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Income Tax Appellate Tribunal, BANGALORE BENCH ‘ B ’
Before: SHRI VIJAY PAL RAO & SHRI INTURI RAMA RAO
Per Shri Vijay Pal Rao, J.M. :
These cross appeals are directed against the order dt.2.7.2012 of
Commissioner of Income Tax (Appeals)-IV, Bangalore for the Assessment
Year 2005-06.
First we take up the assessee's appeal wherein the assessee has
raised the following grounds :
“GROUNDS RELA TING TO LEGAL ISSUES
The Order of the learned Commissioner of Income Tax (Appeals) - 1 V to the extent prejudicial to the appellant is bad in law.
The learned Assessing Officer has erred in making a reference to Transfer Pricing Officer for determining arm's length price without appreciating that under section 92CA( I), a reference could be made to the Transfer Pricing Officer only in circumstances where the assessing officer considers it necessary or expedient so to do and also without specifying the relevant- clause under section 92C(3) which necessitated the reference. The learned Commissioner of Income Tax (Appeals) - IV ['CIT(A) - IV'] has further erred in confirming the action of the Assessing officer. 3. The learned Assessing Officer, learned Transfer Pricing Officer and Commissioner of Income Tax (Appeals) IV have erred in
a. passing the order without demonstrating that appellant had the motive of shifting profits outside India by manipulating prices charged in its international transactions: and,
b. not appreciating that the charging or computation provision relating to income under the head "Profits & Gains of Business or Profession" do not refer to or include the amounts computed under Chapter X and therefore the addition made under Chapter X is bad in law.
3 IT(T.P)A No.1105 & 1259/Bang/2012 GROUNDS ON COMPARABLES AND REJECTION OF TP ANALYSIS OF THE APPELLANT
The learned Assessing Officer and learned Transfer Pricing Officer have erred in
a. rejecting the transfer pricing analysis undertaken by the appellant without specifying the relevant-clause under section 92C(3) which necessitated such rejection; and
b. rejecting the comparables selected by the appellant on unjustifiable grounds.
GROUNDS RELATING TO TP ANALYSIS OF THE TPO: 5. The learned Assessing Officer and learned Transfer Pricing Officer have erred in: a. Performing fresh transfer pricing analysis and adopting inappropriate filters in doing fresh transfer pricing analysis.
b. adopting companies as comparables even though they are not comparable to the appellant.
GROUNDS RELATING TO DETERMINATION OF ARM'S LENGTH PRICE BY THE CIT (A)-IV:
I. Rejection of IT Analysis
The learned Commissioner of Income Tax (Appeals) - I V has erred in a. rejecting the TP Analysis of both the appellant and TPO on unjustifiable grounds and without giving an opportunity of being heard to the appellant:
b. rejecting TNMM method adopted by the appellant and confirmed by the TPO as the most appropriate method;
c. doing separate analysis of selling commission paid to /,E and onsite services rendered by AE by unilaterally adopting CUP Method and CPM as the most appropriate method respectively without giving an opportunity of being heard to the appellant.
ii. TP Analysis of Selling Commission paid to AE 7. The learned Commissioner of Income Tax (Appeals) - IV has erred in: a. adopting CUP as the most appropriate method for evaluating the selling commission paid to AE without justifying how the same was most appropriate method;
4 IT(T.P)A No.1105 & 1259/Bang/2012 b. concluding that arm's length price of selling commission is NIL without bringing on record any comparable; c. concluding that arm's length price of sell ing commission is NI L without appreciating that the services had been actually rendered by the associated enterprises and the evidences supporting the same are on record; d. Concluding that the AE has a markup of 45.91 on cost without appreciating the underlying facts and reality; e. Concluding that the appellant has not produced any evidence to justify commission paid without appreciating that the basis of computation of commission is explained in the TP Report and also explained and submitted the workings during the appellate proceeding; and, f. Combining the marketing expenses incurred by appellant and commission paid to AE to arrive at the ratio of 10.59 of such expenses on sales and accordingly concluding that it is very high without appreciating that marketing expenses of INR 64,76,000 were incurred for non-AE business only.
