TMI Blog2016 (11) TMI 1482X X X X Extracts X X X X X X X X Extracts X X X X ..... d in the assessee’s own case. Deduction u/s 10A computation - AO excluding the three items of expenses claimed by the assessee from `Export turnover’ alone - Held that:- AO computed deduction u/s 10A by reducing the three expenses from the figure of `Export turnover’ without correspondingly reducing such amounts from the figure of ‘total turnover’ in the formula given for computing the amount of deduction. This approach, in our considered opinion, is not right. When a particular amount is excluded from the numerator of `Export turnover’, it has, naturally, to be excluded from the denominator of `Total turnover’ as well in the computation of deduction u/s 10A. It is so for the reason that `Total turnover’ always includes `export turnover’ and if a particular item is not a part of export turnover, that cannot partake the character of total turnover as well. Excluding proportionate amount of interest income from the total profits in the re-computation of deduction u/s 10A - Held that:- In computing the Income under the head `Profit and gains of business or profession’ (before/ after apportionment of interest income to the Noida Unit-IV), the assessee started with Profit before t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and 6 are against the disallowance u/s 40(a)(i) of the Act of expenditure amounting to ₹ 26,63,16,345/- incurred by the assessee as Management services fees on the ground that the assessee failed to deduct tax at source in terms of section 195 of the Act. 4.2. Briefly stated, the facts of this ground are that the assessee incurred an expenditure of ₹ 26.63 crore as remuneration for Management services to Groupe Steria SCA (Steria France). No deduction of tax at source was made before making this payment. Invoking the provisions of Section 40(a)(i) read with section 195 of the Act, the AO disallowed this expenditure. In doing so, he noticed that the assessee s application filed before the Authority for Advance Ruling (AAR) was dismissed vide Ruling dated 2.5.2014 holding that the payment made by the assessee for the Management services provided by Groupe Steria SCA will be taxable as Fee for technical services and, accordingly, the assessee is liable to withhold tax as per the provisions of section 195 of the Act. 4.3. We have heard the rival submissions and perused the relevant material on record. The ld. AR has brought to our notice that the said Ruling of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al turnover in the formula given for computing the amount of deduction. This approach, in our considered opinion, is not right. When a particular amount is excluded from the numerator of `Export turnover , it has, naturally, to be excluded from the denominator of `Total turnover as well in the computation of deduction u/s 10A. It is so for the reason that `Total turnover always includes `export turnover and if a particular item is not a part of export turnover, that cannot partake the character of total turnover as well. The Hon ble Bombay High Court in CIT vs. Gemplast Jewellery India Ltd. (2011) 330 ITR 175 (Bom) has held to this extent. Similar view has been taken by the Delhi Bench of the Tribunal in assessee s own case for the A.Y. 2009-10, a copy of which order is available on record. Respectfully following the precedent, we direct that the total of the above referred three expenses be simultaneously excluded from the amount of Total turnover as well. 6.1. Ground no. 7 is against excluding proportionate amount of interest income from the total profits in the re-computation of deduction u/s 10A of the Act. The facts of this ground are that the AO in recomputing the am ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... crore has been excluded from the business income, which also includes eligible income from Noida Unit-IV STP. 6.3. To be more specific, the computation of deduction u/s 10A is available on pages 509 and 510 of the paper book as Annexure 10 to the computation of total income. The assessee also placed before the AO unit-wise profits, whose copy has been placed before us. From this unitwise Profit Loss Account, it can be seen that the assessee computed Profit before tax of Noida Unit IV at ₹ 1,56,686/- (in ₹ 000). In computing such profit, the assessee included interest on bank deposits at ₹ 62 (in ₹ 000). While computing the amount of deduction u/s 10A as per Annexure 10, the assessee started with this figure of ₹ 15,66,85,756/- as profit before tax as per the P L Account. Thereafter, interest income of ₹ 62,481/- was reduced as Income to be assessed separately. After making certain additions and deletions, being the items inadmissible and admissible under the Income-tax Act, 1961, the assessee computed income under the head Profit and gains of business or profession relatable to Noida Unit-IV at ₹ 26,37,50,768/-. It is this figur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng of transfer pricing adjustment amounting to ₹ 75,47,44,000/- in the `Software development services segment of the assessee. 9.2. Briefly stated, the facts of the case are that the assessee is a subsidiary of Steria UK Corporate Ltd., UK, an I.T. service company in the United Kingdom. The assessee provides both software and BPO services to its customers. It reported, inter alia, an international transaction of `Provision of software services with the transacted value of ₹ 3,31,67,83,807/-. The Transactional Net Margin Method (TNMM) was selected as the most appropriate method with the Profit level indicator (PLI) of Operating Profit/Operating Cost (OP/OC). Certain companies were selected, whose mean OP/OC was shown within the permissible range of the assessee s declared profit rate. The AO made a reference to the Transfer Pricing Officer (TPO) for determining the arm s length price (ALP) of the international transactions. In the original order dated 17.1.2014 passed by the TPO, 16 companies were considered as comparable with an average of OP/OC at 33.45%. The Dispute Resolution Panel (DRP), vide its order dated 20.10.2015, directed to consider the forex fluctuatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n given in para 2.03 of the TP study report, which manifests that the Steria Group is a major I.T. service provider in Europe in Public sector, Financial services, Telecommunications and media, Retail, Utilities and Transport. Profile of the assessee has been set out in para 2.02 of the paper book. Under the segment Software services , the assessee is engaged in providing Software development services to Steria UK both offshore software development services rendered in India and onsite software development rendered at the client s location in UK. Apart from that, the assessee is also providing Maintenance services