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Income Tax Appellate Tribunal, PUNE BENCH “C”, PUNE
Before: SHRI R.S. SYAL & SHRI PARTHA SARATHI CHAUDHURY
आदेश / ORDER
PER R.S.SYAL, VP :
This appeal by the assessee is directed against the final assessment order dated 25-10-2012 passed by the Assessing Officer (AO) u/s.143(3) r.w.s.144C(13) of the Income-tax Act, 1961 (hereinafter called ‘the Act’) in relation to the assessment year 2008-09.
2 ITA No.2549/PUN/2012 BMC Software India Private Limited
I. SOFTWARE DEVELOPMENT SERVICES SEGMENT
The first issue espoused in this appeal is the transfer pricing
addition of Rs.19,23,02,633/- made by the Assessing Officer (AO)
in the international transaction of “Software Development services”.
Briefly stated, the facts of the case are that the assessee is a
wholly owned subsidiary of BMC, USA, which was incorporated in
India in the year 2001. The assessee is engaged in providing
Software Development services, Information technology enabled
services (ITES) and Sale support services solely to BMC group
entities. Return was filed declaring total income of Rs.49,30,810/-.
The assessee filed Form No. 3CEB declaring four international
transactions including the three stated above, in addition to
Reimbursement of expenses. The AO referred the matter of
determination of the Arm’s Length Price (ALP) of the international
transactions to the Transfer Pricing Officer (TPO). The TPO
accepted the international transactions of Reimbursement of
expenses and Rendering of ITES at ALP. Instantly, we are dealing
with the international transaction of “Rendering of Software
Development services” with transacted value of Rs.1,78,27,24,996/-
which was separately processed by the assessee under the
Transactional Net Margin Method (TNMM) with Profit Level
3 ITA No.2549/PUN/2012 BMC Software India Private Limited
Indicator of Operating profits to Total cost (OP/TC). The assessee
selected eight companies as comparable. The assessee worked out
its own PLI at 10.76% as against that of comparables at average of
13.59% to show that the transaction was at ALP. The TPO made
certain inclusions in or exclusions from the assessee’s list of
comparables and finalized his own set of comparables comprising
of nine companies with adjusted average OP/TC at 26.47%.
Applying the same as the arm’s length margin, the TPO worked out
transfer pricing adjustment of Rs.25,32,54,961/-. The AO proposed
this addition in the draft order. The assessee assailed various aspects
of the ALP determination of this transaction before the Dispute
Resolution Panel (DRP). Vide direction dated 05-09-2012, the DRP
made certain adjustments to the list of comparables. Giving effect
to the directions given by the DRP, the AO in his final assessment
order dated 25-10-2012 computed the amount of transfer pricing
addition in the international transaction of Rendering of Software
Development services at Rs.19,23,02,633/-, against which the
assessee has come up in appeal before the Tribunal.
We have heard both the sides and gone through the relevant
material on record. In so far as the international transaction of
“Rendering of Software Development services” with transacted
4 ITA No.2549/PUN/2012 BMC Software India Private Limited
value of Rs.178.27 crore is concerned, it is found as an admitted
position that the assessee applied separate TNMM for this
transaction which has been accepted by the TPO also as the most
appropriate method. Further, there is no dispute on the PLI of
OP/TC. The dispute centers around the inclusion/exclusion of
certain companies from the final set of comparables.
In order to analyze the comparability or otherwise of the
companies under challenge, it is sine qua non to first understand the
functional profile of the assessee under this transaction. A copy of
the assessee’s Transfer Pricing study report has been placed at page
37 onwards of the paper book. Internal page no. 16 of the T.P.
study report gives an insight into the nature of transaction of
provision of Software Development services. It has been set out in
para 4.2.1 that the assessee provides Software Development services
to BMC US, BMC Israel. PNet Inc. under respective Software
Development service agreements on Cost plus 10% mark-up basis.