iii. TP Analysis of Onsite Services Rendered by AE 8. The learned Commissioner of Income Tax (Appeals) - IV has erred in a. adopting CPM as the most appropriate method for evaluating the software development services received by the appellant without justifying how the same was most appropriate method; b. adopting inappropriate methodology and process in arriving at the arm's length price; c. selecting Indian companies having onsite revenues as comparable after selecting AE (a company based in USA) as the tested party. Without prejudice, CIT(A) has erred in rejecting similarly placed Indian companies as comparable on unjustifiable reasons; and. d. adopting net margin of the comparable in computing the arm's length price without appreciating that under CPM gross margin are to be considered.
GROUNDS ON ADJUSTMENT FOR DIFFERENCES 9. The learned Assessing Officer, learned Transfer Pricing Officer and Commissioner of Income Tax (Appeals) - IV have erred in not making proper adjustment for enterprise level and transactional level differences between the appellant and the comparable companies.
5 IT(T.P)A No.1105 & 1259/Bang/2012 10. The learned Assessing Officer, learned Transfer Pricing Officer and Commissioner of Income Tax (Appeals) - IV: have erred in not appropriately computing the working capital adjustment while computing the arm's length price.
GROUND RELATING TO RESTRICTING TP ADJUSTMENT TO AE TRANSACTIONS 11. Without prejudice to all the above, the learned Assessing Officer and learned Transfer Pricing Officer have erred in not restricting the TP adjustment to A E transactions only and thereby making an adjustment in respect of transactions with non-associated enterprise also.
GROUND ON BENEFIT OF 5% RANGE 12. Assuming without admitting that the adjustment is to be made. the learned Assessing Officer. learned Transfer Pricing Officer and Commissioner of Income Tax (Appeals) - IV have erred in not allowing the benefit of the +/-5% range mentioned in the proviso to section 92C(2).
REDUCTION IN DEDUCTION UNDER SECTION l0A OF THE ACT IN RESPECT OF EXPENDITURE INCURRED IN FOREIGN CURRENCY On the facts and in the circumstances of the case, the learned CIT(A) has erred in directing the Assessing Officer ('AO') to reduce the foreign currency expenses amounting to Rs. 108.420,465 from both the export turnover and the total turnover of unit while computing the deduction under section l0A of the Act. without considering the applicant's submission that it is engaged in the business of software development and not in rendering technical services.
DISALLOWANCE UNDER SECTION 40(A)(1) IN RESPECT OF COMMISSION PAYMENTS a. Without prejudice to ground no. 2. the learned CIT(A) erred in holding that the services rendered by MphasiS Corporation outside India are in the nature of managerial services and commission paid to MphasiS Corporation in consideration of such services is chargeable to tax in India under section 9(i)(vii) of the Act and under Article 12 of the India-US treaty,
b. The learned CIT(A) erred in disallowing the commission payment to MphasiS Corporation under section 40(a)(i) of the Act in the absence of tax deducted at source without considering the Circular issued by the Central Board of Direct Taxes.
6 IT(T.P)A No.1105 & 1259/Bang/2012 15. FOREIGN TAX CREDIT NOT GRANTED
a. The learned CIT(A) has erred in concluding that the appellant has failed to substantiate its claim for foreign tax credit without considering the submission tiled by the appellant. b. The learned CIT(A) has erred in not directing the AO to grant appropriate credit for foreign taxes.
INTEREST UNDER SECTION 234B OF THE ACT The learned C IT(A) has erred in confirming the levy of interest under section 234B of the Act amounting to Rs. 10,928,569.
INTEREST UNDER SECTION 234D OF THE ACT The learned CIT(A) has erred in confirming the levy of interest under section 234D of the Act amounting to Rs. 128.352.
