TMI Blog2012 (8) TMI 257X X X X Extracts X X X X X X X X Extracts X X X X ..... erefore, cannot be considered as comparable functionally with that of the assessee. There has been no attempt made to identify and eliminate and make adjustment of the profit margins so that the difference in functional comparability can be eliminated – matter remanded to TPO - assessee is partly allowed - IT APPEAL NO. 970 (BANG.) OF 2011 - - - Dated:- 16-3-2012 - N.K. SAINI, GEORGE GEORGE K, JJ. For the Appellant: R. Vijayaraghavan For the Respondent: Etwa Munda ORDER George George K, Judicial Member This appeal of the assessee company is directed against the assessment completed under section 143(3) rws 144C of the I T Act. The relevant assessment year is 2007-08. The assessee is aggrieved by the order of the Dispute Resolution Panel (DRP) dated 16th August, 2011. The DRP has issued directions under section 144C(5) rws 144C(8). The DRP has approved the Draft Order of Assessment making transfer pricing adjustment as suggested by the Transfer Pricing Officer (TPO) under section 92CA of the Act. 2. The assessee has raised the following grounds:- (1) The order of the learned Assessing Officer and directions of the Hon'ble DRP are bas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Transfer Pricing Adjustment On the facts and in the circumstances of the case and in law: (8) The learned AO/Transfer Pricing Officer ( TPO ) erred in making an addition of ₹ 25,423,419 and ₹ 3,962,020, to the total income of the Appellant on account of adjustment in the arm's length price of the software development and related services and customer support services transactions entered by the Appellant with its associated enterprise. (9) The learned AO/TPO erred in disregarding the economic analysis undertaken by the Appellant without proper justification and conducting a fresh economic analysis for the determination of the arm's length price in connection with the impugned international transactions and holding that the Appellant's international transactions are not at arm's length. (10) The learned AO/TPO have erred in ignoring the fact that since that Appellant is availing tax holiday u/s 10A of the Act, there is no intention to shift the profit base out of India, which is one of the basic intentions of the introduction of transfer pricing provisions. (11) The learned AO/TPO erred in determining the arm's length ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s based on unreasonable comparability criteria. Common grounds of appeal relating to corporate tax and transfer pricing matters (22) The learned AO erred in levying interest of ₹ 56,08,016 and ₹ 15,662/- u/s 234B and 234D of the Act respectively. (23) The learned AO erred, in law and in facts, in initiating penalty proceedings u/s 271(1)(c) of the Act. 3. Ground nos. 1, 2 and 8 are general in nature and no specific adjudication is called for. Hence, these grounds are dismissed. 3.1 Ground Nos.22 and 23 is consequential and hence, these grounds are also rejected. 3.2 Ground nos.3 to 7 mentioned above relates to the corporate tax matters. Ground Nos. 9 to 21 relates to transfer pricing adjustment. We shall consider the grounds chronologically. Corporate Tax Matters 4. Ground No.3 : Software Expenses Debited to P L Account During the previous year relevant to the concerned asst. year, the assessee company had debited to the P L account an amount of ₹ 22,94,928/- as software expenses. The details of the same are as follows:- (i) Annual Software licence fee ₹ 19,29,480 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India and only the depreciation is being claimed on a year on year basis. The assessee also relied on the following judgements of various High Courts and the orders of various Tribunals:- Amway India Enterprises v. Dy. CIT [2008] 111 ITD 112 (Delhi) (SB) CIT v. M/s Raychem RPG Limited (Bom.); Bank of Punjab Ltd. v. Jt. CIT [2002] 122 Taxman 235 (Chd.) (Mag.); CIT v. Mohd Ishaque, Mohd. Gulam [1994] 210 ITR 817/[1995] 78 Taxman 323 (MP); Jt. CIT v. Citicrop Overseas Softwares Ltd. [2004] 85 TTJ 87 (Mum.); Lubi Electricals (P.) Ltd. [IT Appeal No. 163 /Ahd/1992); Business Information Processing Ltd. v. ACIT (Ahm.) (IT Appeal No. 163/Ahd/1992); Media Video Ltd. v. Jt. CIT [2002] 122 Taxman 28 (Delhi)(Mag.); Asstt. CIT v. Jasper Investments Ltd. [2007] 109 TTJ 530 (Mum.); GE Capital Services India v. Dy. CIT [2007] 106 TTJ 65 (Delhi); CIT v. Southern Roadways Ltd. [2009] 183 Taxman 234 (Mad.) IBM India Ltd. v. CIT [2007] 105 ITD 1 (Bang.) 4.3 The learned DR supported the assessment order. 4.4 We have heard the rival submissions and perused the materials on record. The Hon& ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... matter. It is ordered accordingly. Therefore, ground nos.3 is allowed for statistical purposes. 5. Ground No.4 : Foreign Exchange loss debited to P L Account During the assessment year 2007-08, the assessee company had debited the P L account with the net foreign exchange loss of ₹ 58,40,841/-. The break-up of the same is as follows:- Sl. No. Particulars Amount (in Rs.) 1. Restatement of export sale proceeds, debtors bank balances 62,04,206 2. Travel other expenses 1,25,950 3. Trade Imports payable for assets purchased (4,89,314) TOTAL 58,40,841 It was claimed before the Assessing Officer that the loss debited to the P L account is in accordance with Accounting Standard 11 as prescribed by the Institute of Chartered Accountants of India. It was further submitted that these were losses arises in the normal course of doing business and therefore, should be considered as revenue in nature. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. ( supra ). The assessee shall be afforded a reasonable opportunity of being heard before any decision is rendered on the matter. It is ordered accordingly. Hence, ground no.4 is allowed for statistical purposes. 