AZTECSOFT LIMITED,BANGALORE vs. ACIT, BANGALORE

Assessee has altogether raised twelve grounds of which grounds 1 to 8 are on TP issues. Ld. Counsel for the Assessee at the outset submitted that he had filed a petition seeking admission of additional evidence. Ld. AR submitted that assessee by mistake in its TP study, had made a wrong allocation of the revenue from software development services between AE and Non-AE. As per the Ld. AR, services provided by the assessee fell within the software development services stream. Revenues were incorrectly bifurcated between AE and non-AE, due to a mistake, as per the Ld. AR. Further as per the Ld. AR, TPO went by the bifurcation done by the assessee and proceeded with the transfer pricing analysis, relying on the figures of revenue stream worked out by the assessee. Final recommendations made by the TPO were based on the revenues from software development services provided to the AEs, and such revenues considered by the TPO were based on assessee’s bifurcation, leading to fundamentally wrong results. As per the Ld. AR, correct segmental results have been now worked out by him and therefore a relook was necessary on the ALP of the international transactions based on such correct segmentation. Ld. AR submitted that such segmental results were reflected in Schedule 15 of its final audited accounts and the revenue from software development segment came to only Rs.43,18,18,000/-. However as per the Ld. AR revenue taken in the software development segment originally IT(TP)A.1239/Bang/2011 Page - 3 by the assessee in its TP study came to Rs.49,59,13,140/-. Expenditure was divided between the segments based on the turnover in the original study as well, compounding the error. Such expenditure allocation would also have to be set right since the revenue stream underwent a change if correct figures are adopted.

Ld. DR on the other hand submitted that assessee ought have brought out the error which it was pointing out now before the lower authorities. However as per the Ld. DR it was true that if the revenue was incorrectly bifurcated between the AE and non-AE, the TP study and analysis would give erroneous results.

We have heard the rival contentions. In the original TP study made by the assessee, revenue stream was divided between AE and non-AE as under :

Contention of the assessee is that the total revenue from the AEs as per the above comes to Rs.49,59,13,140/-, whereas the actual revenue from AE segment was different. New segmental results given as additional evidence is reproduced below :

Total income from software development service remains more or less the same in both studies. However, the expenditure having been allocated based on turnover, the operating profit to operating cost ratio in the AE segment will under go substantial change if there is a change in the revenues shown in the AE segment. It is therefore fundamentally important that correct revenue is adopted for the AE as well as the non-AE IT(TP)A.1239/Bang/2011 Page - 5 segments for the TP study. TPO had proceeded to make the TP analysis based on the segmental results given by the assessee originally. This, in our opinion could lead to functionally wrong results. We are therefore of the opinion that the issue regarding Transfer pricing requires a fresh look by the lower authorities so that the revenue stream is correctly bifurcated between AE and non-AE segment. This being a threshold bifurcation before proceeding with the TP study, we are of the opinion that additional evidence has to be admitted. We therefore admit the additional evidence and remit the matter back to the file of TPO/ AO for consideration afresh. All the issues raised by the assessee in relation to TP pricing are kept open. AO / TPO is directed to redo the TP analysis after correctly working out the revenue streams for AE and non-AE segments with regard to the software development services and proceed in accordance with law. Ordered accordingly.

In its ground 9, assessee is aggrieved that communication expenditure of Rs.2,14,39,704/- and travel expenses of Rs.8,02,29,023/- were deducted from export turnover for computing the deduction u/s.10A of the Act. Alternatively assessee states that such amounts which are deducted from export turnover, have to be reduced from total turnover also.

We find the alternative contention taken by the assessee to be acceptable in view of the decision of Hon’ble jurisdictional High Court in the case of Tata Elxsi Ltd v. CIT (349 ITR 98). However, by virtue of the definition of the term ‘export turnover’, given in explanation (iv) to Section 10A of the Act, the contention of the assessee that communication expenditure and telecommunication expenditure have to be included in export turnover cannot be accepted. Nevertheless as mentioned by us whatever is reduced from total turnover should also be deducted from export turnover for working out the deduction u/s.10A of the Act. AO is directed to do so. Ground 9 is partly allowed.

Vide ground 10, grievance raised by the assessee is that loss brought forward from the earlier years, were not allowed to be set off. Counsel for the assessee submitted that loss for the earlier years after giving effect to the appellate decisions had to be set off against the current business income of the assessee.

Per contra, Ld. DR submitted that assessee had never claimed such losses and Audit report in Form 3 CED did not reveal any such loss.

We have heard the rival contentions. We are of the opinion that the matter can be verified by the AO. If the assessee had not claimed set-off of brought forward loss in its return of income, then there is no question of allowing such set off. However, if the assessee had claimed such losses and if the losses were to be reworked based on orders of higher judicial forums then the loss that remains would have to be allowed to be set off. We direct the AO to verify this aspect and proceed in accordance with law. Ground 10 is allowed for statistical purpose.

Grounds 11 and 12 are consequential in nature relating to interest u/s.234B & 234C of the Act, which do not require specific adjudication.

In the result, appeal of the assessee is allowed for statistical purpose.