DCIT, V. M/s Electronics for Imaging India Pvt. Ltd.,

ITA 462/BANG/2013

• Counselvise Citation: [2017] 130 COUNSELVISE.COM (IT) 8503 (ITAT-BANGALORE)
• Duration Of Justice: 3 year(s) 11 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-03-2017
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 14-12-2016
• Assessment Year: 2005-2006
• Appeal Filed On: 03-04-2013
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SWAPNA DAS
• Assessee Lawyers: PADAMACHAND KHINCHA
• Keywords: Business income; Transfer pricing; International transaction; Question of law; Wholly owned subsidiary
• Section: 32; 147; 131; 68; 246; 69; 145; 27; 148; 54; 37; 6; 56; 263; 63; 132; 12; 28; 144; 10; 90; 154; 2; 11; 15; 271(1)(b); 139; 92; 80HHC; 10B; 201; 43; 13; 22; 92CA

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, B E NGAL U R U BEFORE SHRI VIJAY PAL RAO , JUDICIAL MEMBER AND SHRI INTURI RAMA RAO , ACCOUNTANT MEMBER IT (TP) A NO. 462 / BANG/20 1 3 (ASSESSMENT YEAR: 20 0 5 - 06 ) DEPUTY COMMISSIONER OF INCOME - TAX, CIRCLE 11 ( 3 ) , BENGALURU. VS APPELLANT M/S. ELECTRONICS FOR IMAGING INDIA PVT. LTD. KALYANI PLATINA, 4 TH FLOOR, BLOCK - I, 24, EPIP ZONE, PHASE - II, WHITEFIELD, BENGALURU - 560066 PAN: AA ACG 6053E RESPONDENT AND CO NO. 149 /BANG/2015 (IN IT (TP) A NO. 4 62 / BANG/20 15) (ASSESSMENT YEAR: 200 5 - 10 ) (BY THE ASSESSEE) REVENUE BY : SMT. SWAPNA DAS, JCIT . ASSESSEE BY : SHRI PADAMACHAND KHINCHA, CA. DATE OF HEARING : 14 /12/2016 DATE OF PRONOUNCEMENT : 10 /0 3 /2017 O R D E R PER I NTURI RAMA RAO, AM : TH IS IS AN APPEAL IS FILED BY THE REVENUE AND THE CROSS OBJECTIONS BY THE ASSESSEE DIRECTED AGAINST THE ORDER OF THE CIT(A) - IV, BENGALURU, DATED 23/01/2013 FOR THE ASSESSMENT YEAR 200 5 - 06 . IT (TP) A NO . 462 /B/2013 & CO 149/B /201 5 PAGE 2 OF 25 2. BRIEFLY FACTS OF THE CASE ARE AS UNDER: THE ASSESS EE IS A COMPANY DULY INCORPORATED UNDER THE PROVISIONS OF THE COMPANIES ACT, 1956. THIS IS WHOLLY OWNED SUBSIDIARY OF M/S.ELECTRONICS FOR IMAGING INC.(EFI GROUP), USA. IT IS ENGAGED IN THE BUSINESS OF SOFTWARE DEVELOPMENT AND MARKETING SUPPORT SERVICES T O ASSOCIATED ENTERPRISES (AES). 3 . RETURN OF INCOME FOR THE ASSESSMENT YEAR 2005 - 06 WAS FILED ON 25/10/2005 DECLARING TOTAL INCOME OF RS. 14,27,123/ - . THE ASSESSEE - COMPANY ALSO REPORTED THE FOLLOWING INTERNATIONAL TRANSACTION S WITH ITS ASSOCIATED ENTERPRI SES (AE): PROVISION FOR SOFTWARE DEVELOPMENT AND RELATED SERVICES - RS.12,74,70,626/ - INTEREST PAID RS. 1,42,784/ - THE ASSESSEE - COMPANY SOUGHT TO JUSTIFY THE CONSIDERATION RECEIVED FOR INTERNATIONAL TRANSACTION S WITH ITS AES TO BE AT ARM S LENGTH PRICE . THE ASSESSEE - COMPANY ALSO SUBMITTED TRANSFER PRICING STUDY REPORT ADOPTING GROSS PROFIT MARGIN BY COST AS THE PROFIT LEVEL INDICATOR FOR THE TRANSFER PRICING ( TP ) STUDY. THE ASSESSEE - COMPANY APPLIED CPM METHOD I.E. COST PLUS METHO D WHICH WAS CONSIDERED TO BE MOST APPROPRIATE METHOD FOR THE PURPOSE OF BENCH MARKING ITS INTERNATIONAL TRANSACTIONS. THE ASSESSEE - COMPANY S PROFIT MARGIN WAS COMPUTED AT 39.5% AND THE ASSESSEE - COMPANY CLAIMED THAT HE SAME WAS COMPARABLE WITH OTHER COMPANI ES RENDERING OR ENGAGED IN SIMILAR BUSINESS. FOR THE PURPOSE OF TRANSFER PRICING (TP) STUDY ASSESSEE - COMPANY IT (TP) A NO . 