6. Ground Nos. 5, 6 7 : Re-computation of deduction under section 10A The assessee in its return of income had claimed deduction under section 10A of the Act to the tune of ₹ 3,42,45,811/-. The Assessing Officer re-computed the deduction under section 10A of the Act by reducing from the export turnover a sum of ₹ 8,69,205/- being telecommunication expenses and a sum of ₹ 1,24,78,919/- being traveling expenses incurred in foreign currency. The Assessing Officer however did not reduce the above said expenses from the total turnover while computing deduction under section 10A of the Act. 6.1 Aggrieved by the re-computation of deduction under section 10A of the Act, the assessee is in appeal before us. 6.2 It was submitted that the telecommunication expenses and the expenses incurred in foreign exchange for travel ought not to be excluded from the export turnover. Alternatively, it was contended that if the expenses are reduced from the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alls 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 be derived from the total business income of the assessee, whereas in section 10-A, the export profit is to be derived from the total business of the un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... titutes 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 excluded in computing export turnover, a similar exclusion has not been provided in regard to total turnover. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... corresponding reduction from total turnover, thereby reducing the deduction claimed by the assessment u/s 10B of the Act. 6.7 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 . 6.8 In the light of the above judgements and the order of the Special Bench ( Supra ), we direct the AO to exclude the above mentioned expenses both from the export turnover as well as from the total turnover while calculating deduction u/s 10A of the Act. It is ordered accordingly. Hence, the ground No. 7 is allowed. Since the alternative plea of the assessee is allowed, the ground nos. 5 6 raised by the assessee is not adjudicated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fference in risks assumed by the comparable companies vis- -vis the assessee. 7.1 The Transfer Pricing Officer re-determined the ALP for the provision of software services and ITES transactions. The details of study undertaken by the TPO reads as follows:- The TPO did not accept the economic analysis undertaken by the assessee company and identified new comparables at the time of assessment proceedings. The TPO used single year data (FY 2006-07) for economic analysis, instead of data for FY 2004-05 to 2006-07 used by the assessee company; The TPO has re-determined the operating margins of comparable companies by considering foreign exchange gain/losses as non-operating in nature; The TPO was of the view that some of the comparable companies identified by the assessee company and the approach adopted for undertaking the economic analysis were not appropriate. The TPO applied certain filters for the selection of comparable companies. In arriving at the ALP, the TPO rejected certain comparables identified by the assessee company on the following filters:- ■ Companies having turnover less than 1 crore were rejected for software ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 13,149.00 40.30% 11. Ishir Infotech Limited 7.42 30.12% 12. KALS Infosystems Limited 2.00 30.55% 13. Lanco Global Systems Limited 45.39 15.75% 14. Lucid Software Limited 1.70 19.37% 15. Mediasoft Solutions (P) Limited 1.85 3.66% 16. Megasoft Limited 139.33 60.23% 17. Mindtree Consulting Limited 590.35 16.90% 18. Persistent Systems Limited 293.75 24.52% 19. Quintegra Solutions Limited 62.72 12.56% 20. R S Software (India) Limited 101.04 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bodthtree Consulting Limited (Seg.) 2.94 29.58% 8. Caliber Point Business Solutions Limited 39.30 21.26% 9. Cosmic Global Limited 4.28 12.40% 10. Datanmatics Finbancial Services Limited (Seg.) 2.92 5.07% 11. Ecerx Services Limited 86.12 89.33% 12. Flextronics Software Systems Limited (Seg.) 12.93 8.62% 13. Gensys International Corporation Limited 19.17 13.35% 14. HCL Comnet Systems Services Limited (Seg) 260.18 44.99% 15. ICRA Techno Analytics Limited (Seg) 7.23 12.24% 16. Informed Technolog ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sing Officer/TPO and rejected the contentions raised by the assessee company. 7.4 The assessee company being aggrieved is in appeal before us. 7.5 The learned AR submitted that the TPO has erred in identifying new comparables at the time of assessment proceedings. It was submitted that the TPO failed to appreciate that such data was not available in public domain at the time of complying with the mandatory TP documentation required by the prescribed due date. It was stated that the TPO has erred in using only single year data for his economic analysis. The assessee, it was submitted, had used the data for the FY 2004-05 and FY 2005-06, apart from the data available for the FY 2006-07 in the case of all the companies identified as comparables to the software services and ITES transactions. It was argued that the TPO applied certain filters and did not undertake an objective comparative analysis for selection of comparable companies. It was further submitted that the TPO had obtained information, which was not available in public domain from some other companies by exercising his powers vested under section 133(6) of the Act and using the same for judging the comparability ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were closed linked to the business operation and did not constitute abnormal-extra-ordinary items. Those differences arise on account of number of factors, some of which, were explained