It has further been elaborated that under the agreements with BMC
overseas entities, the assessee is required to provide Software
services (including development and testing of software) in
accordance with the specifications provided by the BMC overseas
entities from time to time. Then, there is functional analysis of the
5 ITA No.2549/PUN/2012 BMC Software India Private Limited
Software Development services at pages 18 and 19 of the Transfer
Pricing study report and it has been shown in a tabular statement
that both the assessee as well as its Associated Enterprises are
engaged in Research and development; Conceptualization & design;
Functional specification/requirement analysis; Coding,
documentation, testing; Quality control; Modification of existing
products; and Customer Support. Conceptualization of the required
Software products is performed by BMC overseas entities and the
assessee based on the requirements of the clients and the market.
Based on the product conceptualization, the functional
specifications and requirement analysis for the software to be
developed is jointly undertaken by the assessee and BMC overseas
entities. The part relating to Coding and development of the
software modules is largely done by the assessee. Since the
software are to be developed for the ultimate customers of BMC
overseas entities, the assessee also sometimes directly liaises with
the customers to understand their exact requirements.
We have also gone through the Software Development and
Information Technology Enabled Services Agreement (Agreement)
dated 01-09-2001 entered into between assessee and BMC Software
Inc., USA, which was amended from time to time in the years 2002,
6 ITA No.2549/PUN/2012 BMC Software India Private Limited
2003 and 2004. A copy of such Agreement has been placed on
record. Definition clause in the Agreement defines “Services” to
have the meaning as set forth in Appendix-A. Such an Appendix, in
turn, lists various services to be performed by the assessee.
Software Development services have been primarily shown at point
(a) - Production of Computer Software by way of architecturing,
engineering, design, development, testing and support of software;
and partly at point (b) concerning support services to the above.
Clause II of the Agreement provides that: `To enable BMC India to
render Services, BMC shall grant a non-exclusive and personal
license to BMC India to use any and all intellectual property owned
by BMC that may be required by BMC India to provide the
Services.’ Clause V of the Agreement further provides that : `BMC
and BMC India hereby agree that any activities of BMC India that
result in the creation of intellectual property rights, including all
inventions, designs, and work of authorship, are the property of
BMC and shall be and hereby are assigned to BMC.’ Clause II para
2.2 describes `Relationship of Parties’ by explaining that : `The
relationship created pursuant to this Agreement is one of the
Independent contractor between BMC, as the party receiving the
7 ITA No.2549/PUN/2012 BMC Software India Private Limited
services of an independent contractor and BMC India, as the
independent contractor providing such services.’
In view of the above factual panorama, it is palpable that the
nature of services provided by the assessee under the international
transaction of rendering of Software Development services is
chiefly to develop computer software, as an independent contractor,
from beginning till end for and on behalf of its Associated
Enterprises to be used by their ultimate customers abroad, on cost
plus 10%. Almost all the stages are jointly by the assessee in
consultation with its AE. BMC USA is responsible for marketing
the products obtained from the assessee. The assessee plays for its
10% mark-up as an independent contractor irrespective of the fact
whether the software developed by it is sold, abandoned or re-
worked. The assessee renders software development services with
the help of intellectual property owned by its AE and further the
intellectual property rights in the software developed by the
assessee vest in the AE. With the above understanding of the
functional profile of the assessee under this transaction, we now
proceed to examine the comparability or otherwise of the companies
under challenge.
8 ITA No.2549/PUN/2012 BMC Software India Private Limited
(i) Bodhtree Consulting Ltd. :
8.1. The TPO treated Bodhtree Consulting Ltd. as one of the
comparables. The assessee objected to its inclusion on the ground
of functional dissimilarity, extraordinary financial events and
fluctuating profit margins. The TPO rejected the assessee’s
contention of business restructuring during the year and also held
the same to be functionally similar inasmuch as it was having only
one identifiable reportable segment of `Software development
services’. The assessee is aggrieved by the inclusion of this
company in the final list of comparables.
8.2. We find from the Annual report of this company that it: “has
only one segment, namely, Software development. Being a
software solutions company, which is engaged in providing open
and end-to-end web solutions, software consultancy, design and
development of solutions, using the latest technologies.” Thus, it
can be seen that this company is providing end-to-end solutions and
also consultancy, which is not the case with the assessee company.
