TMI Blog2017 (11) TMI 1758X X X X Extracts X X X X X X X X Extracts X X X X ..... calculating its export turnover, has suo-moto excluded the reimbursement on account of telecommunication charges. Deduction on the amounts payable under ISA under Section 37(1) - Held that:- Under the present circumstances of the business, such global arrangement is necessary for the purpose of business. The expenditure incurred for such global arrangement is allowable expenses u/s 37(1) of the Act. In addition to that, we find that the payment of expenditure is at arm’s length determined by the TPO u/s 92CA(3) of the Act. We do not find any substance in the case of the revenue because when an international transaction at arms length as determined by the TPO in the said transaction, it cannot be said that the assessee has paid the prices under the said transaction without obtaining any services. The contention of the revenue is baseless and under the facts and circumstances of the case, the expenditure is incurred for the purpose of business. Therefore, we are of the view that the CIT(A) has rightly allowed the claim of the assessee. Upward adjustment in respect of international transaction related to employees share purchase plan (ESPP) expenses - Held that:- CIT(A) has give ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 05-06 regarding non-allowance of working capital adjustment and risk adjustments by the following ground Nos. 4 5: - 4. The learned CIT(A) has erred in not adjudicating on the contention of the Respondent that the benefit of the working capital adjustment should be allowed to the Respondent, which is required to be undertaken in its case to account for the difference in working capital levels between the comparable companies (as identified by the learned AO) and the Respondent. 5. The learned CIT(A) has erred in not adjudicating on the contention of the Respondent that the benefit of the risk adjustment should be allowed to the Respondent to account for the difference between the risks assumed by the respondent and the risks assumed by the comparable companies (as identified by the learned AO). 4. Briefly stated facts are that the assessee is engaged in the business of range of software services and also business process/out sourcing services. These services are provided by the assessee to its group entities across the world. During the relevant assessment year, assessee entered into international transactions with its associate enterprises in term of section 92 of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9% 10. Vishal Information Technologies Limited 45.62% Arithmetic Mean 12.87% The TPO out of 10 comparables selected by the assessee rejected 6 comparables. The TPO also introduced 6 more additional comparables and accordingly, he selected the final set of comparables for computing the arm s length operating margin of ITES as under: - Sr. No. Name of the Company Operating Margin 1. Allsec Technologies Limited 28.58% 2. Tulsyan Technologies Limited (Cosmic Global) 18.75% 5 Saffron Global Limited 24.91% 4. Vishal Information Technologies Limited 51.26% 5. Ace Software Exports Limited 21.11% 6. Nucleus Netsoft GIS Limited 45.31% 7. Asian Cere Information Technolo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sumed in view of the decision of the Delhi High Court in the case of CIT vs. Marubeni India Pvt. Ltd. 4. Whether principles of natural justice does not require that, where the assessee is permitted to selectively reject a comparable chosen initially on account of functional differences, the revenue should also be given an opportunity to examine all the comparables particularly when assessee had rejected 408 companies on account of functional differences initially. 5. Whether principles of natural justices does not require that, where the assessee is permitted to selectively review its selection process and reject comparables chosen by it initially, the revenue should also be given an opportunity to examine all the comparable particularly when assessee had rejected 192 companies On account of insufficient financial information initially and whose data are now available. It means that the above six companies are under dispute now, which we will adjudicate. 8. First we will deal with the CS Software Enterprise Limited. The TPO has rejected the company for the reason that it is engaged in providing both IT software development as well as ITES. According to TPO, the annual ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... part of para 13 at the same page, i.e. page 368, it is once again reiterated that the company provides both Business Processing Office (BPO) as well as IT Software services. Further, at page 370 of assessee's Paper Book, as part of management discussion, software services have been separately discussed. From the said discussion at page 370, it is evident that this company is definitely engaged in Software Development activity. At page 372 of assessee's Paper Book, the income from operations is disclosed at ₹ 8.66 crores. Here again, there is no breakup of the same into IT Software Services and ITES activity. He stated that the assessee has filed only a few pages of the Annual