TMI Blog2019 (11) TMI 1023X X X X Extracts X X X X X X X X Extracts X X X X ..... MBER AND SHRI PAVAN KUMAR GADALE, JUDICIAL MEMBER For The Assessee : Shri Umashankar Gautam, Advocate For The Revenue : Shri C.H.Sundar Rao, CIT (D.R) ORDER PER SHRI PAVAN KUMAR GADALE, JM : These are the cross appeals filed by the assessee and revenue against the order of learned CIT(Appeals) 7, Bangalore passed under Section 143(3) r.w.s. 144C and 250 of the Income Tax Act, 1961 ('the Act'). 2. The assessee has filed the revised Grounds of appeal which are as under : 3. The Brief facts of the case are that the assessee is a wholly owned subsidiary of Veri Sign Inc, USA and is engaged in the business of providing Capital Software Services and Marketing Support Services to its Associated Enterprises (AEs) and with STPI Scheme of Govt. of India for claiming deduction under Section 10A of the Act and Software Development Services and sales and support services. The assessee filed the Return of Income on 12.10.2010 with total income of ₹ 7,14,01,486 under normal IT provisions and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The TPO granted working capital and risk adjustment and determined the ALP of software development services of ₹ 6,20,88,064 whereas in marketing segment, the assessee has submitted the TP document with 5 comparables. The TPO has rejected the TP Study and made analysis of the comparables selected by the assessee and thus final list of comparables selected referred at page 31 of the order as under : 6. The TPO has passed the order with ALP adjustment of ₹ 1,16,56,676 under Section 92CA of the Act dt.29.01.2014. The Assessing Officer on receipt of the order under Section 92CA of the Act with an adjustments to ALP under Section 92CA of the Act of ₹ 7,37,44,740 in respect of software development services segment and marketing segment and allowed deduction under Section 10A of the Act after adjustment and found that the assessee has considered the refund of Service Tax amount of ₹ 31,22,710 as profit of business undertaking for deduction under Section 10A of the Act and accordingly reduced the claim under Section 10A of the Act and made addition of excess deduction under Section 10A of the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nificant R D expenses in own laboratory scale of operations are functionally and profits are derived predominantly due to premium branding. The learned Authorised Representative supported the arguments with the judicial decisions of co-ordinate Bench of Tribunal in the case of Cyprus Semi-conductor India Pvt. Ltd. for the Assessment Year 2010-11 in IT(TP)A No.434/Bang/2015; CSR India Pvt. Ltd. for Assessment Year 2010-11 in IT(TP)A No.256/Bang/2015; Softek India Pvt. Ltd. for Assessment Year 2010-11 in IT(TP)A No.396/Bang/2015 and CGI Information Systems and Management Consultants Pvt. Ltd. in IT(TP)A No.346/Bang/2015 for Assessment Year 2010-11. We find the co-ordinate Bench of Tribunal in the case of CGI Information Systems and Management Consultants Pvt. Ltd. (supra) has observed at pages 21 22 and held as under : Infosys Ltd: The Hon ble DRP had directed the exclusion of companies from the list of comparables on the ground that it owns intangibles and high brand value. And the coordinate bench in the case of Electronics for Imaging India P. Ltd., also recorded similar findings vide para 19 of the order which is reproduced below: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ist of comparables on noticing that the software segment consisted both of sale of software services and products and no segmental information was available and it further noticed that the company was predominantly outsourcing software product development services. Even the coordinate bench in the case of Electronics for Imaging India P. Ltd., (supra) has recorded similar finding vide para 26 of order: Therefore, when this company is engaged in diversified activities and earning revenue from various activities including licencing of products, royalty on sale of products as well as income from maintenance contract, etc., the same cannot be considered as functionally comparable with the assessee. Further, this company also earns income from outsource product development. In the absence of any segmental data of this company, we do not find any error or illegality in the findings of the DRP that this company cannot be compared with the assessee and the same is directed to be excluded from the set of comparables. The revenue had not filed any evidence contradicting the above findings. Therefore, we do not find any reason to differ from the fin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r applied by the TPO, is wholly arbitrary and thus the company ought to be included in final list of comparables. In fact, in the assessee