TMI Blog2016 (6) TMI 1293X X X X Extracts X X X X X X X X Extracts X X X X ..... existence. Exclusion of freight charges, telecommunication charges, insurance charges, travelling and financial charges from the export turnover as well as total turnover while computing the deduction u/s. 10A - Held that:- Hon’ble Karnataka High Court in the case of CIT v M/s Tata Elxsi Ltd. & Others (2011 (8) TMI 782 - KARNATAKA HIGH COURT) had held that while computing the exemption u/s 10A, if the export turnover in the numerator is to be arrived at after excluding certain expenses, the same should also be excluded from the total turnover in the denominator. - I.T. (T.P.) A. No.33/Bang/2013, I.T. (T.P.) A. No.115/Bang/2013 - - - Dated:- 8-6-2016 - SHRI VIJAY PAL RAO, JUDICIAL MEMBER AND SHRI INTURI RAMA RAO, ACCOUNTANT MEMBER For The Assessee : Shri Padam Chand Khincha, C.A. For The Respondent : Dr.P.K. Srihari, Addl. CIT (D.R.) ORDER Per Shri Vijay Pal Rao, J.M. : These Cross Appeals are directed against the order dated 6.11.2012 of Commissioner of Income Tax (Appeals)-IV, Bangalore for the Assessment Year 2008-09. 2. The assessee-company was incorporated in June 2000 and is wholly owned subsidiary of Versata International Inc., (previously k ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... argin on cost. % 1. Akshay Software Technologies Ltd. 6.60 2 Aztecsoft Ltd. 18.16 3 Goldstone Technologies Ltd. 11.50 4 Helios Matheson Information Technology Ltd. 38.40 5 Indium Software (India) Ltd. 11.09 6 KPIT Cummins Infosystems Ltd. 13.20 7 Lanco Global Systems Ltd. 13.28 8 Larsen Toubro Infotech Ltd. 11.35 9 Maars Software Intl. Ltd. 15.58 10 Melstar Information Technologies Ltd. 3.46 11 Mindtree Ltd. 16.98 12 Persistent Systems Pvt. Ltd. 24.34 13 Quintegra Solutions Ltd. 15.18 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 18.65 11 Mindtree Consulting (Seg.) 16.41 16.26 12 Persistent Systems Ltd. 20.31 21.43 13 Quintegra Solutions Ltd. 21.74 19.41 14 R S Software (India) Ltd. 7.41 9.71 15 R Systems International Ltd. 15.30 14.31 16 Sasken Communication Technologies Ltd. (Seg.) 7.58 7.97 17 Soft Sol India Ltd. 17.89 16.33 18 Tata Elxsi Ltd. (Seg.) 18.97 19.58 19 Thirdware Solutions Ltd 19.35 17.75 20 Wipro Ltd (Seg.) 28.45 30.40 Arithmetic Mean 23.65% 23.50% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0.30 5. The assessee is aggrieved by the order of the CIT (Appeals) so far as it has retained 11 comparable companies from the set of TPO whereas the revenue is aggrieved by the impugned order of the CIT (Appeals) whereby CIT (Appeals) has excluded 9 comparable companies selected by the TPO by applying turnover and some other comparable companies on functional dis-similarity. 6. First we take up the assessee's appeal wherein the assessee has raised the following grounds : 1. The Order of the learned Commissioner of Income Tax (Appeals) IV to the extent prejudicial to the appellant is bad in law. 2. The learned Assessing Officer has erred in making a reference to Transfer Pricing Officer for determining arm s length price without demonstrating as to why it was necessary and expedient to do so. The learned Commissioner of Income Tax (Appeals) - IV has erred in confirming the action of the Assessing officer. 3. The learned Assessing Officer, learned Transfer Pricing Officer and Commissioner of Income Tax (Appeals) - IV have erred in a. passing the order without demonstrating that appellant had motive of tax evasion. b. not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be excluded while computing operating cost of the appellant. b. Treating foreign exchange gain or loss as operating in nature while computing arm s length price. In the alternative, in case, foreign exchange gain or loss is treated as non-operating in nature, then the TPO/AO be directed to exclude foreign exchange loss incurred by the appellant from the operating cost while computing arm s length price. 7. The learned Commissioner of Income Tax (Appeals) - IV has erred in confirming companies selected by the TPO as comparables ignoring the submissions of the appellant. 8. The learned Assessing Officer, learned Transfer Pricing Officer and Commissioner of Income Tax (Appeals) - IV have erred in not giving 9. The learned Assessing Officer has erred in disallowing a sum of ₹ 2,99,07,451/- being research and development expenses under section 37 of the Act stating that the said expenses confer an enduring benefit and is not revenue in nature and stating that R D Expenses was incurred on behalf of parent company without appreciating that same was incurred for domestic operations. The learned Commissioner of Income Tax (Appeals) - IV has erred in confirming ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lected it as a comparable. In respect of other comparables, the TPO had selected these companies as comparables in the order passed u/s 92CA. The additional ground also relates to inclusion of Indium software as a comparable which is rejected as a comparable by CIT(A) on the ground of losses. With respect to rejection/inclusion of these comparables, the ground pertains to question of facts. All the necessary facts for adjudicating this ground are already on record. The Appellant humbly prays that the additional ground be admitted and adjudicated along with the other grounds of appeal in the course of hearing of the appeal. The Appellant prays accordingly. 