Report but the complete annual report of this company is available at page of 160 of the Revenue's Paper Book, to which attention was drawn. At page 197 of the revenue's Paper Book, the company's principal service is shown as computer software and not BPO activity. Further he argued that at page 192 of the Revenue's Paper Book, the details of operating expenses are disclosed and out of total operating expense of ₹ 7.86 crores, ₹ 3.46 cores is on account of outside cost ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Revenue to argue that the company has no foreign exchange earnings. The learned Counsel for the assessee referred to the profit and loss account schedule 17 on page 32 of the company, wherein, it has incurred Forex losses of ₹ 10.54 lakhs during the year, which shows that the company has dealing in foreign exchange. He answers the objection of the Departmental Representative who has relied on disclosers of earning in foreign exchange on page 10 of the Annual Report to conclude that the company does not have any export earnings. He referred to the fact that the company which exports services but raises invoices for the same in INR (Indian Rupees), may or may not disclose any information under the head of disclosure of earnings in foreign exchange. Further, he argued that this company should be accepted as comparable for the simple reason that functional comparability which was accepted by the CIT(A) and not disputed by the Departmental Representative, is clear from the MDA Report under the head Key Strengths of the company and from there it is clear that the company is leading IT/BPO service provider with a clear focus on specific verticals and business process areas. He ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e final selection. The CIT(A) held that the nature of activity of both the company are similar and therefore, retained Genesys in the final set. Now before the ITAT the assessee has proposed the rejection of Nucleus Netsoft and the CIT(A) has reintroduced Genesys only on the basis of maintaining parity with Nucleus. it is therefore, argued by the learned CIT DR that in the event Nucleus Netsoft is to be excluded, taking a consistent stand, Genesys International should also be rejected. Additionally, it is observed that, the total revenues from the relevant segment are only 16.40 crores during the relevant year. The assessee, on the other hand, has a turnover of ₹ 270 crores in the relevant segment. Therefore, it appears that even in terms of size, this company is not comparable to the assessee. It is also observed that as part of Schedule L to the P L Account at page 389 of assessee's Paper Book, the details of operating costs are given. During the previous year, the assessee has written off significant project expenditure as part of Operating cost. This shows that part of the work is performed through outside sources. For all these reasons, this company deserved to be re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this company should be considered as a comparable for transfer pricing purposes. Aggrieved, Revenue is in second appeal before Tribunal. 16. Before us, the learned CIT DR argued that this was part of assessee's comparable that was rejected by the TPO as functionally not comparable. The CIT(A) reintroduced this comparable stating that the same is engaged only in ITES activity. The assessee has also not furnished the entire Balance Sheet but has instead filed certain papers in respect of the same downloaded from its Website. At page 403 to 406 are the details from which it is evident that these appears as downloaded much later in 2009 and in fact, does not form part of the documents filed before the TPO. Further, a reference to the annual report for F.Y 2005-06 in the same case shows that this company is engaged in many functions such as development of applications, systems software and BPO operations. The same can be referred to Revenue's Paper Book page 615. Separate details of the same are not available. Further, the total turnover of this company is only ₹ 61 lakhs during the relevant period resulting in a loss of 36.94 %. Therefore, even in terms of level of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evant criteria for selecting comparables and it is now accepted principle that if turnover filter is to be applied it should be applied at the assessment stage itself and in that case, it would not be permissible to do so at later stage. The learned Counsel for the assessee relied on the decision of Hon ble Delhi High Court in the case of CIT vs. Nortel Networks India A. (P.) Ltd. (ITA No. 115/2015), which was followed by Mumbai Tribunal in the case of Golawala Diamonds (2017) 78 taxmann.com 82 (Mumbai-Trib). Alternatively, the learned Counsel for the assessee argued that the TPO himself has introduce low turnover comparables in the final state of comparables i.e. Asian Cerc Information Technology Limited having turnover of ₹ 1.70 crores, Tulsyan Technoliges Ltd having a turnover of ₹ 1.90 crores, which are referred at pages 21 and 17 of the TP order. According to him, in view of the decision of the Hon ble Bombay High Court in the case of CIT vs. Maersk Global