PENALTY UNDER SECTION 271(1)(C) The learned CIT(A) has erred in directing the AO to re-compute the penalty in view of the enhanced total income of the Company.
RELIEF a) The Appellant prays that directions be given to grant all such relief arising from the above grounds and also all relief consequential thereto.
b) The Appellant craves leave to add to or alter, by deletion, substitution, modification or otherwise, the above grounds of appeal. either before or during the hearing of the appeal.
c) Further, the Appellant prays that all the above adjustments / additions / disallowances made by the learned AO / TPO and upheld by the CIT(A) are bad in law and liable to be deleted.”
The assessee company was incorporated in the year 1997 to provide
software solutions and services to domestic and overseas customers. It
has presence in the field of industrial automation and embedded
solution, health care and life sciences, financial services and enterprise
7 IT(T.P)A No.1105 & 1259/Bang/2012 allocation. With effect from 1.6.2004 the assessee was acquired by
Mphasis BFL Limited vide purchase agreement dt.2.4.2004.
Consequently, the assessee is the wholly owned subsidiary of Mphasis
BFL Limited. The assessee provides services to both external customers
and its Associated Enterprises (AEs). The service contract with AE is
primarily for provision of services to clientes of AE. The assessee has
entered into service agreement with its AE to provide services to its
clients. The assessee has reported the financial results and international
transactions for the year under consideration as under :
Financial Results of Kshema India, F.Y.2004-05 :
The following are the brief financials of the tax payer as under :
Operating Revenue 62,33,93,000/- Operating Expenses 55,54,82,000/- Operating Profit (PBIT) 6,79,11,000/- Operating Profit to Revenue 10.89%
International transactions (as mentioned in the 92CE Report)
The following are the international transactions entered into by the tax
payer with its associated enterprises (as per the 3CEB Report and as per
the reference received by the TPO from the Assessing Officer u/s.92CA.
8 IT(T.P)A No.1105 & 1259/Bang/2012 Rendering software development and Rs.27,44,255. IT Consultancy Services Receipt of software development, Rs.7,84,23,892. professional and IT Consultancy Services Reimbursement of Expenses to AEs Rs.9,24,729. Reimbursement of Expenses by AEs Rs.2,67,631 Payment of selling commission. Rs.2,37,45,355.
The assessee is basically having international transactions in two
segments i.e. software development services provided to AEs and
payment of selling commission to AEs. In fact the assessee is providing
software development services to overseas third party through its AE and
some part of the services were also sub-contracted to the AE.
Accordingly, the assessee is making payment on selling commission to its
AE on cost plus 12%. Similarly, the assessee is also receiving sub-
contracts work of software development services from AE which was
ultimately meant for the third party as per the contract between the AE
and the third party. However, since the work is sub-contracted by the
AE to the assessee therefore there is no privity of contract between the
assessee and the ultimate recipient of the service. The assessee is
undertaking software development from its AE under the sub-contract.
9 IT(T.P)A No.1105 & 1259/Bang/2012 The assessee bench marked its international transactions by applying
Transactional Net Margin Method (‘TNMM’) as Most Appropriate
Method (‘MAM’) at entity level. The assessee's margin at entity level is
12.61%. The assessee selected 15 comparables for bench marking its
transactions, the details of comparables are as under :-
Sl.No. Name of the company 1. Akshay Software Technologies Ltd. 2. Aztec Software and Technologies Services Ltd. 3. Geometric Softweare Solutions Company Ltd. 4. iGate Global Solutions Ltd. 5. Maars Software International Ltd. 6. Mascon Global Ltd. 7. Melstar InformationTEchnologies Ltd. 8. Mphasis BFL Ltd. 9. Orient Information Technologies Ltd. 10. PSI Data Systems Ltd. 11. R S Software (India) Ltd. 12. Sasken Communication Technology Ltd. 13. Sonata Software Ltd. 14. Visualsoft Technologies Ltd. 15. VJIL Consulting Ltd.