462 /B/2013 & CO 149/B /201 5 PAGE 3 OF 25 HAD CHOSEN 12 COMPARABLE ENTITIES AND THE ARITHMETICAL AVERAGE OF OPERATING MARGIN OF SAID COMPARABLES WAS COMPUTED AT 23.11%. ACCORDING TO THE A SSESSEE - COMPANY, ITS PLI WAS MUCH HIGHER THAN THE ORIGINAL ARITHMETICAL MEAN OF THE COMPARABLE ENTITIES. HENCE, IT WAS CLAIMED THAT THE TRANSACTIONS WITH ITS AES ARE AT ARM S LENGTH. THE ASSESSEE - COMPANY ALSO CHOSE THE FOLLOWING 12 ENTITIES AS COMPARABLE S WHOSE AVERAGE PROFIT MARGIN WAS COMPUTED AT 23.11%: 4. THE ASSESSING OFFICER [AO] REFERRED THE MATTER TO THE TRANSFER PRICING OFFICER [TPO] FOR THE PURPOSE OF BENCH MARKING ITS INTERNATIONAL TRANSACTIONS WITH ITS AES. THE TPO, BY ORDER DATED 31/1 0/2008 PASSED U/S 92CA F THE ACT, COMPUTED TP ADJUSTMENT OF RS.1,79,31,851/ - . THE TPO REJECTED THE TP STUDY REPORT SUBMITTED BY THE ASSESSEE - COMPANY AND ALSO REJECTED THE CPM METHOD AND ADOPTED TNMM AS THE MOST APPROPRIATE METHOD IT (TP) A NO . 462 /B/2013 & CO 149/B /201 5 PAGE 4 OF 25 AND ADOPT ED THE OPERATING PROFIT BY OPERATING COST AS PROFIT LEVEL INDICATOR [PLI]. THEN THE TPO PROCEEDED TO IDENTIFY A DIFFERENT SET OF COMPARABLE ENTITIES FOR THE PURPOSE OF DETERMINING THE ARM S LENGTH PRICE (ALP). WHILE DOING SO, THE TPO APPLIED THE FOLLOWING FILTERS: THE T PO FINALLY SELECTED THE FOLLOWING COMPARABLES: THE TPO COMPUTED AVERAGE PROFIT MARGIN OF THE COMPARABLE FINALLY SELECTED BY HIM AT 26.59%. AFTER GIVING WORKING CAPITAL IT (TP) A NO . 462 /B/2013 & CO 149/B /201 5 PAGE 5 OF 25 ADJUSTMENT OF 1.69% ADJUSTED ARITHMETICAL MEAN PLI WAS DETERMINED AT 24.9%. ON THE A BOVE BASIS, THE TPO COMPUTED TP ADJUSTMENT AS FOLLOWS: 5. AFTER RECEIPT OF THE TPO S ORDER, THE AO PASSED THE ASSESSMENT ORDER ON 31/12/2008 INCORPORATING THE ADJUSTMENTS PROPOSED BY THE TPO AND ALSO MADE ADDITION ON ACCOUNT OF RESTRICTING THE BENEF IT U/S 10A BY REDUCING EXPORT TURN OVER BY TELECOMMUNICATION EXP ENSES AND FOREIGN EXCHANGE LOSS INCURRED IN FOREIGN EXCHANGE. 6. BEING AGGRIEVED, AN APPEAL WAS PREFERRED BEFORE THE CIT(A) - IV, BENGALURU. IT WAS CONTENDED BEFORE THE CIT(A) INTER ALIA THAT T HE VERY REFERENCE MADE BY THE AO TO TPO IS INVALID IN LAW. HOWEVER, THE CIT(A), AFTER UPHOLDING THE VALIDITY OF IT (TP) A NO . 462 /B/2013 & CO 149/B /201 5 PAGE 6 OF 25 REFERENCE TO THE TPO, HELD THAT THE TPO WAS JUSTIFIED IN REJECTING THE TP STUDY REPORT SUBMITTED BY THE ASSESSEE - COMPANY. 6.1 ON THE ISSU E OF SELECTION OF COMPARABLES, THE CIT(A) HAS EXCLUDED THE FOLLOWING COMPANIES : ( I) BODHTREE CONSULTING LTD ON THE GROUND OF FUNCTIONALITY (II) EXENSYS SOFTWARE SOLUTIONS LTD. MAKING ABNORMAL PROFITS (III) THIRDWARE SOLUTIONS LTD. ON THE GROUND OF T URNOVER IS MORE THAN RS.200 CRORES. 