Applied Materials India Private Limited, Bangalore V. Asst.C.I.T., Bangalore

ITA 17/BANG/2016

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 9390 (ITAT-BANGALORE)
• Duration Of Justice: 8 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-09-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 08-08-2016
• Assessment Year: 2011-2012
• Appeal Filed On: 07-01-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: T SURYANARAYANA SHRI
• Keywords: Related party transaction; Business income; Transfer pricing; Principle of natural justice; International transaction; Question of law; Initiation of penalty proceedings; Wholly owned subsidiary
• Section: 143(3); 80HHC; 133(6); 10B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH C BEFORE S HRI VIJAY PAL RAO, JUDICIAL MEMBER AND SHRI S. JAYARAMAN, ACCOUNTANT MEMBER I.T . (T.P) A. NO. 17 /BANG/20 16 (ASSESSMENT YEAR : 20 11 - 12 ) M/S. APPLIED MATERIALS INDIA PVT. LTD., UNIT - 5, 3 RD FLOOR, EXPLORER BUILDING, INTERNATIONAL TECH PARK, WHITEFIELD ROAD, BANGALORE - 560 066 . . APPELLANT. PAN AABCA 2635C VS. ASST. COMMISSIONER OF INCOME TAX, CI RCLE 1(1)(1), BANGALORE. .. RESPONDENT. I.T. (T.P) A. NO. 39/BANG/2016 (ASSESSMENT YEAR : 20 11 - 12 ) (BY REVENUE) ASSESSEE BY : SHRI T. SURYANARAYANA, ADVOC A TE. R E SPONDENT BY : SHRI SANJAY KUMAR, C IT - III (D.R) DATE OF H EARING : 09.08.2016. DATE OF P RONOUNCEMENT : 21.9 .201 6 . O R D E R PER SHRI VIJAY P AL RAO, J .M . : THESE CROSS APPEALS ARE DIRECTED AGAINST THE ASSESSMENT ORDER DT.20.11.2015 PASSED UNDER SECTION 143(3) R.W.S. 144C OF THE INCOME TAX 2 IT (T.P) A NO S . 17 & 39 /BANG/201 6 ACT, 1961 (IN SHORT 'THE ACT') IN PURSUANT TO THE DIRECTIONS OF DISPUTE RESOLUTION PANEL (IN SHORT DRP ) DT.9.10.2015 FOR THE ASSESSMENT YEAR 2011 - 12. 2. THE ASSESSEE IS WHOLLY OWNED SUBSIDIARY OF APPLIED MATERIALS INC, USA WHICH IN TURN IS A SUPPLIER OF PRODUCTS AND SERVICES TO THE GLOBAL SEMI - CONDUCTOR INDUSTRY. THE ASSESSEE - COMPANY WAS INCORPORATED DT.11.7.2003 UNDER T HE PROVISIONS OF COMPANIES ACT, 1956 AND IS ENGAGED IN THE PROVISION OF SOFTWARE DEVELOPMENT SERVICES AND ENGINEERING SERVICES TO ITS ASSOCIATED ENTERPRISE (AE) APPLIED INC AS A CAPTIVE SERVICE PROVIDER. THE FINANCIALS OF THE ASSESSEE AS WELL AS INTERNAT IONAL TRANSACTIONS FOR THE YEAR UNDER CONSIDERATION HAVE BEEN REPRODUCED BY THE TRANSFER PRICING OFFICER (TPO) AS UNDER : SOFTWARE DEVELOPMENT & ENGINEERING SERVICES RS.2,063,193,768 TOTAL EXPENDITURE RS. 1,875,630,698 LESS : FOREIGN EXCHANGE LOSS RS. 2 3,976,188 OPERATING EXPENDITURE RS. 1,851,654,510 OPERATING PROFIT RS. 211,539,258 OP/OC 11.42% 3 IT (T.P) A NO S . 17 & 39 /BANG/201 6 PARTICULARS PAID RECEIVED SOFTWARE DEVELOPMENT SERVICES 1,955,823,476 SUPPORT SERVICES 107,370,292 REIMBURSEMENT OF EXPENSES 31,949,528 RECOVERY OF EXPENSES 8,584,353 RECOVERY OF WITHHOLDING TAXES OF EMPLOYEES ON RESTRICTED STOCKS UNIT GRANTED AND REMITTED TO LOCAL TAX AUTHORITIES. 13,610,607 3. THE ONLY DISPUTE IN THESE APPEALS IS REGARDING THE ARM S LENGTH PRICE ( ALP ) OF SOFTWARE DEVEL OPMENT SERVICES TO THE AE AND CONSEQUENT ADJUSTMENT BY THE TPO APART FROM THE ISSUE OF EXCLUSION OF EXPENSES INCURRED IN FOREIGN CURRENCY WHILE COMPUTING THE DEDUCTION UNDER SECTION 10A OF THE ACT. THE OTHER INTERNATIONAL TRANSACTIONS HAVE BEEN ACCEPTED B Y THE TPO AT ALP. THE OPERATING PROFIT CLAIMED BY THE ASSESSEE IS 11.42%. THE ASSESSEE SELECTED 10 COMPARABLE COMPANIES IN ITS TP STUDY ANALYSIS AND CLAIMED ITS INTERNATIONAL TRANSACTIONS AT ARM S LENGTH AS UNDER : 4 IT (T.P) A NO S . 17 & 39 /BANG/201 6 COMPARABLES SELECTED BY ASSESSE E AND THEIR ARITHMETIC MEAN: SL. NO. NAME OF THE COMPANY NCP 2008 - 09 (%) NCP 2009 - 10 (%) NCP 2010 - 11 (%) WEIGHTED AVERAGE (%) 1 AKSHAY SOFTWARE TECHNOLOGIES LTD. 12.47 - 3.16 0.66 3.33 2 EVOKE TECHNOLOGIES PVT. LTD. 17.49 15.13 15.16 16.04 3 HELIOS & MA THESON INFORMATION TECHNOLOGY LTD. 21.27 10.83 13.94 14.67 4 L G S GLOBAL LIMITED 24.63 10.00 4.61 13.31 5 POWERSOFT GLOBAL SOLUTIONS LTD. 9.96 9.88 16.35 12.26 6 RS SOFTWARE (INDIA) LTD. 12.20 21.17 7.71 13.52 7 R SYSTEMS INTERNATIONAL LTD. 15.97 25.0 5 27.10 22.14 8 SASKEN COMMUNICATION TECHNOLOGIES LTD. 20.29 17.09 9.69 18.09 9 TATA ELXSI LTD. 6.53 9.33 14.59 9.87 10 VAMA INDUSTRIES LTD. 20.72 18.99 NA 19.92 ARITHMETICAL MEAN 14.31 THE TPO REJECTED 6 COMPARABLE COMPANIES FROM THE TP STUDY AND AC CEPTED 4 COMPANIES FROM THE SET OF COMPARABLES. THE TPO HAS CARRIED OUT A FRESH SEARCH AND ADDED 9 MORE COMPANIES TO THE SET OF 4 COMPARABLES FROM TP STUDY. THE TPO WORKED OUT THE ARITHMETIC MEAN (AM) OF 13 COMPARABLES AS UNDER : 5 IT (T.P) A NO S . 17 & 39 /BANG/201 6 COMPARABLES SELECTED B Y TPO AND THEIR ARITHMETIC MEAN : SL. NO. NAME OF THE COMPANY MARK - UP ON TOTAL COSTS (WC UNADJ) (IN %) MARK - UP ON TOTAL COSTS (WC ADJ) (IN %) 1 ACROPETAL TECHNOLOGIES LTD. (SEG) 31.98 29.60 2 E - ZEST SOLUTIONS LTD. 21.03 19.97 3 E - INFOCHIPS LTD. 56.44 56. 74 4 EVOKE TECHNOLOGIES PVT. LTD. 8.11 9.10 5 ICRA TECHNO ANALYTICS LTD. 24.83 23.79 6 INFOSYS LTD. 43.39 44.21 7 LARSEN & TOUBRO INFOTECH LTD. 19.83 20.86 8 MINDTREE LTD. (SEG) 10.66 10.34 9 PERSISTENT SYSTEMS & SOLUTIONS LTD. 22.12 22.16 10 PERSISTENT S YSTEMS LTD. 22.84 23.60 11 R S SOFTWARE (INDIA) LTD. 16.37 17.24 12 SASKEN COMMUNICATION TECHNOLOGIES LTD. 24.13 25.46 13 TATA ELXSI LTD. (SEG) 20.91 19.95 AVERAGE MARGIN 24.82 24.77 AFTER GIVING WORKING CAPITAL ADJUSTMENT, THE TPO COMPUTED THE ADJUSTED AVERAGE PLI AT 24.77% AND PROPOSED AN ADJUSTMENT UNDER SECTION 92CA OF THE ACT OF RS.23,41,94,490 AS UNDER : 6 IT (T.P) A NO S . 17 & 39 /BANG/201 6 COMPUTATION OF ARM S LENGTH PRICE BY THE TPO AND THE ADJUSTMENT MADE : ARM S LENGTH MEAN MARGIN 24.82% LESS: WORKING CAPITAL ADJUSTMENT 0.0 5% ADJUSTED MEAN MARGIN OF THE COMPARABLES 24.77% OPERATING COST RS. 175,52,43,966/ - ARM S LENGTH PRICE - 124.77% OF OPERATING COST RS. 219,00,17,896/ - PRICE RECEIVED RS.195,58,23,477/ - SHORTFALL BEING ADJUSTMENT U/S. 92CA RS.23,41,94,419/ - THE ASSESSEE CHALLENGED THE ACTION OF THE TPO/A.O. BEFORE DRP AND RAISED VARIOUS OBJECTIONS INCLUDING THE COMPARABILITY OF CERTAIN COMPANIES SELECTED BY THE TPO AS WELL AS THE ISSUE OF REJECTION OF CERTAIN COMPANIES SELECTED BY THE ASSESSEE IN THE TP STUDY. THE DRP REJECTED 9 COMPANIES OUT OF THE SET OF 13 COMPARABLES SELECTED BY THE TPO ON VARIOUS CRITERIA AND FILTERS APPLIED BY IT. THE FINAL LIST OF COMPARABLES AFTER THE DIRECTIONS OF THE DRP IS AS UNDER : SI. NO. NAME OF THE COMPANY MARK - UP ON TOTAL CO STS (WC UNADJ) (IN %) MARK - UP ON TOTAL COSTS (WC ADJ) (IN %) 1 E - ZEST SOLUTIONS LIMITED 21.03 19.97 2 PERSISTENT SYSTEMS & SOLUTIONS LTD. 22.12 22.16 7 IT (T.P) A NO S . 17 & 39 /BANG/201 6 3 PERSISTENT SYSTEMS LTD. 22.84 23.60 4 SASKEN COMMUNICATION TECHNOLOGIES LTD. 24.13 25.46 ARITHME TICAL MEAN 22.53 22.80 THUS BOTH THE ASSESSEE AS WELL AS REVENUE ARE AGGRIEVED BY THE DIRECTIONS OF THE DRP AND FILED THEIR CROSS APPEALS. THE ASSESSEE AND DEPARTMENT RAISED THE FOLLOWING GROUNDS RESPECTIVELY AS UNDER : ASSESSEE'S GROUNDS : 1. ORDER/ DIRECTIONS BAD IN LAW AND ON FACTS 1.1 THE ORDER PASSED BY THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE 1(1)(1) [ THE AO ], UNDER SECTION 143(3) READ WITH SECTION 144C OF THE INCOME - TAX ACT, 1961 ('THE ACT'), IS BAD IN LAW AND ON FACTS AND IS IN VIOLATIO N OF THE PRINCIPLES OF NATURAL JUSTICE. WITHOUT PREJUDICE TO THE GENERALITY OF THE ABOVE, THE ORDER ISSUED BY THE AO IS BAD IN LAW IN SO FAR AS THE FACT THAT THE AO DID NOT ISSUE TO APPLIED MATERIALS INDIA PRIVATE LIMITED ( THE APPELLANT OR THE COMPANY ), A SHOW CAUSE NOTICE AS PER PROVISO TO SECTION 92C(3) OF THE ACT. 1.2 THE AO HAS ERRED IN LAW IN MAKING A REFERENCE TO THE ADDITIONAL COMMISSIONER OF INCOME TAX (TRANSFER PRICING) 1(1) [ TPO ], INTER ALIA , SINCE HE HAS NOT RECORDED AN OPINION THAT ANY OF THE CONDITIONS IN SECTION 92C(3) OF THE ACT, WERE SATISFIED IN THE INSTANT CASE. ACCORDINGLY, THE ORDER PASSED BY THE TPO IS WITHOUT JURISDICTION 1.3 THE DIRECTIONS ISSUED BY THE LD. DISPUTE RESOLUTION PANEL ( DRP/ LD. PANEL ) DID NOT TAKE COGNIZANCE OF THE OBJEC TIONS RAISED BY THE APPELLANT IN RELATION TO THE TRANSFER PRICING MATTERS. 1.4 THE ORDER PASSED BY THE AO IS WITHOUT JURISDICTION, INTER ALIA , IN SO FAR AS IT PURPORTS TO GIVE EFFECT TO AN INVALID DIRECTIONS OF THE LD. PANEL. 1.5 THE DIRECTIONS ISSUED BY THE LD. P ANEL AND THE ORDER PASSED BY THE AO IS WITHOUT JURISDICTION, INTER ALIA , IN SO FAR AS IT PURPORTS TO GIVE EFFECT TO AN INVALID ORDER OF THE TPO. 2. THE LD. PANEL AND AO/ TPO HAS ERRED IN JUSTIFYING THE MOTIVE OF SHIFTING OF PROFITS ON THE FACTS AND IN THE CI RCUMSTANCES OF THE CASE AND IN LAW, THE LD. PANEL AND AO/ TPO ERRED IN NOT DEMONSTRATING THAT THE MOTIVE OF THE APPELLANT WAS TO SHIFT PROFITS 8 IT (T.P) A NO S . 