The mean margin of the comparables selected by the assessee is arrived
at 6.99% and therefore the assessee claimed its international
transactions at arm’s length. The TPO has rejected the Transfer Pricing
Study Analysis of the assessee and also recomputed the profit margin of
10 IT(T.P)A No.1105 & 1259/Bang/2012 the assessee at 10.89%. The TPO has carried out a fresh search and
selected 17 comparables as under :
S.No. Name of the company Margins WC (OP/OR) % Adjusted Margins (OP/OR) % 1. Bodhtree Consulting Ltd. 19.91 19.31 2. Lanco Global Solutions Ltd. 12.01 9.86 3. Exensys Softwre Solutions 41.41 39.35 Ltd. 4. Sankya Infotech Ltd. 21.50 18.51 5. Sasken Network Systems 14.27 13.42 Ltd. 6. Foursoft Ltd. 18.69 18.65 7. Thirdware Solutions Ltd. 39.79 39.77 8. R S Software (India) Ltd. 7.47 7.56 9. Geometric Software 16.90 16.15 Solutions Ltd. 10. Tata Elxsi Ltd. (Seg.) 19.58 19.59 11. Visualsoft Technologies Ltd. 19.04 17.70 (Seg.) 12. Sasken Communication Ltd. 12.60 12.83 (Seg.) 13. iGate Global Solutions Ltd. 4.14 3.13 (Seg.) 14. Flextronics Software 24.35 23.81 Systems Ltd. 15. L&T Infotech Ltd. 9.37 9.07 16. Satyam Computer Services 22.74 22.22 Ltd. 17. Infosys Ltd. 29.99 29.95 Average 19.63 18.87
11 IT(T.P)A No.1105 & 1259/Bang/2012 Thus the TPO has worked out the mean margin at 17.63% and after
working capital adjustment at 18.77%. It is pertinent to note that in the
set of TPO’s comparables, 5 companies are common as it was also part of
the assessee's TP analysis which are at Sl. Nos.8, 9, 11, 12 & 13 of the
above table. Thus the TPO has proposed an adjustment of
Rs.4,97,23,259 under Section 92CA of the Act. The assessee challenged
the action of the TPO before the learned CIT (Appeals). The CIT (Appeals)
did not agree with the methodology applied by the assessee as well as by
the TPO wherein the entity level result was taken into consideration for
determining the ALP. The CIT (Appeals) selected Cost Plus Method
(‘CPM’) as the MAM instead of TNMM. As regards the sales commission
paid by the assessee to AE, the CIT (Appeals) held that it was not justified
and accordingly the ALP of the commission paid to AE was considered by
the CIT (Appeals) at NIL. Accordingly, the entire payment of commission
was disallowed under TP Adjustment. As regards the other international
transactions with regard to the software development charges paid to
the AE, the CIT (Appeals) recomputed the ALP by taking the AEs of the
assessee has tested party Thus the CIT (Appeals) selected MAARS
12 IT(T.P)A No.1105 & 1259/Bang/2012 Software International Ltd., an Indian Company as comparable to test the
price at the hand of the various AEs of the assessee in different
countries. The operating margin of the MAARS was computed at 9.61%
whereas the operating margin of the AEs of the assessee was
recomputed by the CIT (Appeals) by disallowing marketing / selling
expenses and accordingly the CIT (Appeals) made a TP Adjustment of
Rs.2,54,18,865 on this account.