as under: (i) Realized foreign exchange gain/loss: (a) Export proceeds at a rate higher/lower than the rate at which they were booked; (b) Import payables at a rate lower/higher than the rate at which they were booked; (c) Adjustment of customer advances (received in foreign currency) against export invoices Relies on case laws: Smt. Sujata Grover (supra); Renaissance Jewellery (P) Ltd v. ITO [2006] 101 ITD 380 (Mum) SAP Labs India (P.) Ltd v. Asstt. CIT [2011] 44 SOT 156/[2010] 8 taxmann.com 207 (Bang); Gem Plus Jewellery India Ltd (supra) Four Soft Ltd [IT Appeal No;1495/Hyd/2010 - ITAT, Hyderabad. (ii) Unrealized foreign exchange gains/loss on account of restatement (in the financial statements) of the following as on the last day of the year Export receivables/import payables; Advances received from customers in foreign currency Deutsche Bank A.G v. Dy. CIT [2003] 86 ITD 431 (Mum.); ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ferences between them in the risks assumed is made. A risk analysis begins with the identification of specific and realistic risks borne by each related party. It is also important to note that economically significant risks count for transfer pricing purposes. Non-economically significant risks are of minor importance due to their small or negligible impact on the profits. Also, it is the significance of risks that positively correlates to the amount of expected return. As evident from the transfer pricing report, the appellant functions under a limited risk environment vis- -vis entrepreneurial risk borne by comparable companies who are independent service providers. Accordingly, it is operating under economic circumstances that warrant adjustments to the margins earned by the comparable companies, so as to make the comparison between the margins earned by the comparable companies and the appellant appropriate. The comparables selected for the analysis include companies which have fairly diversified areas of specialization, perform additional functions viz., marketing, etc, and bear more risks akin to any third party independent service provider vis- -vis the appel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce the commencement of its operations in India has been making profits irrespective of the performance of the IT/ITES industry in India. The appellant does not bear any risk of incurring losses due to under utilization of capacity or insufficient business from its AE as it is compensated on cost plus basis i.e., all the cost incurred by the appellant are borne by the AE and reimbursed along with a mark-up; ■ Given the continued operations of the appellant for the subsequent years (i.e., FY 2007-08 to 2009-10), it is quite unlikely that the appellant would be winding off its business/operations in India ■ As mentioned in the documentation report, the AE does not avail similar services from any other third party in India and is, in a way, somewhat dependent on the appellant for deliverables/execution. While the appellant does not undertake any marking activity and is dependent on its parent/group for business, the AE is also somewhat dependent on the Indian entity for its operations/deliverables. Given the above and keeping in mind the fact that the AE has not attempted to engage another Indian person to perform software development support services in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding quality products to the customers and industrial community. This is an ayurvedic portal dedicated to B28 C market with online live consulting with out ayurvedic consultants. It provides excellent platform for trading of herbal products with identification raw herbs, scientific data, market and trade data, monographs, policy, laws, good manufacturing practices, DNA finger printing etc. It facilitates contacts with suppliers, manufacturers and dealers of herbal Pharma industry. In conclusion, the essence of the Ld. A.R's submission was that the activities undertaken Celestial Labs were in the nature of providing multitude of IT related services and some trading activity which was not comparable with the assessee and, thus, it was not comparable to the functional profile of the assessee and, accordingly, ought not to have been considered as comparable. 7.6 On the other hand, the Ld. D R fairly submitted that most of the issues raised by the assessee have since been dealt with in the assessee's own case in the immediately preceding assessment year wherein the earlier Bench had remitted back the issues to the TPO for fresh consideration. As such, the Ld. D R wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gard to the submissions of the Ld. A R in respect of (1) foreign exchange fluctuation gain (loss) and (2) risk profile, we are of the considered view that there is considerable force in the arguments put forth by the Ld. A R. the contentions of the appellant have not been given due weight-age at the time of finalizing the issues by the TPO as alleged by the assessee in its submissions ( supra ). In the interests of principles of natural justice and fair-play and since many of the issues have already been reverted back to the file of the TPO for fresh consideration, we are of the considered view that these issues require to be looked into afresh by the TPO in view of the assessee's assertions cited supra, both of these issues are also required to be remitted back to the file of the TPO for fresh consideration. It is ordered accordingly. 7.7.2 In respect of the appellant's other contention i.e., Celestial Labs Limited as a comparable, we would like to recall the findings of the Hon'ble Mumbai Bench 'E' in the case of Tevapharm (P.) Ltd. v. Addl. CIT [2012] 50 SOT 150/18 taxmann.com 148 (URO). The issue, in brief, before the Hon'ble Bench was that the ..... 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