8.3. The ld. AR submitted that Bodhtree Consulting Ltd. cannot
be considered as comparable because of a different model of
revenue recognition. He invited our attention towards the Annual
9 ITA No.2549/PUN/2012 BMC Software India Private Limited
report of this company, in which it has been specifically reported
under the head ‘Revenue recognition’, that: “Revenue from software
development is recognized based on software developed and billed
to clients.” The ld. AR submitted that the costs incurred by this
company in respect of the projects pending completion at the end of
the year are booked at the time of incurring, but, the income is
recognized on the raising of bills, thereby distorting the figure of
operating profit for a particular year. In contrast to that, the ld. AR
submitted that the assessee was recognizing revenue from software
development side by side without waiting for the completion of the
project.
8.4. Ordinarily, if some software development project is
incomplete at the end of the year, there may arise two situations ,
viz., the first, in which the expenses incurred in respect of such
software development may be capitalized, which appears to be a
more rational manner of depicting the true and fair view of the
profitability of the enterprise; and the second, in which such
expenses may be straightway taken as revenue costs for the year of
its incurring itself, which may not reflect a true and fair view of the
profits on year to year basis. The contention of the ld. AR is that
whereas Bodhtree falls into the second situation, the assessee falls
10 ITA No.2549/PUN/2012 BMC Software India Private Limited
in the first. Though the contention that Bodhtree was accounting for
expenses in the year of incurring but considering income only on
the conclusion of the project in the subsequent year sounded a little
awkward, we attempted to find out the amount of capitalized
expenses in respect of incomplete projects at the end of the year. Ex
facie, we could not find out any such capitalized value of work-in-
progress in the balance sheet of the company on standalone basis
nor the ld. DR could point out any. This prima facie shows that the
expenses incurred in respect of incomplete projects of software
development at the end of the year, but billed in the subsequent
year, were, in fact, treated as expenses for the current year alone. In
the same manner, expenses incurred in the preceding year(s) for the
contracts of software development remaining incomplete at the end
of the year also must have been included in the expenses of the last
year(s) alone, but, the income got recognized on the raising of bills
in the current year.
8.5. Under the mercantile system of accounting, income is
recognized at the time of its accrual and the expenses become
deductible when liability to pay is incurred. The dates of actual
payment of expenses or receipt of income become insignificant.
This is also called `Matching concept’, as per which income is
11 ITA No.2549/PUN/2012 BMC Software India Private Limited
recognized with the incurring of expenses. To put it simply, if
income does not accrue from a particular transaction, the expenses
incurred for such transaction are excluded from the Trading and
Profit & loss account by taking them to Balance sheet. To illustrate,
if there is an incomplete contract worth Rs.100 for doing a
particular work, and the assessee has incurred Rs.60 on this project
till the close of the year, but the income is to be recognized only on
the completion of the project, an event to take place in the
subsequent year, then, the amount of Rs.60 is not considered as
expenditure for the year, but is taken to the Balance sheet as closing
work-in-progress, which becomes opening work-in-progress for the
subsequent year and the income is finally computed from such
project/contract in the next year on the raising of bill of Rs.100/-
after allowing deduction for the expenses incurred in the earlier year
at Rs. 60 and the further expenses incurred in the year of raising of
the bill. In this way, profit for the earlier year in which expenses of
Rs.60 were incurred and the next year in which bill is raised for
Rs.100 on completing the work, gives true and fair view of the
profitability of that enterprise for both the years. If an enterprise,
instead of capitalizing Rs. 60 in the first year, claims deduction in
the year of incurring itself but recognizes income of Rs.100 in the
12 ITA No.2549/PUN/2012 BMC Software India Private Limited
next year, then profit of both the years, will not give a fair view.
Bodhtree is following the model of booking expenses at the time of
their incurring notwithstanding the raising of bills in next year. This
shows that the revenue recognition model of Bodhtree Consulting
Ltd. is quite different from the assessee in as much as unless the
software is fully developed and billed, it will go on debiting
expenses to the Profit and loss account but the invoice will be raised
only in the year of completing the project. This leads to fluctuating
margins from year to year. The Hon’ble Gujarat High Court in Pr.