Before us, the learned Authorised Representative of the assessee
has submitted that the CIT (Appeals) has adopted a new method without
giving any show cause notice to the assessee for the same. Further the
CIT (Appeals) has committed an error by considering the AEs of the
assessee as tested party and further margins of the AEs have been
compared with a domestic company selected as comparable. Therefore
the CIT (Appeals) has taken completely different approach to the issue
which is not permissible. He has further pointed out that since there was
an acquisition of the assessee by the Mphasis BFL Limited therefore, due
to this event of acquisition a proper representation could not be made
before the authorities below. No notice was given to the assessee by the
13 IT(T.P)A No.1105 & 1259/Bang/2012 CIT (Appeals) to adopt a different method and AE as a tested party. Even
otherwise, the profit margin of the AE has not been properly computed
by the CIT (Appeals) as it has excluded certain expenses while computing
the profit margin. Thus the learned Authorised Representative has
submitted that the impugned order of the CIT (Appeals) is not
sustainable as the same suffers from illegality being contrary to the
provisions of transfer pricing. Even otherwise, the learned Authorised
Representative of the assessee has submitted that the comparable
companies selected by the TPO cannot be considered for the purpose of
determining the ALP as the same are functionally different from the
assessee. The assessee has raised the objections against various
companies selected by the TPO and one company namely Geometric
Software Solutions Ltd. which was though selected by the assessee also
however, as it is found to be not comparable with the assessee,
therefore the assessee is seeking exclusion of the same from the set of
comparables. The learned Authorised Representative of the assessee
has submitted that the assessee is seeking the exclusion of the following
companies :
14 IT(T.P)A No.1105 & 1259/Bang/2012 (i) Bodhtree Consulting Ltd. (ii) Exensys Software Solutions Ltd. (iii) Sasken Network Systems Ltd. (iv) Four Soft Limited. (v) Thirdware Solution Ltd. (vi) Tata Elxsi Ltd. (Seg.) (vii) Flextronics (Seg.)
As regards, Bodhtree Consulting Ltd., the learned Authorised
Representative has submitted that the comparability of the company has
been examined by the co-ordinate bench of this Tribunal in the case of
Kodiak Network India Ltd. in ITA No.532/Bang/2013 vide order
Dt.30.7.2015 wherein the co-ordinate bench found that the functional
comparability of the company cannot be considered as good
comparable. He has further submitted that even otherwise this company
is having its revenue from sale of products, sale of services to subsidiaries
and therefore in the absence of segmental results, this company cannot
be considered as a good comparable for software development services
of the assessee.
15 IT(T.P)A No.1105 & 1259/Bang/2012 5. Exensys Software Solutions Ltd. : The learned Authorised
Representative of the assessee has submitted that the comparability of
this company has also been considered by the co-ordinate bench of this
Tribunal in the case of Kodiak Network India Ltd. (supra) as well as ITO
Vs. Vendo Technology Pvt. Ltd. in ITA No.1374/Bang/2011 vide order
dt.19.9.2014.
Sasken Network Systems Ltd. : The learned Authorised
Representative of the assessee has submitted that the comparability of
this company has also been considered by the co-ordinate bench of this
Tribunal in the case of Kodiak Network India Ltd. (supra) as well as ITO
Vs. Vendo Technology Pvt. Ltd. in ITA No.1374/Bang/2011 vide order
dt.19.9.2014.
7.1 Foursoft Limited & Thirdware Solutions Ltd. : The functional
comparability of these two companies are also examined by the Tribunal
in the case of Kodiak Network India Ltd. (supra).
7.2 The learned Authorised Representative has pointed out that
Related Party Transactions (RPT) in the case of Thirdware Solutions Ltd.
is 19.89% and therefore in view of the consistent view taken by this
16 IT(T.P)A No.1105 & 1259/Bang/2012 Tribunal regarding the threshold limit of the RPT at 15%, this company
cannot be considered as a good comparable.
Tata Elxsi Limited (Seg.) : The functional comparability of this
company is examined by the Tribunal in the case of Kodiak Network India
Ltd. (supra) and it was found that this company is functionally dis-similar
to the software development services provider.
Flextronic Software System Ltd. : The learned Authorised
Representative has submitted that the comparability of this company has
been examined by the co-ordinate bench of this company in the case of
ITO Vs. Sunquest Information Systems (India) Pvt. Ltd. in ITA
No.1302/Bang/2011 vide order dt.11.6.2015. This company is
functionally not comparable with the assessee.
