9911796707
TMI Blog2012 (2) TMI 172X X X X Extracts X X X X X X X X Extracts X X X X ..... ansfer Pricing Officer for determining arm's length price; (iii) passing the order without demonstrating that appellant had motive of tax evasion; (iv) not appreciating that the members of Dispute Resolution Panel also being jurisdictional Commissioners/Director of Income Tax of the appellant, the constitution of the DRP is bad in law; (v) not appreciating that the charging or computation provision relating to income under the head "profits and gains of business or profession" do not refer to or include the amounts computed under Chapter X and therefore the addition under Chapter X is bad in law; (vi) adopting a flawed process of issuing notices u/s 133(6) and relying on the same without providing complete information to the appellant or an opportunity to cross examine the parties involved; (vii) rejecting comparables and transfer pricing analysis of the appellant on unjustifiable grounds; (viii) doing fresh transfer pricing analysis and adopting inappropriate filters in such analysis; (ix) considering the data which was not available to the appellant at the time of complying with the TP documentation requirements; (x) selecti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he DRP vide its order dated 20/09/2010 upheld the TPO/AO's transfer pricing adjustment with minor modification in regard to M/s Megasoft Ltd. 5. Being aggrieved with the direction of the DRP, the appellant company ['the appellant' in short] has come up with the present appeal. During the course of hearing, the Ld. A.R argued, touching various aspects and also filed two written submissions, the substances of the second written submissions are summarized as under: (1) The appellant rendered software development services wholly to its AE. The total value of software development service was Rs. 24,06,82,087/-. The appellant adopted Transactional Net Margin Method (TNMM) to justify the price charged in the international transactions. The appellant conducted a methodical search process on Prowess database to identify comparable companies. After adopting various search filters, the appellant selected 49 companies as comparables. The arithmetic mean of these comparables was 11.01%. The appellant's operating margin on cost was 10.70%. Since the appellant's margin of 11.01% was within the 5% range as provided in proviso to s. 92C (2), it was concluded that the international transactions r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant case), for e.g., contemplates an adjustment for an enterprise wide difference (Rule 10B(1)(e)). Rule 10B (3) outlines various conditions for comparability that in judging whether an uncontrolled transaction is comparable, the enterprise level differences will have to be reckoned. In choosing the most appropriate method, Rule 10C(2)(e) factors the ability of making reliable and accurate adjustment to account for the differences in the enterprises levels. Size is an important facet of an enterprise level difference. Size of an enterprise is thus to be examined for comparability purposes. Significant differences in size of companies would impact comparability. Comparable means something that is similar or equivalent. It is something which possesses the same or almost the same characteristics. It is not that every company in the industry becomes a comparable. To use a simile, a Maruti 800 car cannot be compared to Benz car. In business, size matters. Unusual patterns, stray cases, wide disparities have to be eliminated as they don't satisfy the test of comparability. Companies operating on a large scale benefit from economies of scale, higher risk taking capabilities, robust glo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve, an appropriate turnover range should have been applied in selecting comparable uncontrolled companies; that selection on basis of size may be made based on Dun and Bradstreet's analysis, the classification of the software companies of which is: "The IT industry has been logically divided into 3 categories based on the net sales turnover. Large size firms (> Rs. 20,000 mn) Medium size firms (Rs. 2,000 - 20,000 mn) Small size firms (< Rs. 2,000 mn)" The assessee submits that above extract forms part of TPO's own order passed u/s 92CA. Accordingly, a turnover range of Rs. 1 crore at the lower end and Rs. 200 crores at the higher end may be adopted while choosing the comparables. In the alternative, a selection on the basis of size may be made based on the NASSCOM categorisation. NASSCOM recognises three categories based on turnover: Tier I: Greater than USD 1 billion (approx Rs. 5,000 crores) Tier II: between USD 100 million to USD 1 billion (Rs. 500 crores to Rs. 5,000 crores) Others: less than USD 100 million (Rs. 500 crores) With regard to use of Information received in pursuance to notice u/s 133(6) For the comparability analysis, the TPO conducted enquiries from cert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plies. This has not been done. Withholding such