Services Centre (India) Pvt. Ltd (ITA No: 692, 693/Mum/2012), the same should be rejected and this company should be accepted as comparable. The learned Counsel for the assessee also stated that the decision of H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase of certain companies, the TPO has used a threshold of 25% for the related party transactions filter. Applying this related party transactions filter selected by the TPO consistently, I see no reason why this company should not be considered as a comparable. Therefore, applying the related party transactions filter on a uniform basis, since she percentage of related party transactions in case of this company is less an 25%, this company is to be selected as a comparable. Aggrieved, Revenue came in second appeal before Tribunal. 21. Before us, the learned CIT DR argued that this company is part of assessee's set of comparables and the same was rejected by the TPO on account of RPT but the CIT(A) reintroduced the same for the reason that the RPT was less than 25%. In this connection, Ld CIT-DR argued that if the said comparable was to be included in the final set, only the margins relating to the international call centre should be considered. He stated that this company is engaged in multiple activities and segmental details are available at page 420 of assessee's Paper Book. He argued that this company provides both international call center services as well as do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unal and for this he placed reliance on the order of Mumbai Tribunal in the case of TPG Capital India (P.) Ltd. (supra). He stated that the TPO has rejected this company solely on the basis that if it fails in related party transaction filter the Revenue should not be allowed to bring any new reason at this stage before Tribunal. On merits also the learned Counsel argued that the company is engaged in multiple activities which is not correct because the assessee has considered only the call center services related segment i.e. (international and domestic) for comparability analysis and hence, the Spanco Telesystems and Solutions Limited is engaged in other activities and separate segmental details are available for call centre activities, which are in the nature of ITES and the same alone has been considered by assessee for comparability analysis. As regards to the argument that only the margins of international call centre should be considered for the purpose of comparability, it was argued that Revenue s contention now contradicts TPO s position of applying an export earning filter of 12.5% for the reason that now DR is contending that only companies which have 100% export earnin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the company should be selected as a comparable. Aggrieved, Revenue is in second appeal before Tribunal. 25. Before us, the learned CIT Departmental Representative argued that this company was part of assessee's comparable set and rejected by the TPO on account of history of losses but the CIT(A) has held that since the data relating to only the relevant previous year is to be considered and during the previous year, this company has earned a marginal profit, the same cannot be rejected. He stated that even if the company is to be retained in the final set for the reason that there is a profit during the year, the business model of this company is different from that of the assessee. This company is an entrepreneur and it is evident from its P L account at page 428 of assessee's Paper Book wherein marketing and business development expenses of ₹ 2.56 crores are separately disclosed. He further explained from note no. 12 of Schedule 18 - Notes to accounts, that the payment is to its wholly owned subsidiary for rendering of marketing services. Thus this Company provides services to its end customers in US market and bears the necessary risk in this regard whereas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ear and hence, according to the learned Counsel, consistent approach is required even taking Transworks Information Services Limited as comparable. The learned Counsel referred to annual report which indicates that the company has to consider growth prospects for the future and he referred to page 4 of the annual report. The learned Counsel for the assessee stated that new contentions raised by Revenue before the Tribunal is for the first time and for this he placed reliance on the order of Mumbai Tribunal in the case of TPG Capital India (P.) Ltd. (supra). As regards to the argument on merits that the company underwent an amalgamation during the year, the learned counsel stated that as per notes on accounts at point No. 2(ii) the subsidiary company which merged into Transworks Information Services Limited is engaged in similar business operations as that of Transworks Information Services Limited. This merger would not have any impact on the function comparability of Transworks Information Services Limited. The learned Counsel for the assessee relied on the decision of Mumbai Tribunal in the case of Whillis Processing Services (India) Private Ltd in ITA No. 6877/Mum/2012 for Y 200 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tribunal. 