10.1 Geometric Software Solutions Ltd. : The learned Authorised Representative has submitted that though the company was selected by the assessee, however, in view of the RPT of this company at 22.52%, this company cannot be considered as a good comparable. 10.2 On the other hand, the learned Departmental Representative has
submitted that despite sufficient opportunities were given by the TPO as
well as the CIT (Appeals) the assessee did not file the relevant details and
17 IT(T.P)A No.1105 & 1259/Bang/2012 therefore the assessee's conduct was completely non-co-operative
during the proceedings before the TPO as well as the CIT (Appeals). He
has referred to the para No.4.3.2 of CIT (Appeals)’s order and submitted
that the CIT (Appeals) has given details of repeated notices but the
assessee failed to furnish the requisite details as well as the information
so as to arrive at a proper decision. Thus the learned Departmental
Representative has submitted that the CIT (Appeals) was compelled to
take a decision on its own as the assessee has failed to furnish the
relevant details. The learned Departmental Representative has
submitted that the assessee cannot take the advantage of its own wrong.
As regards the functional comparability of the various companies as
described by the assessee, the learned Departmental Representative has
submitted that the Geometric Software Solutions Ltd. was selected by
the assessee and therefore the assessee cannot seek the exclusion of the
same. She has further contended that the TPO has applied RPT filter of
25% which is also upheld by this Tribunal in various decisions. She has
relied upon the decision of the Tribunal in the case of Curam Software
International Ltd. Vs. ITO 149 ITD 458 (ITA No.1280/Bang/2012). Thus
18 IT(T.P)A No.1105 & 1259/Bang/2012 the learned Departmental Representative has submitted that the TPO
has applied a filter of 25% RPT which is acceptable.
11.1 Flextronics Software System Ltd. : The learned Departmental
Representative has submitted that the Tribunal in the case of Sunquest
Information System Ltd. (supra) has observed that this company is also in
the software development product service. However, there was no sale
of software product during the year. Further, the TPO has considered
the segmental data of this company as computed in the Annexure B of
the T P order. When the TPO has considered the segmental data, then,
this company is functionally comparable. Similarly in the case of
Thirdware Solutions Ltd., the TPO has recomputed the margins of the
software development services segment of the said company and only
segmental results has been taken into consideration for the purpose of
determination of ALP.
11.2 In rebuttal, the learned Authorised Representative has submitted
that the TPO has recomputed the profit margins of the comparables on
adhoc basis without allocation of certain expenses. Therefore, the
recomputation made by the TPO cannot be relied upon.
19 IT(T.P)A No.1105 & 1259/Bang/2012 11.3 We have heard the rival submissions and considered the relevant
material on record. We find that the assessee took its operating margin
at entity level and then compared the same with the mean margins of
the selected comparables. The TPO has not objected to its methodology
of the assessee but rejected certain comparables selected by the
assessee and included the some more comparables in the set of
comparables for determining the ALP. It is pertinent to note that as per
the provisions of Transfer Pricing, the entity level margin of the assessee
cannot be considered for the purpose of bench marking the international
transactions when the assessee is having both international as well as
third party transactions. Though there is a strength in the contention of
the learned Authorised Representative that in view of the complexity of
the transactions between the assessee and its AEs as well as the third
party transactions in which the assessee has to pay the selling
commission to the AE, the assessee adopted entity level operating
margin for the purpose of bench marking its international transactions.
However, this method is not permitted as per the provisions and rules of
the transfer pricing under Income Tax Act and I.T. Rules and therefore to
20 IT(T.P)A No.1105 & 1259/Bang/2012 that extent, we find that the learned CIT (Appeals) was justified in
rejecting the methodology applied by the assessee as well as by the TPO.
