TMI Blog2017 (8) TMI 1561X X X X Extracts X X X X X X X X Extracts X X X X ..... RPT filter of 15% is proper in the case of the assessee. Accordingly we direct the Assessing Officer/TPO to exclude the comparable companies having the revenue of more than 15% from related parties. Since we have determined the RPT filter at 15% and the assessee has agreed not to apply any turnover filter, the only issue remained to be decided is functional comparability of various companies selected by the TPO and objected by the assessee. Tribunal in the case of DCIT Vs. Electronics for Imaging India (P.) Ltd. [ 2016 (2) TMI 1123 - ITAT BANGALORE] companies not functionally comparable to the assessee and therefore the TPO / A.O is directed to exclude these companies from the set of comparables. MINDTREE LIMTIED - There is a restructuring in this company which has influenced the profits however, the decision relied upon by the learned Authorised Representative in the case of HSBC Electornic Data Processing (I) Pvt. Ltd. Vs. ACIT [ 2015 (1) TMI 1063 - ITAT HYDERABAD] is not directly on the comparability of this company but it was in respect of some other company which was under restructuring of event like merger, demerger, etc. In the facts and circumstances of the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2014 for the Assessment Year 2010-11. 2. The assessee stated to be engaged in the business of software development services providing to its parent company outside India. The assessee has reported the international transactions with its Associated Enterprises (AEs) as under : International Transactions Amount (Rs.) Software development services 17,68,09,824 Reimbursement of expenses 8,60,212 Total value of International Transactions 17,76,70,036 Segment in dispute Software development services Methodology adopted to determine ALP TNMM Turnover from software d evelopment services 17,68,09,824 Margins : Appellant s Margin in software segment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not justified in considering incorrect operating expenses of ₹ 15,45,13,286/- [excluding forex loss of ₹ 33,13,729/-] as against the correct operating expenses of ₹ 15,78,27,015/- [including forex loss of ₹ 33,13,729/-] as directed by the Honourable DRP. 4. The Honourable DRP is not justified in rejecting the comparable Companies selected by Learned TPO viz. M/s. Persistent Systems Solutions Ltd. and M/s. Thinksoft Global Services Ltd. having Related Party Transaction (RPT) within 15%, on the basis that there is no necessity to adopt comparable Companies having RPT within 15%, when there are comparable Companies with 0% RPT. 5. The Honourable DRP is not justified in upholding selection of M/s. ICRA Techno Analytics Ltd. (Seg.) as a functionally comparable Company ignoring that the said Company is into business analytics and business process outsourcing. 6. The Honourable DRP is not justified in upholding selection of M/s. Kals Information Systems Ltd. (Seg.) as a comparable Company when the said Company is into development of software products when there is a material difference/error in the segmental information avai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es of ₹ 1,58,82,853/- from the export turnover. 2. The Honourable DRP has failed to appreciate that the phrase used in clause(iii) of Explanation 2 to Section 10B is does not include and not to be reduced by . The said phrases have different connotations. The phrase does not include deals with items which by trade practice or contractual terms or accounting treatment are considered as components of export turnover but by the aforesaid fiction are not to be so considered. The phrase to be reduced by may mean statutory deduction irrespective of the composition of the sale price. 3. The Honourable DRP has failed to appreciate the fact that the appellant has not charged its customers separately in respect of communication expenses and travelling expenses incurred by it and has neither included the said expenditure in the export turnover nor recovered the same from its customers. Therefore, the Learned Assessing Officer is not justified in excluding the aforesaid expenditure from the export turnover. 4. Without prejudice to the above, the Honourable DRP is not justified in failing to appreciate that the question of deduction of telecommun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ustified in upholding the levy of interest under sections 234B 234C of IT Act when the conditions for levying such interest did not exist in the present case. Revenue s Grounds 3. The revenue has raised an issue of turnover filter applied by the DRP for exclusion of comparables apart from the computation of deduction under Section 10A of the Income Tax Act, 1961 (in short 'the Act') by exclusion of the expenses on telecommunication, travel and other foreign currency expenses from export turnover as well as total turnover. 4. On the other hand, the assessee has raised the issue of functional dissimilarity of the companies selected by the TPO including the companies which were rejected by the DRP by applying the turnover and 0% RPT filter apart from the corporate issues. 5. First we will deal with the TP issue including the turnover filter and 0% RPT filter applied by the DRP. 6. As regards the turnover filter applied by the DRP and challenged by the revenue, the learned Authorised Representative of the assessee has submitted that the assessee has no objection if the directions of the DRP to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 17. In view of the conclusion above that exclusion of comparable companies with RPT of less than zero percent is not valid, and that companies where RPT is less than 15% alone can be considered, then the comparable rejected by the CIT (Appeals) on the basis of the said filter will have to be included along with the four comparable retained by the CIT (Appeals). Although 12 comparable which were rejected on the basis of RPT being more than zero percent, one comparable viz., Four Soft Ltd, will have to be excluded since the RPT is at 19.89% and thus in excess of 15%. Sathyam Computers Ltd. and Infosys Technologies Ltd. will get