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M/s. Actiance India Private Limited (Formerly known as FaceTime Communications India Private Limited Versus The Income Tax Officer

Computation of deduction under section 10A - AO and DRP excluding expenses incurred on travel expenses in foreign currency and expenses incurred towards telecommunication expenses from export turnover on the ground that these expenses are incurred in rendering technical services rendered to clients outside India - Held that:- Taking into consideration the decision rendered by the Hon’ble High Court of Karnataka in the case of CIT v. Tata Elxsi Ltd [2011 (8) TMI 782 - KARNATAKA HIGH COURT] we are .....

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8 comparable companies [Avani Cimcon Technologies Ltd., Celestial Biolabs Ltd.,KALS Information Systems Ltd., Infosys Technologies Ltd., Wipro Ltd., Tata Elxsi Ltd.,Thirdware Solutions Ltd.,. Lucid Software Ltd.] as not functionally comparable with a software development service provider such as the Assessee - Decided in favour of assessee. - IT(TP)A No.1186/Bang/2012 - Dated:- 10-4-2015 - Shri N.V. Vasudevan And Shri Jason P. Boaz JJ. For the Appellant : Shri Chavali S.Narayan, C.A. For the Res .....

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el excluding expenses incurred on travel expenses in foreign currency and expenses incurred towards telecommunication expenses from export turnover on the ground that these expenses are incurred in rendering technical services rendered to clients outside India, while computing deduction under section 10A. It is the plea of the Assessee that at all times during the relevant previous year, it was engaged in development of computer software and not in rendering any technical services. Without preju .....

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he ld. DR on the issues raised in ground Nos.2 to 4. Taking into consideration the decision rendered by the Hon ble High Court of Karnataka in the case of CIT v. Tata Elxsi Ltd [2012] 349 ITR 98 (Karn), we are of the view that it would be just and appropriate to direct the Assessing Officer to exclude expenses incurred in foreign currency towards travelling and expenses incurred towards telecommunication both from export turnover and total turnover, as has been prayed for by the assessee in grou .....

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peal challenging the comparability of comparable companies with that of the Assessee alone need be adjudicated and the other grounds of appeal may not require adjudication and kept open. The comparable companies chosen by the TPO and the addition made by the AO in the draft assessment order which was confirmed by the DRP are identical to the case decided by the Tribunal in ITA No.1303/Bang/2012 for AY 08-09 in M/S.3DPLM Software Solutions Ltd. Vs. DCIT order dated 28.11.2013. It was also submitt .....

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s to its holding company. It was remunerated on a cost plus 10% mark up for services rendered to its holding company. It is not in dispute before us that the transaction of providing software research & development support services by the Assessee to its holding company was an international transaction with the Associated Enterprise (AE) and therefore the price at which the assessee renders services to its AE has to pass the Arm s Length Price (ALP) test as laid down by section 92C of the Ac .....

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quired by the provisions of section 92E of the Act in Form 3EB together with detailed analysis. The assessee adopted Transaction Net Margin Method (TNMM) as the most appropriate method for determining the ALP. Operating profits to cost was adopted as the Profit Level Indicator ( PLI ). The PLI of the assessee was arrived at as follows:- Operating Revenue Rs.15,54,90,786 Operating Cost Rs.13,52,09,383 Operating Profit Rs.2,02,81,403 Op.pr/cost% 15.00% 7. The TPO arrived at a final set of 20 compa .....

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are (India) Ltd. 7.41 15 Sasken CommunicationTechnologies Ltd. (Seg) 7.58 16 Tata Elxsi (Seg) 18.97 17 Thirdware Solution Ltd. 19.35 18 Wipro Ltd. (Seg) 28.45 19 Softsol India Ltd. 17.89 20 ucid Software Ltd. 16.50 AVERAGE 23.65 8. The assessee raised various objections to the methodology adopted and the reasons assigned by the TPO for rejecting the comparables chosen by the assessee in its TP study. In the course of proceedings before the TPO, notice u/s. 133(6) has been issued to the companies .....