CIT Vs. Allscripts (India) Private Ltd. (2016) 288 CTR 675
(Gujarat) considered the fluctuating margins of this company from
the F.Ys. 2005-06 to 2012-13 which have been tabulated in para 6
of the judgment, viz., 13.87%, 80.15%, 19.89%, 62.27%, 33.42%,
(-) 4.46%, 3.29% and (-)11.53%. Considering the fluctuating profit
margins based on an altogether different revenue recognition model,
the Hon’ble High Court upheld the exclusion of this company from
the list of comparables. Respectfully following the precedent, we
order to delete this company from the list of comparables.
13 ITA No.2549/PUN/2012 BMC Software India Private Limited
(ii) e-Infochips Limited :
9.1. The TPO proposed the inclusion of this company in the set of
comparables, which was resisted by the assessee contending that the
same was engaged in Software Development and IT Enabled
Services, which was their only reportable business segment. The
TPO rejected the contention of the assessee. No relief was allowed
by the DRP. The assessee is against the inclusion of this company in
the list of comparables.
9.2. After considering the rival submission and perusing the
relevant material on record, we find from the Annual Report of this
company, whose copy is available in the paper book, that its P & L
Account shows `Income from software services & Products’ as one
unit at Rs. 24,02,78,099/-. Schedules 7 gives break up of this
income with “Income from Software Services” at Rs. 21.03 crore
and “Consultancy Charges” at Rs. 2.16 crore. Segmental
information of this company is available on page 36 of its Annual
Report, which states that: “The Company is primarily engaged in
Software Development and I.T. enabled services which is
considered the only reportable business segment”. This indicates
that the revenues from Software Development and ITES have been
clubbed by this company which also includes Consultancy charges.
14 ITA No.2549/PUN/2012 BMC Software India Private Limited
No doubt Consultancy charges in relation to Software Development
are part of Software Development, but the inclusion of ITES in the
overall segment frustrates the comparability. We are currently
dealing with the international transaction of `Provision of Software
Development services’ and the international transaction of ITES by
the assessee is a separate one which has also been benchmarked
distinctly. In our considered opinion, e-Infochips Bangalore Ltd.,
having a pool of both software development and ITES segments
into a common segment cannot be considered as comparable on
entity level with the international transaction of `Software
development’ of the assessee. We, therefore, order the exclusion of
this company from the list of comparables.
(iii) e-Zest Solutions Ltd. :
10.1. This comparable was proposed for inclusion by the TPO in
his final set of comparables. The assessee objected to this move on
the basis of functional differences by pointing out that this company
was engaged in software services as well as sale of software
products. Not satisfied, the TPO considered it as comparable,
which was countenanced by the DRP.
15 ITA No.2549/PUN/2012 BMC Software India Private Limited
10.2. We have heard both the sides and gone through the relevant
material on record. A copy of the Annual Report of this company,
placed on record by the ld. AR, has also been gone into. In Notes to
accounts, under the head `Generic Names of Principle
products/Service of company’, it has been mentioned as `Computer
Software Development’. Though the assessee stated before the TPO
that this company was also engaged in software products, but we are
unable to find any signs of software product from the Annual
accounts of this company. Neither there is any sale of software
product, nor any such product has been referred to in the Annual
accounts. Thus it is evident that it is a pure software development
company like the assessee.
10.3. The ld. AR invited our attention towards the Balance sheet
of this company to show that it had shown Inventories at
Rs.11,80,308/-. Schedule G to the Balance sheet gives the
description of `Inventories’ by mentioning it as “Work-in-process”.
This shows that unlike Bodhtree, this company adopted a proper
revenue recognition model by identifying income only on its
earning and keeping the expenses as work in process to be taken
over to the next year till the raising of the bill on the completion of
16 ITA No.2549/PUN/2012 BMC Software India Private Limited
the project. We, therefore, uphold the inclusion of this company in
the list of comparables.
(iv) Helios & Matheson Information Technology Ltd. :
11.1. The TPO proposed to include this company in the list of
comparables which was objected by the assessee contending that it
was a super profit making company and was also having a different
turnover filter. The TPO did not accept the contention of the
assessee and included it in the list of comparables, which got
concurrence from the DRP.