excluded for the reason that the financial results are not reliable in the case of Sathyam Computers Ltd. and for the reason that the high turnover, brand value, high risks etc. The remaining 9 comparable companies which were excluded by the CIT (Appeals) by applying the RPT filter of 0% related party transaction will not have to be included. Their comparability with the assessee in terms of other filters will be discussed in the following paragraphs. In view of the facts and circumstances of the case when there is good number of comparable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onally different from the assessee. In support of his contention he has relied upon the co-ordinate Bench of this Tribunal in the case of DCIT Vs. Electornics for Imaging India (P.) Ltd. (supra). KALS INFORMATION SYSTEMS LIMTIED (SEG.) 12. The learned Authorised Representative of the assessee has submitted that this company is engaged in the development of software products and cannot be compared with the assessee who has engaged in the software development services. The segment results of the said company as disclosed in the Annual Report does not show the correct profit from operation. Therefore this company is not functionally comparable to the assessee. In support of his contention he has relied upon the co-ordinate Bench of this Tribunal in the case of DCIT Vs. Electornics for Imaging India (P.) Ltd. (supra). L T Infotech Limited 13. The learned Authorised Representative of the assessee has submitted that this company also commands significant brand value in the market. This company earns 49% of its revenue from on site software services. Therefore this company is functionally not comparable. Further the RPT of this compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 17. On the other hand, the learned Departmental Representative has submitted that the TP provisions of the Act and Rules under Section 92C and Rule 10B(2) mandate that the comparability of an international transaction with an uncontrolled transactions shall be judged with reference to specific character of property transferred or services provided in the service transaction/functions performed. The dispute of determination of Arm s Length Price (ALP) is necessarily fact based and requires consideration of business model of the assessee and the contractual terms entered into with AE along with the details of FAR Analysis so as to characterize the transaction and business model. After characterization of the tax payer on the basis of FAR Analysis the selection of comparable companies has to be made whether functionally similarity qua the transaction on the basis of FAR Analysis of the comparable companies is required to be done. The learned Departmental Representative has vehemently contended that the functional comparability has to be examined separately in each case and the decision of the Tribunal in other case cannot be considered as a precedent. In support of his contention, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aving the related party revenue at 20.94% of the total revenue, this company was also found to be functionally not comparable with software development services segment of the assessee. The DRP has given its finding at pages 13 to 14 as under:- Having heard the contention, on perusal of the annual report, it is noticed by us that the segmental information is available for two segments i.e., services and sales. However, it is evident from the annual report that the service segment comprises of software development, software consultancy, engineering services, web development, web hosting, etc. for which no segmental information is available and therefore, the objection of the assessee is found acceptable. Accordingly, Assessing Officer is directed to exclude the above company from the comparables. 15. We find that the facts recorded by the DRP in respect of business activity of this company are not in dispute. Therefore, when this company is engaged in diversified activities of software development and consultancy, engineering services, web development hosting and substantially diversified itself into domain of business analysis and business process outsou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... power, the same cannot be compared with the assessee who is providing services to its AE. (3) KALS Information Systems Ltd. 21. The assessee raised objections against this company on the ground that this company is engaged in the development of software and software products. Further, this company consists of STPI unit and also having a training centre engaged in training of software professionals on online products. Thus, when this company is having revenue from software services as well as software product, the same cannot be considered as comparable with software development service providing company. 22. The DRP has directed the AO to exclude this company from the list of comparables by taking note of the fact that there were inventories in the books of accounts of this company which shows that this company is in the software product business. Further, by following the decision of this Tribunal in the case of Trilogy EBusiness Software India (P.) Ltd. v. Dy. CIT [2013] 140 ITD 540/29 taxmann.com 310 (Bang. - Trib.), this company was found to be not comparable with that of the assessee. 23. We have heard the ld. DR as well as ld. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Communication Technologies Ltd. 27. The assessee raised objection that this company has revenue from software services, software products and other services. The DRP has come to the conclusion that this company earned revenue from 3 segments. However, no segmental information is available. Accordingly, the DRP directed the AO to exclude this company from the comparables. 