Once the CIT (Appeals) has rejected the entity level profit margin of the
assessee for the purpose of bench marking the international transactions
with ALP, the CIT (Appeals) was required to redo exercise of
determination of ALP as per the provisions of transfer pricing. Instead of
following the proper procedure stipulated under Chapter X of the I.T. Act
as well as Rule 10 of I.T. Rules, the CIT (Appeals) has proceeded to take
the AEs of the assessee as tested party and further recomputed their
profit margin by excluding certain expenses which we find is not
permitted under the provisions of transfer pricing. Not only changing the
tested party from the assessee to its AE, the CIT (Appeals) has also
selected a domestic company as a comparable to the AE of the assessee.
Therefore the entire exercise of determining the ALP by the CIT (Appeals)
is contrary to the provisions of transfer pricing under the I.T. Act. Hence
in view of the facts and circumstances of the case, we set aside the
impugned order of the authorities below and remit the issue to the
record of the Assessing Officer / TPO for deciding the matter afresh by
21 IT(T.P)A No.1105 & 1259/Bang/2012 considering the segment-wise data of the assessee and then compare
the same with the comparable companies in the light of various decisions
relied upon by the assessee. We find that in the series of decisions, this
Tribunal has come to a conclusion that the threshold limit of the RPT
should not be more than 15% in normal circumstances where there is no
difficulty in selecting the comparable companies. Therefore we direct the
TPO to apply the RPT filter at 15% instead of 25% and then consider the
comparability of the companies. Since the assessee did not fully co-
operate with the authorities below in the first round of the proceedings
therefore we direct the assessee to co-operate in the proceedings before
the A.O./TPO and furnish the relevant and requisite details in order
determining the ALP. Needless to say that the Assessing Officer/TPO
also consider the benefit of tolerance range of + / - 5% as per the proviso
to Section 92C(2) as well as working capital adjustment.
12.1 Ground No.13 regarding the reduction of foreign currency
expenses from the export turnover.
12.2 We have heard the rival submissions and considered the relevant
material on record. An identical issue has been considered and decided
22 IT(T.P)A No.1105 & 1259/Bang/2012 by the Hon'ble jurisdictional High Court in assessee's own case for the
Assessment Year 2004-05 vide decision dt.8.1.2016 in ITA No.703 of 2009
in paras 11 to 13 as under :
“11. We have considered the rival submissions made by the parties and perused the material on record. 12. On substantial question No.1, the assessing authority has extensively considered whether the activity carried on by the assessee is software development or technical service. It is an admitted fact, as per the assessment order, the role of the assessee is of developer of software and not a consultant to any project. It is also categorically held by the assessing authority that the purpose of business of the assessee is to develop the software and in such process, expenditure is incurred in foreign currency to provide technical services outside India. Having held so, the assessing authority proceeded to conclude that the nature of expenditure and the nature of business are two different and distinct concepts and as per the statute, what is to be excluded is the expenses in foreign exchange for rendering technical services, though the same is forming an integral part as embedded in the process of on site development of software. This view is upheld by the Appellate Commissioner. 13. We have perused the relevant provisions of the Act i.e., ‘export turnover’ as defined under explanation (2)(iv) to section 10A of the Act. The said export turnover as per explanation (2)(iv) to section 10A of the Act means the consideration in respect of export by the undertaking of articles or things or computer software received in, or brought into, India by the assessee in convertible foreign exchange in accordance with sub-section (3), but does not include 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. What is relevant to be noticed as per this provision is that the consideration in respect of export of computer software received in or brought into India by the assessee in convertible foreign exchange is an export turnover and what is excluded from this clause is (a) freight, (b) telecommunication charges or insurance attributable to the delivery of the articles or things or computer software outside India (c) expenses, if any, incurred in foreign exchange in providing the technical services outside India. Explanation (3) inserted by Finance Act, 2001 with effect from 1.4.2001 explains that the profits and gains derived from on site development of computer software including services for development of software, outside India shall be deemed to be the profits and gains derived from the export of computer software outside India. Thus, it is clarified by the legislature by inserting explanation (3) to Section 10A that the profits and gains derived from on site development of computer software including services for the development of such software outside India is
23 IT(T.P)A No.1105 & 1259/Bang/2012 deemed to be the profits and gains derived from the export of computer software outside India. In other words, the services rendered by the assessee relating to the development of computer software is deemed to be part of export turnover of computer software outside India.”