17 & 39 /BANG/201 6 OUTSIDE INDIA BY MANIPULATING THE PRICES CHARGED IN THE INTERNATIONAL TRANSACTION, WHICH IS A PRE - REQUISITE CONDI TION TO MAKE ANY ADJUSTMENT UNDER THE PROVISION OF CHAPTER X OF THE ACT. 3. DETERMINATION OF ARM S LENGTH PRICE OF INTERNATIONAL TRANSACTIONS 3.1 THE LD. PANEL AND AO/ TPO ERRED IN REJECTING THE VALUE OF INTERNATIONAL TRANSACTIONS AS RECORDED IN THE BOOKS OF ACC OUNT, AS THE ARM S LENGTH PRICE. 3.2 THE LD. PANEL AND AO/ TPO ERRED IN DETERMINING A NEW ARM S LENGTH PRICE IN SUBSTITUTION OF THE ARM S LENGTH PRICE AS DETERMINED BY THE APPELLANT. 4. DETERMINATION OF NET COST MARGIN OF THE APPELLANT 4.1 THE AO / TPO HAD GROSSLY E RRED ON FACTS AND IN LAW IN BENCHMARKING THE TRANSACTIONS OF THE APPELLANT WITHOUT CONSIDERING THE DIFFERENCES IN THE FUNCTIONS PERFORMED, ASSETS EMPLOYED AND RISK UNDERTAKEN BY THE APPELLANT VIS - - VIS COMPARABLE COMPANIES. THE LD. PANEL ERRED IN CONFIRMIN G THE SAME. 4.2 THE LD. AO / LD. TPO HAD ERRED ON FACTS AND IN LAW IN NOT ACKNOWLEDGING THAT THE SUB - CONTRACTING CHARGES, INCURRED BY THE APPELLANT, REPRESENTS ARM S LENGTH CONSIDERATION, AND THEREBY WAS REQUIRED TO BE CONSIDERED AS PASS - THROUGH COST. THE LD. PANEL ERRED IN CONFIRMING THE SAME. 5. THE FRESH COMPARABLE SEARCH UNDERTAKEN BY THE TPO IS BAD IN LAW THE AO/ TPO ERRED IN LAW IN HOLDING THAT THE FRESH COMPARABILITY ANALYSIS USING NON CONTEMPORANEOUS DATA CONDUCTED BY THE TPO AND FURTHER SUBSTITUTING THE A PPELLANT S ANALYSIS WITH FRESH BENCHMARKING ANALYSIS ON HIS OWN CONJECTURES AND SURMISES. THUS, THE APPELLANT PRAYS THAT THE FRESH BENCHMARKING ANALYSIS CONDUCTED BY THE TPO IS LIABLE TO BE QUASHED. 6. COMPARABILITY ANALYSIS ADOPTED BY THE TPO FOR DETERMINATI ON OF ARM S LENGTH PRICE 6.1 THE AO/ TPO GROSSLY ERRED ON FACTS AND THE LD. PANEL ERRED IN CONFIRMING THE BENCHMARKING OF TRANSACTIONS OF SOFTWARE DEVELOPMENT SERVICES OF THE APPELLANT WITH COMPANIES OPERATING AS FULL - FLEDGED ENTREPRENEURS WITHOUT CONSIDERING THE DIFFERENCES IN THE FUNCTIONS PERFORMED, ASSETS EMPLOYED AND RISK UNDERTAKEN BY THE APPELLANT VIS - - VIS COMPARABLE COMPANIES. 6.2 THE AO/ TPO ERRED ON FACTS IN REJECTING THE COMPARABLE COMPANIES ARRIVED AT IN THE TRANSFER PRICING STUDY WITHOUT CONSIDERING THE FUNCTIONAL AND RISK ANALYSIS OF THE APPELLANT AND THE LD. PANEL ALSO ERRED IN CONFIRMING THE SAME. 6.3 THE AO/ TPO ERRED IN LAW IN APPLYING ARBITRARY FILTERS TO ARRIVE AT A FRESH SET OF COMPANIES AS COMPARABLES TO THE APPELLANT, WITHOUT ESTABLISHING FUNCTI ONAL COMPARABILITY AND THE LD. PANEL ALSO ERRED IN CONFIRMING THE SAME. 6.4 THE AO/ TPO ERRED ON FACTS IN ARBITRARILY ACCEPTING COMPANIES WITHOUT CONSIDERING THE TURNOVER AND SIZE OF THE ASSESSEE AND COMPARABLES. THE LD. PANEL ALSO ERRED IN CONFIRMING THE SAME . IN VIEW OF THE HIGH TURNOVER OF INFOSYS LTD, L & T INFOTECH LTD., MINDTREE LTD., PERSISTENT SYSTEMS LTD , SASKEN COMMUNICATION TECHNOLOGIES LTD., AND TATA ELXSI LTD THEREFORE, THE SAID COMPANIES OUGHT TO STAND EXCLUDED FROM THE FINAL LIST OF COMPARABLES . 6.5 THE AO/ TPO GROSSLY ERRED IN LAW IN DEVIATING FROM THE UNCONTROLLED PARTY TRANSACTION DEFINITION AS PER THE INCOME - TAX RULES AND ARBITRARILY APPLYING A 9 IT (T.P) A NO S . 17 & 39 /BANG/201 6 25% RELATED PARTY CRITERIA IN ACCEPTING / REJECTING COMPARABLES AND THE LD. PANEL ALSO ERRED IN CONFIR MING THE SAME. 6.6 THE AO/ TPO GROSSLY ERRED ON FACTS IN ARBITRARILY REJECTING COMPANIES HAVING SOFTWARE DEVELOPMENT REVENUE LESS THAN 75% OF TOTAL OPERATING REVENUE AND APPLYING INCONSISTENTLY SUCH FILTER, WITHOUT CONSIDERING THE SPECIFIC SEGMENTAL RESULTS A ND THE LD. PANEL ALSO ERRED IN CONFIRMING THE SAME. 6.7 THE AO/ TPO ERRED ON FACTS IN ARBITRARILY REJECTING COMPANIES HAVING EXPORT REVENUES LESS THAN 75% OF TOTAL SALES AND THE LD. PANEL ALSO ERRED IN CONFIRMING THE SAME. 6.8 THE AO/ TPO ERRED IN REJECTING COMPAN IES HAVING EMPLOYEE COST LESS THAN 25% OF TOTAL SALES AND THE LD. PANEL ALSO ERRED IN CONFIRMING THE SAME. 6.9 THE AO/ TPO ALSO ERRED ON FACTS AND IN LAW IN ARBITRARILY REJECTING COMPANIES WITH DIFFERENT YEAR ENDING (I.E. OTHER THAN 31 MARCH 2010) AND THE LD. PANEL ALSO ERRED IN CONFIRMING THE SAME. 6.10 THE AO/ TPO ERRED IN FACTS IN ARBITRARILY REJECTING COMPANIES BASED ON THEIR FINANCIAL RESULTS WITHOUT CONSIDERING THE FUNCTIONAL COMPARABILITY. 6.11 THE AO/ TPO ALSO ERRED ON FACTS IN WRONGLY COMPUTING THE MARGINS OF A CERTAIN COMPANIES IDENTIFIED AS COMPARABLE BY THE TPO. 6.12 THE AO/ TPO ERRED IN REJECTING AKSHAY SOFTWARE TECHNOLOGIES LTD , L G S GLOBAL LTD , POWERSOFT GLOBAL SOLUTIONS LTD , HELIOS & MATHESON INFORMATION TECHNOLOGY LTD. AND VAMA INDUSTRIES LTD DESPITE THESE CO MPANIES BEING FUNCTIONALLY COMPARABLE. THE LD. PANEL ALSO ERRED IN CONFIRMING THE SAME. 6.13 THE AO/ TPO ERRED IN INCLUDING SASKEN COMMUNICATION TECHNOLOGIES LTD, PER SISTENT SYSTEMS & SOLUTIONS LTD AND PERSISTENT SYSTEMS LTD DESPITE THESE COMPANIES BEING FUNC TIONALLY DISSIMILAR TO THE APPELLANT. THE LD. PANEL ALSO ERRED IN CONFIRMING THE SAME. 6.14 THE LD. PANEL ERRED IN ARBITRARILY REJECTING EVOKE TECHNOLOGIES PRIVATE LIMITED AND R S SOFTWARE (INDIA) LTD. DESPITE BEING FUNCTIONALLY COMPARABLE COMPANIES. 7. ERRONEOUS DATA USED BY THE TPO 7.1 THE AO/ TPO HAS ERRED IN LAW AND THE LD. PANEL FURTHER ERRED IN CONFIRMING USE OF DATA, WHICH WAS NOT CONTEMPORANEOUS AND WHICH WAS NOT AVAILABLE IN THE PUBLIC DOMAIN AT THE TIME OF CONDUCTING THE TRANSFER PRICING STUDY BY THE APPELLA NT. 7.2 THE AO/ TPO ERRED IN LAW AND THE LD. PANEL FURTHER ERRED IN CONFIRMING NON - APPLICATION OF MULTIPLE - YEAR DATA WHILE COMPUTING THE MARGIN OF ALLEGED COMPARABLE COMPANIES AS SUCH DATA HAD AN INFLUENCE IN DETERMINING THE TRANSFER PRICING POLICY OF THE ASSE SSEE. 8. NON - ALLOWANCE OF APPROPRIATE ADJUSTMENT TO THE COMPARABLE COMPANIES BY THE LD. PANEL AND AO/ TPO AO/ TPO ERRED IN LAW AND ON FACTS IN NOT ALLOWING APPROPRIATE ADJUSTMENTS UNDER RULE 10B TO ACCOUNT FOR, INTER ALIA , DIFFERENCES IN (I) ACCOUNTING PRACT ICES, (II) MARKETING EXPENDITURE ADJUSTMENT, (III) RESEARCH AND DEVELOPMENT EXPENDITURE ADJUSTMENT, (IV) WORKING CAPITAL, AND (IV) RISK PROFILE BETWEEN THE APPELLANT AND THE COMPARABLE COMPANIES. 10 IT (T.P) A NO S . 17 & 39 /BANG/201 6 9. VARIATION OF 5% FROM THE ARITHMETIC MEAN THE AO/ TPO ERRED I N LAW IN NOT GRANTING THE BENEFITS OF PROVISO TO SECTION 92C(2) OF THE ACT AVAILABLE TO THE APPELLANT. 10. REDUCTION OF EXPENSES FROM EXPORT AND TOTAL TURNOVER FOR COMPUTATION OF DEDUCTION UNDER SECTION 10A OF THE ACT 10.1 THE LD. PANEL ERRED IN UPHOLDING THE ACTI ON OF THE LD. AO IN REDUCING SUB - CONTRACTING CHARGES OF RS. 594,413,108 INCURRED TOWARDS EXPORT OF COMPUTER SOFTWARE FROM THE EXPORT TURNOVER , WITHOUT CONSIDERING THE FACT THAT THESE EXPENSES WERE NOT INCURRED FOR THE PURPOSE OF RENDERING ANY TECHNICAL SER VICES OUTSIDE INDIA . 10.2 THE LD. PANEL ERRED IN UPHOLDING THE ACTION OF THE LD. AO IN REDUCING TRAVEL EXPENSES INCURRED IN FOREIGN CURRENCY AMOUNTING TO RS. 9,284,032 INCURRED TOWARDS EXPORT OF COMPUTER SOFTWARE FROM THE EXPORT TURNOVER, WITHOUT CONSIDERING TH E FACT THAT THE SAID TRAVEL EXPENSES ARE NOT INCURRED FOR THE PURPOSE OF RENDERING ANY TECHNICAL SERVICES OUTSIDE INDIA. 10.3 THE LD. PANEL ERRED IN UPHOLDING THE ACTION OF THE LD. AO IN NOT MAKING A CORRESPONDING REDUCTION OF THE FOREIGN EXCHANGE LOSS OF RS. 22,010,559 FROM THE TOTAL TURNOVER AFTER HAVING REDUCED THE SAME FROM THE EXPORT TURNOVER AND NOT FOLLOWING THE DECISION OF THE HON BLE KARNATAKA HIGH COURT IN THE CASE OF TATA ELXSI LTD VS. ACIT [2011] [349 ITR 198 WHEREIN IT WAS INTER ALIA HELD THAT EXPENSES REDUCED FROM THE EXPORT TURNOVER OUGHT TO BE REDUCED FROM THE TOTAL TURNOVER AS WELL. 11. INITIATION OF PENALTY PROCEEDINGS THE APPELLANT SUBMITS THAT BASED ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THERE WAS NO BASIS FOR THE AO TO INITIATE PROCEEDI NGS UNDER SECTION 274 READ WITH SECTION 271 OF THE ACT. 12. RELIEF 12.1 THE APPELLANT PRAYS THAT DIRECTIONS BE GIVEN TO GRANT ALL SUCH RELIEF ARISING FROM THE ABOVE GROUNDS AND ALSO ALL RELIEF CONSEQUENTIAL THERETO. 12.2 THE APPELLANT DESIRES LEAVE TO ADD TO OR ALTER, B Y DELETION, SUBSTITUTION OR OTHERWISE, ANY OR ALL OF THE ABOVE GROUNDS OF OBJECTIONS, AT ANY TIME BEFORE OR DURING THE HEARING OF THE APPEAL. 12.3 FURTHER, THE APPELLANT PRAYS THAT THE ADJUSTMENT IN RELATION TO TRANSFER PRICING MATTERS MADE BY THE LEARNED AO/ TPO AND UPHELD BY THE LD. PANEL IS BAD IN LAW AND LIABLE TO BE DELETED. 11 IT (T.P) A NO S . 17 & 39 /BANG/201 6 REVENUE S GROUNDS : 12 IT (T.P) A NO S . 