information results in prejudice to the assessee and is against principles of natural justice. Authenticity of the Information received Rule 10D (3) provides that information specified in sub-rule (1) shall be supported by authentic documents. The TPO had not established whether the information obtained by way of notice u/s 133(6) was authentic and complete. In spite of these differences, the TPO had relied and completed the assessment based on replies received u/s 133(6), in preference to Annual Report of the companies which were audited by professionally qualified CA and approved by Board of Directors and that such reliance is bad in law. The TPO had relied on segmental information received u/s 133(6), which did not form part of Annual Report. The bifurcation and reporting of income and expense into different segments as done by the company, was not audited by a CA. It was possible that the same may not be as per Accounting Standard 17 issued by the Institute of Chartered Accountants of India and, hence, either incomplete or unreliable apart from being unverifiable. Sankhya Infotech for e.g. was selected as comparable in precedi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bsequently. Such a process or result is not contemplated. The powers u/s 133(6) is not to be used for gathering data not in existence in public domain by the specified date. The power u/s 133(6) is to be used for validating data that has been adopted. The power u/s 133(6) cannot be used to obtain information to enable selection of comparables. That the data has to be in existence by the specified date is also recognised by the amendment made to the definition of 'specified date' - 30th November. It has been clarified that the date has been extended as sufficient data was not available under the existing specified date to make the comparison meaningful. The extension of the specified date is recognition as also an acceptance by the Legislature that the comparability analysis as also the determination of ALP has to be on the basis of data that is available in the public domain by the specified date. If subsequent information is permitted to be used, then the ALP would remain fluid. The assessee may determine ALP on the basis of a particular date. The TPO may re-determine ALP on the basis of data up-to another particular date. The DRP/ CIT(A) may re-determine ALP on the basis of updat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3.06% 1.00% 10. Bodhtree Consulting Ltd 5,31,89,165 15.99% 14.85% 11. Accel Transmatics Ltd(seg) 8,02,05,000 44.07% 42.23% 12. Synfosys Business Solutions Ltd 4,48,86,725 10.61% 7.27% 13. Megasoft Ltd 19,21,85,451 16.97% 10.53% 14. Lanco Global Solutions Ltd 35,62,93,560 5.27% 4.78% Arithmetic Mean 17.23% 15.61% NOTES After removing KALS - Mean - 15.50% & WC adjusted mean 13.64% After removing KALS and Tata Elxsi - Mean - 14.49% & WC adjusted mean 12.48% After removing KALS, Tata Elxsi & Accel - Mean - 11.80% & WC adjusted mean 9.77% TABLE 2 - TURNOVER RANGE 1 TO 500 CRORES Sl. No. Name of the Company Operating Revenues Operating Margin on Cost WC Adjusted Operating Margin on Cost 1. Aztec Software Limited 1,28,61,36,000 18.09% 18.61% 2. Geometric Software Limited(seg) 98,59,57,838 6.70% 5.62% 3. KALS Information Systems Limited 1,96,90,390 39.75% 41.21% 4. Mindtree Consulting Limited 4,48,79,82,158 14.67% 13.34% 5. Persistent Systems Limited 2,09,17,76,542 24.67% 23.79% 6. R Systems International Limited(seg) 79,41,94,053 22.20% 20.21% 7. Sasken Communication Technologies Limited ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TABLE 3 - WITHOUT TURNOVER FILTER AND REJECTING COMPARABLES AS DETAILED ABOVE Sl. No. Name of the Company Operating Revenues Operating Margin on Cost Adjusted Operating Margin on Cost 1. Aztec Software Limited 1,286,136,000 18.09% 18.61% 2. Geometric Software Limited(seg) 985,957,838 6.70% 5.62% 3. iGate Global Solutions Ltd (Seg.) 5,279,075,000 15.61% 13.57% 4. Persistent Systems Limited 2,091,776,542 24.67% 23.79% 5. R Systems International Limited(seg) 794,194,053 22.20% 20.21% 6. Sasken Communication Technologies Limited(seg) 2,400,342,000 13.90% 13.14% 7. Lucid Software Limited 10,191,181 8.92% 5.36% 8. Media Soft Solutions Private Limited 17,577,145 6.29% 4.10% 9. R S Software (India) Limited 915,707,164 15.69% 15.16% 10. SIP Technologies & Exports Limited 65,344,634 3.06% 1.00% 11. Bodhtree Consulting Ltd 53,189,165 15.99% 14.85% 12. Synfosys Business Solutions Ltd 44,886,725 10.61% 7.27% 13. Megasoft Ltd 192,185,451 16.97% 10.53% 14. Lanco Global Solutions Ltd 356,293,560 5.27% 4.78% 15. Flextronics Software Systems Ltd 5,951,198,183 27.24% 26.78% Arithmetic Mean ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d (iii) the additions being unsustainable as the definition of income or the computation process under section 28 to 44 not envisaging a reference to or incorporation of an adjustment proposed under Chapter X. DEDUCTION UNDER SECTION 10A While computing deduction u/s 10A, the AO reduced Rs. 527,929 from the export turnover. However the same has not been reduced from the total turnover. In this regard, the appellant submits that what is reduced from export turnover should also be reduced from total turnover. The appellant's contention is supported by the Special Bench decision in the case of ITO v. Sak Soft [2009] 313 ITR (AT) 353 and plethora of decisions listed on pages 373 to 375 of PB-I. The appellant submits that amount reduced from export turnover should also be reduced from total turnover. 