TMI Blog2017 (11) TMI 1832X X X X Extracts X X X X X X X X Extracts X X X X ..... bench marking assessee s transactions of software development services before arriving at the ALP. Reimbursement of expenses on cost to cost basis - HELD THAT:- In the earlier A.Y, the TPO had included the reimbursement of cost to the operating cost of the international transaction for arriving at the ALP, but in the relevant A.Y, the AO treated it as a separate international transaction and has added a markup of 10% to make the adjustment. We find that, before the TPO, the assessee has made detailed submissions that the reimbursement of the expenditure is done both by the assessee as well as its AEs without any in markup and therefore, there should not be any adjustment on such account. He submitted that this reimbursement of expenditure is mostly on the travel cost of the deputed employees both of the assessee as well as its AEs. In view of the decision of the Coordinate Bench in the assessee s own case in the earlier A.Ys on similar set of facts, we hold that the reimbursement of expenditure cannot be treated as a separate international transaction with a markup on the same. Therefore, the adjustment on account of such transaction is deleted. Addition/adjustment made on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ges from the export turnover only for the purpose of deduction u/s 10A of the Act. At the time of hearing, both the parties agreed that this issue is covered in favour of the assessee by the decision of the Hon'ble Karnataka High Court in the case of Commissioner Of Income-Tax And Another vs. Tata Elxsi Ltd, reported in (2012) 349 ITR 98 (Kar.) and also the jurisdictional High Court in the case of BA Continuum (ITTA No.214 of 2017) wherein it has been held that if any expenditure is excluded from the export turnover, then the same should also be excluded from the total turnover while computing the deduction u/s 10A of the Act and the DRP has followed similar decisions to direct the AO to reduce the same from the total turnover as well. Respectfully following the same, we do not see any reason to interfere with the order of the DRP and the Revenue s appeal is accordingly dismissed. ITA Nos.207/Hyd/2014 A.Y 2009-10 3. As regards the assessee s appeal, brief facts are that the assessee, formerly known as M/s Four Soft Ltd, was engaged in software development and I.T. Consulting Services. It filed its return of income for the relevant A.Y on 30.09.2009 admitting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al TNMM by which the ALP of comparables was within the margin of + or -5% of assessee s margin and therefore, there was nil adjustment made to the software development services. Copies of the consequential orders were also filed before us. 6. The learned DR, however, supported the orders of the authorities below. 7. Having regard to the rival contentions and the material on record, we find that the Tribunal in ITA No.1495/Hyd/2010 for the A.Y 2006-07 in the assessee s own case at Para 10 to 15, has held as under: 10. The learned counsel for the assessee also submitted that there are errors in computing the net margin of the assessee. He submitted that the TPO computed the adjustments considering the total cost of the assessee (including the cost of transactions with non-AEs). An analysis under TNMM considers only the profit that is attributable to particular controlled transactions. The TPO should have determined the ALP for the international transaction with AE considering only the operating cost allocable to the AE segment. For this proposition, he relied on several decisions cited in its written submissions which includes the case of IL Jin Electronics ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de its submissions before the TPO dated 16-9- 2009 has worked out margins separately in respect of AE and non- AE transactions and the TPO simply rejected the claim of the assessee company for the reason that those segmental details are not audited and no books of accounts are maintained separately. It is also submitted that TPO himself followed the segmental financials in respect of comparables like Infosis. Therefore, it is submitted that the plea of segmental financials to be adopted was taken both before the TPO as well as DRP. 13. On the other hand, the learned departmental representative while relying on the order of the AO and directions of the DRP, submitted that the assessee company has not taken the specific ground in the grounds of appeal stating that segmental financials prepared by the assessee company is to be adopted for the purpose of arriving ALP. It is also submitted that the TPO rightly rejected the multiple year data adopted by the tax payer in its TP study. As per Rule 10B[4], the data relating to the financial year in which the international transaction has been entered into to be used in analysing the comparability of an uncontrolled transaction with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble