TMI Blog2016 (10) TMI 1286X X X X Extracts X X X X X X X X Extracts X X X X ..... There is no dispute that the adjustment for working capital be granted. But the only issue is whether the advance received from AE should be considered as trade payable and be considered for working capital adjustment. The advance received from AE par takes the character of trade payables which is to be adjusted against the future invoice. As a result of receipt of this advance money the necessity for borrowings from outside is reduced to that extent thereby reducing the cost of the borrowings. Thus it has a direct bearing on the profitability of the concern. Therefore the trade payable should be considered while computing the working capital adjustment. Thus the grounds of appeal filed by the revenue are dismissed. TP Adjustment - comparable selection - HELD THAT:- The assessee-company is engaged in providing software development services only to its AEs. Being a captive service centre providing contact services to its AEs, assumes less than normal risks and all the significant business and entrepreneurial risks are borne by the overseas affiliates , thus companies functionally dissimilar with that of assessee need to be deselected from final list. - IT(TP) No.346/Bang/2015 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ances received from AE on the ground that there is time value of money. 6. On the facts and in the circumstances of the case, the Hon'ble Dispute Resolution Panel erred by not upholding the approach of the TPO in its order. 7. On the facts and in the circumstances of the case, whether the Hon'ble Dispute Resolution Panel is correct in excluding M/s. ICRA Techno Analytics Ltd and M/s. Persistent Systems Ltd while the comparables are qualifying all the qualitative and quantitative filters applied by the TPO. 8. On the facts and in the circumstances of the case, whether the Hon'ble Dispute Resolution Panel is correct in excluding INFOSY Ltd on the basis of decision in a different case for a different FY while the comparable is qualifying all the qualitative and quantitative filters applied by the TPO. 9. For these and other grounds that may be urged at the time of hearing, it is prayed that the directions of the Dispute Resolution Panel in so far as it relates to the above grounds may be reversed. 10. The appellant craves leave to add, alter, amend and I or delete any of the grounds mentioned above. 3. Briefly, fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ces. For the purpose of transfer pricing study, the assessee-company had chosen 16 companies as comparable entities in respect of software development services and arithmetic average of operating profit margins of said comparables was computed at 13.25% in respect of software development services. According to the assessee-company, its PLI was much higher than the arithmetic mean of the comparable entities. Hence, it was claimed that the transactions with its AE are at arm s length. 6. The Assessing Officer (AO) referred the matter to the Transfer Pricing Officer (TPO). The TPO, by an order dated 24/02/2014 passed u/s 92CA of the IT Act, 1961 computed the transfer pricing adjustment at ₹ 21,25,70,985/- in respect of software development services and accepted that other international transactions are at arm s length. The TPO accepted TNMM adopted by the assessee-company as well as cost + margin as a profit level indicator but rejected the transfer pricing study report. The TPO proceeded to identify a different set of comparable entities for the purpose of determining the ALP. While doing so, the ld. TPO had applied the following filters: St ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 12.74 6. Persistent Systems Solutions Ltd., 15.38 15.15 7. Persistent systems Ltd., 30.35 28.11 8. R S Software (India) Ltd., 10.29 10.45 9. Sasken Communication Technologies Ltd., 17.36 16.41 10. Tata Elxsi Ltd., (Seg) 20.93 17.20 11. Thinksoft Global Services Ltd., 17.05 13.96 AVERAGE MARGIN 22.71 21.21 8. The TPO computed average profit margin of the comparables at 22.71% and after giving working capital adjustment of 1.5%, adjusted arithmetical mean of PLI was determined at 21.21%. On the above basis, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal and cross-objections are filed by assessee company being aggrieved that part of the order of CIT(A) rejecting the entities viz., Akshay Software Technologies Ltd., chosen by the assessee and contending that the comparables Kals Information Systems Ltd., and Tata Elxsi Ltd., chosen by the TPO be excluded. 