11.2. We have heard both the sides and gone through the relevant
material on record. A copy of the Annual report of this company has
been placed on record. Profit and loss account of the relevant
Division of this company has been placed at page 60 of the Annual
report, which shows “Income - revenue from operations” at
Rs.2,18,26,36,019/-. The elaboration of such revenue from
operations has been given in Schedule l as “Income from software
sales and services” at Rs.2,13,37,41,527/- in addition to Other
income and Dividend income. Segmental reporting has been
discussed at page 66 of the Annual report to indicate that “The
company is operating in a single segment”. It, therefore, transpires
17 ITA No.2549/PUN/2012 BMC Software India Private Limited
that the income of this company is not only from software services
but also from software sales. This shows that the company is
engaged into the business of software products as well. There is
hardly any need to state difference between the software product
company and a software development company. Whereas a
software product company would develop a product and then earn
revenue from its sale over a period, a simplicitor software
development company would render software development services
not leading to creation of any software product in its hands and earn
revenue from such rendition of services only. The assessee is only a
software development service provider, though such service may
lead to creation of some product but the same is meant for its AE
and not the assessee. Au contraire, Helios and Matheson is also
engaged in software products, rendering it unfit for comparison. As
the assessee is not engaged in any software product business and is
confined only to rendering software development services, we,
therefore, exclude this company from the list of comparables.
(v) KALS Infosystems Ltd. :
12.1. The TPO proposed to include this company in the list of
comparables. The assessee objected to the same by contending that
18 ITA No.2549/PUN/2012 BMC Software India Private Limited
it was functionally different as also engaged in Software products.
The TPO rejected the assessee’s contention by observing that
nothing was mentioned in the Annual Report of the company about
the sale of products. The DRP upheld the action of the AO in the
draft order, incorporating the inclusion of this company in the final
set of comparables by the TPO. Aggrieved thereby, the assessee is
in appeal before the Tribunal.
12.2. We have heard both the sides and gone through the relevant
material on record. We have perused the Annual report of this
company, a copy of which is available in the paper book. Note no.1
to the Notes to the Financial statements provides background of this
company by stating that: “The company is engaged in Development
of Software and Software products since its inception. The
company consisting of STPI unit engaged in Development of
Software and Software products and a Training Centre engaged in
training of Software professionals on online products.’ Segmental
information has been given at page 19 of the Annual Report, which
shows segmental revenues from “Application Software” and
“Training”. Profit and loss account of this company has been set
out at page 14 of the Annual Report. First item under the head
“Income” is “Sales, Services & Training” with the figure of
19 ITA No.2549/PUN/2012 BMC Software India Private Limited
Rs.2,19,82,589/-. Break-up of this amount has been given in
Schedule No.12 showing `Income from Software Development –
Export’ – Rs.2,05,40,685/-; `Translation and Interpretation’ –
Rs.5,07,985/-; and `Training receipts’ – Rs.9,33,919/-. Under the
head “Operating Expenses”, an item worth Rs.27,19.495/- has been
shown with narration of “Software Consumption from Inventory”.
Balance sheet of this company shows `Inventories’ at
Rs.85,77,723/-. The above information clearly deciphers that Kals
Information Technology Systems Ltd. is not only engaged in
providing Software Development Services but is also dealing in
Software products under the relevant segment. As the assessee is
not engaged in the business of Software products but is rendering
only Software services on captive basis, in our considered opinion,
this company cannot be considered as comparable. The Hon’ble
jurisdictional High Court in CIT vs. PTC Software (I) Pvt. Ltd.
(2017) 395 ITR 0176 (Bom) has held that a Software product
company cannot be compared with a company providing software
services. As Kals Information Technology Systems Ltd. is engaged
in selling of software products which is different from the activities
undertaken by assessee, namely, rendering of software service only
20 ITA No.2549/PUN/2012 BMC Software India Private Limited
to its AEs, we hold the same to be incomparable and accordingly
direct to exclude it from the final list of comparables.