6. On the other hand, the Ld. D.R came up with a spirited refutation of the Ld. A R's contentions. The learned DR also filed written submissions, essences of which are summarized, chronologically, as under: (1) During the proceedings u/s 144C of the Act, the DRP had given opportunities twice to the assessee. Relies on the case laws: (a) Messe Dusseldorf v. DCIT [2010 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... doubt that the adjustments have to be made to the income on the basis of arms length price determined, and, therefore, while computing the income of the assessee the provisions of Ch. X are clearly applicable. Ground No.6 In regard to the issue of notices u/s 133(6), it was stated that the TPO discussed in detail in para 14.5 to 14.5.1, which reveals that copies of notices u/s 133(6) issued to the companies as well as the copies of the replies received from companies were in fact given to the assessee in a soft copy for its comments. The decision of the TPO based on information collected was also duly communicated to the assessee. The DRP have upheld the AO's action and after considering the assessee's objection and held that TPO is empowered to collect the details relevant to the transfer pricing proceedings and the TPO used his power to collect relevant information requiring for better comparability analysis. The TPO used the data for information that was available to him in the public domain whenever a company did not submit the information or wherever the notice u/s 133(6) not served at the latest address available even after repeated attempts. The TP order transpires that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tegorisation. It was submitted by the learned DR that the ICAI TP Guideline note and NASSCOM categorisation are only certain opinion formed by the agencies and general in nature. Against the assessee's argument, it was submitted that the TPO in his order stated that the tax payer's argument of size, scale and nature of operation was also raised during the proceeding U/s 92CA of the Act and the same has been dealt with in detail in the order (in para 9.2). Further it also held that lesser known companies like Mega Soft Ltd, Accel Transmatic Ltd, KALS Info Systems Ltd etc are having almost the profit margin equivalent to the margin of Infosys Technology Ltd. which means that brand per se does not effect the margins. Thus brand name may get higher turnover but it does not necessarily mean that it would generate higher margin. It was stated that the observation of the TPO has also supported by the decision of Hon'ble ITAT, Mumbai 'E' Bench in u/s Symantec software solutions private Limited v. ACIT in ITA No 7894/MUM/2010. Submission of learned DR relating to use of information received in pursuance to notice u/s133 (6). For the comparability analysis, the TPO conducted enquiries fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 03-2006 operating Revenue (excluding non operating Revenue) are: Particulars Blue ally(consulting Division) in Rs. XIUS-Bcits Division (product Division) in Rs. Total in Rs. Sale/service Export 17,07,45,151 24,32,21,163 41,39,66,314 Domestic 2,14,40,300 12,60,56,269 14,74,96,569 Total 19,21,85,451 36,92,77,432 56,14,62,883 As per TPO 56,14,62,883 Expenditures Personnel Cost 9,66,62,247 9,11,68,236 18,78,30,483 Increase/Decrease in work-in-progress 98,62,642 49,62,180 1,48,24,822 Operating Expenses (excluding net loss on foreign exchange , loss on sale of assets, finance changes and provision made on debtors) 4,18,62,533 9,61,41,392 13,80,03,925 Depreciation 1,59,14,244 1,68,55,710 3,27,69,954 Total 16,43,01,666 20,91,27,519 37,34,29,185 As per TPO 36,75,94,111 Profit Before Tax 2,78,83,785 16,01,49,913 18,80,33,698 It is also clarified by the company that: (1) Blue ally division is an offshore and on limit consulting division and does jobs based on customers requirements and billing done on hourly basis. (2) XIUS-BCCIL is a product which caters the need of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dopting the arm's length price as the basis disregarding transfer price recorded by the eternises concerned. The AR of the assessee stated that M/s Megasoft limited owns intellectual property right and patents is however how far these influenced the International Transactions, no explanation has been furnished. Further it is also stated that company hold opening invention of Rs. 3,20,26,000/- as on 31-12-2005 however no such figures appears at page 212 of the assessee's paper books. It is pertinent to note that in the annual report it is mentioned that (please refer