8. By way of additional ground, the assessee is seeking exclusion of 3 companies namely Quintegra Solutions Ltd., e-Zest Solutions Ltd. And Persistent Systems Ltd. The assessee is also raised an issue of exclusion of certain comparable companies by applying the RPT filter at 15% as it has been consistently accepted by this Tribunal. Apart from that the assessee has also seeking inclusion of one company i.e. Indium Software India Pvt. Ltd . as a comparable. 9. We have heard the learned Authorised Representative as w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owever,the assessee would not object against nonapplication of turnover filter as sought by the revenue in its appeal. The learned Authorised Representative has submitted that those comparables selected by the TPO are otherwise functionally dis-similar to the assessee. He has pointed out that an identical set of 21 comparable companies selected by the TPO has been considered by the co-ordinate bench of this Tribunal in the case of Kodiak Network (India) Pvt. Ltd. Vs. DCIT in IT(TP)A No.1540/Bang/2012 vide order dt.5.5.2015 for the same asst. year 2008-09. 10.3 Thus the learned Authorised Representative has submitted that an identical set of comparable companies selected by the TPO has been examined by the co-ordinate bench in the case of Kodiak Network (India) Pvt. Ltd. (supra). The Tribunal has finally concluded that out of 21 comparable companies selected by the TPO, 12 companies cannot be considered good comparables to the software development services provider company. 10.4 On the other hand, the learned Departmental Representative has submitted that the decision of the co-ordinate bench of this Tribunal in the case of Kodiak Network (India) Pvt. Ltd. (supra) cannot be ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd 3 Celestial Biolabs Ltd 4 E-Zest Solutions Ltd 5 Infosys Technologies Ltd 6 KALS Information Systems Ltd (Seg.) 7 Lucid Software Ltd 8 Persistent Systems Ltd 9 Quintegra Solutions Ltd 10 Softsole India Ltd 11 Tata Elxsi Ltd (Seg.) 12 Thirdware Solutions Ltd (Seg 13 Wipro Ltd (Seg.) 22. We note that the comparability of these 13 companies have been examined by this Tribunal in series of decision as referred by the ld. AR. In the case of M/s 3DPLM Software Solutions Ltd (supra), the co-ordinate Bench of this Tribunal has considered the comparability of these companies in paras 7 to 19.3 of the order which have been reproduced below: 7.0 Avani Cincom Technologies Ltd. 7.1 This company was selected by the TPO as a comparable. The assessee ob ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this company evidences that this company develops and sells customizable software solutions like DX Change, CARMA, etc. 7.4 The learned Authorised Representative submitted that a co-ordinate bench of the Tribunal in its order in Curram Software International Pvt. Ltd., in its order in ITA No.1280/Bang/2012 dt.31.7.2013 has remanded the matter back to the file of the Assessing Officer / TPO to examine the comparability of this company afresh, by making the following observations at paras 9.5.2 and 9.5.3 thereof :- 9.5.2 As regards the submission of the learned Authorised 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 Triology E-Business Software India Pvt. Ltd. (supra). No doubt this company has been deleted as a comparable in the case of Triology 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 following reasons :- (i) The assessee needs to demonstrate that the FAR analysis and other relevant facts of the Triolo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 a comparable violates the principle enunciated in Curram Software International Pvt. Ltd. (supra) that a company can be selected as a comparable only on the basis of FAR analysis conducted for that year and therefore pleaded for its exclusion. The learned Authorised Representative also submitted that he has brought on record sufficient evidence to show that the functional profile of this company remains unchanged from the earlier year and hence the findings rendered by the co-ordinate benches of the Tribunal in the assessee's own case for Assessment Year 2007-08 (supra) and in other cases like Triology E-Business Software India Pvt. Ltd. (supra) are applicable to the year under considerat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee by the TPO; the inclusion of which was not objected to by the assessee before both the TPO and the DRP. The assessee has not objected to the inclusion of this company in the list of comparables, as can be seen from the grounds of appeal raised in Form 36B before this Tribunal. 