29. The learned Counsel for the assessee stated that the assessee has not applied any employees cost filter while selecting the comparables in the TP study and hence, Vishal was selected as one of the comparables. However, the TPO consider the employ cost to sales ratio at the Rate of 25% as filter for selective comparables whereas, he himself rejected the comparables Tulsyan Technologies on the basis that employee costs are only 14.73% of the sales and hence the company fails the employ cost filter of 25%. The learned counsel for the assessee explained that the employee cost to sale ratio of Vishal Information Technologies Limited, wherein data of employee cost of total revenue is ₹ 19,70,458/- by ₹ 20,82,33,000/-. He referred to the order of CIT(A), wherein he has rejected one of the TPO s comparable i.e. Tulsyan Technologies Limited on the basis that employees cost is to the extent 14.73% of sales and hence, the company fails to employees cost filter of 25%. The learned Counsel for the assessee relied on the decision of Mumbai Tribunal in the case of GlobeOp Financial Services India Pvt. Ltd in ITA No. 1610/Mum/2011 for AY 2005-06. The relevant para 27 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ftware services of following 20 companies:- Sr. No. Name of the Company Operating Margin 1. ABM Knowledgware Limited 2.23% 2. Aztec Software and Technology Limited 19.40% 3. Compucom Software Limited 18.83% 4. Datamatics Limited -5.87% 5. Gebbs Infotech Limited 16.52% 6. Goldstone Technologies Limited 4.65% 7. Infosys Technologies Limited 43.87% 8. KPIT Cummins Infosystems Limited 13.42% 9. Lanco Global Systems Limited 12.01% 10. Larsen Turbo Infotech Limited 10.59% 11. Maars Software International Limited 3.25% 12. Orien ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 14. Sasken Communication Technologies Limited (Segmental) 14.42 15. Flextronics (segmental) 32.19 16. L T Infotech Limited 11.72 17. Satyam Computers Limited 30.31 18. Infosys Systems Limited 43.49 19. Compulink Systems Limited 50.76 Arithmetic Mean 27.69 Arithmetic Mean 15.92% 33. The assessee while selecting 20 comparable companies reached to arithmetic mean of 15.9% as against TPO arrived at arithmetic mean by 27.69% after arriving at arms length operating margin in respect of software services segment of the assessee. On the basis of the above, the TPO passes an order under section 92CA (3) of the Act and made a upward adjustment of ₹ 119,003,906/-. Aggrieved assessee preferred the appeal before CIT(A) and CIT(A) accepted few of the compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rightly accepted this company as comparable for the reason that this company does not fail to 25% related party transaction filter applied by TPO. The learned Counsel stated that Departmental Representative has only made contentions that the operating margin of the company has to be taken at 28.62% instead 18.83 as considered by the assessee and accepted by CIT(A). The learned Counsel for the assessee referred to Revenue s paper book at page 687. He argued that the company was accepted as comparable by the CIT(A) based on its consolidated financial statements because in consolidated financial statement the impact of related party transactions gets eliminated. According to him, the TPO wrongly rejected the consolidated financial statement and hence, rejected the company on the basis of related party transactions. The learned Counsel drew our attention to page 28 and 29 of TPO Order that the margin of the assessee of 18.83% is erroneous margin but an operating margin based on consolidated financial statements. But standalone financials are to be considered than the company is rendered in capable as it fails to related party transaction filter of 25% applied by the TPO as the related ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cquisition of the same is 101h February 2005. Since the CIT(A) has rejected other companies for similar reason, it is submitted that for this reason alone the comparable ought to be rejected. Further, details of its revenue and expenditure are discussed at page 13 of Revenue's Paper Book as part of management discussion. It is stated that the revenues are generated from offshore technical solutions as well as consultancy services. Though the CIT(A) states that the entire revenue is on account of exports, it is found that the details of foreign exchange earnings are specifically provided at page 34 of revenue's Paper Book. It is shown that earnings in foreign currency in respect of software export are ₹ 794 lacs. The total earnings of the assessee during the year is ₹ 4,121 Iacs. Therefore, the contention of the TPO that foreign exchange earnings failed the export filter of 25% is correct, as the earnings in foreign currency are only 19% of the total receipts. It appears that the CIT(A) has only seen the breakup of sales and not the foreign exchange earnings separately disclosed in the Company's Annual Report at page 34 as well as page 9 of the Revenue's ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the notes to accounts), which are given at page 245 of the assessee s paper books. On this portion