column 12, page 215 of the assessee's paper book) Quantitative details: The company is in the business of development and maintenance of computer software. The development and sale of such software cannot be expressed in any generic unit. Hence it is not possible to furnish the quantitative details and the information required under paragraphs 3, 4 C and 4D of part II of schedule VI to the companies Act 1956. Consumption particulars are given below: Particulars Year ended 31 Dec 2006 Rs. 000 Year ended 31 Dec 2005 Rs. 000 Computers and allied peripherals used for system integrations 51,259 64,821 From it reve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quantitative details and corresponding amount in regard to purchase, production and sale of software products made during the year which requires as per part II of schedule VI to companies Act 1956. This clearly indicates that major revenue consist software development services. The auditor put remarks that "The Company is engaged in development of software and software products since its inception." This is general remarks put by the auditors in fact revenue for the year order consideration mainly from software development segment which constitute 97.54% of the total income . The A.R stated that the total turnover of KAL is Rs. 2.15 crores, and holds an inventory of Rs. 1.27 crores, however from the statement of account for year ending 31-03-2006 nowhere appears such figures(inventories the amount of Rs. 1.27 crores actually represents receivables. Debtors arising on rendering of software development services for evidence enclosed copy of statement of account as per annexure 'A'. Thus, the assessee was giving misleading facts. In view of the facts discussed above, the TPO has rightly considered that the company is a software development service provider and there is no merit in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ls and specification for products. Visual computing labs order takes contests development and animation services using commercial and proprietary high end software for graphics, animation and image/video editing content or edit existing content to add special effects as specified by customers, using very high end computers and software. As per financial statement segmental revenues disclosed as under: Particulars System integration and support (Rs. 000) Software development and services (Rs. 000) Revenues 4,733.42 18,882.42 Identifiable operating expenses 4,032.86 14,835.21 Segmental opening income 700.56 4,047.21 M/s Tata Elxsi Limited furnished the segmental revenue i.e. software development services for F.Y. 2005-06 as under:- Rs. Sales 18,881.25 Other income 1.17 Total 18,882.42 Cost of sales 435.33 Personnel expenses 10,676.21 Administration expenses 3,058.91 Depreciation 620.43 Total 14,790.59 PBIT 4,091.53 PBIT after excluding exchange loss and interest. Thus company has furnished segmental revenues and expenses. Merely because expenses from cash of the sub-activities are not available tantamount for rejection. In the directors repor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... operation:- Rs. Rs. Manufacture sales 43,143,255 Trading Sales 71,758,548 Total 114,901,803 Service income Maintenance and repairs services 25,341,956 Training and education services 76,302,823 Software services Domestic 24,705,319 Export 55,500,099 Total 181,850,197 Grand Total 296,752,000 M/s Accel Transmatic Ltd vide its letter dated 27-01-2009 clarified in regard to Ushus technologies that (kindly refer para 4 page 75 of paper book). "Ushus Technologies is the technology division of M/s. Accel Transmatic Ltd that produces custom software development services to companies' world wide. Ushus technologies division services clients in offshore software development and on site consultancy" From a clarification, it reveals that given by M/s. Accel Ushus Technologies division of Accel is exclusively software service division. Further it is also contended that the IP Rights have been created/developed by Ushus Technologies division and related cost of creation and transfer of IP Rights has also been recorded in this segment. In this context it is to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the defined period and on fulfilling the conditions specified in the agreement. The issue price of Mindtree share was fixed at Rs. 425 per share as on the listing dated 7th March 2007. This provides an incentive of Rs. 423 per share to the customer. This is an indirect benefit to the customers to the tune of Rs.349.68 crores equity." From the notes to accounts year ending 31-03-2006 reveals that as per agreement 82,66,777 warrants has been issued to the customer and same can be converted into shares at an exercise price of Rs. 2 per share, however there is no details available conversion of shares during the year. Even though how it influenced/factorised the international transaction with its AE owing to issue of warrants and conversion of shares remained unexplained. No such arguments were made before the TPO nor the DRP. It