(vi) Maars Software International Ltd.:
13.1. In addition to the assessee seeking exclusion of the above
five companies, a prayer has also been made for inclusion of Maars
Software International Ltd. , which was excluded by the TPO on the
ground that it was predominantly an on-site service provider having
different features vis-a-vis the assessee providing offshore services
only. Considering the view taken by him in the preceding years, the
TPO ordered to exclude this company from the list of comparables,
which was upheld by the ld. DRP. The assessee is aggrieved by the
exclusion of this company.
13.2. After considering the rival submissions and perusing the
relevant material on record, we find that the TPO excluded this
company by relying on his similar action taken for earlier years.
This company came up for consideration before the Tribunal in
assessee’s own case for the A.Y. 2006-07. Vide order dated 16-03-
2016, copy provided at page 743 onwards of the paper book, the
Tribunal in ITA Nos.1425/PUN/2010 considered this company at
page 22 of its order. Considering on site development impacting
21 ITA No.2549/PUN/2012 BMC Software India Private Limited
operating margins differently vis-a-vis a company providing
offshore services, the Tribunal held that Maars Software
International Ltd. was liable to be excluded from the list of
comparables. It is further noted that this company once again came
up for consideration before the Tribunal in assessee’s own case for
the A.Y. 2007-08. Vide its order dated 01-03-2019 in ITA
No.1646/PUN/2011, copy available at page 773 onwards of the
paper book, the Tribunal examined the comparability of this
company in para 24.1 of its order and directed to include it in the
list of comparables on the ground that its principal business was that
of software development.
13.3. Now it is seen that there are two orders of the Tribunal in
assessee’s own case for two earlier years dealing with the
comparability or otherwise of this company. Whereas in the earlier
order, the reason for upholding the exclusion was onsite service
model of this company, which was not there in the later year. As for
the instant year also, the reason given by the TPO for the exclusion
of this company is onsite service model, we follow the earlier order
of the Tribunal citing this as a valid reason for its exclusion from
the list of comparables. Following the precedent and without going
22 ITA No.2549/PUN/2012 BMC Software India Private Limited
further deep into it, we uphold the exclusion of this company from
the list of comparables.
The assessee has then sought risk adjustment. It was pointed
out that the TPO did not grant any risk adjustment which was
upheld by the ld. DRP.
Having heard both the sides and gone through the relevant
material on record, we find that similar issue came up for
consideration before the Tribunal in assessee’s own case for the
A.Y. 2006-07. In para 44 of its order, the Tribunal has restored the
matter to the file of AO/TPO for computing the risk adjustment
after granting reasonable opportunity of hearing to the assessee. In
the absence of any distinguishing feature having been brought to our
notice by the ld. DR, respectfully following the precedent, we-set
aside the impugned order on this score and remit the matter to the
file of AO/TPO to follow the directions given by the Tribunal in its
order for the A.Y. 2006-07.
II. SALES SUPPORT SERVICES SEGMENT
The assessee declared an international transaction of
“Rendering of sales support services” with transacted value of
23 ITA No.2549/PUN/2012 BMC Software India Private Limited
Rs.2,47,84,351/- The assessee applied the TNMM as the most
appropriate method for its benchmarking. Computing its own
OP/TC at 8.84%, the assessee worked out average adjusted margin
of comparables at 15.24% to demonstrate that its transaction was at
ALP. As against the assessee choosing seven companies as
comparables, the TPO expanded the list and recommended a
transfer pricing adjustment of Rs.33,09,723/-. The DRP made
certain alterations to the list of comparables. The AO, giving effect
to the direction of the DRP, recomputed the average adjusted
margin of comparables at 13.20%. This led to the transfer pricing
addition of Rs.14,78,560/- in the international transaction of Sales
Support services, aggrieved by which the assessee has come up
before the Tribunal.
We have heard both the sides and gone through the relevant
material on record. The assessee has set out nature of Sales support
services on page 27 of its T.P. study report by indicating that as
against BMC, US mainly conceptualizing the marketing and
advertisement strategy for its products, the sales support staff of the
assessee was responsible for identifying any new opportunities in
India either through channel partners or directly through customers.
We have also gone through the Agreement referred to hereinabove
24 ITA No.2549/PUN/2012 BMC Software India Private Limited
through which the assessee rendered the services. Appendix-A to
the Agreement gives the nature of sales support services under point
(h) as: “Sales support services to market and sell BMC products in
India and the Asia Pacific Region, either directly or through channel
partners”.