to Steria Ltd., UK in respect of the projects handled from India and the projects executed at the client s location in UK. In addition, the assessee is providing Testing services, which comprise of Testing and quality assurance consultancy, Managed testing services, Business process testing, Test automation, Specialized testing and Test environment services. We have also gone through the Agreement effective from 1.4.2009 between the assessee and Steria Ltd., UK, whose copy has been provided to us. This Agreement provides that Steria Ltd., UK, undertakes software projects ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the related segment results. In such a later case, the company treated as non-comparable to the first company may become comparable to the second company. To put it simply, if company A has been held to be incomparable vis-a-vis company B , then it is not essential that company A would be incomparable to company C also. What is relevant to consider is, firstly, the functional profile of company A vis-a-vis company C . If both are functionally similar, then notwithstanding the fact that company A was held to be incomparable to company B , it may still be comparable to company C . Despite the fact that company A is functionally similar to company B , it still might have been declared as incomparable to company B because of other relevant reasons. If company A passes the same reasons vis-avis company C , then company A will find its place in the list of comparables of company C , notwithstanding the fact that it was held to be incomparable to company B . The crux of the matter is that the mere fact that company A has been held to be not comparable in a judicial order passed in the case of company B , does not per se make it incomparable in all the subsequ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pment services. Since there is no separate information available of this company relating to Software development services and the details of income have been given in a consolidated manner also including I.T. enabled services segment, we are not inclined to treat this company as comparable on entity level with the only Software development services segment of the assessee. This company is, therefore, directed to be excluded from the list of comparables. ii) Thirdware Solutions 15.1. The TPO proposed this company as comparable. The assessee objected to its inclusion in the list of comparables by contending that its segmental results were drawn on geographical basis. The TPO rejected the assessee s contention by noticing that the revenues in the Overseas segment came from export of software services and the balance revenue coming from India segment were in relation to Subscription, Sale of licence and Other software services. The assessee is aggrieved against the inclusion of this company in the list of comparables on the basis of such geographical segments. 15.2. We have heard the rival submissions and perused the relevant material on record. The Annual accounts of this co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of Sales and support amounting to ₹ 2167.51 lac. As the assessee is not engaged in any sale of products, this company, on entity level, ceases to be comparable. We, therefore, order for the exclusion of this company. iv) Sasken Communications 17.1. This company was originally taken by the assessee as comparable, which was not objected to by the TPO. The ld. AR contended that this company was inadvertently included in the list of comparables. Inviting our attention towards the Annual report of this company, it was impressed that it has shown revenues under one head alone with the caption of Revenues , which is common to Software services, Software products and Other services. As the assessee was not engaged in any software Products, the ld. AR contended that the same be excluded. 17.2. The ld. DR vigorously objected to the even consideration of the contention of the assessee for the exclusion of Sasken Communications on the reasoning that it was chosen as comparable by the assessee itself and now it was impermissible to resile from its own stand. Referring to page 213 of the paper book, being Annexure 4, which is part of the Transfer pricing study report, the ld ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 17.4. Reverting to the facts of the extant case, we find that the assessee itself treated this company as comparable not only in this year but also in at least two preceding years. Though there is no legal embargo in claiming that this company was wrongly treated as comparable, but the TPO must get an opportunity to vet the assessee s claim of non-comparability. The Annual report of this company giving break-up of the segmental revenues etc. was not available with the TPO, who simply accepted the assessee s claim of comparability. Now since the assessee is resiling from its consistent stand of comparability, it is but natural that the TPO should also be given an opportunity to examine the assessee s claim and then decide as to the comparability or otherwise of this company. We, therefore, set aside the impugned order to this extent and direct a fresh examination of the assessee s claim in this regard. 18. Apart from the above inclusions, the assessee has also challenged the exclusion of some of the companies by the TPO, which we will deal with one by one. (i) CG Vak Software Exports Ltd. 19.1. This company was included by the assessee in the list of comparables. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d of I.T. and I.T. enabled services and presently rendering I.T. enabled services. The assessee s contention that it was only in software development services, was rejected by the TPO after referring to the relevant pages of the Annual report of this company. The assessee is aggrieved against such exclusion. 20.2. Having heard both the sides and perused the relevant material on record, we find from the Profit Loss Account of this company which is available on page 71 of the paper book that it earned `Income by way of `Sales exports and `Sales domestic . Bifurcation of such Sales has been given in Schedule No.13 with the narration: Software Services Exports Domestic. Thus, it is clear that this company, apart from earning income from software, is also earning income from I.T. enabled services. In its Annual report, under the head 12. Additional information required as per Paras 3 and 4 of Part II of the Schedule VI to the Companies Act, 1956 , it has been reported that: The Company is engaged in Information Technology Information Technology Enabled Services. Segment revenues have been set out in Note 9, from which it is discernible that it earned income, inter al ..... X X X X Extracts X X X X X X X X Extracts X X X X
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