8.1 However in the course of proceedings before us, the learned Authorised Representative objected to the inclusion of this company as a comparable for the following reasons : (i) This company has reported abnormally fluctuating margins in the period from 2005 to 2011, which indicate abnormal business factors and abnormal profit margins and hence should not be considered as comparable to the assessee. (ii) The abnormally fluctuating margins indicate that this company bears higher risk in contrast to the assessee who has earned consistent margins over the years, indicating difference in the risk profile between this company and the assessee. (iii) This company has registered exponential growth of 67% in terms of revenue and 41% in terms of profits over the immediately preceding year which can be attributed to the development of a software application, MIDAS (Multi Industry Data Anomaly) which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... jection raised in respect of the employee cost filter issue, the TPO rejected the 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 bioinformatics 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 functionally comparable to the assessee; (ii) This company has been held to be functionally incomparable to software service providers by the decision of the co-ordinate bench of this Tribunal in the assessee's own case for Assessment Year 2007-08 (supra); (iii) The co-ordinate bench of this Tribunal in its order in the case of Triology EBusiness Software India Pvt. Ltd. (supra) at para 43 thereof had observed about this company that .. As explained earlier, it is a diversified company and therefore cannot be considered as comparable functionally with the assessee. There has been no attempt t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from relying on the afore cited judicial decisions in the matter (supra), the assessee has brought on record IT(TP)A 1380/Bang/2012 Page 8 of 34 substantial factual evidence to establish that this company is functionally dis-similar and different from the assessee in the case on hand and is therefore not comparable and also that the findings rendered in the cited decisions for the earlier years i.e. Assessment Year 2007-08 is applicable for this year also. We agree with the submissions of the assessee that this company is functionally different from the assessee. It has also been so held by co-ordinate benches of this Tribunal in the assessee's own case for Assessment Year 2007-08 (supra) as well as in the case of Triology 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 in the assessee's own case for Assessment Year 2007-08 in ITA No.845/Bang/2011 and Triology E-Business Software India Pvt. Ltd. in ITA No.1054/Bang/2011, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Representative contended that the decision of the co-ordinate bench of the Tribunal in the case of Triology EBusiness Software India Pvt. Ltd. (supra) was rendered with respect to F.Y.2006-07 and therefore there cannot be an assumption that it would continue to be applicable to the year under consideration i.e. A.Y. 2008-09. To this, the counter argument of the learned Authorised Representative is that the functional profile of this company continues to remain the same for the year under consideration also 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ervice provider operating its business in India and does not possess either any brand value or own any intangible or intellectual property rights (IPRs). It was also submitted by the learned Authorised Representative that :- (i) the co-ordinate bench of this Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. in ITA No.227/Bang/2010 has held that a company owning intangibles cannot be compared to a low risk captive service provider who does not own any intangible and hence does not have an 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 cannot be considered as comparable to captive service providers assuming limited risk ; (iii) the company has generated several inventions and filed for many patents in India and USA ; (iv) the compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot 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 at para 5.2 thereof, that Infosys Technologies Ltd. being a giant company and a market leader assuming all risks leading to higher profits, cannot be considered as comparable to captive service providers assuming limited risk; (iii) the co-ordinate bench of the ITAT, Mumbai in the case of Telecordia Technologies India Pvt. Ltd. (ITA No.7821/Mum/2011) has held that Wipro Ltd. is not functionally comparable to a software service provider. (iv) this company has acquired new companies pursuant to a scheme 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 produc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... activity, brand value, size, etc. The TPO, however, rejected the contention put forth by the assessee and included this company in the set of comparables. 