TMI Blog2016 (2) TMI 1123X X X X Extracts X X X X X X X X Extracts X X X X ..... - IT(TP)A No. 212/Bang/2015, CO No.94/Bang/2015 - - - Dated:- 24-2-2016 - Abraham P. George (Accountant Member) And Vijay Pal Rao (Judicial Member) For the Revenue : Neera Malhotra, CIT(DR) For the Assessee : Padamchand Khincha, CA ORDER Vijay Pal Rao (Judicial Member) The appeal by the Revenue and the Cross Objection by the assessee are directed against the order dated 30.12.2014 passed by the Assessing Officer u/s. 143(3) r.w.s. 144C of the Income-tax Act, 1961 [ the Act ] in pursuance of the directions of the DRP dated 25.11.2014 for the assessment year 2010-11. 2. The Revenue has raised the following grounds in its appeal:- 1. The directions of the Dispute Resolution Panel are opposed to law and facts of the case. 2. On the facts and in the circumstances of the case the Dispute Resolution Panel erred in law in directing the AO to exclude reimbursement of specific expenditure both from the export turnover as well as from total turnover for the purpose of computation of deduction u/s 1OA, without appreciating the fact that the statute allows exclusion of such expenditure only from export turnover by way of specific definition of export turn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the Dispute Resolution Panel in so far as it relates to the above grounds may be reversed. 9. The appellant craves leave to add, alter, amend and/or delete any of the grounds mentioned above. 3. Ground No.1 is general in nature and does not require adjudication. 4. Ground Nos. 2 3 are regarding exclusion of expenditure incurred in foreign exchange from export turnover as well as from total turnover. 5. We have heard the ld. DR and the ld. AR as well as considered the material on record. At the outset, we note that this issue is covered by the Hon ble jurisdictional High Court in the case of ACIT v. Tata Elxsi Ltd., 349 ITR 49 [Karn] , wherein the Hon ble High Court has held as under:- 10. The Bombay High Court had an occasion to consider the meaning of the word 'total turnover' in the context of Section 10-A, in the case of CIT v. Gem Plus Jewellery India Ltd. [2011] 330 ITR 175 [2010] 194 Taxman 192 (Bom.). Interpreting sub-Section (4) of Section 10-A, it is held as under: Under sub-section (4) the proportion between the export turnover in respect of the articles or things, or, as the case may be, computer software exported, to the tot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er has not been defined at all by Parliament for the purposes of section 10A. However the expression export turnover has been defined. The definition of export turnover excludes freight and insurance. Since export turnover has been defined be Parliament and there is a specific exclusion of freight and insurance, the expression export turnover cannot have a different meaning when it forms a constituent part of the total turnover for the purposes of the application of the formula. Undoubtedly, it was open to Parliament to make a provision to the contrary. However, no such provision having been made, the principle which has been enunciated earlier must prevail as a matter of correct statutory interpretation. Any other interpretation would lead to an absurdity. If the contention of the Revenue were to be accepted, the same expression viz. export turnover would have a different connotation in the application of the same formula. The submission of the Revenue would lead to a situation where freight and insurance, though it has been specifically excluded from export turnover for the purposes of the numerator would be brought in as part of the export turnover when it forms a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . In other words, to the extent of export turnover, there would be a commonality between the numerator and the denominator of the formula. In view of the commonality, the understanding should also be the same. In other words, if the export turnover in the numerator is to be arrived at after excluding certain expenses, the same should also be excluded in computing the export turnover as a component of total turnover in the denominator. The reason being the total turnover includes export turnover. The components of the export turnover in the numerator and the denominator cannot be different. Therefore, though there is no definition of the term 'total turnover' in Section 10-A, there is nothing in the said Section to mandate that, what is excluded from the numerator that is export turnover would nevertheless form part of the denominator. Though when a particular word is not defined by the legislature and an ordinary meaning is to be attributed to the same, the said ordinary meaning to be attributed to such word is to be in conformity with the context in which it is used. When the statute prescribes a formula and in the said formula, 'export turnover' is defined, and wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r provision of software development as well as sales marketing services to its group EFI. The assessee has reported financial results along with segmental financials as per TP documentation for the assessment year under consideration, which are reproduced by the TPO in para 3 page 2 as under:- Financial results for the FY 2009-10 as per the P L A/C Service income (excld other income) 478,078,605 Total Expenditure 417,751,509 Less: Finance expenses 2,021,113 Operating Expenditure 415,730,396 Operating Profit 62,348,209 OP/OC 15.00% Segmental financials as per TP document Description Software Development Services Sales and Marketing Services Revenue 454,764,558 23,314,047 Exchange fluctuation gain 2,394,282 116,760 Total 457,158,840 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 ICRA Techno Analytics Ltd. (seg) 24.94% 25.91% 2 Infosys Ltd. 