s own case for the immediately preceding assessment year, Akshay Software Technologies Ltd. ( Akshay for short) has been accepted by the TPO and confirmed by the CIT(A) as being comparable to the Assessee. In addition, Akshay is consistently figuring in the final list of comparables in the cases of several other similarly placed assesses for the same assessment year in question. Further, in Arowana Consulting Ltd. v.ITO in IT(TP)A No.235/Bang/2015, this Hon ble Tribunal vide its order dated 29.06.2015 for AY 2010-11 directed that Akshay be included in the final list of comparables. The ld. AR drawn our attention to the decision of M/s. Arowana Consulting Ltd. Vs. ITO in IT(TP)A No.235/Bang/2015 at pages 5 to 12 referred at page Nos.1829 to 1836 of the Paper Book. We found the submissions made by the ld. AR appears to be realistic but these facts have not been verified and examined by the TPO therefore we restore the comparable Akshay Software Technologies Pvt. Ltd. to the file of TPO. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nvolved in that order is same i.e. 2010 11. Learned DR of the revenue supported the orders of TPO, AO DRP. 5. We have considered the rival submissions. We find that the issue in dispute is squarely covered in favour of the assessee by these two tribunal orders cited by the learned AR of the assessee for same assessment year. We find that in Para 8 of the tribunal order rendered in the case of DCIT vs. Electronics for imaging India Pvt. Ltd. (Supra), the profile of that assessee was noted and as per the same, that assessee was engaged in Software Development services and sales Marketing Support Services. Both were benchmarked separately and the paras of the tribunal order referred to before us are in respect of Marketing Support Services. In the present case also, the dispute is regarding Marketing Support Services provided by the assessee. Hence, the profile of the present assessee and Electronics for imaging India Pvt. Ltd. is same. Hence, we respectfully follow this tribunal order and hold that in the present case also, this comparable i.e. Asian Business Exhibition Conferences Ltd. should be excluded from the final list of comparable. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. (supra) at page 6 para 7 of Paper Book page 1450 of Paper Book as under : 7. Regarding the appeal of the revenue, Learned DR of the revenue supported the draft assessment order passed by the AO and the order of TPO. Learned AR of the assessee supported the order of DRP. He also submitted that in the appeal of the revenue, the grievance of the revenue is regarding direction of DRP to exclude three comparables i.e. 1) HCCA Business Services Pvt. Ltd., 2) Hindustan Hosing Co. Ltd. and 3) Killick Agencies Mktg. Ltd. He submitted that as per the same tribunal order rendered in the case of DCIT vs. Electronics for imaging India Pvt. Ltd. (Supra), it was held that these comparables are also not good comparables and in this regard, our attention was drawn to pages 369, 379 371 of the paper book. At this juncture, the bench pointed out that as per the tribunal order on page 379, the decision is this that since, the availability of comparables is not an issue and therefore, RPT percentage at 15% is approved. The bench pointed out that in the present case, there are only 6 comparables as per TPO and out of that 3 are already excluded by DRP and for 1 comparab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the present case. We direct the TPO to exclude the comparables from the final list of comparables for determination of ALP as under : 1. Asian Business Exhibition Conferences Ltd. 2. HCCA Business Services Pvt. Ltd. 3. Hindustan Housing Company Ltd. 4. Killicks Agencies Marketing Ltd. 11. The ld. AR argued that the learned CIT (Appeals) has erred in observing that service tax refund cannot be said to be profit derived from the undertaking or business of the assessee and hence should be excluded. We find the CIT (Appeals) at page 19 para 12.1 has dealt on the issue as under : We are of the opinion that the nature of service tax has to be verified and accordingly we remit this issue to the file of Assessing Officer for fresh consideration and allow the grounds of appeal for statistical purposes. 12. In the result, the assessee's appeal is partly allowed for statistical purposes. 