28. We have heard the ld. DR as well as ld. AR and considered the relevant material on record. The DRP has reproduced the break-up of revenue in the impugned order as under:- Amount in Rs. lakhs Year ended March 31, 2010 Year ended March 31, 2019 Software Services 37,736.22 40,531.20 Software products 2,041.00 6,146.43 Other Services 372.77 1,297.05 Total Reve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Tata Elxsi is engaged in development of niche product and development services which is entirely different from the assessee company. We agree with the contention of the learned AR that the nature of product developed and services provided by this company are different from the assessee as have been narrated in para 6.6 above. Even the segmental details for revenue sales have not been provided by the TPO so as to consider it as a comparable party for comparing the profit ratio from product and services. Thus, on these facts, we are unable to treat this company as fit for comparability analysis for determining the arm's length price for the assessee, hence, should be excluded from the list of comparable parties. 33 .. 34 . 62. The assessee has raised objection against this company on the basis of high turnover in comparison to the assessee. It was also contended that related party transaction (RPT) of this company is 18.66%. The DRP rejected objections of the assessee on the ground that TPO has applied 25% filter of RPT and annual report of the company does not show any other services rendered other than software development services pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ollowing the decision of coordinate bench of this Tribunal in the case of DCIT Vs. Electronics for Imaging India (P.) Ltd. ;(supra) that these companies are not functionally comparable to the assessee and therefore the TPO / A.O is directed to exclude these companies from the set of comparables. MINDTREE LIMTIED 19. The learned Authorised Representative of the assessee has submitted that this company has gone into restructuring and thereby profit of this company has been influenced. Further in the absence of a reasonable accurate adjustment on account of the impact on the profit due to restructuring, this company cannot be considered as a good comparable. He has further contended that this company enjoys a significant brand value in the market. In support of his contention, he has relied upon various decisions of this Tribunal including the decision in the case of HSBC Electornic Data Processing (I) Pvt. Ltd. Vs. ACIT 52 Taxmann.com 126/152 ITD 128. Hence the learned Authorised Representative has submitted that this company shall be excluded from the set of comparables. 20. On the other hand, the learned Departmental Representative has submitt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n assessee's own case has decided this issue in para 5.1 as under : 5.1 Having regard to the rival contentions and the material on record, we find that the travelling expenses incurred by the assessee are towards the travel of its employees to the offices of the AE outside India in order to discharge its functions of software development. It is not in dispute that the assessee is eligible for exemption u/s 10A of the Act and the only dispute herein is with regard to the travelling expenses forming part of the export turnover. The assessee is eligible for exemption u/s 10A of the Act provided if it is in the manufacture and export of computer software. The traveling of the employees of the assessee is an integral part of the software development. In such circumstances, it cannot be said that the travelling expenses are not part of the export turnover. Therefore, respectfully following the decision of the jurisdictional High Court in the cases cited supra, we hold that these expenses cannot be reduced or excluded from the export turnover for computation of deduction u/s 10A of the Act. 25. Though the said issue was regarding travelling expenses whereas f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ite service cannot be treated as the expenses incurred for rendering the technical services outside India. He has relied upon the decision of the Hon'ble jurisdictional High Court in the case of CIT Vs. Motor Industries Co. Ltd. 55 Taxman.com 377. 28. On the other hand, the learned Departmental Representative has relied upon the orders of the authorities below as well as the decision of this Tribunal in assessee's own case for the Assessment Year 2009-10. 29. We have considered the rival submissions as well as the relevant material on record. As per the definition of export turnover provided in Expln. 2 below Section 10B(9A), the export turnover does not include freight, telecommunication charges or insurance attributable to the delivery of article or thing or computer software outside India or expenses if any incurred in foreign exchange in providing the technical services outside India. Thus from the plain language of the definition of the export turnover, it is clear that the expenses which are not in the nature of freight, telecommunication charges or insurance attributable to the delivery of article or thing or computer software outside India bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... butable to the delivery of computer software outside India; d. expenses, if any, incurred in foreign exchange in providing technical services outside India; 19. If the assessee is engaged in the business of providing technical services outside India in connection with the development or production of computer software then expenses if any incurred in foreign exchange in providing technical services outside India is liable to be deducted out of export turnover. The said provision has no application in the case of export out of India of computer software or its transmission from India to a place outside India by any means. The law makes a distinction between technical services rendered in connection with export of computer software and export of technical services for the purpose of development or production of computer software outside India. If the technical services rendered by the assessee's Engineers is in connection with the export of computer software for the purpose of testing, installation and monitoring of software such a turnover do not fall within clause (ii) of subsection (1) of section 80HHE of the Act. Such a turnover falls within sub-clause ..... X X X X Extracts X X X X X X X X Extracts X X X X
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