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d arithmetic mean was determined at 23.26%. The computation of the ALP by the TPO in this regard was as follows:- 4.4. Computation of Arms Length Price: The arithmetic mean of the Profit Level indicators is taken as the arms length margin. (Please see Annexure B for details of computation of PLI of the comparables). Based on this, the arms length price of the software development services rendered by the taxpayer to its AE(s) is computed as under:- Arm s length mean margin on cost 23.65% Less: W .....

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TPO which was incorporated in the draft assessment order by the AO, the assessee filed objections before the DRP. The DRP rejected those objections and confirmed the transfer pricing adjustment suggested by the TPO. The adjustment confirmed by the DRP was added to the total income of the assessee by the AO in the fair order of assessment. Against the said order of the Assessing Officer, the assessee has preferred the present appeal before the Tribunal. 10. The ld. counsel for the assessee brough .....

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elected by the TPO as a comparable. The assessee objects to the inclusion of this company as a comparable on the ground that this company is not functionally comparable to the assessee as it is into software products whereas the assessee offers software development services to its AEs. The TPO had rejected the objections of the assessee on the ground that this comparable company has categorized itself as a pure software developer, just like the assessee, and hence selected this company as a comp .....

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ubmitted that the segmental details of this company are not available and the Annual Report available in the public domain is not complete. It was further contended that the information obtained by the TPO under section 133(6) of the Act, on the basis of which the TPO included this company in the final list of comparable companies, has not been shared with the assessee. In support of this contention, the learned Authorised Representative placed reliance on the following judicial decisions : i) T .....

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nged from the earlier year (i.e. Assessment Year 2007-08) to the period under consideration (i.e. Assessment Year 2008-09). In support of this contention, it was submitted that :- (i) The extract from the Website of the company clearly indicates that it is primarily engaged in development of software products. The extract mentions that this company offers customised solutions and services in different areas; (ii) The Website of this company evidences that this company develops and sells customiz .....

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thorised Representative, we are unable to agree that this company has to be deleted from the list of comparables only because it has been deleted from the set of comparables in the case of Trilogy E-Business Software India Pvt. Ltd. (supra). No doubt this company has been deleted as a comparable in the case of Trilogy E-Business Software India Pvt. Ltd. (supra) and this can be a good guidance to decide on the comparability in the case on hand also. This alone, however, will not suffice for the f .....

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he facts applicable to the Assessment Year 2007-08, the year for which the decision in case of Trilogy E-Business Software India Pvt. Ltd. (supra) was rendered are also applicable to the year under consideration i.e. Assessment Year 2008-09. 9.5.3 It is a well settled principle that the assessee is required to perform FAR analysis for each year and it is quite possible that the FAR analysis can be different for each of the years. That being so, the principle applicable to one particular year can .....

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Year 2007-08. The assessee, in our view, has not demonstrated that the facts of Trilogy E-Business Software India Pvt. Ltd. (supra) are identical to the facts of the case on hand and that the profile of the assessee for the year under consideration is similar to that of the earlier Assessment Year 2007-08. In view of facts as discussed above, we deem it fit to remand the matter back to the file of the Assessing Officer / TPO to examine the comparability of this company afresh by considering the .....

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, but only as an additional comparable for the reason that it was selected as a comparable in the earlier year i.e. Assessment Year 2007-08 on the basis of information obtained under section 133(6) of the Act. In this regard, the learned Authorised Representative took us through the relevant portions of the TP order under section 92CA of the Act and the show cause notices for both the earlier year i.e. Assessment Year 2007-08 and for this year and contended that the selection of this company as .....

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the Tribunal in the assessee's own case for Assessment Year 2007-08 (supra) and in other cases like Trilogy E-Business Software India Pvt. Ltd. (supra) are applicable to the year under consideration as well. 7.5 Per contra, the learned Departmental Representative supported the order of the TPO / DRP for inclusion of this company Avani Cincom Technologies Ltd. in the final set of comparables. 7.6.1 We have heard both parties and perused and carefully considered the material on record. It is .....