44.98% 46.00% 3 Kals Information Systems Ltd. (seg) 34.41% 31.68% 4 Larsen Toubro Infotech Ltd. 19.33% 20.66% 5 Mindtree Ltd. (seg) 14.83% 13.96% 6 Persistent Systems Solutions Ltd. 15.38% 16.37% 7 Persistent Systems Ltd. 30.35% 29.33% 8 R S Software (India) Ltd. 10.29% 11.68% 9 Sasken Communication Technologies 17.36% 17.65% 10 Tata Elxsi (Seg) 20.93% 18.42% 11 Thinksoft Global Services Ltd. 17.05% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not find any error or illegality in the findings of the DRP that this company is functionally not comparable with that of a pure software development service provider. (2) Infosys Ltd. 17. The assessee objected against the selection of this company on the ground that this company has a big name and brand value and therefore it has a bargaining power. It also contended that the turnover of this company is ₹ 21,140 crores, which is 442 times higher than the assessee. 18. The DRP accepted the objections of the assessee and by following the decision of the Delhi Benches of the Tribunal in the case of Agnity India Pvt. Ltd. v. ITO [2015] 58 taxmann.com 167 (Delhi Trib) , directed the TPO to exclude this company from the list of comparables. 19. We have heard the ld. DR as well as ld. AR and considered the relevant material on record. We note that in the case of Agnity India Pvt. Ltd. (supra) , the Delhi Bench of the Tribunal has considered the comparability of this company and the findings of the Delhi Bench of the Tribunal has been confirmed by the Hon ble Delhi High Court. The Hon ble Delhi High Court has observed that this company having brand value as well a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .2010, there are inventories of ₹ 60,47,977. Therefore, when this company is in the business of software products, the same cannot be compared with a pure software development services provider. Accordingly, we do not find any error or illegality in the impugned findings of the DRP. (4) Persistent Systems Ltd. 24. We have heard the ld. DR as well as ld. AR and considered the relevant material on record. The assessee raised objections against selection of this company on the ground that this company is functionally not comparable as engaged in the product development. The segmental information for services and product is not available. Further, the assessee has also pointed out that there was an acquisition and restructuring during the year under consideration. 25. The DRP has noted the fact that this company has reported the entire receipt from sales and software services and product. Therefore, no segmental information was found to be available for sale of software services and product. Further, the DRP has noted that as per Note 1 of Schedule 15, this company is predominantly engaged in outsource software development service. Apart from the revenue from software ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The assessee has raised objections against this company on the ground that the company is functionally different from the assessee. Though the TPO has considered the software development and services segment of this company as comparable to that of assessee, however, the assessee contended that even within the software segment, this company is engaged in diverse activities. The assessee placed reliance on the information in the annual report under the Directors Report and submitted before the DRP that even under the software development services segment, this company is engaged in various diversified activities including product design service, innovation design, engineering service, visual computing labs, etc. The assessee also placed reliance on the decision of Mumbai Bench of the Tribunal in the case of Telcordia Technologies Pvt. Ltd. v. ACIT, 137 ITD 1 (Mum) . 31. The DRP found that this company is not functionally comparable with assessee company as it is engaged in diversified activities even in the software development services. The DRP has followed the decision of the Mumbai Bench of the Tribunal in the case of Telcordia Technologies Pvt. Ltd. (supra) . 32. We have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that foreign exchange gain need to be considered as operating in nature, if it arises on realization of sale proceeds or on payment against supplies. The DRP has accepted the contention of the assessee by following the decision in the case of SAP Labs India Pvt. Ltd. (supra) and accordingly directed the AO to consider the foreign exchange fluctuation in respect of assessee company as well as comparables as operating in nature. 35. We have considered the rival submissions as well as the relevant material on record. There is no quarrel on the point that if the foreign exchange fluctuation gain/loss arises in relation to the realization of sale proceeds or payment against supplies, then it will be in the nature of operating gain/loss. Only in the case where the foreign exchange gain/loss pertains to non-trading receipts or payment, the same cannot be considered as part of the operating margins. Similar view has been taken by the coordinate Bench of this Tribunal in the case of Obopay Mobile Technology India Pvt. Ltd. in IT(TP)A No.469/Bang/2015 vide order dated 8.1.2016. Accordingly, we direct the AO/TPO to verify the actual source of foreign exchange gain/loss in the case of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of 6 comparable companies selected by the TPO against which Revenue has filed appeal before us. We will discuss comparability of two companies which are excluded by the DRP and challenged by the Revenue as under:- (1) HCCA Business Services Pvt. Ltd. 41. The assessee objected against inclusion of this company in the list of comparables on the ground that this company is engaged in providing payroll process services and therefore it is functionally different. In support of its contention, the assessee referred to Notes to the Accounts wherein the company s operations comprise of payroll processing services is mentioned and hence it is not possible to give the quantitative details of sales and certain information separately. 