrieved, Revenue is in second appeal before Tribunal on both the issues. 63. After going through the order of Tribunal for AY 2002-03 and 2003-04, we are of the view that the Tribunal on considering similar facts for AY 2002-03 and AY 2003-04 allowed the deduction under Section 10A of the Act in respect of receipts of reimbursable expenses in Accenture's own Case for AYs 2002-03 and 2003-04. We find that the ITAT for AY 2003-04 has remanded the matter back to the learned AO for verification of quantum of expenditure incurred in respect of reimbursement on account of telecommunication charges (with needs to be adjusted from the export turnover). However, for the subject year under consideration. Accenture, while calculating its export turnover, has suo-moto excluded the reimbursement on account of telecommunication charges. From the above facts and circumstances, we are of the vie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... should be followed as regards the payment made by the assessee under the abovementioned agreement and income of the foreign recipient entities under the same agreement has been offered to tax in India. Hence, expenses should be allowed as deduction under Section 37(1) of the Act and he allowed the deduction in respect of amount payable under ISA under Section 37(1) of the Act. 67. We find from the facts of the case that the Tribunal agreeing to the findings of the CIT(A) have allowed the deduction on the amounts payable under ISA under Section 37(1) of the Act to Accenture for AY 2002-03 and AY 200304 on the following basis:- "7. We have heard the learned representatives of the parties and perused the record. The claim of the assessee is under 37(1) of the Act. In order to claim deduction of expenditure u/s 37(1) of the Act, the following conditions should be satisfied: i) The expenditure in question should not be of the nature described under the specific provisions of section 30 to 36. ii) the expenditure should not be of the nature of capital expenditure iii) It should not be a personal expenditure. iv) The expenditure should have been laid out or expended wholly and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the AO in connection with the amount paid by the Assessee to the Accenture Organization International Services Agreement (ISA)." We find that this issue is squarely covered and hence, this issue of Revenue's appeal is dismissed. 70. The next issue in Revenue's appeal in ITA No. 4099/Mum/2009 for AY 2004-05 is as regards to deletion of upward adjustment of Rs. 70,98, 354/- made by the TPO in respect of international transaction related to employees share purchase plan (ESPP) expenses. For this Revenue has raised following ground No.4 & 5: - 4. On the facts and in the circumstances of the case and in law, the Id. CIT(A) erred in deleting the upward adjustment of Rs. 70,98,354/- made by the TPO in respect of International transactions relating to ESPP expenses.: 5. On the facts and in the circumstances of the case and in law, the Id. CIT (Appeals) erred in deleting the upward adjustments of Rs. 70,98,354/- made by the TPO." 71. The facts are that the TPO and AO has disallowed the deduction in respect of amounts payable in connection with ESPP during AY 2004-05 by adopting the same basis/ arguments as were raised on this issue by the AO in AYs 2002-03 and 2003-04, which is summ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the employees of the appellant at the behest of the appellant. It is an expense incurred by the appellant to retain, motive and award its employees for their hard work and is akin to the salary costs of the appellant. As has been pointed out by the appellant, this is a common practice to retain and motivate hard-working employees which is being followed by all major companies such as Infosys. Further, the amount that has been claimed by the appellant is the difference in the market price of the shares of Accenture Ltd and the exercise price of such shares by the employees of AIPL and not the entire share price of the shares allotted. Further, such shares have not been issued out of the share capital of the appellant and hence cannot be said to be a capital expenditure. I have analysed the decision of SSI Ltd. relied on by the appellant and am of the view that the same is applicable to the appellant's case. As argued by the appellant, such expense is a qualified business expenditure and should be allowable in computing the taxable income of the appellant. This aspect has been upheld in various judicial precedents. Based on the above, I am of the opinion that such expenses qualif ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