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sessee has vitiated the selection of this company as a comparable. 7.6.2 We also find substantial merit in the contention of the learned Authorised Representative that this company has been selected by the TPO as an additional comparable only on the ground that this company was selected in the earlier year. Even in the earlier year, it is seen that this company was not selected on the basis on any search process carried out by the TPO but only on the basis of information collected under section .....

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company have not undergone any change during the year under consideration which fact has been demonstrated by the assessee, following the decisions of the co-ordinate benches of this Tribunal in the assessee's own case for Assessment Year 2007-08 in ITA No.845/Bang/2011 dt.22.2.2013, and in the case of Trilogy EBusiness Software India Pvt. Ltd. (ITA No.1054/Bang/2011), we direct the A.O./TPO to omit this company from the list of comparables. 12. The learned DR relied on the orders of the Re .....

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ys Technologies Ltd., Wipro Limited and TATA Elxsi Ltd., chosen as comparable companies by the TPO should be excluded as functionally not comparable with a company engaged in software development services such as the Assessee, as laid down by the Hon ble ITAT, Bangalore Bench in the case of 3DPLM Software Solutions Ltd. (supra), wherein it was held as follows: 9. Celestial Biolabs Ltd. 9.1 This comparable was selected by the TPO for inclusion in the final list of comparables. Before the TPO, the .....

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objections by observing that the employee cost filter is only a trigger to know the functionality of the company. 9.2 Before us, the learned Authorised Representative contended that this company is not functionally comparable, as the company is into bio-informatics software product / services and the segmental break up is not provided. It was submitted that :- (i) This company is engaged in the development of products in the field of bio-technology, pharmaceuticals, etc. and therefore is not fu .....

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ny and therefore cannot be considered as comparable functionally with the assessee. There has been no attempt to identify, eliminate and make adjustment of the profit margins so that the difference in functional comparability can be eliminated. By not resorting to such a process of making adjustments, the TPO has rendered this company as not qualifying for comparability. We therefore accept the plea of the assessee in this regard. (iv) The rejection / exclusion of this company as a comparable fo .....

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ose of comparability in the instant case and hence ought to be rejected. In support of this contention, the assessee has also referred to and quoted from various parts of the Annual Report of the company. 9.3 Per contra, the learned Departmental Representative supported the inclusion of this company in the list of comparable companies. The learned Departmental Representative submitted that the decisions cited and relied on by the assessee are for Assessment Year 2007-08 and therefore there canno .....

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the TPO as well who seems to have selected this company as a comparable based on the reasoning given in the TPO s order for the earlier year. It is evidently clear from this, that the TPO has not carried out any independent FAR analysis for this company for this year viz. Assessment Year 2008-09. To that extent, in our considered view, the selection process adopted by the TPO for inclusion of this company in the list of comparables is defective and suffers from serious infirmity. 9.4.2 Apart fro .....

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different from the assessee. It has also been so held by coordinate benches of this Tribunal in the assessee's own case for Assessment Year 2007-08 (supra) as well as in the case of Trilogy E-Business Software India Pvt. Ltd. (supra). In view of the fact that the functional profile of and other parameters of this company have not changed in this year under consideration, which fact has also been demonstrated by the assessee, following the decision of the co-ordinate benches of the Tribunal .....

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the segmental details have not been provided in the Annual Report of the company with respect to software services revenue and software products revenue. The TPO, however, rejected the objections of the assessee observing that the software products and training constitutes only 4.24% of total revenues and the revenue from software development services constitutes more than 75% of the total operating revenues for the F.Y. 2007- 08 and qualifies as a comparable by the service income filter. 10.2 B .....

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l in the assessee's own case. This company has been held to be different from a software development company in the decision of the Tribunal in the case of Bindview India Pvt. Ltd. V DCIT in ITA No.1386/PN/2010. (iii) The rejection of this company as a comparable has been upheld by co-ordinate benches of the Tribunal in the case of - Trilogy E-Business Software India Pvt. Ltd. (ITA No.1054/Bang/2011). LG Soft India Pvt. Ltd. (IT (TP) A No.112/Bang/2011) CSR India Pvt. Ltd. (IT (TP) A No.1119 .....