42. The DRP after considering the annual report noted that except the Note 2.14, there is no other observation in the annual report from which it can be established that the company is engaged in marketing and sales support services comparable to the assessee. Accordingly, the DRP directed the AO to exclude the said company from the comparables. 43. We have heard the ld. DR as well as ld. AR and considered the relevant material on record. The DRP ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his company is less than 75% of the total revenue, a filter applied by the TPO. Once the TPO has applied a filter of 75% of export sale, then this company which fails the filter applied by the TPO cannot be considered as a good comparable. Further, we note that this company is entirely in a different activity with that of the assessee. Undisputedly, this company is acting as agent for various foreign principals for sale of dredgers, dredging equipment, steerable rudder propulsions and other equipments and machineries. Accordingly, we do not find any error or illegality in the findings of the DRP and direct the AO to exclude this company from the comparables. CO No.94/B/15 (By assessee) 50. The assessee has raised various objections in the CO. However, we find that the only effective ground raised by the assessee in the marketing support segment is regarding Asian Business Exhibition Conference Ltd., a comparable selected by the TPO and retained by the DRP. 51. The assessee objected against this company on the ground that this company is functionally different as it is engaged in organizing exhibitions and conferences. The DRP did not accept the contention of the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... observe, on perusal of annual report of this company it is seen that as per directors report, the main operation is organizing exhibition and events. Further, schedule 12 of the profit and loss account as well as notes to the accounts reveals, revenue earned by the company is from sponsorship, delegates attending conferences, events and entry fees charged from visitors for visiting exhibition, sale of stall place etc. 12. Thus, on overall analysis of facts and materials placed on record it is very much clear that the business model of the assessee and Asian Business Exhibition and Conferences Limited are totally different. While assessee undoubtedly is providing support services to its overseas AE s, Asian Business Exhibition and Conferences Limited is primarily and fundamentally engaged in event management. Thus, under no circumstances it can be considered as a comparable to the assessee. Therefore, for the aforestated reasons the DRP, in our view, was justified in excluding this company as a comparable. As far as the contention of learned DR that reasons on which this company was excluded equally applies to other comparables retained by the DRP, we may observe, such argumen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . DR and considered the relevant material on record. At the outset, we note that this company has reported expenditure in foreign currency at ₹ 124.2 crores as against earning in foreign currency at ₹ 158.3 crores. Therefore, it is clear that more than 80% of the expenditure has been incurred by this company in foreign branch expenditure, which shows that the company has main activity of onsite software development. In view of the above fact, we do not find any error or illegality in the finding of the DRP in excluding this company from the list of comparables. This ground is dismissed. Persistent Systems Solutions Ltd. 60. The assessee has the grievance against rejection of this company by the DRP. The ld. AR has submitted that assessee did not raise any objection against this company, however, the DRP has rejected the said company. Therefore, the said company should be retained in the list of comparables. 61. Having considered the rival submissions as well as relevant material on record, at the outset, we note that the DRP has examined the functional comparability of this company by considering the relevant details as given in the annual report of this co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as examined annual report of this company and found that this company earns revenue from software development services and accordingly is comparable. 65. We have considered the rival submissions and relevant material on record. We find that in the normal circumstances the tolerance range of RPT should not be more than 15%. In the case of the assessee, the availability of the comparable is not an issue and therefore we do agree with the view taken by the coordinate Benches of the Tribunal that the threshold limit of tolerance range should not exceed 15% as far as RPT revenue is concerned. Therefore, we direct the AO/TPO to apply 15% RPT filter in respect of all the comparables. 66. As regards the functional comparability of this company is concerned, the assessee has referred to the income under the head software development services and products. However, it is not clear from the details whether any revenue is earned from products or entire revenue is from the software development services. Therefore, in the facts and circumstances of the case, we direct the AO/TPO to verify the details of the revenue earned by this company and if the revenue earned of this company during the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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