12. Now, we shall take up the revenue appeal. Revenue has raised 10 grounds of appeal, ground No. 1, 9 and 10 are general in nature do not require any adjudication. Ground No. 2 and 3 deals with the direction of Hon ble DRP to TPO/AO to reduce the telecommunication expenditure and the travelling expenditure incurred in connection with delivery of the software from both export turnover as well as total turnover. This issue is no longer resintegra as it is covered in favour of the assessee by the decision of Hon ble Jurisdictional High Court in the case of Tata Elxsi Ltd., 349 ITR 98 wherein it was held as follows: 3. Chapter 3 of the Act deals with incomes, which do not form part of total income. Section 10-A is a Special provision in respect of newly established Undertakings in free trade zone, etc. The said provision is enacted as an incentive to exporters ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ous decisions as defined under the Act under Section 80HHC. However, in the aforesaid provision, the total turnover is defined. The definitions of 'export turnover' and 'total turnover' as defined in Explanation to Section 80HHC read as under: 9. (b) export turnover means the sale proceeds received in, or brought into, India by the assessee in convertible foreign exchange in accordance with clause (a) of sub-section (2) of any goods or merchandise to which this Section applies and which are exported out of India, but does not include freight or insurance attributable to the transport of the goods or merchandise beyond the customs station as defined in the Customs Act, 1962. 10. (ba) total turnover shall not include freight or insurance attributable to the transport of the goods or merchandise beyond the customs station as defined in the Customs Act, 1962. 11. In the aforesaid definitions, what is to be excluded from both is expressly mentioned. In Section 10-A, 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 interpreti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of the formula which sought to segregate the export profits from the business profits . Therefore, we have to read the formula in entirety. In that formula the entire business profits is not given deduction. It is the business profit which is proportionately reduced by the above fraction/ratio of export turnover/total turnover which constitute section 80HHC concession (deduction). Income in the nature of business profits was, therefore, apportioned. The above formula fixed a ratio in which business profits under section 28 of the Act had to be apportioned. Therefore, one has to give weightage not only to the words total turnover but also to the words export turnover , total export turnover and business profits . That is the reason why we have quoted hereinabove extensively the illustration from the Direct Taxes (Income tax) Ready Reckoner of the relevant word. In the circumstances, we cannot interpret the words total turnover in. the above formula with reference to the definition of the word turnover in other laws like Central Sales tax or as defined in accounting principles. Goods for export do not incur excise duty liability. As stated, above, even commission a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in exports, the said commission was not includible as it did not spring from the turnover . Just as interest, commission etc. did not emanate from the turnover , so also excise duty and sales tax did not emanate from such turnover. Since excise duty and sales tax did not involve any such turnover, such taxes had to be excluded. Commission, interest, rent etc. do yield profits, but they do not partake of the character of turnover and, therefore, they were not includible in the total turnover . The above discussion shows that income from rent, commission etc. cannot be considered as part of business profits and, therefore, they cannot be held as part of the turnover also. In fact, in Civil Appeal No. 4409 of 2005, the above proposition has been accepted by the Assessing Officer See: page No. 24 of the paper book, if so, then excise duty and sales tax also cannot form part of the total turnover under section 80HHC(3), otherwise the formula becomes unworkable. In our view, sales tax and excise duty also do not have any element of turnover which is the position even in the case of rent, commission, interest etc. It is important to bear in mind that excise duty and sales tax are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st have the same meaning as the export turnover which is a constituent element of the total turnover in the denominator. The legislature has provided a definition of the expression export turnover in Explanation 2 to section 10A by 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. 18. The submission which has been urged on behalf of the Revenue is that while freight and insurance charges are liable to be excluded in computing export turnover, a similar exclusion has not been provided in regard to total turnover. The submission of the Revenue, however, misses the point that the expression total turnover has not been definded at all by Parliament for the purposes of section 10A. However the expression export turnover h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2. 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 10-A 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 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 ease of Section 80HHC, the export profit is to be derived from the total business income of the assessee, whereas in Section 10-A, the export profit is to be derived from the total business of the undertaking. Even in the case of business of an undertaking, it may include export business and domestic business, in other words, export turnover and domestic turnover. The export turnover would be a component or part of a denominator, the other component ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Total Turn Over 23. 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 10-A 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. 