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is engaged not only in the development of software products but also in the provision of training services as can be seen from the website and the Annual Report of the company for the year ended 31.3.2008. (vi) This company has two segments; namely, a) Application Software Segment which includes software product revenues from two products i.e. Virtual Insure and La-Vision and b) The Training segment which does not have any product revenues. 10.3 Per contra, the learned Departmental Representati .....

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and the same is evident from the details culled out from the Annual Report and quoted above (supra). 10.4 We have heard both parties and perused and carefully considered the material on record. We find from the record that the TPO has drawn conclusions as to the comparability of this company to the assessee based on information obtained u/s.133(6) of the Act. This information which was not in the public domain ought not to have been used by the TPO, more so when the same is contrary to the Annua .....

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sessee has also brought on record evidence from various portions of the company s Annual Report to establish that this company is functionally dis-similar and different form the assessee and that since the findings rendered in the decisions of the co-ordinate benches of the Tribunal for Assessment Year 2007-08 (cited supra) are applicable for this year i.e. Assessment Year 2008-09 also, this company ought to be excluded from the list of comparables. In this view of the matter, we hold that this .....

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y relevant in the software development segment. 11.2 Before us, the learned Authorised Representative contended that this company is not functionally comparable to the assessee in the case on hand. The learned Authorised Representative drew our attention to various parts of the Annual Report of this company to submit that this company commands substantial brand value, owns intellectual property rights and is a market leader in software development activities, whereas the assessee is merely a sof .....

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n additional advantage in the market. It is submitted that this decision is applicable to the assessee's case, as the assessee does not own any intangibles and hence Infosys Technologies Ltd. cannot be comparable to the assessee ; (ii) the observation of the ITAT, Delhi Bench in the case of Agnity India Technologies Pvt. Ltd. in ITA No.3856 (Del)/2010 at para 5.2 thereof, that Infosys Technologies Ltd. being a giant company and market leader assuming all risks leading to higher profits canno .....

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ning high performance structural systems. In view of the above reasons, the learned Authorised Representative pleaded that, this company i.e. Infosys Technologies Ltd., be excluded form the list of comparable companies. 11.3 Per contra, opposing the contentions of the assessee, the learned Departmental Representative submitted that comparability cannot be decided merely on the basis of scale of operations and the brand attributable profit margins of this company have not been extraordinary. In v .....

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ware India Pvt. Ltd. (supra) for Assessment Year 2007-08 is applicable to this year also. We are inclined to concur with the argument put forth by the assessee that Infosys Technologies Ltd is not functionally comparable since it owns significant intangible and has huge revenues from software products. It is also seen that the break up of revenue from software services and software products is not available. In this view of the matter, we hold that this company ought to be omitted from the set o .....

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at this company i.e. Wipro Ltd., is not functionally comparable to the assessee for the following reasons:- (i) This company owns significant intangibles in the nature of customer related intangibles and technology related intangibles, owns IPRs and has been granted 40 registered patents and has 62 pending applications and its Annual Report confirms that it owns patents and intangibles. (ii) the ITAT, Delhi observation in the case of Agnity India Technologies Pvt. Ltd. in ITA No.3856(Del)/2010 a .....

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cheme of amalgamation in the last two years. (v) Wipro Ltd. is engaged in both software development and product development services. No information is available on the segmental bifurcation of revenue from sale of products and software services. (vi) the TPO has adopted consolidated financial statements for comparability purposes and for computing the margins, which is in contradiction to the TPO s own filter of rejecting companies with consolidated financial statements. 12.3 Per contra, the le .....

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of product and software services. The TPO appears to have adopted this company as a comparable without demonstrating how the company satisfies the software development sales 75% of the total revenue filter adopted by him. Another major flaw in the comparability analysis carried out by the TPO is that he adopted comparison of the consolidated financial statements of Wipro with the stand alone financials of the assessee; which is not an appropriate comparison. 12.4.2 We also find that this company .....

