2016 (9) TMI 1458 - ITAT BANGALORE

Arm’s Length Price of software development services to the AE - comparable selection - sub-contracting charges being part of operating cost as well as corresponding revenue from AE for the purpose of operating income - Held that:- It is pertinent to note that outsourcing cost in software development services activity is part and parcel of cost of providing the service to the AE and cannot be separated from the operating cost and operating revenue of the said segment of services. Accordingly, the cost of software development services cannot be treated in this fashion as claimed by the assessee. Hence we do not find any merit or substance in the contention raised by the assessee on this issue.

As regards the alternative plea raised by the AR that the comparables should also have similar activity, we find that the TPO has applied a filter of cost of employee which subsumes the outsourcing activity of both assessee as well as the comparables. Accordingly, the issue is decided against the assessee.

Companies functionally dissimilar with that of assessee need to be deselected from final list. Companies with export revenue less than 75% applied by the TPO need to be deselected.

Exclusion of sub-contracting charges from export turnover while computing deduction under Section 10A - Held that:- As in the case of Tata Elxsi Ltd vs. ACIT [1980 (4) TMI 12 - PUNJAB AND HARYANA HIGH COURT] expenses reduced from the export turnover ought to be reduced from the total turnover as well.

Exclusion of forex loss from export turnover while computing the deduction under Section 10A - Held that:- It is pertinent to note that the turnover is considered on mercantile basis and not on realization basis. Therefore any loss on account of fluctuation of forex rate would be a business loss and should have effect of reduction of profits and corresponding eligible profits for deduction under Section 10A - Such loss cannot be reduced from export turnover based on the invoices and the loss on realization is a business loss not affecting the turnover. Therefore we direct the Assessing Officer to recompute the deduction under Section 10A by considering the profit after loss on Forex fluctuations on realization and not by reducing the export turnover. In any case, if the loss is excluded from export turnover then the corresponding total turnover should also be reduced by such amount as per the decision of the Hon'ble jurisdictional High Court in the case of Tata Elxsi Ltd.