is to be noted that the margin of the comparable company on international transaction is relevant and not the AEs revenue in remunerated by assessee. The income from international transaction is computed having regard to ALP and nothing else. Therefore the arguments advanced by the assessee that the above strategy effectively moved the marketing expenditure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rnover has influenced the result of the comparables it is accepted economic principle and commercial practice that highly competitive market condition one can survive and sustain only by keeping low margin but high turnover as held by the Hon'ble ITAT Mumbai "E" Bench in the case of M/s Symantec Software Solution Pvt. Ltd v. ACIT (supra). Further, the assessee referring an article published in the Economic Times dated 12-01-2011 which show in general nature and no specific instance has been brought on record. Secondly article relates for the F.Y. 2010-11 where as transaction in question for F.Y. 2005-06 i.e. after five years and competitive market conditions also varies during the relevant period. Thus, merely because profit margin is on the higher side cannot the reason for elimination as comparable; it is not the general rule to exclude the same unless specific fact has been added. Relying on the judicial decision cited above the TPO has rightly chosen the comparable and the assessee argument in this regards deserves to be rejected, more so because the assessee itself considered as comparable The AR of the assessee submitted list of 14 comparable, (Table-I) adopting turnover o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gies Ltd. (6) VJIL Consulting Ltd. Further it is also submitted that comparables selected by the assessee have not been factored in the analysis shown in three tables and if the analysis under any of the three tables are modified incorporating the above comparables, the result would be increasingly skew in favour of the appellant. In this connection it was submitted that these comparables were not listed in the TP study documents maintain by the assessee. Even proposal for inclusion for aforesaid comparables also was not made before the TPO. Thus, no such matters were before the TPO. The proposal of comparables were before the DRP first time (please refer page- 348 to 356 of paper book-1 of the assessee filed before the DRP) since the comparables selected by the assessee not before the TPO, except VMF Soft tech Limited (please refer page -141 of paper book-1 of the assessee). Furthermore no analysis has been given by the assessee to determine whether comparables qualifies filter criteria adopted by the TPO. Therefore the same cannot be accepted at this stage; hence the assessee's contentions on this point may be rejected. i. Gate Global Solution Limited: The assessee had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany's letter in compliance to the notice u/s 133(6), the TPO examined the data, it found acceptable as comparable. Therefore issue of notice under said section cannot be construed bad in law. From the segmental information available on financial statement for F.Y. 2005-06 in respect of M/s. i Gate Global Solution Ltd, reveals that operating cost consist, salaries and wages, selling and marketing, depreciation etc totalling to Rs. 5,13,50,06,000 which includes certain extra ordinary item like payment of deferred ESOP compensation of Rs. 25.93 crores bad debts of Rs. 33.08 lakhs and also other miscellaneous expense which not relatable into the international transactions. The TPO has worked out extraordinary items after analysing the financial statement for the F.Y. 2005-06. However, according to the assessee operating cost would be Rs. 5,13,50,06,000 (Rs. 4,56,63,78,000+5,68,628,000), resulting margin would be at 2.81%. Whereas TPO computed margin at 15.61% after considering extra ordinary items of Rs. 56,86,28,000, increased operating profit (segmental) by Rs. 71,26,97,000. Here it is to be mentioned that either extra ordinary items to be included to the segmental profit or exclu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctronics Pvt. Ltd v. CIT(A) ITA No 1806, 1807/Del/2008 In view of the facts as well as legal position discussed above, this issue raised by the assessee is devoid of merit and is liable to be rejected. Benefit of 5 percent range. In para-16 of the TPO's order held that proviso to s. 92C (2) was amended with effect from 01.10.2009 by introducing a clarificatory amendment. The second provision says that if arithmetical mean price determined is within +/-5% from price charged in the international transaction, the price charged by the tax payer has been treated as arm's length price. No adjustment would be made, if the arithmetical mean price falls beyond +/-5% from the price charged in the international transaction, and then second proviso is not applicable. In such case, only the first proviso shall alone applicable as per which the arithmetical mean price shall be taken to be the arm's length price. Meaning thereby, the