it was concluded by Revenue that the company fails on the export earning filter. It was explained by the learned Counsel that it is clearly stated in the disclosure that the amounts have been reported on receipt basis and hence, the said disclosure does not reflected totally on foreign exchange earnings reported by the company during the year. As regards to the new argument raised by the learned CIT Departmental Representative, the learned Counsel stated that the company has acquired a subsidiary in US but investment in subsidiary does not have any impact on the standalone financial statements of the company. It was argued that at the most, this could impact the consolidated financial statement which is not relevant in the present case, as the company and TPO both have considered this standalone basis for the exclusion or inclusion of gold stone for comparability analysis. 41. We have gone through the arguments of both the sides seen that from the facts it is clear that as per schedule 12 to the Profit and Loss account it is clearly depicted that company has earned 100% Revenue f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Revenue s appeal is dismissed. 42. The next comparable is RS Software (India) Limited. The facts relating to the issue are that the TPO rejected this company only for the reason that the entire net worth of the company is negative. Aggrieved, assessee preferred the appeal before CIT(A). The CIT(A) after considering the submissions of the assessee accepted this as comparable by observing as under: - view of the above, the appellant submitted that R S Software should be considered as a comparable since it has made an operating profit during FY 2004-05 and has satisfied all other comparability criteria. Merely because it has incurred losses in the previous years is not a sufficient criterion for rejection of this company as a comparable. 34.3 I have gone through the submissions made by the learned AR of the appellant. I have already discussed earlier that the tilters used by The TPO to reject companies should be applied on a consistent basis. The TPO, in his order, has stated that for the purpose of comparability analysis of a company, data for only FY 20 -05 should be used. The negative net worth is clearly on account of performance of the company in the past years whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nly applied persistent losses filter for selection of comparables. He argued that this company RS Software (India) Limited has earned positive operating profits of 7.95% in the year under consideration and the company is not a persistent loss making company. Learned Counsel for the assessee distinguished the case law of the Hon ble Delhi High Court referred by the learned CIT Departmental Representative in the case of Michael Aram Exports Pvt. Ltd. Vs ITO (2013) 40 taxmann.com 21 (Del) and argue that the dispute in the case before Hon ble High Court, there was persistent loss making at had incurred losses in the current years as well as in earlier years. The learned Counsel for the assessee also relied on the decision of Delhi Tribunal in the case of Qualcomm India Pvt. Ltd (ITA No. 5239/Del/2010 for AY 2006-07, wherein, this company RS Software (India) Pvt. Limited was considered as comparable and Tribunal vide Para 33 has considered the company as under: - 33. The Ld. T.P.O. rejected R.S. Software as a comparable company on the basis that the company has negative net worth for the financial years 200304 to 2005-06. The Ld. A.R. submitted that for financial year 2005-06, R.S. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g aside this action of the A.O/T.P.O we direct them to consider R.S. Software as comparable for F.Y. 2005-06 to determine ALP in the case of assessee. 45. In view of the above facts and circumstances, we are of the view that in these year RS Software (India) Pvt. Limited has earned positive profits of 7.92% in the year under consideration and company is not persistent loss making company and hence, we direct the AO to consider this as comparable as accepted by CIT(A). We find no infirmity in the order of CIT(A). 46. The first inclusion asked by the Revenue in the software development segment is Tata Elxsi Limited. The TPO included the company in the set of comparables for the software services segment for the reason that this company is engaged in providing software services. The assessee objected before the TPO on the ground that the Annual Report of the company is clearly states that it is engaged in the business of both software services as well as IT Enabled service and hence, this should not be selected as comparable. The TPO has not considered the objections of the assessee. Aggrieved, assessee preferred the appeal before CIT(A), who rejected the comparable and revers ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the company, which mentioned that the company applies latest digital styling and CAD / CAM tools to enable manufacturer to optimize product concepts, which are given at pages 341 of the assessee s paper book. Further, the description of visual compute lab services provided by the company states that it provides animation (3D/2D) special