17 & 39 /BANG/201 6 4. THE FIRST EFFECTIVE ISSUE IS REGARDING SUB - CONTRACTING CHARGES BEING PART OF OPERATING COST AS WELL AS CORRESPONDING REVENUE FROM AE FOR THE PURPOSE OF OPERATING INCOME. THE ASSESSEE TOOK THE PLEA THAT SUB - CONTRACTING CHARGES INCURRED BY THE ASSESSEE ARE TO BE TREATED AS PASS THROUGH COST AND THEREFORE SHALL BE EXCLUDED FROM THE OPERATING PROFIT AND OPERATING COST OF THE ASSESSEE WHILE COMPUT ING THE ALP IN RESPECT OF THE SOFTWARE DEVELOPMENT SERVICES SEGMENT. THE TPO AS WELL AS DRP DID NOT ACCEPT THIS CONTENTION OF THE ASSESSEE AND CONSIDERED THE SUB - CONTRACTING CHARGES AND RECEIPTS AS PART OF THE OPERATING COST AND 13 IT (T.P) A NO S . 17 & 39 /BANG/201 6 OPERATING INCOME OF THE AS SESSEE FOR THE PURPOSE OF DETERMINING THE ALP. 5. BEFORE US, THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE HAS SUBMITTED THAT FOR THE EARLIER ASSESSMENT YEARS THE TPO ACCEPTED THE SUB - CONTRACTING CHARGES AS PASS THROUGH COST WHILE DETERMINING THE OPERATING PROFIT/MARGINS OF THE ASSESSEE. HE HAS ALSO RELIED UPON THE DECISION OF THE DELHI BENCH OF THE TRIBUNAL IN THE CASE OF DCIT VS. CHEIL COMMUNICATION S INDIA PVT. LTD. (2015) 11 TAXMAN N.COM 205. THUS THE LEARNED AUTHORISED REPRESENTATIVE HAS SUBMITTED THAT SUB - CONTRACT CHARGES OUGHT TO BE CONSIDERED AS PASS THROUGH COST AND SHOULD BE EXCLUDED BOTH FROM THE OPERATING COST AS WELL AS OPERATING INCOME OF THE ASSESSEE FOR THE PURPOSE OF COMPUTING THE OPERATING MARGINS OF THE SOFTWARE DEVELOPMENT S EGMENT. ALTERNATIVELY, THE LEARNED AUTHORISED REPRESENTATIVE HAS SUBMITTED THAT THE COMPARABLES SHOULD ALSO BE HAVING SUB - CONTRACT CHARGES IF THIS IS NOT CONSIDERED AS PASS THROUGH COST. 6. ON THE OTHER HAND, THE LEARNED DEPARTMENTAL REPRESENTATIVE H AS SUBMITTED THAT WHILE COMPUTING THE MARGINS ON THE COST OF SOFTWARE DEVELOPMENT SERVICES SEGMENT, THE ASSESSEE ITSELF CONSIDERED THE COST OF 14 IT (T.P) A NO S . 17 & 39 /BANG/201 6 SUB - CONTRACTING CHARGES AS PART OF THE OPERATING COST. FURTHER THE SUB - CONTRACTING ACTIVITY IS A ROUTINE BUSINES S ACTIVITY CARRIED OUT IN SOFTWARE DEVELOPMENT SERVICES SEGMENT. THE TPO HAS APPLIED EMPLOYEE COST FILTER AND THE COST OF EMPLOYEE IN THE CASE OF ASSESSEE IS MORE THAN THE SAID FILTER APPLIED BY THE TPO. THEREFORE IF THE ASSESSEE IS GETTING SOME OF ITS WORK FROM THIRD PARTY IT WILL BE PART OF THE OPERATING COST OF THE ASSESSEE AND CANNOT BE EXCLUDED. HE HAS FURTHER SUBMITTED THAT FOR THE ASSESSMENT YEAR 2010 - 11, THE DRP DECIDED THIS ISSUE AGAINST THE ASSESSEE. THE LEARNED DEPARTMENTAL REPRESENTATIVE HAS RELIED UPON THE ORDERS OF THE AUTHORITIES BELOW. 7. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AS WELL AS THE RELEVANT MATERIAL ON RECORD. UNDISPUTEDLY, THE ASSESSEE IS CHARGING A MARK UP O N THE SOFTWARE DEVELOPMENT SERVICES PROVIDED TO THE AE BEING CAPTIVE SERVICE PROVIDER. THEREFORE THE ASSESSEE IS NOT ACTING AS AN AGENT OR DISTRIBUTOR OF THE AE BUT IS A PROVIDER OF SERVICES OF ITS OWN. IT IS NOT THE CASE OF RENDERING SERVICES OF AN AGENT WITHOUT ANY VALUE ADDITION BUT THE ASSESSEE IS PROVIDING S OFTWARE DEVELOPMENT SERVICES TO THE AE AND CHARGING MARGIN ON THE SAME. THEREFORE THE COST ON THE SOFTWARE 15 IT (T.P) A NO S . 17 & 39 /BANG/201 6 DEVELOPMENT ACTIVITY IS INCURRED BY THE ASSESSEE AND CHARGING THE AE ON THE SAID SERVICES WITH A MARK UP OF 10% ON COST. THE COST OF SUB - CONTRAC TING IN SOFTWARE DEVELOPMENT SERVICES IS ALSO CHARGED WITH 10% MARK UP TO THE AE. WHEN THE MARGIN ON THE COST OF SUB - CONTRACTING CHARGES IS PART OF THE OPERATING REVENUE OF THE ASSESSEE THEN ONLY THE COST OF SUB - CONTRACTING ACTIVITY CANNOT BE EXCLUDED AS PASS THROUGH. IT WOULD AMOUNT TO ARTIFICIALLY INFLATE THE MARGINS OF THE ASSESSEE ON THE OTHER REVENUE FROM THE SERVICES OTHER THAN SUB - CONTRACTING ACTIVITY. IN ANY CASE, PASS THROUGH COST CAN BE CONSIDERED ONLY WHEN THE ACTIVITY OF PROVIDING SERVICES TO THE AE DOES NOT INVOLVE VALUE ADDITION ON THE PART OF THE AE. THE DECISION OF THE DELHI BENCHES OF THE TRIBUNAL IN THE CASE OF DCIT VS. CHEIL COMMUNICATION S INDIA PVT. LTD. (S UPRA) WOULD NOT HELP THE CASE OF THE ASSESSEE AS IN THE SAID CASE THE ACTIVITY OF THE ASSESSEE WAS ONLY A DISTRIBUTOR WITHOUT ANY VALUE ADDITION. IT IS PERTINENT TO NOTE THAT OUTSOURCING COST IN SOFTWARE DEVELOPMENT SERVICES ACTIVITY IS PART AND PARCEL OF COST OF PROVIDING THE SERVICE TO THE AE AND CANNOT BE SEPARATED FROM THE OPER ATING COST AND OPERATING REVENUE OF THE SAID SEGMENT OF SERVICES. ACCORDINGLY, THE COST OF SOFTWARE DEVELOPMENT SERVICES CANNOT BE TREATED IN THIS FASHION AS CLAIMED BY THE ASSESSEE. 16 IT (T.P) A NO S . 17 & 39 /BANG/201 6 HENCE WE DO NOT FIND ANY MERIT OR SUBSTANCE IN THE CONTENTION RAISED B Y THE ASSESSEE ON THIS ISSUE. 8. AS REGARDS THE ALTERNATIVE PLEA RAISED BY THE LD. AR THAT THE COMPARABLES SHOULD ALSO HAVE SIMILAR ACTIVITY, WE FIND THAT THE TPO HAS APPLIED A FILTER OF COST OF EMPLOYEE WHICH SUBS UMES THE OUTSOURCING ACTIVITY OF BOTH ASSESSEE AS WELL AS THE COMPARABLES. ACCORDINGLY, THE ISSUE IS DECIDED AGAINST THE ASSESSEE. 9. THE NEXT GROUND IN THE ASSESSEE'S APPEAL IS REGARDING SEEKING EXCLUSION OF 4 COMPARABLE COMPANIES RETAINED BY THE DRP. WE WILL DEAL WITH THE COMPARABI LITY OF THESE 4 COMPANIES AS UNDER : (I) E - JUST SOLUTION LTD. 9.1.1 THE LEARNED AUTHORISED REPRESENTATIVE HAS SUBMITTED THAT THE ASSESSEE RAISED THE OBJECTION BEFORE THE DRP FOR EXCLUSION OF THIS COMPANY FROM THE SET OF COMPARABLES BUT T HE DRP HAS NOT ADJUDICATED THE OBJECTIONS OF THE ASSESSEE. HE HAS REFERRED THE OBJECTIONS RAISED BEFORE THE DRP AT PAGE NO. 1373 OF THE PAPER BOOK AS WELL AS REFERRED THE RELEVANT PART OF THE ANNUAL REPORT OF THIS COMPANY AT PAGE NOS.39, 17 IT (T.P) A NO S . 17 & 39 /BANG/201 6 42 & 50 OF THE AN NUAL REPORT. T HE LEARNED AUTHORISED REPRESENTATIVE HAS SUBMITTED THAT THIS COMPANY IS ENGAGED IN THE DIVERSIFIED ACTIVITY AND REPORTED THE INCOME UNDER ONLY ONE SEGMENT. THEREFORE IT CANNOT BE CONSIDERED AS A COMPARABLE OF THE ASSESSEE'S SOFTWARE DEVELOP MENT SERVICES SEGMENT. HE HAS RELIED UPON THE DECISION OF THE CO - ORDINATE BENCH OF THIS TRIBUNAL DT.22.4.2016 IN THE CASE OF ELECTRONIC S FOR IMAGING INDIA PVT. LTD. VS. DCIT IN IT(TP)A NOS.227 & 285/DEL/2013. 9.1.2 ON THE OTHER HAND, THE LEARNED D EPARTMENTAL REPRESENTATIVE HAS SUBMITTED THAT THE MAIN ACTIVITY OF THIS COMPANY IS SOFTWARE DEVELOPMENT SERVICES. THEREFORE THE INSIGNIFICANT VARIATION IN ACTIVITY IF ANY CANNOT BE A DETERMINATIVE FACTOR WHILE COMPUTING THE ALP UNDER TRANSACTIONAL NET MAR GIN METHOD (TNMM). HE HAS RELIED UPON THE DECISION OF THE DELHI BENCH OF ITAT IN THE CASE OF TOLUNA INDIA PVT. LTD. VS. ACIT (2014 ) 151 ITD 177. 9.1.3 WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AS WELL AS THE RELEVANT MATERIAL ON RECORD. WE FIND THAT THE ASSESSEE HAS RAISED OBJECTIONS AGAINST THIS COMPANY BEFORE THE DRP. HOWEVER THE DRP DID NOT ADJUDICATE THE OBJECTIONS RAISED BY THE ASSESSEE. THE DECISION OF THIS 18 IT (T.P) A NO S . 17 & 39 /BANG/201 6 TRIBUNAL IN THE CASE OF M/S. ELECTRONIC S FOR IMAGING INDIA PVT. LTD. VS. DCIT (SUPRA) R ELIED UPON BY THE LEARNED AUTHORISED REPRESENTATIVE IS BASED ON TWO ASPECTS. (I) THE INFORMATION RECEIVED UNDER SECTION 133(6) OF THE ACT WAS CONSIDERED BY THE TPO WITHOUT SHARING WITH THE ASSESSEE AND (II) NATURE OF THE ACTIVITY IS KPO. IT IS PERTINEN T TO NOTE THAT THE QUESTION OF BPO AND KPO IS RELEVANT ONLY IN ITES SEGMENT AND NOT FOR SOFTWARE DEVELOPMENT SERVICES SEGMENT. ON THE CONTRARY, THE DECISION IN THE CASE OF TOLUNA INDIA PVT. LTD. VS. ACIT (SUPRA), PERTAINS TO THE ASSESSMENT YEAR 2007 - 08, T HEREFORE THE FACTS OF THE DIFFERENT YEAR CANNOT BE APPLIED WITHOUT VERIFICATION. ACCORDINGLY, WE SET ASIDE THIS ISSUE OF COMPARABILITY OF E - JUST SOLUTION LTD. TO THE RECORD OF THE ASSESSING OFFICER / TPO FOR DECIDING THE SAME AFTER VERIFICATION OF THE REL EVANT FACTS AS WELL AS CONSIDERING THE OBJECTIONS OF THE ASSESSEE. (II) PERSISTENT SYSTEMS AND SOLUTIONS LTD . (III PERSISTENT SYSTEMS LTD . 9.2.1 THESE TWO COMPANIES WERE PART OF THE TP STUDY ANALYSIS HOWEVER THE ASSESSEE RAISED OBJECTIONS AGAINST TH ESE COMPANIES BEFORE THE TPO AS WELL AS DRP. 19 IT (T.P) A NO S . 