13.2 Before us it was reiterated by the learned Authorised Representative that this company is not functionally comparable to the assessee as it performs a variety of functions under software development and services segment namely - (a) 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 Telcordia Technologies (P.) 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. Assessment Year 2007-08 to the period under considerationi.e. Assessment Year 2008-09 and therefore this company cannot be considered as a comparable to the assessee in the case on hand. (iii) Tata Elxsi Ltd . is predominantly engaged in product designing services and is not purely a software developmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 hand. It is ordered accordingly. 14. E-Zest Solutions Ltd . 14.1 This company was selected by the TPO as a comparable. Before the TPO, the assessee had objected to the inclusion of this company as a comparable on the ground that it was functionally different from the assessee. The TPO had rejected the objections raised by the assessee on the ground that as per the information received in response to notice under section 133(6) of the Act, this company is engaged in software development services and satisfies all the filters. 14.2 Before us, the learned Authorised Representative contended that this company ought to be excluded from the list of comparables on the ground that it is functionally different to the assessee. It is submitted by the learned Authorised Representative that this company is engaged in 'e-Business Consulting Services', consisting o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... comparable to software development services and are therefore not comparable. Following the aforesaid decision of the co-ordinate bench of the Hyderabad Tribunal in the aforesaid case, we hold that this company, i.e. e-Zest software Ltd . be omitted from the set of comparables for the period under consideration in the case on hand. The A.O./TPO is accordingly directed. 15. Thirdware Solutions Ltd. (Segment) 15.1 This company was proposed for inclusion in the list of comparables by the TPO. Before the TPO, the assessee objected to the inclusion of this company in the list of comparables on the ground that its turnover was in excess of ₹ 500 Crores. Before us, the assessee has objected to the inclusion of this company as a comparable for the reason that apart from software development services, it is in the business of product development and trading in software and giving licenses for use of software. In 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 separ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase for Assessment Year 2007-08 (IT(TP)A No.845/Bang/2011), following the decision of Mumbai Tribunal in the case of Telcordia Technologies India (P.) Ltd.(ITA No.7821/Mum/2011) (iii) The rejection of this company as a comparable to software service providers has been upheld by the co-ordinate benches of this Tribunal in the cases of LG Soft India (P.) Ltd and CSR India (P.) Ltd. (supra) and by the Delhi Bench of the Tribunal in the case of Transwitch India (P.) Ltd. (supra).(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 of this company evidences that it is in the business of product development. The learned Authorised Representative prays that in view of the factual position as laid out above and the decisions of the co-ordinate benches of the Tribunal in the assessee's own case for Assessment Year 2007-08 and other cases cited above, it is clear that this c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cial Year 2007-08, it is mainly a software development company and as per the details furnished in reply to the notice under section 133(6) of the Act, software development constitutes 96% of its revenues. In this view of the matter, the Assessing Officer included this company i.e. Persistent Systems Ltd., in the list of comparables as it qualified the functionality criterion. 17.2 Before us, the assessee objected to the inclusion of this company as a comparable submitting that this company is functionally different and also that there are several other factors on which this company cannot be taken as a comparable. In this regard, the learned Authorised Representative submitted that : (i) This company is engaged in software designing services and analytic services and therefore it is not purely a software development service provider as is the assessee in the case on hand. (ii) Page 60 of the Annual Report of the company for F.Y. 2007-08 indicates that this company, is predominantly engaged in 'Outsourced software Product Development Services' for independent software vendors and enterprises. (iii) Website extracts indicate that this company is in the business o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he