effects and games services to its customers worldwide. This is given at page 343 of the assessee s paper book. From the above argument of the learned Counsel for the assessee it is clear that software development and services segment of the company includes both software services as well as ITES enabled services and further segmental breakup is available for soft services. In our view, in the business of separate segmental data for software services, the company cannot be considered as comparable. Accordingly, we are of the view that the CIT(A) has rightly excluded the Tata Elixis Limited from the comparables set for software development services transaction. Even this company was rejected for AY 2005-06 that it cannot be compared to company engaged in software development services. The ITAT A Bench, Bangalore in the case of Sanquest Information ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , assessee preferred the appeal before CIT(A). The CIT(A) excluded this company from its comparable by observing in Para 39.3 as under: - 39.3 I have gone through the submissions and made by the AR of the Appellant and the Annual report of the company. On analysis of the annual report of the company, it is evident that the company is engaged in the business of software services, IT enabled services and software products. Further, no break up is available to determine the operating margins earned from software services alone, The TPO has himself rejected companies where separate segmental data is tint avai1ihJ for the software services, software products and IT enabled services segments. Accordingly, it is not proper to select this company as comparable on the grounds of consistency. Aggrieved, Revenue came in second appeal before Tribunal. 49. Before us, the learned CIT DR argued that company has provided separate segmental data for the software services and hence, can be compared for the segmental data of standalone basis. He explained that this company was introduced by the TPO but rejected by the CIT(A). The reason for rejection is stated to be that this company is al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lied several references in the annual report of the company which shows that the company derives Revenue s from both the software services and sale of software products, he referred to managing directors note to the shareholders under the head of products, wherein it is stated that the company begin as product company, this is referred to page 332 of the assessee s paper book. Even in the P L account under the head of income, the company has represented revenues from the sale of software packages and services, which are given at pages 334 of assessee s paper book. According to him, even the breakup of revenue from software services and software product is not available in the standalone financial statement of this company and hence, the company is not comparable. We find from the above facts and arguments that this company cannot be selected as comparable and particularly the Tribunal in the case of GlobeOp Financial Services India Pvt. Ltd in ITA No. 1610/Mum/2011 for AY 2005-06 has considered this company and held that this company cannot treated as comparably by observing as under: - 60. Before the Transfer Pricing Officer, the assessee objected to selection of the company a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bunal. 53. The learned CIT Departmental Representative argued that this company is predominantly a software service company as its products revenues are not significant, which are approximately 15%. On the other hand, the learned senior Counsel argued that from the various disclosures made in the Annual Report which indicates for the company is more engaged in the business of software services as well as software product and no segmental bifurcation is made available. He referred to the directors referred under the head growth, it is mentioned that the company is a technology company that develops innovative software products and also provides IT consultancy services. The learned Counsel has referred to the pages 317 of the assessee s paper book. According to him, further, the directors report under the head products it is mentioned that the company will investing in the product development and for that purpose it released two upgrade products even under the head of sales and marketing and it is mentioned that the company is slowly maturing into a complete product and solutions company. Even the results of operation, the company has reported income both from software services an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mine the following: - 41. Considering the above submissions we concur with the submission of the Ld. DR that the issue raised in ground No. 6 7 on account of working capital adjustment and risk adjustment depend upon the fact and circumstances of each case. But at the same time we are of the view that these factors are equally important to consider while selecting comparable companies. In the present case the assessee is engaged in the business of software development and providing marketing services, hence there is no dispute that appropriate adjustment to