17 & 39 /BANG/201 6 9.2.2 BEFORE US, THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE HAS SUBMITTED THAT THESE COMPANIES ARE FUNCTIONALLY NOT COMPARABLE TO THE ASSESSEE AS THESE ARE ENGAGED IN DIVERSIFIED ACTIVITY I.E. REN DERING OF SOFTWARE DEVELOPMENT SERVICES AND LICENSING, ROYALTY OF SOFTWARE PRODUCTS. THUS WITHOUT HAVING THE SEPARATE SEGMENTAL DETAILS AND DATA THESE DIVERSIFIED ACTIVITIES CANNOT BE COMPARED WITH THE ASSESSEE. HE HAS FURTHER POINTED OUT THAT THE COMP ANY PERSISTENT SYSTEMS LTD. ALSO ENGAGED IN DEVELOPING PRODUCTS AND THEREFORE THE ACTIVITIES ARE NOT COMPARABLE WITH THAT OF THE ASSESSEE. IN SUPPORT OF HIS CONTENTION, HE HAS RELIED UPON THE DECISION OF THIS TRIBUNAL DT.24.2.2016 IN THE CASE OF DCIT VS. ELECTRONICS FOR IMAGING INDIA PVT. LTD. (SUPRA) AND SUBMITTED THAT THIS COMPANY WAS FOUND TO BE NOT COMPARABLE WITH THE SOFTWARE DEVELOPMENT SERVICES PROVIDER. HE HAS FURTHER POINTED OUT THAT IN ASSESSEE'S OWN CASE FOR THE ASSESSMENT YEAR 2010 - 11, THE DRP VIDE ITS ORDER DT.24.11.2014 HAS EXCLUDED PERSISTENT SYSTEMS AND SOLUTIONS LTD. FROM THE LIST OF COMPARABLES BY HOLDING THAT THIS COMPANY IS NOT COMPARABLE TO THE ASSESSEE. 20 IT (T.P) A NO S . 17 & 39 /BANG/201 6 9.2.3 ON THE OTHER HAND, THE LD. DR HAS SUBMITTED THAT THE TPO AS WELL AS DRP HAS EXAMINED THE FUNCTIONAL COMPARABILITY OF THESE COMPANIES AND FOUND THAT THESE COMPANIES ARE COMPARABLE WITH THE ASSESSEE. THESE TWO COMPANIES HAVE SATISFIED ALL THE FILTERS APPLIED BY THE TPO AND DRP THEREFORE THE MINOR VARIATION IN THE ACTIVITY WOUL D NOT RENDER THESE COMPANIES NON - COMPARABLE WHEN A COMPARABLE PRICE IS CONSIDERED UNDER TNMM. 9.2.4 WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AS WELL AS THE RELEVANT MATERIAL ON RECORD. AT THE OUTSET WE NOTE THAT THE FUNCTIONAL COMPARABILITY OF THESE TWO COMPANIES HAVE EXAMINED BY THE CO - ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF DCIT VS. ELECTRONICS FOR IMAGING INDIA PVT. LTD. (SUPRA) IN PARA 60 AND 61 & PARAS 24 TO 26 AS UNDER : PERSISTENT SYSTEMS & SOLUTIONS LTD. 60. THE ASSESSEE HAS THE GRIEVANCE AGAINST REJECTION OF THIS COMPANY BY THE DRP. THE LD. AR HAS SUBMITTED THAT ASSESSEE DID NOT RAISE ANY OBJECTION AGAINST THIS COMPANY, HOWEVER, THE DRP HAS REJECTED THE SAID COMPANY. THEREFORE, THE SAID COMPANY SHOULD BE RETAINED IN THE LIST OF COMPARABLES. 61. HAVING CONSIDERED THE RIVAL SUBMISSIONS AS WELL AS RELEVANT MATERIAL ON RECORD, AT THE OUTSET, WE NOTE THAT THE DRP HAS EXAMINED THE FUNCTIONAL COMPARABILITY OF THIS COMPANY BY CONSIDERING THE RELEVANT DETAILS AS GIVEN IN THE ANNUAL R EPORT OF THIS COMPANY. THE DRP HAS GIVEN THE FINDING THAT THE ENTIRE REVENUE HAS BEEN EARNED BY THIS COMPANY FROM THE SALE OF SOFTWARE SERVICES AND PRODUCTS AND IN THE ABSENCE OF SEGMENTAL DETAILS, IT CANNOT BE CONSIDERED AS COMPARABLE WITH SOFTWARE SERVI CES SEGMENT. WE FIND THAT THIS COMPANY HAS SHOWN THE INCOME FROM SALE OF SOFTWARE SERVICES AND PRODUCTS TO THE TUNE OF RS.6.67 CRORES. WE FURTHER NOTE THAT AS PER 21 IT (T.P) A NO S . 17 & 39 /BANG/201 6 SCHEDULE 11, THE ENTIRE REVENUE HAS BEEN SHOWN UNDER ONE SEGMENT I.E., SALE OF SOFTWARE SE RVICES AND PRODUCTS. THEREFORE, NO SEPARATE SEGMENT HAS BEEN GIVEN IN RESPECT OF SOFTWARE SERVICES. ACCORDINGLY, THE COMPOSITE DATA OF REVENUE AS WELL AS MARGINS OF THIS COMPANY PERTAINING TO THE SALE OF SOFTWARE SERVICES AND PRODUCTS CANNOT BE CONSIDERE D AS COMPARABLE WITH THE SOFTWARE DEVELOPMENT SERVICES SEGMENT OF THE ASSESSEE. IN VIEW OF THE ABOVE FACTS AND CIRCUMSTANCES, WE DO NOT FIND ANY ERROR OR ILLEGALITY IN THE DIRECTIONS OF THE DRP IN EXCLUDING THIS COMPANY FROM THE LIST OF COMPARABLES. THI S GROUND OF CO IS DISMISSED. (4) PERSISTENT SYSTEMS LTD. 24. WE HAVE HEARD THE LD. DR AS WELL AS LD. AR AND CONSIDERED THE RELEVANT MATERIAL ON RECORD. THE ASSESSEE RAISED OBJECTIONS AGAINST SELECTION OF THIS COMPANY ON THE GROUND THAT THIS COMPANY I S FUNCTIONALLY NOT COMPARABLE AS ENGAGED IN THE PRODUCT DEVELOPMENT. THE SEGMENTAL INFORMATION FOR SERVICES AND PRODUCT IS NOT AVAILABLE. FURTHER, THE ASSESSEE HAS ALSO POINTED OUT THAT THERE WAS AN ACQUISITION AND RESTRUCTURING DURING THE YEAR UNDER CON SIDERATION. 25. THE DRP HAS NOTED THE FACT THAT THIS COMPANY HAS REPORTED THE ENTIRE RECEIPT FROM SALES AND SOFTWARE SERVICES AND PRODUCT. THEREFORE, NO SEGMENTAL INFORMATION WAS FOUND TO BE AVAILABLE FOR SALE OF SOFTWARE SERVICES AND PRODUCT. FURTH ER, THE DRP HAS NOTED THAT AS PER NOTE 1 OF SCHEDULE 15, THIS COMPANY IS PREDOMINANTLY ENGAGED IN OUTSOURCE SOFTWARE DEVELOPMENT SERVICE. APART FROM THE REVENUE FROM SOFTWARE SERVICES, IT ALSO EARNS INCOME FROM LICENCE OF PRODUCTS, ROYALTY ON SALE OF PROD UCTS, INCOME FROM MAINTENANCE CONTRACT, ETC. THESE FACTS RECORDED BY THE DRP HAS NOT BEEN DISPUTED BEFORE US. 26. THEREFORE, WHEN THIS COMPANY IS ENGAGED IN DIVERSIFIED ACTIVITIES AND EARNING REVENUE FROM VARIOUS ACTIVITIES INCLUDING LICENCING OF PRO DUCTS, ROYALTY ON SALE OF PRODUCTS AS WELL AS INCOME FROM MAINTENANCE CONTRACT, ETC., THE SAME CANNOT BE CONSIDERED AS FUNCTIONALLY COMPARABLE WITH THE ASSESSEE. FURTHER, THIS COMPANY ALSO EARNS INCOME FROM OUTSOURCE PRODUCT DEVELOPMENT. IN THE ABSENCE O F ANY SEGMENTAL DATA OF THIS COMPANY, WE DO NOT FIND ANY ERROR OR ILLEGALITY IN THE FINDINGS OF THE DRP THAT THIS COMPANY CANNOT BE COMPARED WITH THE ASSESSEE AND THE SAME IS DIRECTED TO BE EXCLUDED FROM THE SET OF COMPARABLES. WE FURTHER FIND FROM THE A NNUAL REPORT THAT THERE IS NO CHANGE IN THE ACTIVITY AND FUNCTIONS OF THESE COMPANIES DURING THE YEAR UNDER CONSIDERATION IN COMPARISON TO THE ASSESSMENT YEAR 2010 - 11. ACCORDINGLY, FOLLOWING THE DECISIONS OF THE CO - ORDINATE BENCHES OF THIS 22 IT (T.P) A NO S . 17 & 39 /BANG/201 6 TRIBUNAL (SUPRA ), WE DIRECT THE A.O./TPO TO EXCLUDE THESE TWO COMPANIES FROM THE SET OF COMPARABLES. (IV) SASKEN COMMUNICATION TECHNOLOGIES LTD . 9.3.1 THE LD. AR OF THE ASSESSEE HAS SUBMITTED THAT THIS COMPANY IS ENGAGED IN THE DEVELOPMENT OF SOFTWARE PRODUCTS AS I T HAS INVENTORIES, INTANGIBLE ASSETS AS WELL AS HIGH EXPENDITURE ON R&D. THEREFORE THIS COMPANY IS FUNCTIONALLY NOT COMPARABLE TO THE ASSESSEE. THE LD. AR HAS REFERRED TO THE ANNUAL REPORT OF THIS COMPANY AND SUBMITTED THAT IT DERIVES INCOME FROM SOFTWARE PRODUCTS SPECIFICALLY NEW PRODUCTS LAUNCHED CALLED VYAPARASEVA DURING F.Y. 2010 - 11. THUS THIS COMPANY IS ENGAGED IN PRODUCT DEVELOPMENT CANNOT BE COMPARED WITH THE ASSESSEE WHEN SEGMENTAL DETAILS ARE NOT AVAILABLE. HE HAS RELIED UPON THE DECISION DT. 24.2.2016 OF THE CO - ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF DCIT VS. ELECTRONICS FOR IMAGING INDIA PVT. LTD. (SUPRA) . 9.3.2 ON THE OTHER HAND, THE LEARNED DEPARTMENTAL REPRESENTATIVE HAS SUBMITTED THAT THE INVENTORY SHOWN AT PAGE 70 OF THE REP ORT IS VERY NEGLIGIBLE. THE PRODUCT LAUNCHED IS FOR FUTURE PERIOD AND NOT GENERATED 23 IT (T.P) A NO S . 17 & 39 /BANG/201 6 ANY REVENUE DURING THE YEAR UNDER CONSIDERATION. HE HAS RELIED UPON THE ORDERS OF AUTHORITIES BELOW. 9.3.3 WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AS WELL AS THE RE LEVANT MATERIAL ON RECORD. THE CO - ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF DCIT VS. ELECTRONICS FOR IMAGING INDIA PVT. LTD. (SUPRA) HAS CONSIDERED THE COMPARABILITY OF THIS COMPANY IN PARAS 27 TO 29 AS UNDER : (5) SASKEN COMMUNICATION TECHNOLOGI ES LTD. 27. THE ASSESSEE RAISED OBJECTION THAT THIS COMPANY HAS REVENUE FROM SOFTWARE SERVICES, SOFTWARE PRODUCTS AND OTHER SERVICES. THE DRP HAS COME TO THE CONCLUSION THAT THIS COMPANY EARNED REVENUE FROM 3 SEGMENTS. HOWEVER, NO SEGMENTAL INFORMATION IS AVAILABLE. ACCORDINGLY, THE DRP DIRECTED THE AO TO EXCLUDE THIS COMPANY FROM THE COMPARABLES. 28. WE HAVE HEARD THE LD. DR AS WELL AS LD. AR AND CONSIDERED THE RELEVANT MATERIAL ON RECORD. THE DRP HAS REPRODUCED THE BREAK - UP OF REVENUE IN THE IMPUGNE D ORDER AS UNDER: - AMOUNT IN RS. LAKHS _____________________________________________________________ _________________ YEAR ENDED YEAR ENDED MARCH 31, 2010 MARCH 31, 2019 _____________________________________________________________ __________ _______ SOFTWARE SERVICES 37,736.22 40,531.20 SOFTWARE PRODUCTS 2,041.00 6,146.43 OTHER SERVICES 372.77 1,297.05 TOTAL REVENUES 40,150.89 47,974.68 _____________________________________________________________ _______________ _ 29. THUS, THERE IS NO DISPUTE THAT THIS COMPANY EARNS REVENUE FROM 3 SEGMENTS. HOWEVER, THE SEGMENTAL OPERATING MARGINS ARE NOT AVAILABLE. THEREFORE, IN THE ABSENCE OF SEGMENTAL RELEVANT DATA AND PARTICULARLY OPERATING MARGINS, THIS COMPOSITE DATA C ANNOT BE CONSIDERED AS COMPARABLE WITH THE ASSESSEE FOR SOFTWARE DEVELOPMENT SERVICES SEGMENT. ACCORDINGLY, WE DO NOT FIND ANY ERROR OR ILLEGALITY IN THE FINDINGS OF THE DRP. 24 IT (T.P) A NO S . 17 & 39 /BANG/201 6 WE FURTHER NOTE THAT THE DRP HAS NOT ADJUDICATED THE OBJECTIONS OF THE ASSESS EE WHEREAS FOR THE ASSESSMENT YEAR 2010 - 11, THE DRP REJECTED THIS COMPANY AS COMPARABLE. ACCORDINGLY, WE SET ASIDE THIS ISSUE TO RECORD OF THE A.O./TPO TO VERIFY THE RELEVANT FACTS AND COMPARE WITH THE FACTS RECORDED BY THE TRIBUNAL IN THE CASE OF DCIT V S. ELECTRONICS FOR IMAGING INDIA PVT. LTD. (SUPRA) FOR THE ASSESSMENT YEAR 2010 - 11 AND THEN DECIDE THE ISSUE AFTER GIVING AN OPPORTUNITY OF HEARING TO THE ASSESSEE. 