inclusion of this company for the reason that it is functionally different and also that there are other factors for which this company cannot be considered as a comparable. It was submitted that, (i) Quintegra Solutions Ltd., the company under consideration, is engaged in product engineering services and not in purely software development services. The Annual Report of this company also states that it is engaged in preparatory software products and is therefore not similar to the assessee in the case on hand. (ii) In its Annual Report, the services rendered by the company are described as under : Leveraging its proven global model, Quintegra provides a full range of custom IT Solution (such as development, testing, maintenance, SAP, product engineering and infrastructure management services), proprietary software products and consultancy services in IT on various platforms and technologies. (iii) This company is also engaged in research and development activities which resulted in the creation of Intellectual Proprietary Rights (IPRs) as can be evidenced from the statements made in the Annual Report of the company for the period under consideration, which is as un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ration. It is settled principle that where extraordinary events have taken place, which has an effect on the performance of the company, then that company shall be removed from the list of comparables. 18.6 Respectfully following the decision of the co-ordinate bench of the Tribunal in the case of 24/7 Customer.Com (P.) Ltd. (supra), we direct that this company i.e. Quintegra Solution Ltd. be excluded from the list of comparables in the case on hand since it is engaged in proprietary software products and owns its own intangibles unlike the assessee in the case on hand who is a software service provider. 19. Softsol India Ltd. 19.1 This company was selected by the TPO as a comparable. The assessee objected to the inclusion of this company as a comparable on the grounds that this company is functionally different and dis-similar from it. The TPO rejected the assessee's objections on the ground that as per the company's reply to the notice under section 133(6) of the Act, the company has categorized itself as a pure software developer and therefore included this company as a comparable as the assessee was also a provider of software development services. Before us, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... functionally comparable with pure software development service activity. Once the company is found to be a non-comparable company with the assessee, the same is required to be excluded from the set of comparables even if the said company is selected by the assessee itself. This view was taken by the decision of the Special Bench of Chandigarh Tribunal in the case QUARK SYSTEMS (P.) LTD (supra). 25. Thus, out of 20 comparables 12 companies are required to be excluded from the list of comparables for determining the ALP. Accordingly, we direct the TPO/AO to exclude the following companies from the set of comparables and recomputed the ALP after considering the claim of risk adjustment as well as working capital adjustment: S.No. Name of the Company 1 AvaniCimcon Technologies Ltd 2 Celestial Biolabs Ltd 3 E-Zest Solutions Ltd 4 Infosys Technologies Ltd 5 KALS Information Systems Ltd (Seg.) 6 Lucid Software Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otal expenses includes FBT. The assessee has given the details of FBT in the computation statement amounting to ₹ 13,46,722/-. We find that for the asst. year 2007-08, this Tribunal in assessee s own case vide order dt. 23.11.2012 has directed the TPO that the FBT should not be considered as part of the operating cost of the assessee when the same was not considered by the TPO as part of the operating cost. Accordingly, we direct the TPO to consider the operating margin of the assessee after excluding the FBT from the operating cost. 12. The assessee is also seeking risk adjustment being a captive service provider. The learned Authorised Representative of the assessee has submitted that the Tribunal in the case of Kodiak Network (India) Pvt. Ltd. (supra) as well as in the case of 3DPLM Software Solution Ltd. Vs. DCIT in IT(TP)A No.1303/Bang/2012 has held that the TPO should consider the risk adjustment while computing the ALP. 12.1 The learned Departmental Representative has submitted that the assessee is required to furnish complete details and computation of the risk adjustment. In the absence of complete details of computation the risk adjustment cannot be granted as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the learned Authorised Representative has submitted that the Tribunal may pass appropriate direction to the A.O/TPO in this regard. 