transfer pricing adjustment would be made only from arithmetical mean price. Thus according to the TPO, by virtue of amendment the +/-5% variation is allowable only the case of the price charged in the international transactions and not for the adjustment. The DRP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Annual Report. This was clear from the annual report of KALS for FY 2005-06 wherein Rs. 1.27 crores was reflected as inventory and sundry debtors were separately shown. The Ld. D.R'S contention that the appellant did not raise the issue of conversion of warrants in case of Mindtree before the TPO/DRP was also factually incorrect as the appellant had made submissions on this issue before the TPO as well as DRP. 7. We have duly considered rival submissions, diligently perused the relevant case records and also voluminous Paper Books furnished by the Ld. A.R. With due respects, we have also perused various case laws on which either party had placed their unstinted confidence. The prime thrust and grievances of the appellant being: (i) no reasonable opportunity of hearing provided by the Ld. TPO and during the hearing before the DRP, only one opportunity was afforded; (ii) that the TPO had selected six companies in the order passed u/s 92CA of the Act as comparables in addition to those proposed in the notice without giving an opportunity to the appellant to present its objection(s)/comments; (iii) Even under TNMM, considering turnover range of Rs.1 crore to Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... should have been given an opportunity to refute the material sought to be utilized by the TPO? 7.2 As far as the data to be used by the TPO while determining the ALP was concerned, it is observed that it is covered by the provisions of rule 10D sub-rule 4 of the Income-tax Rules. Section 92C provides that the arm's length price in relation to an international transaction shall be determined by any of the methods being the most appropriate method having regard to the nature of transaction or class of transaction or class of associated persons or functions performed by such persons or such other relevant factors for computing the ALP and also any other method as may be prescribed by the Board. S. 92D provides that (i) every person who has entered into an international transaction shall maintain and keep such information and documents in respect thereof; (ii) the Board may also prescribe the period for which the information and documents shall be kept and maintained; and (iii) the AO or the CIT(A) may, in the course of any proceeding under the Act, require any person who has entered into an international transaction to furnish any information or document in respect thereof. Thus, it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he contemporaneous data. The assessee was only required to maintain the information and documents as may be necessary relating to the international transactions so that it can be made available to the TPO or the AO or any other authority in any proceedings under the Act. By providing a specified date in the Act, the obligation is cast upon the assessee to keep and maintain the documents for that period. But, it does not restrict the TPO from making enquiries thereafter for determining the correct ALP. 7.3 Having held so, we shall now glimpse at the next question, as to whether the TPO can make his own enquiries and call for information from various entities keeping the assessee in the dark. Under sub-sec. (3) & (7) of Sec. 92CA, the TPO is entrusted with all the powers under clauses (a) to (d) of sub-section (1) of 131 or sub-section (6) of s.133 to call for and gather any information as may be required. When the TPO is making the search for a relevant comparable, he can issue notices to the parties whom he considers as relevant to gather requisite information and on being satisfied with regard to relevancy of the material which can be used against the assessee only then the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ner. It has been observed that the TPO had not considered those objections while determining the ALP. Further, it was also the stand of the appellant that it should be given a standard deduction of 5% as provided under the proviso to s.92C (2) before making adjustments for the transfer price. To drive home its point, the appellant had placed strong reliance on the following decisions: * M/s. Sap Labs India Pvt. Ltd v. ACIT 2010-T II-44-ITT-BANG-TP; * Philips Software Centre Pvt Ltd. 26 SOT 226; * MSS India Private Limited 32 SOT 132 * Customer Services India (P) Ltd v. ACIT 30 SOT 486; * Skoda Auto India Pvt. Limited v. ACIT 2009-TIOL-214-ITAT-Pune; * Development Consultants P. Ltd v. DCIT 23 SOT 455; * Sony India P. Ltd 315 ITR 150; * Cummins India Limited v. DCIT ITA No.277 & 1412/PN/07; * TNT India Pvt. Ltd v. ACIT 10 Taxmann. Com 161; * (10)Abhishek Auto Industries Ltd v. DCIT 2010-T II-54-ITAT, DEL-TP; & * (11)Technimont ICB Pvt. Ltd v. ACIT 2011-T II-31-ITAT-MUM-TP 7.6. On the other hand, the Ld. D R, placing strong relianc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 00 to 200.00 crores only should be taken into consideration for the purpose of making TP study". In the instant case, the turnover of the company is in the range of 24 crores, therefore, the companies, which have turnover of Rs. 1.00 crores to 200 crores alone should be taken into consideration for the purpose of making TP study. 