11. THE NEXT GROUND OF ASSESSEE'S APPEAL IS REGARDING SEEKING INCLUSION OF SOME OF T HE COMPARABLES IN THE SET OF COMPARABLE COMPANIES WHICH ARE AS UNDER : (I) AKSHAY SOFTWARE TECHNOLOGY LTD. (II) POWERSOFT GLOBAL LTD. (III) R SYSTEMS INTERNATIONAL LTD. (I) AKSHAY SOFTWARE TECHNOLOGY LTD. 12.1 THIS COMPANY WAS SELECTED BY THE AS SESSEE IN THE TP STUDY HOWEVER THE TPO REJECTED THIS COMPANY ON THE GROUND THAT ITS FUNCTIONS APPEAR TO BE MORE IN THE NATURE OF SUPPORT SERVICES OR ITES. THE DRP HAS CONFIRMED THE REJECTION ON A DIFFERENT GROUND BY APPLYING A FILTER THAT THE 25 IT (T.P) A NO S . 17 & 39 /BANG/201 6 EXPENDITURE IN FOREIGN CURRENCY WAS HIGHER WHEN COMPARED TO ITS TOTAL REVENUE. THUS DRP WAS OF THE VIEW THAT THIS COMPANY WAS PREDOMINANTLY ENGAGED IN THE ON SITE DEVELOPMENT OF SOFTWARE. THE LD. AR HAS SUBMITTED THAT SUCH FILTER WAS NEITHER APPLIED BY THE TPO N OR SOUGHT TO BE APPLIED BY THE ASSESSEE. THEREFORE THE DRP WAS NOT ASKED TO APPLY THIS FILTER. SECONDLY THE DRP DID NOT ARRIVE AT THE FINDING THAT THE SAID COMPANY WAS IN FACT ENGAGED IN ON SITE DEVELOPMENT OF SOFTWARE. THE FINDING OF THE DRP ARE BASE D MAINLY ON THE ASSUMPTION THAT BECAUSE OF ITS EXPENDITURE IN FOREIGN CURRENCY WAS HIGH IT MUST HAVE BEEN ENGAGED IN THE ON SITE DEVELOPMENT OF SOFTWARE. THE LD. AR HAS FURTHER CONTENDED THAT THIS FILTER OF ON SITE DEVELOPMENT SERVICES HAVE BEEN APP LIED BY THE DRP WITHOUT GIVING AN OPPORTUNITY OF FILING ITS OBJECTIONS TO THE ASSESSEE. THUS THE LD. AR HAS SUBMITTED THAT THE REJECTION OF THE SAID COMPANY BY APPLYING A FILTER NOT APPLIED BY THE TPO IS LIABLE TO BE SET ASIDE. HE HAS RELIED UPON THE DEC ISION OF THIS TRIBUNAL DT.29.6.2015 IN THE CASE OF M/S. ARO W ANA CONSULTING LTD. VS. ITO IN IT(TP)A NO.235/BANG/2015. 26 IT (T.P) A NO S . 17 & 39 /BANG/201 6 12.2 ON THE OTHER HAND, THE LEARNED DEPARTMENTAL REPRESENTATIVE HAS REFERRED TO PAGE NOS.15 AND 20 OF THE ANNUAL REPORT AND SUBMITT ED THAT THIS COMPANY HAS SHOWN PRODUCT AND STOCK IN THE ACCOUNTS THEREFORE IN THE ABSENCE OF SEGMENTAL REPORTING IT CANNOT BE CONSIDERED AS FUNCTIONALLY COMPARABLE WITH THE ASSESSEE. 12.3 WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AS WELL AS THE RELEVA NT MATERIAL ON RECORD. AS REGARDS THE DECISION OF THE CO - ORDINATE BENCH IN THE CASE OF ARO W ANA CONSULTING LTD. VS. ITO (SUPRA), THE TRIBUNAL HAS DEALT WITH ON L Y ONE OBJECTION OF EMPLOYEE COST IN PARAS 8 & 9 AS UNDER : 08. WHAT IS LEFT FOR CONSIDERATION IS ASSESSEE S GRIEVANCE REGARDING M/S. AKSHAY SOFTWARE TECHNOLOGIES LTD. DRP DIRECTED EXCLUSION OF THE SAID COMPANY FOR A REASON THAT ITS EMPLOYEE COST WAS MORE THAN 89% OF ITS TOTAL OPERATING EXPENDITURE. WE FIND THAT ASSESSEE HAD EMPLOYEE COST IN EXCE SS OF 90% OF ITS OPERATING EXPENDITURE. IN OUR OPINION, IT IS NORMAL TO HAVE A HIGH PERCENTAGE OF EMPLOYEE COST IN A SOFTWARE DEVELOPMENT COMPANY, ESPECIALLY SO, WHEN THE COMPANY IS INVOLVED IN DEVELOPMENT OF SOFTWARE FOR CLIENTS AT THE SITE OF THE CLIENT S. REASON GIVEN BY THE DRP, IN OUR OPINION, WAS NOT CORRECT. HIGHER EMPLOYEE COST IS A NORMAL FEATURE FOR A SOFTWARE DEVELOPMENT COMPANY FOR THE SIMPLE REASON THAT IT IS A SKILL ORIENTED BUSINESS. THE SKILL - SET REQUIRED FOR THE EMPLOYEES IN THE CASE OF T HE ASSESSEE, REQUIRED KNOWLEDGE OF ARABIC ALSO, MAKING IT ALL THE MORE SCARCE. IN ANY CASE, FOR A. Y. 2009 - 10, M/S. AKSHAY SOFTWARE TECHNOLOGIES LTD WAS CONSIDERED AS A PROPER COMPARABLE AND NOT EXCLUDED. IN HIS ORDER DT.07.01.2015 FOR A. Y. 2009 - 10, AFT ER APPLYING THE ONSITE REVENUE FILTER OF 50%, TPO HIMSELF HAD CONSIDERED M/S. AKSHAY SOFTWARE TECHNOLOGIES LTD, AS A PROPER COMPARABLE. AS TO THE ARGUMENT OF THE LD. DR THAT RELATED PARTY TRANSACTION, VOLUME OF M/S. AKSHAY SOFTWARE TECHNOLOGIES WAS NOT P ROVIDED BY THE ASSESSEE, LEADING 27 IT (T.P) A NO S . 17 & 39 /BANG/201 6 TO ITS REJECTION, WE FIND THAT ASSESSEE HAD AT PARA 5.172 AND 5.173 OF ITS OBJECTIONS BEFORE DRP, SUBMITTED THAT RPT OF THE SAID COMPANY WAS 4.33% ONLY, COMPILING THE FIGURES FROM PREVIOUS YEARS DATA AVAILABLE IN ANNUAL REP ORT OF FINANCIAL YEAR 2010 - 11 OF THE SAID COMPANY. THIS WORKING STANDS UNREBUTTED. WE ARE, THEREFORE OF THE OPINION THAT THE ASSESSEE HAS TO SUCCEED IN ITS CLAIM THAT M/S. AKSHAY SOFTWARE TECHNOLOGIES LTD, IS A PROPER COMPARABLE. WE DIRECT THE TPO TO IN CLUDE THE SAID COMPANY AS A COMPARABLE ALONG WITH THE TWO COMPARABLES, NAMELY, M/S. R. S. SOFTWARE (INDIA) LTD AND M/S. THINKSOFT GLOBAL SERVICES LTD, AND REWORK THE MEAN PLI. ALP ADJUSTMENT, IF ANY, REQUIRED SHALL BE BASED ON SUCH MEAN PLI, AFTER CONSID ERING THE WORKING CAPITAL ADJUSTED. ORDERED ACCORDINGLY. GROUND 12 OF THE ASSESSEE IS ALLOWED. 09. VIDE ITS GROUND 13, WE FIND THAT ASSESSEE IS AGGRIEVED THAT DRP HAD DIRECTED TREATMENT OF FOREIGN EXCHANGE LOSS/GAIN AS NON - OPERATING IN NATURE. WE FIND T HAT DRP HAD AT PARA 2.9 OF ITS DIRECTIONS DATED 26.11.2014 DIRECTED INCLUSION OF FOREIGN EXCHANGE GAIN / LOSS AS PART OF THE OPERATING EXPENDITURE AND NOT THE OTHER WAY. THEREFORE, THE SAID GROUND IS ILL CONCEIVED AND DISMISSED. THEREFORE OTHER THAN THE EMPLOYEE COST THE ISSUE OF FUNCTIONAL SIMILARITY WAS NOT BEFORE THE TRIBU NAL IN THE SAID CASE. HOWEVER, WE NOTE THAT AS PER THE FINANCIAL RESULTS REPORTED IN THE ANNUAL REPORT AT PAGE 2 AND 15, THE INCOME SHOWN IN THE PROFIT AND LOSS ACCOUNT IS FROM SOF TWARE SERVICES AND PRODUCTS. FURTHER AS PER THE SCHEDULE 10 AT PAGE 20 OF THE ANNUAL REPORT THIS COMPANY HAS REPORTED INCOME FROM SALE OF PRODUCT. SIMILARLY AS PER SCHEDULE 12, THIS COMPANY HAS SHOWN GOODS PURCHASED FOR RESALE AS WELL AS OPENING STOCK. THEREFORE IN THE ABSENCE OF SEGMENTAL RESULTS AND OPERATION MARGIN, THIS COMPANY CANNOT BE 28 IT (T.P) A NO S . 17 & 39 /BANG/201 6 CONSIDERED AS FUNCTIONALLY COMPARABLE. ACCORDINGLY, WE REJECT THIS GROUND OF ASSESSEE. (II) LGS GLOBAL LTD. 13.1 THE TPO REJECTED THIS COMPANY ON THE GROU ND THAT THE ANNUAL REPORT DID NOT GIVE BREAK UP OF EMPLOYEE COST AND THUS HE COULD NOT COMPUTE ITS EMPLOYEE COST FACTOR. THE DRP UPHELD THE REJECTION ON THE BASIS THAT THE SE PARATE DETAILS OF EMPLOYEE COST WERE NOT AVAILABLE. 13.2 BEFORE US, THE LD .AR OF THE ASSESSEE HAS SUBMITTED THAT THIS COMPANY HAS SHOWN PURCHASE AND EMPLOYEE COST UNDER A COMPOSITE HEAD WHICH IS 83.91% OF THE SALE. THEREFORE THIS COMPANY SATISFIED THE EMPLOYEE COST OF 25% OF TOTAL SALES. THE LEARNED AUTHORISED REPRESENTATIVE HAS POINTED OUT THAT IN CASE OF SERVICE PROVIDER THE MAJOR COMPONENT IS EMPLOYEE COST AND THERE IS HARDLY ANY PURCHASES THEREFORE EVEN IF THE EMPLOYEE COST IS NOT SEPARATELY REPORTED, THE COMPOSITE OF PURCHASE AND EMPLOYEE COST CONSTITUTE 83.91% OF SAL ES. THUS HE HAS SUBMITTED THAT THIS COMPANY SHOULD BE INCLUDED IN THE LIST OF COMPARABLES. 29 IT (T.P) A NO S . 17 & 39 /BANG/201 6 13.3 ON THE OTHER HAND, THE LEARNED DEPARTMENTAL REPRESENTATIVE HAS RELIED UPON THE ORDERS OF THE AUTHORITIES BELOW AND SUBMITTED THAT THERE IS NO DISPUTE THA T THIS COMPANY HAS NOT REPORTED EMPLOYEE COST SEPARATELY AND THEREFORE IT IS NOT POSSIBLE TO ASCERTAIN THE EMPLOYEE COST AND TO APPLY EMPLOYEE COST FILTER. FURTHER THIS COMPANY HAS ALSO SHOWN ITS GOODWILL IN ITS BALANCE SHEET AND THEREFORE THE INTANGIBLE ASSETS RE NDERS THIS COMPANY NON - COMPARABLE TO THE ASSESSEE. 13.4 WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AS WELL AS THE RELEVANT MATERIAL ON RECORD. THIS COMPANY HAS SHOWN THE PURCHASES AND PERSONNEL COST AT PAGE 39 OF THE ANNUAL REPORT AS A COM BINED EXPENDITURE AS UNDER : PURCHASES & PERSONNEL COST : RS.250,61,55,607. THEREFORE THE COST OF EMPLOYEE IS NOT SEPARATELY REPORTED BY THIS COMPANY. FURTHER IT IS NOT CLEAR WH ETHER THE GOODWILL IS SELF - GENERATED OR ACQUIRED INTANGIBLE ASSET. ACCORDIN GLY, THIS ISSUE IS SET ASIDE TO THE RECORD OF THE ASSESSING OFFICER/TPO TO VERIFY THE RELEVANT FACTS TO ASCERTAIN THE EMPLOYEE COST AND THEN DECIDE THE FUNCTIONAL COMPARABILITY. NEEDLESS TO SAY THE INFORMATION UNDER SECTION 133(6) 30 IT (T.P) A NO S . 17 & 39 /BANG/201 6 MAY BE OBTAINED FOR THE PURPOSE OF ASCERTAINING THE ANNUAL EMPLOYEE COST OF THIS COMPANY. 14. THE ASSESSEE IS ALSO SEEKING INCLUSION OF COUPLE OF COMPANIES WHICH WERE SELECTED BY THE TPO BUT REJECTED BY THE DRP AS UNDER : (I) EVOKE TECHNOLOGY LTD. (II) R S SOFTWARE (I NDIA) LTD. 14.1 WE HAVE HEARD THE LEARNED AUTHORISED REPRESENTATIVE AS WELL AS LEARNED DEPARTMENTAL REPRESENTATIVE AND CONSIDERED THE RELEVANT MATERIAL ON RECORD. THESE TWO COMPANIES WERE SELECTED BY THE TPO IN THE SET OF COMPARABLES HOWEVER THE DRP HAS REJECTED THESE COMPANIES ON THE GROUND THAT THE COMPANY EVOKE TECHNOLOGY LTD. IS HAVING LOW MARGIN AND THE COMPANY R S SOFTWARE (INDIA) LTD. IS ENGAGED IN ON SITE ACTIVITY. BOTH THE ASSESSEE AS WELL AS REVENUE ARE SEEKING INCLUSION OF THESE COMPANI ES IN THE LIST OF COMPARABLES. ACCORDINGLY, WHEN THE ASSESSEE AS WELL AS REVENUE ARE SEEKING INCLUSION OF THESE TWO COMPANIES, WE DIRECT THE TPO TO INCLUDE THESE TWO COMPANIES IN THE LIST OF COMPARABLES. 