Respectfully following the decision of the Hon'ble jurisdictional High
Court in assessee's own case, we direct the Assessing Officer/TPO not to
reduce the expenses from the export turnover for computation of
deduction under Section 10A of the Act.
13.1 Ground No.15 is regarding foreign tax credit.
13.2 We have heard the rival submissions and considered the relevant
material on record. In the outcome of the remand proceedings if any tax
liability is determined by the Assessing Officer, then the tax credit in
respect of the foreign tax paid by the assessee is also required to be
considered. We accordingly direct the Assessing Officer to consider the
appropriate credit for foreign tax paid.
Ground Nos.16 & 17, interest under Sections 234B & 234D is
consequential in nature.
Ground No.18 is regarding penalty under Section 271(1)(c) of the
Act is premature to deal with the issue.
24 IT(T.P)A No.1105 & 1259/Bang/2012 Revenue’s Appeal
The Revenue has raised the following grounds :
“1. The order of the learned CIT (Appeals) is opposed to law and facts of the case. 2. On the facts and in the circumstances of the case the learned CIT (Appeals) erred in holding the telecommunication expenses amounting to Rs.38,63,601 and foreign currency expenses incurred for providing software development outside India amounting to Rs.10,84,20,751 are to be excluded from the total turnover as well, for computation of deduction under Section 10A of the IT Act whereas such exclusion is permitted to arrive at the export turnover only as per the definitions given in section 10A of the IT Act and total turnover has not been defined in section 10A of the Act. 3. The CIT (Appeals) ought to have appreciated that the decisionof Hon'ble High Court of Karnataka in the case of M/s. Tata Elxsi Ltd. on the issue of computing deduction under Section 10A by excluding the above expenses from export turnover and total turnover as well, has not reached finality in view of the pending Department’s SLP before the Hon'ble Supreme Court. 4. For these and other grounds that may be urged at the time of hearing, it is prayed that the order of the CIT (Appeals) in so far as it relates to the above grounds may be reversed and that of the Assessing Officer may be restored. 5. The appellant craves leave to add, alter, amend and/or delete any of the ground mentioned above.”
16.1 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 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
25 IT(T.P)A No.1105 & 1259/Bang/2012 excluded from the total turnover in the denominator. The relevant finding of the Hon’ble jurisdictional High Court reads as follows:- “………..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
26 IT(T.P)A No.1105 & 1259/Bang/2012 section 10-A, the export profit is to be derived from the total business of the undertaking. Even in the case of business of an undertaking, it may include export business and domestic business, in other words, export turnover and domestic turnover. 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”.
16.2 The Hon’ble Mumbai High Court in the case of Gem Plus Jewellery India Ltd. (supra), in identical circumstances, held that since the
27 IT(T.P)A No.1105 & 1259/Bang/2012 export turnover forms part of the total turnover, if an item is excluded from the export turnover, the same should also be reduced 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
28 IT(T.P)A No.1105 & 1259/Bang/2012 been defined. The definition of “export turnover” excludes freight and insurance. Since export turnover has been defined by Parliament and there is a specific 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” 16.3 In the light of the above binding precedents, we are of the view that the orders of the CIT(A) is correct and in accordance with law
29 IT(T.P)A No.1105 & 1259/Bang/2012 and he is justified in directing 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.
In the result, the assessee's appeal is allowed for statistical
purposes and revenue’s appeal is dismissed.
Order pronounced in the open court on the 22nd day of April, 2016. Sd/- Sd/- (INTURI RAMA RAO) (VIJAY PAL RAO) Accountant Member Judicial Member *Reddy gp
Copy to : 1. Appellant 2. Respondent 3. C.I.T. 4. CIT(A) 5. DR, ITAT, Bangalore. 6. Guard File.
(True copy) By Order
Asst. Registrar, ITAT, Bangalore