BMC SOFTWARE INDIA PVT. LTD.,PUNE vs. DCIT, CIRCLE 1(1), PUNE

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

addition of Rs.19,23,02,633/- made by the Assessing Officer (AO)

in the international transaction of “Software Development services”.

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.

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.

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.

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.’

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.

out that the TPO did not grant any risk adjustment which was

upheld by the ld. DRP.

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

“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.

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.

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

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.

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.

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).

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.

the ground for initiation of penalty u/s.271(1)(c) is premature.

ITA No.2549/PUN/2012 BMC Software India Private Limited

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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