31 IT (T.P) A NO S . 17 & 39 /BANG/201 6 15. THE REVENUE IS ALSO SEEKING INCLUSION OF SOME OF THE COMPANIES IN THE LIST OF COMPARABLES WHICH WERE RE FLECTED BY THE DRP. WE WILL DEAL WITH THE ISSUES ONE BY ONE AS UNDER : (I) ACROPET AL TECHNOLOGIES LTD. (SEG.) 16.1 THE DRP REJECTED THIS COMPANY ON THE GROUND OF EMPLOYEE COST FILTER. T HE LD. DR HAS SUBMITTED THAT THE TPO HAS APPLIED THE EMPLOYEE COST FILTER AND THIS COMPANY SATISFIES THE SAME. 16.2 ON THE OTHER HAND, THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE HAS SUBMITTED THAT THE TOTAL EMPLOYEE COST OF THIS COMPANY I S 11.51 OF THE TOTAL OPERATING REVENUE THEREFORE IT FAILS THE EMPLOYEE COST FILTER OF 25%. FURTHER HE HAS POINTED OUT THAT THIS COMPANY ALSO FAILS THE SOFTWARE DEVELOPMENT SERVICES REVENUE FILTER OF 75%. HE HAS REFERRED THE DETAILS AT PAGE NOS.39 AND 53 OF THE ANNUAL REPORT AND SUBMITTED THAT THE INCOME FROM SOFTWARE DEVELOPMENT IS RS.81.40 CRORES OUT OF TOTAL REVENUE OF RS.141 CRORES. THEREFORE THIS COMPANY FAILS THIS FILTER. 16.3 IN A REJOINDER THE LD. DR HAS SUBMITTED THAT THE TPO HAS CONSIDERE D ONLY INFORMATION TECHNOLOGY TRANSACTIONS SEGMENT AND 32 IT (T.P) A NO S . 17 & 39 /BANG/201 6 THEREFORE IT SATISFIES SOFTWARE DEVELOPMENT SERVICES INCOME FILTER AS WELL AS EMPLOYEE COST FILTER. 16.4 WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AS WELL AS THE RELEVANT MATERIAL ON RECORD. AS P ER THE SEGMENTAL REPORTING AT PAGE 53 OF THE ANNUAL REPORT THE INCOME FROM INFORMATION TECHNOLOGY SERVICES IS RS.81.40 CRORES OUT OF THE TOTAL INCOME OF RS.141 CRORES. THE REFORE THE REVENUE FRO M INFORMATION TECHNOLOGY TRANSACTIONS SERVICES IS LESS THAN 75 % AND CONSEQUENTLY THIS COMPANY DOES NOT SATISFY THE FILTER OF INFORMATION TECHN OLOGY REVENUE APPLIED BY THE TPO ITSELF. ACCORDINGLY, WE DO NOT FIND ANY REASON TO INTERFERE WITH THE ORDER OF THE DRP FOR THIS ISSUE. (II) ICRA TECHNO ANALYTIC LTD. 17.1 WE HAVE HEARD THE LEARNED D.R. AS WELL AS LEARNED A.R. AND CONSIDERED THE RELEVANT MATERIAL ON RECORD. THE DRP HAS REJECTED THIS COMPANY BY RECORDING THE FACT AS UNDER : WE EXAMINED THE ANNUAL REPORT FROM WHICH IT IS EVIDENT THAT THE ENTIRE REVENU E HAS BEEN SHOWN UNDER SERVICE SEGMENT WHICH INDICATES THAT THE REVENUE FROM SOFTWARE DEVELOPMENT, CONSULTANCY, LICENSING AND SUB - LICENSING, ANNUAL MAINTENANCE CHARGES FOR SOFTWARE SUPPORT. WEB 33 IT (T.P) A NO S . 17 & 39 /BANG/201 6 DEVELOPMENT AND HOSTING HAS BEEN REPORTED IN ONE SEGMENT, THUS IN ABSENCE OF SEGMENTAL INFORMATION, WE CONCUR WITH THE VIEW OF THE DRP IN PRECEDING YEAR AND ACCORDINGLY DIRECT THE ASSESSING OFFICER TO EXCLUDE THIS COMPANY FROM COMPARABLES. 17.2 WE FURTHER NOTE THAT THE TRIBUNAL IN THE CASE OF DCIT VS. ELECTRON ICS FOR IMAGING INDIA PVT. LTD. (SUPRA) HAS CONSIDERED THE COMPARABILITY OF THIS COMPANY IN PARAS 14 TO 16 AS UNDER : (1) ICRA TECHNO ANALYTICS LTD. (SEG) 14. AT THE OUTSET, WE NOTE THAT APART FROM HAVING THE RELATED PARTY REVENUE AT 20.94% OF THE TOTAL REVENUE, THIS COMPANY WAS ALSO FOUND TO BE FUNCTIONALLY NOT COMPARABLE WITH SOFTWARE DEVELOPMENT SERVICES SEGMENT OF THE ASSESSEE. THE DRP HAS GIVEN ITS FINDING AT PAGES 13 TO 14 AS UNDER: - HAVING HEARD THE CONTENTION, ON PERUSAL OF THE ANNUAL R EPORT, IT IS NOTICED BY US THAT THE SEGMENTAL INFORMATION IS AVAILABLE FOR TWO SEGMENTS I.E., SERVICES AND SALES. HOWEVER, IT IS EVIDENT FROM THE ANNUAL REPORT THAT THE SERVICE SEGMENT COMPRISES OF SOFTWARE DEVELOPMENT, SOFTWARE CONSULTANCY, ENGINEERING S ERVICES, WEB DEVELOPMENT, WEB HOSTING, ETC. FOR WHICH NO SEGMENTAL INFORMATION IS AVAILABLE AND THEREFORE, THE OBJECTION OF THE ASSESSEE IS FOUND ACCEPTABLE. ACCORDINGLY, ASSESSING OFFICER IS DIRECTED TO EXCLUDE THE ABOVE COMPANY FROM THE COMPARABLES. 15 . WE FIND THAT THE FACTS RECORDED BY THE DRP IN RESPECT OF BUSINESS ACTIVITY OF THIS COMPANY ARE NOT IN DISPUTE. THEREFORE, WHEN THIS COMPANY IS ENGAGED IN DIVERSIFIED ACTIVITIES OF SOFTWARE DEVELOPMENT AND CONSULTANCY, ENGINEERING SERVICES, WEB DEVEL OPMENT & HOSTING AND SUBSTANTIALLY DIVERSIFIED ITSELF INTO DOMAIN OF BUSINESS ANALYSIS AND BUSINESS PROCESS OUTSOURCING, THEN THE SAME CANNOT BE REGARDED AS FUNCTIONALLY COMPARABLE WITH THAT OF THE ASSESSEE WHO IS RENDERING SOFTWARE DEVELOPMENT SERVICES TO ITS AE. 16. IN VIEW OF THE ABOVE FACTS, WE DO NOT FIND ANY ERROR OR ILLEGALITY IN THE FINDINGS OF THE DRP THAT THIS COMPANY IS FUNCTIONALLY NOT COMPARABLE WITH THAT OF A PURE SOFTWARE DEVELOPMENT SERVICE PROVIDER. NOTHING HAS BEEN BROUGHT BEFORE US TO SHOW THAT THE FACTS RECORDED BY THE DRP AS WELL AS BY THE CO - ORDINATE BENCH OF THIS TRIBUNAL ARE NOT 34 IT (T.P) A NO S . 17 & 39 /BANG/201 6 CORRECT. ACCORDINGLY, IN VIEW OF THE DECISION OF THE CO - ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF DCIT VS. ELECTRONICS FOR IMAGING INDIA PVT. LTD. (S UPRA), WE DO NOT FIND ANY ERROR OR ILLEGALITY IN THE ORDER OF THE DRP ON THIS ISSUE. (III) INFOSYS LTD. 18. WE HAVE HEARD THE LEARNED D.R. AS WELL AS LEARNED A.R. AND CONSIDERED THE RELEVANT MATERIAL ON RECORD. AT THE OUTSET, WE NOTE THAT THE CO - ORDI NATE BENCH OF THIS TRIBUNAL IN THE CASE OF DCIT VS. ELECTRONICS FOR IMAGING INDIA PVT. LTD. (SUPRA) HAS CONSIDERED THIS ISSUE IN PARA 17 AS UNDER : (2) INFOSYS LTD. 17. THE ASSESSEE OBJECTED AGAINST THE SELECTION OF THIS COMPANY ON THE GROUND TH AT THIS COMPANY HAS A BIG NAME AND BRAND VALUE AND THEREFORE IT HAS A BARGAINING POWER. IT ALSO CONTENDED THAT THE TURNOVER OF THIS COMPANY IS RS.21,140 CRORES, WHICH IS 442 TIMES HIGHER THAN THE ASSESSEE. FOLLOWING THE DECISION OF THIS TRIBUNAL IN THE CASE OF DCIT VS. ELECTRONICS FOR IMAGING INDIA PVT. LTD. (SUPRA) , WE DO NOT FIND ANY REASON TO INTERFERE WITH THE DIRECTIONS OF THE DRP ON THIS ISSUE. 35 IT (T.P) A NO S . 17 & 39 /BANG/201 6 (IV) L&T INFOTECH LTD. 19. WE HAVE HEARD THE LEARNED D.R. AS WELL AS LEARNED D .R. AND CONSIDERED THE RELEVANT MATERIAL ON RECORD. THE DRP REJECTED THIS COMPANY BY RECORDING THE FACTS AT PAGE 15 AS UNDER : WE FURTHER FIND THAT THE COMPARABILITY OF THIS COMPANY HAS BEEN CONSIDERED BY THE CO - ORDINATE BENCH OF THIS TRIBUNAL IN T HE CASE OF DCIT V S. ELECTRONICS FOR IMAGING INDIA PVT. LTD. (SUPRA) IN PARAS 62 TO 65 AS UNDER : 36 IT (T.P) A NO S . 17 & 39 /BANG/201 6 62. THE ASSESSEE HAS RAISED OBJECTION AGAINST THIS COMPANY ON THE BASIS OF HIGH TURNOVER IN COMPARISON TO THE ASSESSEE. IT WAS ALSO CONTENDED THAT RELAT ED PARTY TRANSACTION (RPT) OF THIS COMPANY IS 18.66%. THE DRP REJECTED OBJECTIONS OF THE ASSESSEE ON THE GROUND THAT TPO HAS APPLIED 25% FILTER OF RPT AND ANNUAL REPORT OF THE COMPANY DOES NOT SHOW ANY OTHER SERVICES RENDERED OTHER THAN SOFTWARE DEVELOPM ENT SERVICES PROVIDED BY THIS COMPANY. THUS THE DRP HELD THAT SOFTWARE DEVELOPMENT SEGMENT IS COMPARABLE TO THE ASSESSEE AND THEREFORE THIS COMPANY HAS TO BE RETAINED AS COMPARABLE. 63. WE HAVE HEARD THE LD. AR AS WELL AS LD. DR AND CONSIDERED THE RELE VANT MATERIAL ON RECORD. THE LD. AR HAS SUBMITTED THAT THIS COMPANY IS HAVING 18.66% RPT AND FURTHER THIS COMPANY EARNS REVENUE FROM BOTH SERVICES AND PRODUCTS. THUS, THE LD. AR SUBMITTED THIS COMPANY IS ALSO IN THE SOFTWARE PRODUCTS AND THEREFORE CANNO T BE CONSIDERED AS GOOD COMPARABLE. HE HAS FURTHER CONTENDED THAT IN A SERIES OF DECISIONS, THE TRIBUNAL HAS APPLIED 15% RPT FILTER AND SINCE THIS COMPANY IS HAVING MORE THAN 15% RPT, THE SAME CANNOT BE CONSIDERED AS A GOOD COMPARABLE. 64. ON THE OTHER HAND, THE LD. DR HAS SUBMITTED THAT TPO HAS APPLIED RPT FILTER OF 25% AND THEREFORE ONLY FOR THIS COMPANY, THE RPT CANNOT BE REDUCED TO 15%. FURTHER, THE DRP HAS EXAMINED ANNUAL REPORT OF THIS COMPANY AND FOUND THAT THIS COMPANY EARNS REVENUE FROM SOFTWA RE DEVELOPMENT SERVICES AND ACCORDINGLY IS COMPARABLE. 65. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND RELEVANT MATERIAL ON RECORD. WE FIND THAT IN THE NORMAL CIRCUMSTANCES THE TOLERANCE RANGE OF RPT SHOULD NOT BE MORE THAN 15%. IN THE CASE OF THE ASS ESSEE, THE AVAILABILITY OF THE COMPARABLE IS NOT AN ISSUE AND THEREFORE WE DO AGREE WITH THE VIEW TAKEN BY THE COORDINATE BENCHES OF THE TRIBUNAL THAT THE THRESHOLD LIMIT OF TOLERANCE RANGE SHOULD NOT EXCEED 15% AS FAR AS RPT REVENUE IS CONCERNED. THEREFO RE, WE DIRECT THE AO/TPO TO APPLY 15% RPT FILTER IN RESPECT OF ALL THE COMPARABLES. IN VIEW OF THE FACTS RECORDED BY THE DRP AS WELL AS THE DECISION OF THE CO - ORDINATE BENCH, WE DO NOT FIND ANY REASON TO INTERFERE WITH THE DIRECTIONS OF THE DRP. 37 IT (T.P) A NO S . 