account for difference in working capital employed by the assessee vis. a vis. the comparable companies for software development services is required to be considered. Similarly making of suitable adjustments to account for differences in the risk profile of the assessee vis. a vis. the comparable companies for software development services is also required to be considered. Of course these adjustments on account of working capital and risk is to be made after analyzing the case of the assessee since it depends upon the facts of the case of the assessee. The request for such adjustments cannot be summarily rejected unless ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... covered by Tribunal s decision in assessee s own case for AY 2002-03 and 2003-04 in 4541/Mum/2008 and ITA Nos. 5029/Mum/2008, wherein tribunal adjudicated the issues as under: - 29. We have heard the learned representatives of the parties and perused the record. The controversy in the case under consideration is in respect of method of accounting followed by the assessee in respect of reimbursement of expenses. In simple words the issue is that whether amount of reimbursement of expenses to be included in eligible business profit as well as in export turnover in the year of receipt of such amount for the purpose of computation of deduction under section 10A of the Act. To appreciate method of accounting in respect of reimbursement of expenses, we would like to go through relevant accounting entries to be passed in books of account. There are two ways of passing accounting entries in such a situation. First one is that when the assessee incurred various expenses which are to be reimbursed, in other words, the expenditure incurred on behalf of others, the amount should be debited in a separate account i.e reimbursement of expenses a/c. when amount is reimbursed by the other part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arges against assessee. To examine this issue we would like to refer Explanation 2 of section 10A which defines certain terms for the purpose of section 10A Export Turnover has been defined in the said Explanation 2 to section 10A under clause (iv) which reads as under: (iv) export turnover means the consideration in respect of export (by the undertaking) of articles or things or computer software received in, or brought into, India by the assessee in convertible foreign exchange in accordance with sub-section (3), but does not include 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; 29.2 Sub-section (4) of section 10A refers about profits of the business relating to export turnover. The said sub-section (4) of section 10A reads as under: [(4) For the purposes of 57 [sub-sections (1) and (1A)], the profits derived from export of articles or things or computer software shall be the amount which bears to the profits of the business of the undertaking, the same proportion as the exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ally received by the assessee in convertible foreign exchange within six months of the end of the previous year or within such further period as the Chief Commissioner/Commissioner may allow in this regard. 29.5 On the basis of the above material and discussion, it can be said that only those freight, telecommunication charges or insurance attributable to delivery of goods out of India are to be considered while reducing from consideration received in convertible foreign exchange. Thus if such expenses are not attributable to delivery of goods outside India, such expenses are not required to be deducted from the consideration. One more aspect which is required to be considered here is that the consideration received in convertible foreign exchange is including such expenses. If such expenses are not included in the consideration received in convertible foreign exchange, deduction of such expenditures from the consideration does not arise. Normally in a transaction of purchase and sale there are two types of conditions between the parties. One is where price quoted of goods is inclusive of all expenses or in other words price quoted is only in respect of goods. Another condition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r as provided in clause (iv) of Explanation 2 to section 10A is required to be interpreted accordingly. 29.6 The definition of export turnover can be summarized in the following formula: Particulars Amount The consideration in respect of export (by undertaking) of articles or thing or computer software received in or brought in to India by the assessee in convertible foreign exchange in accordance with sub-section (3). xxxxxxxxx Less : (1) Following expenses attributable to the Delivery of articles or things or Computer software outside India (if same are included in above consideration) (i) freight x (ii) Telecommunication charges x (iii) Insurance or x xx (2) Expenses, if any, incurred in foreign Exchange in providing technical services outside India xxx Export Turnover Xxxxxxxxxx 29.7 In the light of above discussions the facts and quantum of expenditures are required to determine after verification from record, we therefore send back matter of this cross ground of appeal and Co to the file of the AO for necessary verifications in the light of above discussions. The AO will provide reasonable opportunity of hearing to the assessee. 