with the Arms Length Margin of 19% determined by the Transfer Pricing Officer. In our considered view, for computing the net margin of the assessee for the purposes of transfer pricing, only the cost related to the transaction with the Associated Enterprises has to be considered and accordingly, we approve that segmental financials is to be considered for the purpose of arriving at the net margin on the international transaction with the assessee s enterprise in respect of software development services. In that process, bad debts/reimbursements has to be excluded and segmental profitability has to be adopted. We find support in this behalf from various decisions of the Tribunal relied upon by the learned counsel for the assessee duly filing copies thereof in the paper-book, which have been noted hereinabove. That being so, the TPO should have determined the Arms Length Price for the international transactions with associated enterprises considering only the operating cost allocable to the Associated Enterprises segment. Since the assessing officer had no occasion to verify the veracity of the segmental financials prepared by the assessee company, for limited purpose, we direct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee that such bad debts cannot be taken into account for computing the margin of the assessee from the transactions with the associated enterprises in respect of software development services. The learned counsel for the assessee has also filed before us a comparative chart explaining the computation of Net Margin, excluding the bad debts and clearly demonstrated before us that if the bad debts/reimbursements are excluded for the purpose of computing the margins on the transactions relating to the associated enterprises, the net margin comes to 19.07%, which is well comparable with the Arms Length Margin of 19% determined by the Transfer Pricing Officer. In our considered view, for computing the net margin of the assessee for the purposes of transfer pricing, only the cost related to the transaction with the Associated Enterprises has to be considered and accordingly, we approve that segmental financials is to be considered for the purpose of arriving at the net margin on the international transaction with the assessee's enterprise in respect of software development services. In that process, bad debts/reimbursements has to be excluded and segmental profitability has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... und No.12, we find that this issue also is covered in favour of the assessee by the decision of the Coordinate Bench in the assessee s own case for the A.Ys 2006-07 and 2007-08 wherein it has been held that the reimbursement of expenses on cost to cost basis does not require any mark up. It is clarified by the learned Counsel for the assessee that in the earlier A.Y, the TPO had included the reimbursement of cost to the operating cost of the international transaction for arriving at the ALP, but in the relevant A.Y, the AO treated it as a separate international transaction and has added a markup of 10% to make the adjustment. We find that, before the TPO, the assessee has made detailed submissions that the reimbursement of the expenditure is done both by the assessee as well as its AEs without any in markup and therefore, there should not be any adjustment on such account. He submitted that this reimbursement of expenditure is mostly on the travel cost of the deputed employees both of the assessee as well as its AEs. 11. In view of the decision of the Coordinate Bench in the assessee s own case in the earlier A.Ys on similar set of facts, we hold that the reimbursement of e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or as to how it is derived from software development and export. Since the same has been excluded both from the export as well as from the total turnover, the net result is Nil and there is no prejudice caused to the assessee. In view of the same, we do not see any reason to interfere with the order of the AO on this issue and the assessee s ground of appeal No.16 is rejected. 17. Ground No.17 is against the initiation of penalty proceedings u/s 271(1)(c) of the Act. We reject the same as it is premature in nature. 18. In the result, assessee s appeal for A.Y 2009-10 is partly allowed. ITA No.268/Hyd/2015 A.Y 2010-11 19. In this appeal against the assessment order u/s 143(3) r.w.s. 144C of the Act, all the grounds raised by the assessee are similar to the grounds raised for the A.Y 2009-10 and for the detailed reasons given in our order even dated, for the A.Y 2009- 10, the grounds of appeal of the assessee for the A.Y 2009-10 i.e. Ground 1 against rejection of internal TNMM and Grounds 5 6 against incomparable companies taken as comparables are treated as allowed for statistical purposes. 20. As regards Ground No.7 against error in c ..... X X X X Extracts X X X X X X X X Extracts X X X X
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