7.8 In these circumstances, we are of the considered view that this issue requires to be remitted back to the file of the TPO for fresh consideration with the following directions: (i) the operating revenue and the operating cost of the transactions relating to associated enterprises only shall be considered; (ii) the comparables having the turnover of more than Rs. 1 crore, but, less than Rs. 200 crores only shall be taken into consideration; (iii) all the information relating to comparables which were sought to be used against the appellant shall be furnished to the appellant; (iv) the appellant shall also be extended an opportunity to cross-examine the parties whose replies were sought to be used against the appellant; (v) to consider the objections of the appellant that relate to additional comparables sought to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the word total turnover is not defined for the purpose of this section. It is because of this omission to define 'total turnover', the word 'total turnover' falls for interpretation by this Court; ...... .In section 10A, not only the word 'total turnover' is not defined, there is no clue regarding what is to be excluded while arriving at the total turnover. However, while interpreting the provisions of section 80HHC, the courts have laid down various principles, which are independent of the statutory provisions. There should be uniformity in the ingredients of both the numerator and the denominator of the formula, since otherwise it would produce anomalies or absurd results. Section 10A is a beneficial section which intends to provide incentives to promote exports. In the case of combined business of an assessee, having export business and domestic business, the legislature intended to have a formula to ascertain the profits from export business by apportioning the total profits of the business on the basis of turnovers. Apportionment of profits on the basis of turnover was accepted as a method of arriving at export profits. In the case of section 80HHC, the export profit is to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... king would consist of the turnover from export and the turnover from local sales. The export turnover constitutes the numerator in the formula prescribed by sub-section (4). Export turnover also forms a constituent element of the denominator in as much as the export turnover is a part of the total turnover. The export turnover, in the numerator must have the same meaning as the export turnover which is constituent element of the total turnover in the denominator. The legislature has provided a definition of the expression "export turnover" in Expln.2 to s.10A which the expression is defined to mean the consideration in respect of export by the undertaking of articles, things or computer software received in or brought into India by the assessee in convertible foreign exchange but so as not to include inter alia freight, telecommunication charges or insurance attributable to the delivery of the articles, things or software outside India. Therefore in computing the export turnover the legislature has made a specific exclusion of freight and insurance charges. The submission which has been urged on behalf of the revenue is that while freight and insurance charges are liable to be excl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the technical services outside India, from the export turnover without corresponding reduction from total turnover, thereby reducing the deduction claimed by the assessment u/s 10B of the Act. 8.5. In light of the above facts, the Special Bench held as under:- "For the above reasons, we hold that for the purpose of applying the formula under sub-section (4) of section 10B, the freight, telecom charges or insurance attributable to the delivery of articles or things or computer software outside India or the expenses, if any, incurred in foreign exchange in providing the technical services outside India are to be excluded both from the export turnover and from the total turnover, which are the numerator and the denominator respectively in the formula. The appeals filed by the department are thus dismissed". Although the order of Special Bench is in the context of section 10B of the Act, the ratio laid down in the above decision applies to section 10A of the Act as well, as the provisions of sections 10A and 10B are identical on all material aspects. More particularly, both the sections define only export turnover but not total turnover and sub-section (4) of both the sections p ..... X X X X Extracts X X X X X X X X Extracts X X X X
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