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Income Tax Appellate Tribunal, BANGALORE BENCH ‘ A ’
Before: SHRI VIJAY PAL RAO & SHRI INTURI RAMA RAO
Per Shri Vijay Pal Rao, J.M. : This appeal by the assessee is directed against the assessment order dt.7.9.2010 passed under Section 143(3) rws 144C in pursuant to the directions of Dispute Resolution Panel (‘DRP’) dt.30.08.2010.
2 I T (T.P) A No.1303/Bang/2010 2. The assessee has raised the following effective grounds :- Grounds “ 1. Transfer Pricing : The appellant wishes to state that the Hon'ble DRP and the learned A.O. grossly erred in upholding the income adjustment proposed by the learned TPO in arriving at the ALP of the international transactions entered into by the appellant. The appellant is in appeal before the Hon'ble Bench of the Income Tax Appellate Tribunal under Section 253(1)(d) against the order passed by the learned A.O. in pursuance of the directions of the learned Hon'ble DRP.
Software – Upper limit should be fixed for application of turnover filter. The Hon'ble DRP and the learned A.O. have erroneously upheld the TPO’s contention that an upper limit to the turnover should not be applied while selecting the comparables.
3. Software-The filters should be used consistently for selecting comparable companies. The Hon'ble DRP and the learned A.O. have completely ignored the fact that the appellant did not contend on application of the filters or on the appropriateness of most filters, but on the inconsistent application of the filters by the learned TPO.
4. Software – Onsite filter should not be applied. The Hon'ble DRP and the learned A.O. have erroneously upheld the learned TPO’s contention that the companies having onsite revenues greater than 75% of the operating revenue should be rejected.”
Ground No.1 is regarding Transfer Pricing Adjustment - At the time of hearing, the learned A.R. of the assessee has submitted that the issue relating to transfer pricing was the subject matter under the Mutual Agreement Procedure (‘MAP’) in accordance with the Article 27 of Indo USA DTAA. The learned Authorised Representative has submitted that the parties have accepted the MAP Resolution and therefore the 3 I T (T.P) A No.1303/Bang/2010 assessee seeks withdrawal of the ground relating to Transfer Pricing Adjustment. In this respect the assessee has filed a letter dt.20.01.2016 explaining that the assessee has received MAP Resolution and the same has been accepted. The learned Departmental Representative has not disputed the MAP Resolution and acceptance of the same by the parties.
In view of the fact that there is a MAP Resolution of the transfer pricing issue vide order dt.20.10.2015, the Ground No.1 relating to the issue of Transfer Pricing Adjustment become infructuous and accordingly the same is dismissed as withdrawn.
3. Ground No.2 regarding exclusion of telecommunication expenses and foreign travel expenditure from export turnover for the purpose of deduction under Section 10A.
3.1 We have heard the rival submission and perused the material on record. The Hon’ble Karnataka High Court in the case of CIT v M/s Tata Elxsi Ltd. & Others 349 ITR 98 (Kar) had held that while computing the exemption u/s 10A, if the export turnover in the numerator is to be arrived at after excluding certain expenses, the same should also be excluded from the total turnover in the denominator. The relevant finding of the Hon’ble jurisdictional High Court reads as follows:-
4 I T (T.P) A No.1303/Bang/2010 “………..Section 10A is enacted as an incentive to exporters to enable their products to be competitive in the global market and consequently earn precious foreign exchange for the country. This aspect has to be borne in mind. While computing the consideration received from such export turnover, the expenses incurred towards freight, telecommunication charges, or insurance attributable to the delivery of the articles or things or computer software outside India, or expenses if any incurred in foreign exchange, in providing the technical services outside India should not be included. However, the word total turnover is not defined for the purpose of this section. It is because of this omission to define ‘total turnover’, the word ‘total turnover’ falls for interpretation by this Court;
……..In section 10A, 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 interpreting the provisions of section 80HHC, the courts have laid down various principles, which are independent of the statutory provisions. There should be uniformity in the ingredients of both the numerator and the denominator of the formula, since otherwise it would produce anomalies or absurd results. Section 10A is a beneficial section which intends to provide incentives to promote 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 case of section 80HHC, the export profit is to be derived from the total business income of the assxcessee, 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 5 I T (T.P) A No.1303/Bang/2010 domestic business, in other words, export turnover and domestic turnover. To the extent of export turnover, there would be a commonality between the numerator and the denominator of the formula. If the export turnover in the numerator is to be arrived at after excluding certain expenses, the same should also be excluded in computing the export turnover as a component of total turnover in the denominator. The reason being the total turnover includes export turnover. The components of the export turnover in the numerator and the denominator cannot be different. Therefore, though there is no definition of the term ‘total turnover’ in section 10A, there is nothing in the said section to mandate that, what is excluded from the numerator that is export turnover would nevertheless form part of the denominator. When the statute prescribed a formula and in the said formula, ‘export turnover’ is defined, and when the ‘total turnover’ includes export turnover, the very same meaning given to the export turnover by the legislature is to be adopted while understanding the meaning of the total turnover, when the total turnover includes export turnover. If what is excluded in computing the export turnover is included while arriving at the total turnover, when the export turnover is a component of total turnover, such an interpretation would run counter to the legislative intent and impermissible. Thus, there is no error committed by the Tribunal in following the judgements rendered in the context of section 80HHC in interpreting section 10A when the principle underlying both these provisions is one and the same”.