18.1. Armed with the above understanding of the functional
profile of the assessee under the international transaction of
`Rendering of sales support services’, we now proceed to examine
the comparability or otherwise of TSR Darashaw Limited which has
been challenged by the assessee in the instant appeal. The TPO
included this company by observing that he selected this company
in the earlier years as well. The DRP did not agree with the
contention of the assessee and upheld the inclusion. The assessee is
aggrieved by such inclusion.
18.2. We have heard both the sides and gone through the relevant
material on record. At this stage, it is relevant to mention that the
TPO has referred to the inclusion of this company in the list of
comparables for earlier years. On a specific query, the ld. AR
contended that the Tribunal in its order for the A.Y. 2006-07 upheld
the inclusion of this company. He, however, contended that the
25 ITA No.2549/PUN/2012 BMC Software India Private Limited
business profile of this company underwent a change later on as has
been recognized by the Pune Benches of the Tribunal in its later
order passed in the case of Honeywell Turbo Technologies (India)
Pvt. Ltd. Vs. DCIT for the A.Y. 2008-09 (ITA No.2584/PUN/2012
dated 10-02-2017), a copy of which has been placed on record. The
ld. AR invited our attention towards para 24 of the later order
accepting change in profile of this company in comparison to earlier
years and accordingly holding it to be not includible in the list of
comparables. It was, therefore, prayed that the changed business
profile of TSR Darashaw be considered, which is relevant for the
year and it should be removed from the list of comparables
following the decision of the co-ordinate bench in the case of
Honeywell Turbo Technologies (India) Pvt. Ltd. (supra). The ld.
DR did not dispute the position as put forth on behalf of the
assessee.
18.3. We have heard both the sides and gone through the relevant
material on record. We have also gone through the Annual report of
this company for the year under consideration, a copy of which has
been placed on record. On perusal of such Annual Report, it
emerges that this company on an overview is a broking and
investment banking house. Apart from ‘Pay Roll and Trust Fund
26 ITA No.2549/PUN/2012 BMC Software India Private Limited
activity (Pay Roll), its other segments are: ‘Registrar and Transfer
Agent activity (R&D)’ and ‘Records management activity
(Records).’ Under the ‘Pay Roll’ segment, this company undertakes
pay roll and employee trust fund administration and management.
When we compare the nature of the functions carried out by this
company with the marketing support services rendered by the
assessee to its AEs, we find that both are a way apart from each
other. There can be no logical comparison between a pay roll
services rendered by a company to its clients along with Registrar
and Transfer Agent activity and Records management activity
(Records) with the marketing support services rendered by the
assessee to its AEs. This company is, therefore, directed to be
excluded from the final set of comparables.
The ld. AR submitted that if TSR Darashaw Limited is
excluded from the list of comparables, then he will not be pressing
for the inclusion/exclusion of other companies as has been agitated
in the instant appeal. In view of our decision on the exclusion of
TSR Darashaw, we do not propose to consider other companies
from the angle of comparability.
27 ITA No.2549/PUN/2012 BMC Software India Private Limited
To sum up, we set aside the impugned order on the issue of
transfer pricing addition in the international transactions of
Rendering of software development services and Rendering of sales
support services and remit the matter to the file of AO/TPO for the
fresh determination of their ALPs in consonance with our above
directions. Needless to say, the assessee will be allowed a
reasonable opportunity of hearing in such fresh proceedings.
Ground no. 15 is against the inclusion of revenue from sales
support division in export and total turnover and other income in
total turnover while re-computing deduction us/ 10A of the Act.
This ground was not pressed by the ld. AR. The same is, therefore,
dismissed.
Another ground raised in this appeal is against the computation
of deduction u/s.10A by reducing foreign currency expenses from
export turnover (without excluding the same from the total turnover
of the STP unit).