61. We fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the CIT(A) allowed the claim of the assessee. Aggrieved, Revenue is in second appeal before Tribunal on both the issues. 63. After going through the order of Tribunal for AY 2002-03 and 2003-04, we are of the view that the Tribunal on considering similar facts for AY 2002-03 and AY 2003-04 allowed the deduction under Section 10A of the Act in respect of receipts of reimbursable expenses in Accenture's own Case for AYs 2002-03 and 2003-04. We find that the ITAT for AY 2003-04 has remanded the matter back to the learned AO for verification of quantum of expenditure incurred in respect of reimbursement on account of telecommunication charges (with needs to be adjusted from the export turnover). However, for the subject year under consideration. Accenture, while calculating its export turnover, has suo-moto excluded the reimbursement on account of telecommunication charges. From the above facts and circumstances, we are of the view that both the issues are covered by Tribunal s decision in earlier years and the facts are exactly identical. Hence, with similar directions on the issue of quantum of expenditure, we restore the matter back to the file of the AO for verification pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as deduction under Section 37(1) of the Act and he allowed the deduction in respect of amount payable under ISA under Section 37(1) of the Act. 67. We find from the facts of the case that the Tribunal agreeing to the findings of the CIT(A) have allowed the deduction on the amounts payable under ISA under Section 37(1) of the Act to Accenture for AY 2002-03 and AY 200304 on the following basis:- 7. We have heard the learned representatives of the parties and perused the record. The claim of the assessee is under 37(1) of the Act. In order to claim deduction of expenditure u/s 37(1) of the Act, the following conditions should be satisfied: i) The expenditure in question should not be of the nature described under the specific provisions of section 30 to 36. ii) the expenditure should not be of the nature of capital expenditure iii) It should not be a personal expenditure. iv) The expenditure should have been laid out or expended wholly and exclusively for the purposes of the business or profession. 7.1 The scope of expression for the purpose of business or profession is wider in scope and its range is wide. It may take not only day-to-day running of business b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is dismissed. 70. The next issue in Revenue s appeal in ITA No. 4099/Mum/2009 for AY 2004-05 is as regards to deletion of upward adjustment of ₹ 70,98, 354/- made by the TPO in respect of international transaction related to employees share purchase plan (ESPP) expenses. For this Revenue has raised following ground No.4 5: - 4. On the facts and in the circumstances of the case and in law, the Id. CIT(A) erred in deleting the upward adjustment of ₹ 70,98,354/- made by the TPO in respect of International transactions relating to ESPP expenses.: 5. On the facts and in the circumstances of the case and in law, the Id. CIT (Appeals) erred in deleting the upward adjustments of ₹ 70,98,354/- made by the TPO. 71. The facts are that the TPO and AO has disallowed the deduction in respect of amounts payable in connection with ESPP during AY 2004-05 by adopting the same basis/ arguments as were raised on this issue by the AO in AYs 2002-03 and 2003-04, which is summarized as under:- (I) Shares of the parent company are being offered to the employees of the Indian subsidiary. (2) Such offer of shares is for the benefit of the parent company i.e. M/s Accent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e salary costs of the appellant. As has been pointed out by the appellant, this is a common practice to retain and motivate hard-working employees which is being followed by all major companies such as Infosys. Further, the amount that has been claimed by the appellant is the difference in the market price of the shares of Accenture Ltd and the exercise price of such shares by the employees of AIPL and not the entire share price of the shares allotted. Further, such shares have not been issued out of the share capital of the appellant and hence cannot be said to be a capital expenditure. I have analysed the decision of SSI Ltd. relied on by the appellant and am of the view that the same is applicable to the appellant s case. As argued by the appellant, such expense is a qualified business expenditure and should be allowable in computing the taxable income of the appellant. This aspect has been upheld in various judicial precedents. Based on the above, I am of the opinion that such expenses qualify as business expenses of the appellant and the appellant should accordingly be given a deduction on this account. Accordingly, I hereby delete the addition made by the AO on ground N ..... X X X X Extracts X X X X X X X X Extracts X X X X
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