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les, following the aforesaid decision of the co-ordinate bench of the Tribunal i.e. 24/7 Customer.Com Pvt. Ltd. (supra), we hold that this company cannot be considered as a comparable to the assessee. We, therefore, direct the Assessing Officer/TPO to omit this company from the set of comparable companies in the case on hand for the year under consideration. 13. Tata Elxsi Ltd. 13.1 This company was a comparable selected by the TPO. Before the TPO, the assessee had objected to the inclusion of t .....

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product design, (b) innovation design engineering and (c) visual computing labs as is reflected in the annual report of the company. The learned Authorised Representative submitted that, (i) The co-ordinate bench of the Mumbai Tribunal in the case of Telecordia Technologies Pvt. Ltd. (supra) has held that Tata Elxsi Ltd. is not a functionally comparable for a software development service provider. (ii) The facts pertaining to Tata Elxsi Ltd. have not changed from the earlier year i.e. Assessmen .....

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iv) Tata Elxsi Ltd. invests substantial funds in research and development activities which has resulted in the Embedded Product Design Services Segment of the company to create a portfolio of reusable software components, ready to deploy frameworks, licensable IPs and products. The learned Authorised Representative pleads that in view of the above reasons, Tata Elxsi Ltd. is clearly functionally different / dis-similar from the assessee and therefore ought to be omitted form the list of comparab .....

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services and are not similar to software development services performed by the assessee. 13.4.2 The Hon'ble Mumbai Tribunal in the case of Telecordia Technologies India Pvt. Ltd. V ACIT (ITA No.7821/Mum/2011) has held that Tata Elxsi Ltd. is not a software development service provider and therefore it is not functionally comparable. In this context the relevant portion of this order is extracted and reproduced below :- …. Tata Elxsi is engaged in development of niche product and devel .....

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able to treat this company as fit for comparability analysis for determining the arm s length price for the assessee, hence, should be excluded from the list of comparable portion. As can be seen from the extracts of the Annual Report of this company produced before us, the facts pertaining to Tata Elxsi have not changed from Assessment Year 2007-08 to Assessment Year 2008-09. We, therefore, hold that this company is not to be considered for inclusion in the set of comparables in the case on han .....

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fit margin while determining ALP. 15. The learned counsel for the Assessee next point out that Thirdware Solutions Ltd., Lucid Software Ltd., chosen as comparable companies by the TPO should be excluded as functionally not comparable with a company engaged in software development services such as the Assessee, as laid down by the Hon ble ITAT, Bangalore Bench in the case of 3DPLM Software Solutions Ltd. (supra), wherein it was held as follows:- 15. Thirdware Solutions Ltd. (Segment) 15.1 This co .....

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this regard, the learned Authorised Representative submitted that :- (i) This company is engaged in product development and earns revenue from sale of licences and subscription. It has been pointed out from the Annual Report that the company has not provided any separate segmental profit and loss account for software development services and product development services. (ii) In the case of E-Gain communications Pvt. Ltd. (2008-TII- 04-ITAT-PUNE-TP), the Tribunal has directed that this company b .....

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e heard the rival submissions and perused and carefully considered the material on record. It is seen from the material on record that the company is engaged in product development and earns revenue from sale of licenses and subscription. However, the segmental profit and loss accounts for software development services and product development are not given separately. Further, as pointed out by the learned Authorised Representative, the Pune Bench of the Tribunal in the case of E-Gain Communicat .....

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cid Software Ltd. 16.1 This company was selected as a comparable by the TPO. Before us, the assessee has objected to the inclusion of this company as a comparable on the grounds that it is into software product development and therefore functionally different from the assessee. In this regard, the learned Authorised Representative submitted that - (i) This company is engaged in the development of software products. (ii) This company has been held to be functionally different and therefore not co .....

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011) and CSR India Pvt. Ltd. [ IT(TP)A No.1119/Bang/2011 ] and by the Delhi Bench of the Tribunal in the case of Transwitch India Pvt. Ltd. (ITA No.6083/Del/2010). (iv) The factual position and circumstances pertaining to this company has not changed from the earlier Assessment Year 2007-08 to the period under consideration i.e. Assessment Year 2008-09 and therefore on this basis, this company cannot be considered as a comparable in the case on hand. (v) The relevant portion of the Annual Report .....