13. Respectfully following the decision of the jurisdictional High Court, we hold that the decision of the CIT(A) is in consonance with the law laid down by the Hon ble Jurisdictional High Court in the case cited supra. We therefore dismiss the grounds of appeal filed by the revenue on this issue. The grounds of appeal are disposed off. 14. Ground Nos. 2 and 3 challenges the direction of the Hon ble DRP to exclude the travelling expenditure and telephone expenses incurred in connection with the software products from both export turnover as well as total turnover. This direction is in consonance with the law laid down by the Hon ble Jurisdictional High Court in the cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all deal with each of the comparables. ICRA Techno Analytics Ltd., (seg) The learned CIT (A) argued that the Hon ble DRP ought not to have deleted these companies from the list of the comparables on the ground of functional dissimilarity. On other hand the ld. Counsel for the assessee submitted that these comparables were excluded by the coordinate bench in the case of DCIT V. Electronics for Imaging India P. Ltd., [(2016) 70 taxmann.com 299. We heard the rival submissions and perused the material on record. We find from the order of the Hon ble DRP that in the case of ICRA Techno Analytics Ltd., the Hon ble DRP after perusing the Annual Report had come to conclusion that the service segment comprised of software development, software consultancy, engineering services, web development, web hosting etc., for which no segment details were available. The revenue had not led any evidence on record controverting the above findings. Even the Hon ble coordinate bench in the case of DCIT V. Electronics for Imaging India P. Ltd., [(2016) 70 taxmann.com 299 had held that this company is not comparable with the software development company in view of the fact tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... findings vide para 19 of the order which is reproduced below: We have heard the ld. DR as well as ld. AR and considered the relevant material on record. We note that in the case of Agnity India Technologies (P.) Ltd., (supra), the Delhi Bench of the Tribunal has considered the comparability of this company and the findings of the Delhi Bench of the Tribunal has been confirmed by the Hon ble Delhi High Court. The Hon ble Delhi High Court has observed that this company having brand value as well as intangible assets cannot be compared with an ordinary entity provide captive service. We further note that this company provides end to end business solutions that leverage cutting edge technology thereby enabling clients to enhance business performance. This company also provides solutions that span the entire software lifecycle encompassing technical consulting, design, development, re-engineering, maintenance, systems integration, package evaluation and implementation, testing and infrastructure management service. In addition, the company offers software product for banking industry. Thus, this company is engaged in diversified services including design as well as technical ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee company and we uphold the rejection of this company from the list of comparables. This view is also supported by the decision of the coordinate bench in the case of Trilogy E-Business Software V. DCIT[TS 748 ITAT 2012(Bang) TP]. 25. The next cross-objection seeks the exclusion of M/s. Kals Information Systems Ltd., and M/s. Tata Elxsi Ltd., from the list of comparables. The assessee company submits that M/s. Kals information Systems is engaged in the development of software products such as Shine ERP Software, Docuflo, Dac4Cast, CMSS, La Vision, Virtual Insure and Aldon and also provides implementation and maintenance services of software products and segment details are available for the above valid activities. Therefore, it is submitted that this company cannot be considered as comparable with that of assessee company on the grounds of functional dissimilarity and reliance in this regard was placed on the coordinate bench s decision in DCIT v. Electronics for Imaging India P. Ltd., [(2016) 70 taxmann.com 299 (Bang Trib.)]. We heard the rival submissions and perused the material on record. Now it is settled law that a company which is engaged in pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, product/service innovation, industrial design, functional prototyping and engineering. It also engages in brand development and retail design. The VLC division delivers 3D computer graphics, animation and special effects in the preproduction, production and post-production of content for the film, television, gaming and advertising industry. The system integration support segment is involved in valueadded reselling involving systems integration and support for a wide range of technical computing hardware and software solutions involving high-end computing platforms, mechanical design automation tools, enterprise storage solutions, digital media and life sciences solutions through its tie-ups with global leaders in these respective areas. It is now fairly settled that a product design company cannot be compared with the pure software services provider like that of the assessee company and therefore this company deserves to be rejected fr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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