17 & 39 /BANG/201 6 (V) TATA ELXSI LTD. (SEG.) : 20. WE HAVE HEARD THE LEARNED DEPARTMENTAL REPRESENTATIVE AS WELL AS LEARNED AUTHORISED REPRESENTATIVE AND CONSIDERED THE RELEVANT MATERIAL ON RECORD. THE DRP HAS REJECTED THIS COMPANY BY DISCUSSING THE FACT AT PAGE 16 AS UNDER : WE FURTHER NOTE THAT THE DRP HAS ALSO RECORDED THE FACT THAT EXPORT REVENUE OF THIS COMPANY IS 73.30% WHICH IS LESS THAN 75% APPLIED BY THE TPO. THEREFORE THIS COMPANY DOES NOT QUALIFY THE EXPORT EARNING FILTER APPLIED B Y THE TPO. FURTHER THE CO - ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF DCIT VS. ELECTRONICS FOR IMAGING INDIA PVT. LTD. (SUPRA) HAS CONSIDERED THIS ISSUE IN PARAS 30 TO 33 AS UNDER : 30. THE ASSESSEE HAS RAISED OBJECTIONS AGAINST THIS COMPANY ON THE GROUND THAT THE COMPA NY IS FUNCTIONALLY DIFFERENT FROM THE ASSESSEE. THOUGH THE TPO HAS CONSIDERED THE SOFTWARE DEVELOPMENT AND SERVICES SEGMENT OF THIS COMPANY AS COMPARABLE TO THAT OF ASSESSEE, HOWEVER, THE ASSESSEE CONTENDED THAT EVEN WITHIN THE SOFTWARE SEGMENT, THIS COMP ANY IS ENGAGED IN DIVERSE ACTIVITIES. THE ASSESSEE PLACED RELIANCE ON THE INFORMATION IN THE 38 IT (T.P) A NO S . 17 & 39 /BANG/201 6 ANNUAL REPORT UNDER THE DIRECTORS REPORT AND SUBMITTED BEFORE THE DRP THAT EVEN UNDER THE SOFTWARE DEVELOPMENT SERVICES SEGMENT, THIS COMPANY IS ENGAGED IN VARIOU S DIVERSIFIED ACTIVITIES INCLUDING PRODUCT DESIGN SERVICE, INNOVATION DESIGN, ENGINEERING SERVICE, VISUAL COMPUTING LABS, ETC. THE ASSESSEE ALSO PLACED RELIANCE ON THE DECISION OF MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF TELCORDIA TECHNOLOGIES PVT. LTD . V. ACIT, 137 ITD 1 (MUM) . 31. THE DRP FOUND THAT THIS COMPANY IS NOT FUNCTIONALLY COMPARABLE WITH ASSESSEE COMPANY AS IT IS ENGAGED IN DIVERSIFIED ACTIVITIES EVEN IN THE SOFTWARE DEVELOPMENT SERVICES. THE DRP HAS FOLLOWED THE DECISION OF THE MUMB AI BENCH OF THE TRIBUNAL IN THE CASE OF TELCORDIA TECHNOLOGIES PVT. LTD. (SUPRA) . 32. WE HAVE HEARD THE LD. DR AS WELL AS LD. AR AND CONSIDERED THE RELEVANT MATERIAL ON RECORD. WE FIND THAT THIS COMPANY EVEN IN THE SOFTWARE DEVELOPMENT SEGMENT IS ENG AGED IN DIVERSIFIED ACTIVITIES OF PRODUCT DESIGN SERVICES, INNOVATION DESIGN, ENGINEERING SERVICES, VISUAL COMPUTING LABS, ETC. WE FURTHER NOTE THAT IN THE CASE OF TELCORDIA TECHNOLOGIES PVT. LTD. (SUPRA) , THE MUMBAI BENCH OF THE TRIBUNAL VIDE ITS ORDER D ATED 11.5.2012 IN PARA 9.7 HAS HELD AS UNDER: - 7.7 FROM THE FACTS AND MATERIAL ON RECORD AND SUBMISSIONS MADE BY THE LEARNED AR, IT IS SEEN THAT THE TATA ELXSI IS ENGAGED IN DEVELOPMENT OF NICHE PRODUCT AND DEVELOPMENT SERVICES WHICH IS ENTIRELY DIFFERE NT FROM THE ASSESSEE COMPANY. WE AGREE WITH THE CONTENTION OF THE LEARNED AR THAT THE NATURE OF PRODUCT DEVELOPED AND SERVICES PROVIDED BY THIS COMPANY ARE DIFFERENT FROM THE ASSESSEE AS HAVE BEEN NARRATED IN PARA 6.6 ABOVE. EVEN THE SEGMENTAL DETAILS FO R REVENUE SALES HAVE NOT BEEN PROVIDED BY THE TPO SO AS TO CONSIDER IT AS A COMPARABLE PARTY FOR COMPARING THE PROFIT RATIO FROM PRODUCT AND SERVICES. THUS, ON THESE FACTS, WE ARE UNABLE TO TREAT THIS COMPANY AS FIT FOR COMPARABILITY ANALYSIS FOR DETERMIN ING THE ARM S LENGTH PRICE FOR THE ASSESSEE, HENCE, SHOULD BE EXCLUDED FROM THE LIST OF COMPARABLE PARTIES. 33. NO CONTRARY VIEW HAS BEEN BROUGHT TO OUR NOTICE REGARDING COMPARABILITY OF THIS COMPANY WITH THAT OF A PURE SOFTWARE DEVELOPMENT SERVICE PROV IDER. ACCORDINGLY, IN VIEW OF THE DECISION OF THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF TELCORDIA TECHNOLOGIES PVT. LTD. (SUPRA) , WE DO NOT FIND ANY REASON TO INTERFERE WITH THE FINDING OF THE DRP. 39 IT (T.P) A NO S . 17 & 39 /BANG/201 6 IN VIEW OF THE FACTS RECORDED BY THE DRP AS WELL AS THE DECISION OF THE TRIBUNAL IN THE CASE OF DCIT VS. ELECTRONICS FOR IMAGING INDIA PVT. LTD. (SUPRA) , WE DO NOT FIND ANY ERROR OR ILLEGALITY IN THE DIRECTIONS OF THE DRP TO EXCLUDE THIS COMPANY FORM THE SET OF COMPARABLES. 21. THE REVENUE IS ALSO SEE KING INCLUSION OF THE FOLLOWING COMPANIES WHICH WERE REJECTED BY THE DRP. (I) EVOKE TECHNOLOGY PVT. LTD. (II) MINDTREE LIMITED (SEG.) (III) R S SOFTWARE INDIA PVT. LTD. 21.1 AT THE TIME OF HEARING, THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESS EE HAS SUBMITTED THAT THE ASSESSEE HAS NO OBJECTIONS IF THESE THREE COMPANIES ARE RESTORED TO THE SET OF COMPARABLES AS THE ASSESSEE DID NOT RAISE ANY OBJECTION BEFORE THE DRP BUT THE DRP REJECTED THIS COMPANY SUO MOTO. 21.2 IN VIEW OF THE FACT TH AT BOTH THE REVENUE AS WELL AS THE ASSESSEE ARE SEEKING INCLUSION OF THESE COMPANIES IN THE SET OF COMPARABLES, WE SET ASIDE THE DIRECTIONS OF THE DRP QUA THESE 40 IT (T.P) A NO S . 17 & 39 /BANG/201 6 COMPARABLES AND RESTORE THESE THREE COMPANIES TO THE SET OF COMPARABLES. 21.3 AS WE HAVE DIRECTED TO EXCLUDE CERTAIN COMPANIES AS WELL AS INCLUDE SOME OF THE COMPANIES IN THE SET OF COMPARABLES THEREFORE THE TPO/A.O IS REQUIRED TO RECOMPUTE THE ALP ON THE BASIS OF THE FINAL SET OF COMPARABLES AFTER GIVING EFFECT TO THIS ORDER. NEEDLESS TO SAY THE BENEFIT OF TOLERANCE RANGE OF +/ - 5% AS PER THE PROVISO TO SECTION 92C(2) BE ALSO CONSIDERED. 22. THE NEXT GROUND OF THE ASSESSEE'S APPEAL IS REGARDING EXCLUSION OF SUB - CONTRACTING CHARGES FROM EXPORT TURNOVER WHILE COMPUTING DEDUCTION UNDER SEC TION 10A OF THE ACT. 22.1 THE ASSESSING OFFICER HAS REDUCED SUB - CONTRACTING CHARGES INCURRED BY THE ASSESSEE FROM EXPORT TURNOVER WHILE COMPUTING THE DEDUCTION UNDER SECTION 10A OF THE ACT. THE DRP THOUGH HAS ALLOWED THE CLAIM OF THE ASSESSEE SO FAR AS THE TRAVELLING EXPENSES INCURRED IN THE FOREIGN CURRENCY BY DIRECTING THE ASSESSING OFFICER TO EXCLUDE THE SAME FROM TOTAL TURNOVER AS WELL AS BY FOLLOWING THE DECISION OF THE HON'BLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. TATA ELXSI LTD. 349 ITR 98 41 IT (T.P) A NO S . 17 & 39 /BANG/201 6 HOWEVER , NOT ALLOWED THE CLAIM IN RESPECT OF THE SUB - CONTRACTING CHARGES WHICH WERE REDUCED FROM THE EXPORT TURNOVER. 22.2 THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE HAS SUBMITTED THAT THE SUB - CONTRACTING CHARGES OUGHT NOT TO HA VE BEEN REDUCED FROM THE EXPORT TURNOVER AS THE ASSESSEE IS ENGAGED IN THE EXPORT OF COMPUTER SOFTWARE OUTSIDE INDIA AND NOT IN THE PROVISIONS OF TECHNICAL SERVICES OUTSIDE INDIA. THEREFORE THE SAID SUM WERE NOT REQUIRED TO HAVE BEEN REDUCED FROM THE EX PORT TURNOVER. THE SUB - CONTRACTING CHARGES PAID TO THIRD PARTY SERVICE PROVIDER AS CONSIDERATION FOR PROVISION OF SERVICE BY THEM IN INDIA FOR WHICH PAYMENT WAS MADE IN FOREIGN CURRENCY BECAUSE THIRD PARTY SERVICE PROVIDER OPERATED FROM THEIR EOU UNIT. THE SUMS WERE NOT INCURRED FOR RENDERING TECHNICAL SERVICES OUTSIDE INDIA. THEREFORE THE SAME IS NOT REQUIRED TO BE REDUCED FROM ITS EXPORT TURNOVER FOR THE PURPOSE OF COMPUTING DEDUCTION UNDER SECTION 10A OF THE ACT. ALTERNATIVELY, THE LEARNED AUTHORISE D REPRESENTATIVE HAS SUBMITTED THAT IF THE ABOVE SUMS ARE TO BE REDUCED FROM ITS EXPORT TURNOVER THEY SHOULD ALSO BE REDUCED FROM THE TOTAL 42 IT (T.P) A NO S . 17 & 39 /BANG/201 6 TURNOVER IN VIEW OF THE JUDGMENT OF HON'BLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. TATA ELXSI LTD. (SUPR A). 22.3 ON THE OTHER HAND, THE LD. DR HAS RELIED UPON THE ORDERS OF THE AUTHORITIES BELOW. 22.4 WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AS WELL AS THE RELEVANT MATERIAL ON RECORD. THE DRP HAS DIRECTED THE ASSESSING OFFICER THAT THE TRAVEL EXPE NSES INCURRED IN FOREIGN CURRENCY SHOULD ALSO BE EXCLUDED FROM THE EXPORT TURNOVER WHILE COMPUTING THE DEDUCTION UNDER SECTION 10A OF THE ACT BY FOLLOWING THE HON'BLE JURISDICTIONAL HIGH COURT IN THE CASE OF TATA ELXSI LTD. (SUPRA). WE DO NOT FIND ANY CO N TRADICT IONS IN THE PROPOSITION OF LAW APPLICABLE IN RESPECT OF THE DEFINITION OF TURNOVER AND TOTAL TURNOVER AS LAID DOWN BY THE HON'BLE HIGH COURT IN THE CASE OF TATA ELXSI LTD. (SUPRA). A SIMILAR ISSU E HAS BEEN RAISED BY THE REVENUE REGARDING EXCLUSIO N OF TELECOMMUNICATION AND TRAVEL EXPENSES FROM EXPORT TURNOVER WHICH IS ALSO COVERED BY THE DECISION IN THE CASE OF TATA ELXSI LTD. (SUPRA). THE HON'BLE HIGH COURT WHILE DEALING WITH THE DEFINITION OF EXPORT TURNOVER AS WELL AS TOTAL TURNOVER AS PER THE PROVISIONS OF SECTION 10A HAS HELD AS UNDER : 43 IT (T.P) A NO S . 