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herefore this company i.e. Lucid Software Ltd., ought to be omitted from the list of comparables. 16.2 per contra, the learned Departmental Representative supported the action and finding of the TPO in including this company in the list of comparables. 16.3 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the details on record that the company i.e. Lucid Software Ltd., is engaged in the development of software products whereas the a .....

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n the software product development and not software development services, it is functionally different and dis-similar and is therefore to be omitted from the list of comparables for software development service providers. The assessee has also brought on record details to demonstrate that the factual and other circumstances pertaining to this company have not changed materially from the earlier year i.e. Assessment Year 2007-08 to the period under consideration i.e. Assessment Year 2008-09. In .....

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Forum: 3B mistake

Notification: Seeks to amend notification no. 1/2017- central tax(rate) dated 28.06.2017 to give effect to gst council decisions regarding gst rates

Notification: Seeks to amend notification no. 1/2017- integrated tax(rate) dated 28.06.2017 to give effect to gst council decisions regarding gst rates.

Forum: GST - TRAN1 - filed - Data uploaded with Remarks Processed with Error - Not coming in Electronic credit ledger - need suggession guidance

News: Notification Issued For GST Actionable Claim On Branded Food Products

Highlight: Classification printed computer stationary/manifold Business Forms - to be classified under Chapter Heading 4820.00 or under Chapter Heading 4901.90 - items like A4 sheets, advertisement and job card to be classified under Chapter 49

Forum: GST Invoice

Article: Websites of Government Departments need lot of improvement. We are noticing detoriations in them for example, case of website of ITAT.

Article: RCM – Applicability to persons not liable to get registered us 23(1)

Article: Credit of unsold stock [Section 140(3)] - Actual Credit as well as Notional Credit - Part-I - GST Transitional provisions

News: GST Refund - Blockage of Working Capital of Exporters - earlier also there was a normal blockage of funds for a period of 5-6 months at least

News: Clarification about Transition Credit - ₹ 1.27 lakh crore of credit of Central Excise and Service Tax was lying as closing balance as on 30th June, 2017 - claim of credit of ₹ 65,000 crore is not unexpected

Article: 20 Things You must know about E Way Bills in GST Law

Article: MISTAKES IN DRAFTING

Forum: Duty Drawback- Urgent

Highlight: The Customs and Central Excise Duties Drawback Rules, 2017 and All Industry Rates (AIRs) of Drawback related changes -reg. - Circular

Highlight: The definition of "subsidiary company" or "subsidiary" u/s 2(87) of the Companies Act, 2013 shall come into force w.e.f. 20-9-2017

Highlight: Central Government notified the All Industry Rates of Duty Drawback Schedule w.e.f. 1.10.2017 - Notification

Notification: All Industry Rates of Duty Drawback Schedule w.e.f. 1.10.2017

Circular: Investment by Foreign Portfolio Investors in Corporate Debt Securities – Review

Notification: Exemptions on supply of services under UTGST Act

Notification: Rates for supply of services under UTGST Act

Notification: Exemptions on supply of services under IGST Act

Notification: Rates for supply of services under IGST Act

Notification: List of Exempted supply of services under the CGST Act

Notification: Rates for supply of services under CGST Act

Highlight: Acceptance of deposits by companies from its members - conditions relaxed in case of Specified IFSC Public company and a private company - Rule 3 amended

Notification: Rate of exchange of conversion of the foreign currency with effect from 8th September, 2017

News: Tax Payers Advised To Confirm Identities Of Income Tax Search Authorities

Notification: Amendment in Appendix 3 (SCOMET items) to Schedule- 2 of ITC (HS) Classification of Export and Import Items 2012

Notification: The Customs and Central Excise Duties Drawback Rules, 2017

Circular: The Customs and Central Excise Duties Drawback Rules, 2017 and All Industry Rates (AIRs) of Drawback related changes -reg.



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