TMI Blog2016 (7) TMI 1409X X X X Extracts X X X X X X X X Extracts X X X X ..... ant : Shri P.Chandrashekar, CIT(DR) For The Respondent : Shri Sharath Rao, CA. ORDER Per INTURI RAMA RAO, AM : This is an appeal filed by the revenue directed against the order of the assessment order passed u/s 143(3) r.w.s. 144C of the Income-tax Act,1961 [ the Act for short] for the assessment year 2010-11. 2. The revenue raised the following grounds of 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 AG to exclude the expenditure incurred in foreign currency both from the export turnover as well as from total turnover for the purpose of computation of deduction u/s 10A, without appreciating the fact that the statute allows exclusion of such expenditure only from export turnover by way of specific definition of export turnover as envisaged by Sub-clause (4) of Explanation 2 below Sub-section (8) of Section 10A and the total turnover has not been defined in this Section. 3. On the facts and in the circumstances of the case the Dispute Resolution Panel erred in directing the AO t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y be urged at the time of hearing, it is prayed that the directions of the Dispute Resolution Panel in so far as it relates to the above grounds may be reversed. 13.The appellant craves leave to add, alter, amend and/or delete any of the grounds mentioned above. 3. Briefly, facts of the case are that the respondent-assessee is a company duly incorporated under the provisions of the Companies Act, 1956. The assessee-company is a wholly owned subsidiary of M/s.Broadcom Netherlands BV. The assessee- company is engaged in providing chip design, software development and system design constituting research and development activities and exporting the results of such R D activities in the form of customized electronic data, computer hardware and computer software to its associated enterprises i.e. Broadcom International Ltd. Cayman Island. 4. Return of income for the assessment year 2010-11 was filed on 29/09/2010 declaring a total income of ₹ 83,87,525/- after claiming deduction u/s 10A to the extent of ₹ 11,61,21,985/-. The assessee-company also reported the following international transactions with its Associated Enterprises (AE): Descrip ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re development services: Use of current year data only; Turnover filter i.e. excluding companies having income from software development services less than INR 1 crore. foreign exchange earnings less than 75% of total revenue in respect of software development services. Companies who have more than 25% related party transactions of the sales were excluded. Companies who have export sales less than 75% of the sales were excluded. Companies with employee cost less than 25% of turnover were excluded. Companies who have persistent losses for the last three years up-to and including FY 2009-10 were excluded. Companies having different financial year ending (i.e. not March 31, 2010) or data of the company does not fall within 12 month period i.e. 01/04/2009 to 31/3/2010 were rejected. Companies that are functionally different from the taxpayer were excluded. Companies that are having peculiar economic circumstances were excluded. Appling the above filters, the TPO had rejected 11 out of 15 comparables selected by the respondent-assessee-company; accepted/rejected matrix of the comparables selected by assessee-company as under: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... I C R A Techno Analytics Ltd.(seg) 11,89,81,000 9,52,33,000 24.94% 2 Infosys Ltd 2,11,40,00,00,000 1,45,81,00,00,000 44.98% 3 Kals Information Systems Ltd.(seg) 2,16,92,935 1,61,39,288 34.41% 4 Larsen Toubro Infotech Ltd. 17,76,76,48,294 14,88,92,91,379 19.33% 5 Mindtree Ltd.(seg) 6,98,02,80,117 6,07,89,59,413 14.83% 6 Persistent Systems Solutions Ltd. 6,67,28,828 5,78,33,452 15.38% 7 Persistent Systems Ltd. 5,04,41,30,000 3,86,97,20,000 30.35% 8 RS Software (India) Ltd. 1,61,83,71,419 1,46,73,31,694 10.29% 9 Sasken Communica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dertaken by the assessee-company and also not using the multiple years data for selecting or rejecting companies as comparables. The assessee-company also contended that the TPO ought not to have applied the filter of 25% of relatable party transaction. All these contentions were overruled by the DRP. However, the DRP accepted the contention of the assessee that company ICRA Techno Analytics Ltd., is not comparable as no segmental information of software development, software consultancy, engineering services, web development, web hosting, etc. were available. As regards Infosys Technologies Ltd., the DRP held that the same is not comparable as it is having high brand value and high intangible etc. To come to this conclusion, the DRP relied on the decision of the co-ordinate bench in the case of: Agnity india Technologies Vs. ITO ITA No.3856/Del/2010 Telcordia Technologies Pvt. Ltd. vs. ACIT - ITA No.7821/Mum/2011 Logica Pvt. Ltd. vs. ACIT IT(TP)A No.1129/Bang/2011/TS-131-ITAT-2013-BANG-TP Sonata Software Ltd. ITA No.3514/Mum/2010-ITATMumbai. Meritor LVS India P Ltd. ITA No.405 523/B/11 ITAT Bengalure Bearing Point Business Consulting Pvt. L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... formula, since otherwise it would produce anomalies or absurd results. Sec. 10A is a beneficial section. It is intended to provide incentives to promote exports. The incentive is to