Having heard both the sides and gone through the relevant
material on record, it is seen that the AO while computing deduction
u/s.10A excluded foreign currency expenses from `export turnover’
without giving any corresponding effect to the amount of `total
28 ITA No.2549/PUN/2012 BMC Software India Private Limited
turnover’. Formula for computation of deduction has been set out in
sub-section (4) of section 10A providing that computation of the
amount of profits derived from export of the eligible products shall
be done by considering the same proportion as export turnover in
respect of such products bears to the total turnover to the profits of
the business of the undertaking. There are three components
involved in the computation of eligible profits. Apart from the
profits of the business of the undertaking, there is a one component
of export turnover and another of total turnover. The term “export
turnover” has been defined in Explanation 2(iv) to section 10A as
consideration in respect of export of articles or things etc. received
or brought into in India but does not include freight,
telecommunication charges or insurance attributable to the delivery
of articles or things etc. outside India incurred in foreign exchange
in providing the technical services outside India. The term “total
turnover” has not been specifically defined in the definition clause
of section 10A contained in Explanation 2. However, it goes
without saying that `total turnover’ comprises of `export turnover’
and domestic turnover. For example, if export turnover is Rs.100
and domestic turnover is Rs.80, then total turnover would be Rs.180
(Rs.100 + Rs.80), which is sum total of both the export and
29 ITA No.2549/PUN/2012 BMC Software India Private Limited
domestic turnovers. If certain portion relevant to export of goods,
say Rs.10, is not to be considered as part of export turnover of
Rs.100, it is but natural that the amount of export turnover would
come down to Rs.90. In that case, total turnover would be Rs.170
(Rs.90 as export turnover + Rs.80 as domestic turnover). Adverting
to the facts of the instant case, we find that since the amount of
foreign currency expenses has been held by the AO himself as not
forming part of `export turnover’, the sequitur is that the same
would also not form part of `total turnover’, as there cannot be two
different figures of `export turnover’, one as an independent
numerator in the formula and the other constituting part of total
turnover in the denominator. To put it simply, foreign currency
expenses which have been excluded by the AO from the ambit of
`export turnover’ would also require exclusion from `total turnover’.
The Hon’ble Delhi High Court in CIT Vs. Genpact India (2011) 203
Taxman 632 (Del) has held that any exclusion from export turnover
should also be reduced from total turnover for the purpose of
deduction u/s.10A. We, therefore, overturn the impugned order on
this score and allow the ground of appeal.
Ground relating to charging of interest is consequential and
the ground for initiation of penalty u/s.271(1)(c) is premature.
ITA No.2549/PUN/2012 BMC Software India Private Limited
In the result, the appeal is partly allowed.
Order pronounced in the Open Court on 19th August, 2019.
Sd/- Sd/- (PARTHA SARATHI CHAUDHURY) (R.S.SYAL) JUDICIAL MEMBER VICE PRESIDENT
पुणे Pune; �दनांक Dated : 19th August, 2019 सतीश
आदेश क� क� क� �ितिलिप क� �ितिलिप �ितिलिप अ�ेिषत �ितिलिप अ�ेिषत अ�ेिषत/Copy of the Order is forwarded to: अ�ेिषत आदेश आदेश आदेश अपीलाथ� / The Appellant; 1. 2. ��यथ� / The Respondent; 3. The CIT(A)-13, Pune 4. The Pr.CIT-V, Pune िवभागीय �ितिनिध, आयकर अपीलीय अिधकरण, पुणे “सी” / 5. DR ‘C’, ITAT, Pune; 6. गाड� फाईल / Guard file. आदेशानुसार आदेशानुसार/ BY ORDER, आदेशानुसार आदेशानुसार // True Copy // Senior Private Secretary आयकर अपीलीय अिधकरण ,पुणे / ITAT, Pune Date 1. Draft dictated on 09-08-2019 Sr.PS 2. Draft placed before author 19-08-2019 Sr.PS 3. Draft proposed & placed before JM the second member 4. Draft discussed/approved by JM Second Member. 5. Approved Draft comes to the Sr.PS Sr.PS/PS 6. Kept for pronouncement on Sr.PS 7. Date of uploading order Sr.PS 8. File sent to the Bench Clerk Sr.PS 9. Date on which file goes to the Head Clerk 10. Date on which file goes to the A.R. 11. Date of dispatch of Order.
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