17 & 39 /BANG/201 6 10. THE BOMBAY HIGH COURT HAD AN OCCASION TO CONSIDER THE MEANING OF THE WORD 'TOTAL TURNOVER' IN THE CONTEXT OF SECTION 10 - A, IN THE CASE OF CIT V. GEM PLUS JEWELLERY INDIA LTD. [2011] 330 ITR 175 [2010] 194 TAXMAN 192 ( BOM.). INTERPRETING SUB - SECTION (4) OF SECTION 10 - A, IT IS HELD AS UNDER: 'UNDER SUB - SECTION (4) THE PROPOR TION BETWEEN THE EXPORT TURNOVER IN RESPECT OF THE ARTICLES OR THINGS, OR, AS THE CASE MAY BE, COMPUTER SOFTWARE EXPORTED, TO THE TOTAL TURNOVER OF THE BUSINESS CARRIED OVER BY THE UNDER - TAKING IS APPLIED TO THE PROFITS OF THE BUSINESS OF THE UNDERTAKING I N COMPUTING THE PROFITS OF THE BUSINESS OF THE UNDERTAKING IN COMPUTING THE PROFITS DERIVED FROM EXPORT. IN OTHER WORDS, THE PROFITS OF THE BUSINESS OF THE UNDERTAKING ARE MULTIPLIED BY THE EXPORT TURNOVER IN RESPECT OF THE ARTICLES, THINGS OR, AS THE CASE MAY BE, COMPUTER SOFTWARE AND DIVIDED BY THE TOTAL TURNOVER OF THE BUSINESS CARRIED OR BY THE UNDERTAKING. THE FORMULA WHICH IS PRESCRIBED BY SUB - SECTION (4) OF SECTION 10A IS AS FOLLOWS: THE TOTAL TURNOVER OF THE BUSINESS CARRIED ON BY THE UNDERTAKING W OULD 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 INASMUCH AS THE EXPO RT 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 A CONSTITUENT ELEMENT OF THE TOTAL TURNOVER IN THE DENOMINATOR. THE LEGISLATURE HAS PROVIDED A DEFINITION OF THE E XPRESSION 'EXPORT TURNOVER' IN EXPLANATION 2 TO SECTION 10A BY 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 PROFITS DERIVED FROM EXPORT OF ARTICLE S OR THINGS OR COMPUTER SOFTWARE = PROFITS OF THE BUSINESS OF THE UNDERTAKING X EXPORT TURNOVER IN RESPECT OF THE ARTICLES OR THINGS OR COMPUTER SOFTWARE TOTAL TURNOVER OF THE BUSINESS CARRIED ON BY THE UNDERTAKING 44 IT (T.P) A NO S . 17 & 39 /BANG/201 6 ATTRIBUTABLE TO THE DELIVERY OF THE ARTICLES THINGS OR SOFTWARE OUTSIDE INDIA. THEREFORE IN COMPUTING THE EXPORT TURNOVER THE LEGISLATURE HAS M ADE 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 PRO VIDED 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 SECTION 10A. HOWEVER THE EXPRESSION 'EXPORT TURNOVER' HAS BEEN DE FINED. THE DEFINITION OF 'EXPORT TURNOVER' EXCLUDES FREIGHT AND INSURANCE. SINCE EXPORT TURNOVER HAS BEEN DEFINED BE PARLIAMENT AND THERE IS A SPECIFIC EXCLUSION OF FREIGHT AND INSURANCE, THE EXPRESSION 'EXPORT TURNOVER' CANNOT HAVE A DIFFERENT MEANING WHE N 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 TO THE CONTRARY. HOWEVER, NO SUCH PROVISION HAVING BEEN MADE, THE PRINCIPLE WHICH HAS BEEN EN UNCIATED 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 CONN OTATION IN THE APPLICATION OF THE SAME FORMULA. THE SUBMISSION OF THE REVENUE WOULD LEAD TO A SITUATION WHERE FREIGHT AND INSURANCE, THOUGH IT HAS BEEN SPECIFICALLY EXCLUDED FROM 'EXPORT TURNOVER' FOR THE PURPOSES OF THE NUMERATOR WOULD BE BROUGHT IN AS PA RT 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.' THE SPECIAL BENCH OF THE TRIBUNAL, IN THE CASE OF ITO V. SAK SOFT LTD. [2009] 313 ITR (AT) 353/ 30 SOT 55 (CHENNAI) ALSO HAD AN OCCASION TO CONSIDER THE MEANING OF THE WORD 'TOTAL TURNOVER'. AFTER REFERRING TO THE VARIOUS JUDGMENTS OF THE HIGH COUR T AS WELL AS THE SUPREME COURT HELD AS UNDER: '53. FOR THE ABOVE REASONS, WE HOLD THAT FOR THE PURPOSE OF APPLYING THE FORMULA UNDER SUB - SECTION (4) OF SECTION 10 - B, THE FREIGHT TELECOM CHARGES OR INSURANCE ATTRIBUTABLE TO THE DELIVERY OF ARTICLES OR THING S OR COMPUTER SOFTWARE OUTSIDE INDIA OR THE EXPENSES, IF ANY, INCURRED IN FOREIGN EXCHANGE IN PROVIDING THE TECHNICAL SERVICES OUTSIDE INDIA ARE TO BE EXCLUDED BOTH FROM THE EXPORT TURNOVER AND 45 IT (T.P) A NO S . 17 & 39 /BANG/201 6 FROM THE TOTAL TURNOVER, WHICH ARE THE NUMERATOR AND THE DENOM INATOR RESPECTIVELY IN THE FORMULA.' THE FORMULA FOR COMPUTATION OF THE DEDUCTION UNDER SECTION 10 - A WOULD BE AS UNDER: PROFITS OF THE BUSINESS X EXPORT TURNOVER TOTAL TURNOVER FROM THE AFORESAID JUDGMENTS, WHAT EMERGES IS THAT, THERE SHOULD BE UNIFORMI TY IN THE INGREDIENTS OF BOTH THE NUMERATOR AND THE DENOMINATOR OF THE FORMULA, SINCE OTHERWISE IT WOULD PRODUCE ANOMALIES OR ABSURD RESULTS. SECTION 10 - A IS A BENEFICIAL SECTION. IT IS INTENDED TO PROVIDE INCENTIVES TO PROMOTE EXPORTS. THE INCENTIVE IS TO EXEMPT PROFITS RELATABLE TO 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 EASE OF SECTION 80HHC, THE EXPORT PROFIT IS TO BE DERIVED FROM THE TOTAL BUSINESS INCOME OF THE ASSE SSEE, 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 DOMESTIC BUSINESS, IN OTHER WORDS, EXPORT TURNOVER AND DOMESTIC TURNOVER. THE EXPORT TURNOVER WOULD BE A COMPONENT OR PART OF A DENOMINATOR, THE OTHER COMPONENT BEING THE DOMESTIC TURNOVER. IN OTHER WORDS, TO THE EXTENT OF EXPORT TURNOVER, THERE WOULD BE A COMMONALITY BETWEEN THE NUMERATOR AND THE DENOMINATOR OF THE F ORMULA. IN VIEW OF THE COMMONALITY, THE UNDERSTANDING SHOULD ALSO BE THE SAME. IN OTHER WORDS, 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 A S 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 TH E TERM 'TOTAL TURNOVER' IN SECTION 10 - A, 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. THOUGH WHEN A PARTICULAR WORD IS NOT DEFINED BY THE LEGISLATURE AND AN 46 IT (T.P) A NO S . 17 & 39 /BANG/201 6 ORDINARY MEANING IS TO BE ATTRIBUTED TO THE SAME, THE SAID ORDINARY MEANING TO BE ATTRIBUTED TO SUCH WORD IS TO BE IN CONFORMITY WITH THE CONTEXT IN WHICH IT IS USED. WHEN THE STATUTE PRESCRIBES 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 EX PORT 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 IMPERMIS SIBLE. IF THAT WERE THE INTENTION OF THE LEGISLATURE, THEY WOULD HAVE EXPRESSLY STATED SO. IF THEY HAVE NOT CHOSEN TO EXPRESSLY DEFINE WHAT THE TOTAL TURNOVER MEANS, THEN, WHEN THE TOTAL TURNOVER INCLUDES EXPORT TURNOVER, THE MEANING ASSIGNED BY THE LEGISL ATURE TO THE EXPORT TURNOVER IS TO BE RESPECTED AND GIVEN EFFECT TO, WHILE INTERPRETING THE TOTAL TURNOVER WHICH IS INCLUSIVE OF THE EXPORT TURNOVER. THEREFORE, THE FORMULA FOR COMPUTATION OF THE DEDUCTION UNDER SECTION 10 - A, WOULD BE AS UNDER: PROFITS OF THE BUSINESS OF THE UNDERTAKING X EXPORT TURN OVER (EXPORT TURNOVER + DOMESTIC TURN OVER) TOTAL TURN OVER 11. IN THAT VIEW OF THE MATTER, WE DO NOT SEE ANY ERROR COMMITTED BY THE TRIBUNAL IN FOLLOWING THE JUDGMENTS RENDERED IN THE CONTEXT OF SECTIO N 80HHC IN INTERPRETING SECTION 10 - A WHEN THE PRINCIPLE UNDERLYING BOTH THESE PROVISIONS IS ONE AND THE SAME. THEREFORE, WE DO NOT SEE ANY MERIT IN THESE APPEALS. THE SUBSTANTIAL QUESTION OF LAW FRAMED IS ANSWERED IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE. FOLLOWING THE DECISION OF HON'BLE JURISDICTIONAL HIGH COURT , THE ALTERNATIVE PLEA OF THE ASSESSEE REGARDING THE SUB - CONTRACTING CHARGES THEREFORE ALLOWED AND THE GROUND OF THE REVENUE S APPEAL STAND DISMISSED. 47 IT (T.P) A NO S . 17 & 39 /BANG/201 6 23.1 THE NEXT GROUND IS REGARD ING EXCLUSION OF FOREX LOSS FROM EXPORT TURNOVER WHILE COMPUTING THE DEDUCTION UNDER SECTION 10A OF THE ACT. THE ASSESSING OFFICER HAS REDUCED THE AMOUNT OF FOREX LOSS FROM EXPORT TURNOVER WHILE COMPUTING THE DEDUCTION UNDER SECTION 10A OF THE ACT. THE L D. AR OF THE ASSESSEE HAS SUBMITTED THAT THE SUM WAS REDUCED FROM THE EXPORT TURNOVER WHILE COMPUTING THE DEDUCTION AVAILABLE UNDER SECTION 10A , IT MUST ALSO BE CORRESPONDINGLY BE REDUCED FROM ITS TOTAL TURNOVER IN VIEW OF THE RATIO OF THE JUDGMENT OF HON 'BLE JURISDICTIONAL HIGH COURT IN THE CASE OF TATA ELXSI LTD. (SUPRA). 23.2 ON THE OTHER HAND, THE LEARNED DEPARTMENTAL REPRESENTATIVE HAS RELIED UPON THE ORDERS OF THE AUTHORITIES BELOW. 23.3 WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AS WELL AS THE RELEVANT MATERIAL ON RECORD. IT IS PERTINENT TO NOTE THAT THE TURNOVER IS CONSIDERED ON MERCANTILE BASIS AND NOT ON REALIZATION BASIS. THEREFORE ANY LOSS ON ACCOUNT OF FLUCTUATION OF FOREX RATE WOULD BE A BUSINESS LOSS AND SHOULD HAVE EFFECT OF REDUC TION OF PROFITS AND CORRESPONDING ELIGIBLE PROFITS FOR DEDUCTION UNDER SECTION 10A OF THE ACT. SUCH LOSS CANNOT BE REDUCED FROM EXPORT TURNOVER BASED ON THE INVOICES AND THE LOSS ON REALIZATION IS 48 IT (T.P) A NO S . 17 & 39 /BANG/201 6 A BUSINESS LOSS NOT AFFECTING THE TURNOVER. THEREFORE W E DIRECT THE ASSESSING OFFICER TO RE COMPUTE THE DEDUCTION UNDER SECTION 10A BY CONSIDERING THE PROFIT AFTER LOSS ON FOREX FLUCTUATIONS ON REALIZATION AND NOT BY REDUCING THE EXPORT TURNOVER. IN ANY CASE, IF THE LOSS IS EXCLUDED FROM EXPORT TURNOVER THEN T HE CORRESPONDING TOTAL TURNOVER SHOULD ALSO BE REDUCED BY SUCH AMOUNT AS PER THE DECISION OF THE HON'BLE JURISDICTIONAL HIGH COURT IN THE CASE OF TATA ELXSI LTD. (SUPRA). 24. IN THE RESULT, THE APPEAL OF THE ASSESSEE AS WELL AS THE REVENUE ARE PARTLY A LLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 21ST SEPT.,2 01 6 . SD/ - ( S. JAYARAMAN ) ACCOUNTANT MEMBER SD/ - ( VIJAY PAL RAO ) JUDICI AL MEMBER *REDDY GP COPY TO : 1. APPELLANT 2. RESPONDENT 3. C.I.T. 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE. BY ORDER ASST. REGISTRAR, ITAT, BANGALORE