12.3 On the other hand, the learned Departmental Representative has relied upon the orders of the authorities below and submitted that the Tribunal has already set aside to the record of the A.O./TPO for proper verification for the A.Y. 2007-08. By following the same, the issue may be remitted to the A.O. with similar direction. 12.4 We have considered the rival submission as well as relevant material on record. Without going into the controversy of allowable revenue expenditure we are of the view that even if this expenditure is considered as capital in nature, the assessee is entitled for depreciation on the entire expenditure incurred once the work of web site creation is completed. The A.O has already allowed the depreciation for the asst. year 2010-11. Therefore, we uphold the orders of the authorities below treating the said expenditure as capital in nature, however, the assessee may claim depreciation on the entire amount from the year in which the work is completed and the asset has come into existence. 13. Now we will take up the revenue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Assessing Officer may be restored. 9. The appellant craves leave to add, alter, amend and / or delete any of the grounds mentioned above. 13.1 The first grievance of the revenue s appeal is regarding the turnover filter applied by the ld. CIT (Appeals). At the outset, the learned A.R. of the assessee has submitted that when the comparable companies are otherwise functionally dis-similar then at this stage the assessee will not insist for application of turnover filter. 13.2 Having considered the rival submissions and in view of the fact that we have already decided the functional comparability of the companies objected by the assessee as well as the contention of the ld. A.R. we allow this ground of the revenue s appeal and consequently modify the impugned order of the CIT (Appeals). 14.1 The next grievance of the revenue s appeal is that VGS Software Tech Ltd. was excluded by the TPO on the ground that the relevant data was not available whereas the CIT (Appeals) has included this company by considering the data filed by the assessee. Thus the learned Departmental Representative has submitted that the CIT (Appeals) has decided the issue of comparability of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10A is enacted as an incentive to exporters to enable their products to be competitive in the global market and consequently earn precious foreign exchange for the country. This aspect has to be borne in mind. While computing the consideration received from such export turnover, the expenses incurred towards freight, telecommunication charges, or insurance attributable to the delivery of the articles or things or computer software outside India, or expenses if any incurred in foreign exchange, in providing the technical services outside India should not be included. However, the word total turnover is not defined for the purpose of this section. It is because of this omission to define total turnover , the word total turnover falls 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 for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nderlying both these provisions is one and the same . 16.2 The Hon ble Bombay High Court in the case of CIT Vs. Gem Plus Jewellery India Ltd. 330 ITR 175, in identical circumstances, held that since the export turnover forms part of the total turnover, if an item is excluded from the export turnover, the same should also be reduced from the total turnover to maintain parity between numerator and denominator while calculating deduction u/s 10A of the Act. The relevant finding of the Hon ble Mumbai High Court reads as follows:- The total turnover of the business carried on by the undertaking would consist of the turnover from export and the turnover from local sales. The export turnover constitutes 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a legislative prescription to the contrary CIT v Sudarshan Chemicals Industries Ltd. (2000) 163 CTR (Bom) 596: (2000) 245 ITR 769 (Bom) applied; CIT v Lakshmi Machine Works (2007) 210 CTR (SC) 1: (2007) 290 ITR 667 (SC) and CIT v Catapharma (India) (P) Ltd. (2007) 211 CTR (SC) 83: (2007) 292 ITR 641 (SC) relied on 16.3 In the light of the above binding precedent, we are of the view that the order of the CIT(A) is correct and in accordance with law and he is justified in directing 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. Accordingly, the grounds raised on this issue by revenue are dismissed. 17. In view of the above findings when we have directed the TPO to exclude 12 comparable companies and also to re-examine one of the companies, it is directed to recompute the ALP after considering the correct operating margin of the assessee as well as considering the risk adjustment. Needless to say that the benefit of proviso to Section 92C(2) has to be considered if the assessee s operating margin is within the tolerance range of mean margin. 18. In the result ..... X X X X Extracts X X X X X X X X Extracts X X X X
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