3.2 The Hon’ble Mumbai High Court in the case of CIT Vs. Gem Plus Jewellery India Ltd. 330 ITR 175, in identical circumstances, held that since the export turnover forms part of the total turnover, if an item is excluded from the export turnover, the same should also be reduced
6 I T (T.P) A No.1303/Bang/2010 from the total turnover to maintain parity between numerator and denominator while calculating deduction u/s 10A of the Act. The relevant finding of the Hon’ble Mumbai High Court reads as follows:- “The total turnover of the business carried on by the undertaking would consist of the turnover from export and the turnover from local sales. The export turnover constitutes the numerator in the formula prescribed by sub-section (4). Export turnover also forms a constituent element of the denominator in as much as the export turnover is a part of the total turnover. The export turnover, in the numerator must have the same meaning as the export turnover which is constituent element of the total turnover in the denominator. The legislature has provided a definition of the expression “export turnover” in Expln.2 to s.10A which the expression is defined to mean the consideration in respect of export by the undertaking of articles, things or computer software received in or brought into India by the assessee in convertible foreign exchange but so as not to include inter alia freight, telecommunication charges or insurance attributable to the delivery of the articles, things or software outside India. Therefore in computing the export turnover the legislature has made a specific exclusion of freight and insurance charges. The submission 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 defined at all by Parliament for the purposes of s.10A. However, the expression “export turnover” has been defined. The definition of “export turnover” excludes freight and insurance. Since export turnover has been defined by Parliament and there is a specific
7 I T (T.P) A No.1303/Bang/2010 exclusion of freight and insurance, the expression “export turnover” cannot have a different meaning when it forms a constituent part of the total turnover for the purposes of the application of the formula. Undoubtedly, it was open to Parliament to make a provision which has been enunciated earlier must prevail as a matter of correct statutory interpretation. Any other interpretation would lead to an absurdity. If the contention of the Revenue were to be accepted, the same expression viz. ‘export turnover’ would have a different connotation in the application of the same formula. The submission of the Revenue would lead to a situation where freight and insurance, though these have been specifically excluded from ‘export turnover’ for the purposes of the numerator would be brought in as part of the ‘export turnover’ when it forms an element of the total turnover as a denominator in the formula. A construction of a statutory provision which would lead to an absurdity must be avoided. Moreover, a receipt such as freight and insurance which does not have any element of profit cannot be included in the total turnover. Freight and insurance charges do not have any element of turnover. For this reason in addition, these two items would have to be excluded from the total turnover particularly in the absence of a legislative prescription to the contrary – CIT v Sudarshan Chemicals Industries Ltd. (2000) 163 CTR (Bom) 596: (2000) 245 ITR 769 (Bom) applied; CIT v Lakshmi Machine Works (2007) 210 CTR (SC) 1: (2007) 290 ITR 667 (SC) and CIT v Catapharma (India) (P) Ltd. (2007) 211 CTR (SC) 83: (2007) 292 ITR 641 (SC) relied on”
8 I T (T.P) A No.1303/Bang/2010 3.3 In the light of the above binding precedents, we direct the AO to exclude the above mentioned expenses both from the export turnover as well as from the total turnover while calculating deduction u/s 10A of the Act.
Ground No.3 is regarding charging of interest under Sections 234B & 234C which is consequential in nature.