13. Now we shall take up the revenue s appeal in IT(TP)A No.2511/Bang/2017, the Revenue has raised the following grounds of appeal : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n by the undertaking 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 to mean the consideration in respect of export by the undertaking of articles, things or computer software received in or brought into India by the assessee in convertible foreign exchange but so as not to include inter alia freight, telecommunication charges or insurance attributable to the delivery of the articles, things or software outside India. Therefore in computing the export turnover the legislature has made a specific exclusion of freight and insurance charges. The submission ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h are the numerator and the denominator respectively in the formula .. The formula for computation of the deduction under section 10A would be as under : Profits of the business x export turnover / Total turnover From the aforesaid judgments, what emerges is that, there should be uniformity in the ingredients of both the numerator and the denominator of the formula, since otherwise it would produce anomalies or absurd results. Section 10A is a beneficial section. It is intended to provide incentives to promote exports. The incentive is to exempt profits relatable to exports. In the case of combined business of an assessee, having export business and domestic business, the legislature intended to have a formula to ascertain the profits from export business and domestic business, the legislature intended to have a formula to ascertain the profits from export business by apportioning the total profits of the business on the basis of turnovers. Apportionment of profits on the basis of turnover was accepted as a method of arriving at export profits. In the case of section 80HHC, the export profit is to be derived from the total busi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xport turnover. Therefore the formula for computation of the deduction under section 10A, would be as under : Profits of the business of the undertaking x Export turn over ( Export turnover + domestic turn over) Total Turnover 11. In that view of the matter, we do not see any error committed by the Tribunal in following the judgments rendered in the context of section 80HHC in interpreting section 10A when the principle underlying both these provisions is one and the same. Therefore, we do not see any merit in these appeals. The substantial question of law framed is answered in favour of the assessee and against the revenue. Respectfully following the aforementioned decision of the Hon ble High Court of Karnataka in the case of Tata Elxsi Ltd. (supra), we find the ld. CIT (Appeals) has relied on judicial decisions and we uphold the order of the learned CIT (Appeals) in directing the Assessing Officer to reduce the expenditure from both export turnover and total turnover for the purpose of computing the deduction under section 10A of the Act and dismissed the grounds of appeal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... comparable with the software development company in view of the fact that it is engaged in the diversified activities. The relevant paragraph is reproduced below: 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 outsourcing, then the same cannot be regarded as functionally comparable with that of the assessee who is rendering software development services to its AE. Respectfully following the decision of the coordinate bench, we do not find any reason to interfere with the findings of the DRP that this company is not comparable with that of a software development service provider. 21. Similarly Kals Inormation Systems Ltd. was excluded as observed at pages 24 25 para 25 as under : 25. The next cross-objection seeks the exclusion of M/s. Kals Information Systems Ltd., and M/s. Tata Elxsi L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omparability, comprising of services such as product design, engineering and visual computing labs which are in the nature of IT enabled services and thus this company cannot be compared with a company which is engaged in the software development like the assessee company and reliance in this regard was placed in the decision of DCIT v. Electronics for Imaging India P. Ltd., [(2016) 70 taxmann.com 299 (Bang Trib)]. Therefore, it was prayed that this company should be excluded from the list of the comparables. 28. We heard the rival submissions and perused the material on record. There is no dispute about the business profile of this comparable that it is engaged in the software segment business of the company consisting of product design services (PDS), industrial design engineering (IDE) and visual computing labs division (VLC). The PDS division provides offerings in multiple domains such as broadcase, wireless, transportation, convergence, DSP, graphics and imaging and semicon. The IDE segment supports global corporations in the area of new brand/product introduction from concept to market. Its expertise lies in the areas of consumer insights ..... X X X X Extracts X X X X X X X X Extracts X X X X
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