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2018 (9) TMI 1978 - ITAT BANGALORETP Adjustment - comparable selection - Functional similarity - HELD THAT:- Assessee-company is engaged in the business of export of software development and IT enabled services. Acropetal Technologies Limited - segmental information containing the break-up of its export sales and employee costs, was not available and it was not possible to ascertain if it passed the export earnings and/or employee costs filters; and (ii) a substantial portion of its software development activities have been outsourced on sub contract and it could, therefore, not be retained as a comparable - As rightly held by the DRP to be not comparable. We are of the view that once a company becomes not comparable for the reason that segmental information to apply filters, we need not consider any other aspect of comparability. L&T InfoTech Ltd - This company goes out of comparability on the ground that the profit margins adopted by the TPO was from 3 divisions of the Assessee - this company was held to be functionally not comparable as it is a market leader and thus enjoys significant benefits on account of ownership of marketing intangibles and intellectual property rights. Also, in addition to the above, the company owns proprietary software products which are developed in-house. Accordingly, as the company is a product company having significant intangibles and is thus not comparable to captive software service providers such as the Assessee. E-Infochips Ltd. company - It is functionally different from the profile of the assessee-company as it is engaged in development of maintenance of computer software and software development consulting and also manufacturing EVM and VDB electronic board. As per the website of the company, it provides silicon engineering evolving ASIC and FVGA design, verification and validation, physical design and DFD. Further, the company is engaged in manufacturing activities as evident from income statement. It has items pertaining to consumption of materials, changes in inventory and manufacturing service cost. It also fails service revenue filter as its software development filter is 73.78% which is less than 75% to the total revenue thereby failing the service revenue filter applied by the TPO. RS Software (India) Ltd. - Since, the entire operations of taxpayers are taking place offshore i.e in India, it is but natural that it should be compared with companies with major operations offshore, due to the reason that economics and profitability of onsite operations are different from that of offshore business model. We find that though the assessee as well as TPO has selected this company as comparable, the DRP on its own excluded this company by applying onsite revenue filter. Since, assessee as well as the revenue wants to include this company as comparable, we direct the A.O to include RS Software (India) Ltd as comparable company. Comparable for ITeS Segment - exclude M/s iGate Global Solutions Ltd, from the list of comparables on the ground that segmental information is not available - We find that though the company is deriving revenue from two different segments, it has failed to report segmental information in its annual reports. Therefore, we are of the considered view that the DRP was right in rejecting iGate Global Solutions Ltd., as comparable. We do not find any error in the findings of the DRP. Hence we are inclined to upheld findings of the DRP and reject the ground taken by the Revenue. Deduction u/s 10A - exclusion of telecommunication expenses from export turnover as well as total turnover for the purpose of determination of income eligible for deduction - HELD THAT:- we find that the issue of exclusion of telecommunication expenses from export turnover needs to be excluded from total turnover or not has been decided in the case of TATA Elexi Ltd. [2011 (8) TMI 782 - KARNATAKA HIGH COURT]and held that expenses excluded from export turnover have to be excluded from total turnover also, otherwise any other interpretation makes the formula unworkable and obsured and hence such deduction shall be allowed from the total turnover in same proportion as well. - DRP is right in directing the A.O to exclude expenses deducted from export turnover from total turnover. We do not find any error in the findings of the DRP, hence we are inclined to upheld the DRP findings and reject the ground raised by the Revenue. Disallowance of expenses incurred in relation to exempt income u/s 14A - HELD THAT:- We find that the ITAT has considered the issue of disallowance of expenses incurred in relation to exempt income in the light of the fact that the assessee has not earned any dividend income for the year under consideration and by following the decision of Hon'ble Delhi High Court in the case of Cheminvest Ltd. v. CIT [2015 (9) TMI 238 - DELHI HIGH COURT] held that disallowances contemplated u/s 14A has no application, if no exempt income is received or receivable in the relevant previous year. Thus we direct the A.O to delete the additions made towards disallowance of expenses incurred in relation to exempt income u/s 14A.
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