exempt profits relatable to 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 s. 80HHC, the export profit is to be derived from the total business income of the assessee, whereas in s. 10A, the export profit is to be derived from the total business of the undertaking. Even in the case of business of an undertaking, it may include export business and domestic business, in other words, export turnover and domestic turnover. The export turnover would be a component, or part of a denominator, the other component being the domestic turnover. In other words, to the extent of export turnover, there would be a commonality between the numerator and the denominator of the formul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng s. 10A when the principle underlying both these provisions is one and the same. Therefore, we do not see any merit in these appeals. The substantial question of law framed is answered in favour of the assessee and against the Revenue. The directions of the Hon ble DRP are in consonance with the law laid down by the Hon ble Jurisdictional High Court in the above case. Therefore, we do not see any reason to interfere with the direction of the Hon ble DRP. Hence, we dismiss the grounds of appeal Nos.2 3 raised by the revenue. 12. Ground No.4, 5 6 relates to the grant of working capital adjustment. From the perusal of the order of the DRP, it is clear that the DRP only directed to re-work the margins of the comparable finally selected after the adjustment of working capital adjustment. The DRP had not rendered any finding as to the quantum of eligible working capital adjustment. Hence, the grounds of appeal raised by the revenue and do not survive and hence, dismissed as such. 13. Ground Nos.7, 8, 9 10 challenge the direction of the DRP to exclude the companies viz. IRCA Techno Analytics Ltd., Persistent Systems Solutions Ltd., Sasken Communications Technologies ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the ground that no segmental information was available. The relevant finding of the DRP is as under: 3.3.4 Having heard the assessee, we examined the annual report from which it is noticed that the entire receipt of Z504 crores are shown from 'Sale of software services Product'. There is no segmental information available for sale of software services product. It is also noticed from Note-1 of Schedule- 15 that the company is predominantly engaged in outsourced software product development services. The company offers complete product life cycle servi es.: It is also noticed from the Note H to Schedule 15 in regard to revenue recognition that the company in addition to software services also earns income from licensing of products, Royalty on sale of products, income from maintenance contract etc., In the annual report, the difference between the OPD (Outsource Product Development) has been highlighted according to which, in IT services, projects starts with well defined requirements, and vendors use time and money as variables to arrive at a reasonable cost estimate for the project. After completion, the project goes into maintenance mode. In product development ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was available. The relevant finding of the DRP is as under: Considering the fact that the objections were raised by the assessee in respect of all higher margin comparables, it was found appropriate by us to examine other companies selected by the TPO as comparable in regard to their comparability. From the perusal of annual reports :- (i) It is noticed from the perusal of the Page 45 of annual reports in the case of R.S Software (India) Limited, the expenses on foreign branches are'incurred to the extent of T 12.42 crores (82%) of total expenses of 15 1crores debited in P L account, which makes it clear that it is pre1ominantly onsite software development company and therefore, canhot be retained as comparable. The Assessing Officer is accordingly directed to exclude the above company from comparables. (ii)In the case of Persistent Systems Solutions Ltd, on perusal of the anhual report, it is noticed by us that the receipt of Z 6.67 crores has been shown from 'sale of software services and products'. However, no segmental information is available in regard to software services and product separately. Therefore, we are of the view that in absence of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 as intangible assets cannot be compared with an ordinary entity provide captive service. We further note that this company provides end to end business solutions that leverage cutting edge technology thereby enabling clients to enhance business performance. This company also provides solutions that span the entire software lifecycle encompassing technical consulting, design, development, re-engineering, maintenance, systems integration, package evaluation and implementation, testing and infrastructure management service. In addition, the company offers software product for banking industry. Thus, this company is engaged in diversified services including design as well as technical consultancy, consulting. re-engineering, maintenance, systems integration as well as products for banking industry. 20. In view of the above facts that Infosys Ltd. having a huge brand value and intangibles as well as having bargaining power, the same cannot be compared with the assessee who is pro ..... X X X X Extracts X X X X X X X X Extracts X X X X
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