6.2 ON THE GROUND THAT TURNOVER OF THE COMPANIES IS MORE THAN RS.200/ - CRORES, T HE CIT(A) REJECTED THE COMPANIES VIZ., (I) IGATE GLOBAL SOLUTIONS, (II) FLEXTRONICS SOFTWARE SYSTEMS LTD., (III) L&T INFOTECH LTD ., (IV)SATYAM COMPUTER SERVICES LTD., AND (V) INFOSYS LTD. AS REGARDS THE ISSUE OF REDUCTION OF TELECOMMUNICATION EXPENDITURE FROM EXPORT TURNOVER, THE CIT(A) HELD THAT THE SAME SHOULD BE REDUCED FROM EXPORT TURNOVER AS WELL AS TOTAL TURNOVER ON THE REASON ING OF PARITY. THUS, THE CIT(A) HAS PARTLY ALLOWED THE APPEAL FILED BY THE ASSESSEE - COMPANY. 7 . BEING AGGRIEVED, THE REVENUE IS IN APPEAL IN IT ( TP)A NO.462/BANG/2013 BEFORE US RAISING THE FOLLOWING GROUNDS OF APPEAL: IT (TP) A NO . 462 /B/2013 & CO 149/B /201 5 PAGE 7 OF 25 8 . GROUND NOS.1, 9 A ND 10 ARE GENERAL NATURE AND DO NOT REQUIRE ANY ADJUDICATION. 9 . GROUND NOS.2 TO 5 CHALLENGE S THE DIRECTION OF THE CIT(A) TO EXCLUDE CERTAIN COMPANIES. GROUND NO.2 CHALLENGES THE DIRECTION OF THE CIT(A) TO EXCLUDE COMPANIES SUCH AS EXENSYS SOFTWARE SOLUTIONS, IGATE GLOBAL SOLUTIONS LTD., L&T INFOTECH LTD. SATYAM COMPUTERS LTD., THIRDWARE SOLUTIONS, INFOSYS TECHNOLOGY LTD., M/S.FLEXTRONICS SOFTWA R E SYSTEMS LTD., TATA ELXSI ON THE GROUND OF TURNOVER EXCEEDING RS.200 CRORES. 9.1 THE LEARNED DEPARTM ENTAL REPRESENTATIVE VEHEMENTLY CONTESTED THAT TURNOVER IS NOT A RELEVANT CRITERIA FOR DECIDING IT (TP) A NO . 462 /B/2013 & CO 149/B /201 5 PAGE 8 OF 25 COMPARABILITY OF A COMPANY ON THE TOUCHSTONE OF PROVISIONS OF RULE 10B OF THE IT RULES,1962. . IN THIS CONNECTION, HE HAS RELIED ON THE DECISION OF THE COORDINAT E BENCH OF THE TRIBUNAL IN THE CASE OF M/S.SOCIETE GENERALE GLOBAL SOLUTION CENTRE PVT. LTD . IN IT(TP)A NO.1188/BANG/2011 DATED 15/03/2016 AND NTT DATA GLOBAL DELIVERY SERVICES LTD. VS. ACIT REPORTED IN (2016) 69 TAXMANN.COM 7. 9.2 ON THE OTHER HAND, LEARN ED AR OF THE ASSESSEE VEHEMENTLY CONTESTED THAT M/S.EXENSYS SOFTWARE SOLUTIONS LTD., CANNOT BE CONSIDERED AS COMPARABLE ON THE GROUND OF FUNCTIONALITY AS IT IS ENGAGED IN THE BUSINESS OF PROVIDING BPO SERVICES AND IS A PRODUCT BASED COMPANY. IN THIS CONNEC TION, HE HAS INVITED OUR ATTENTION TO PAGE 154 OF THE PAPER BOOK WHEREIN IT IS STATED AS UNDER: IT (TP) A NO . 462 /B/2013 & CO 149/B /201 5 PAGE 9 OF 25 IT (TP) A NO . 462 /B/2013 & CO 149/B /201 5 PAGE 10 OF 25 9.3 IT WAS FURTHER SUBMITTED THAT THERE WAS AMALGAMATION OF THE COMPANY HOLOOL INDIA LTD. , WITH ASSESSEE - COMPANY. AS A RESULT OF AMALGAMATION, THER E IS ABNORMAL INCREASE IN THE PROFIT AND TURNOVER. IN SUPPORT OF THIS, HE RELIED ON THE DECISION OF THE CO - ORDINATE BENCH IN THE CASE OF (I) DCIT VS. KODIAK NETWORKS INDIA PVT. LTD. IN IT(TP)A NO.532/BANG/2013 DATED 30/07/2015, (II) ITO VS. VENDIO TECHNOL GOIES INDIA PVT. LTD. IN IT(TP)A NO.1374/BANG/2011 DATED 19/09/2014; (III) ITO VS. SUNQUEST INFORMATION SYSTEMS (INDIA) PVT. LTD. IN IT(TP)A NO.1302/BANG/2011 DT.11/06/2015 ; (IV) IVY COMPTECH PVT LTD. (2014) 43 TAXMANN.COM 183)(HYD); AND (V) M/S.INTOTO SOF TWARE INDIA PVT. LTD. TS - 141 - ITAT - 2013(HYD). 10. WE HEARD RIVAL SUBMISSIONS AND PERUSED MATERIAL ON RECORD. IT IS CLEAR FROM THE ANNUAL REPORT OF THE COMPANY AS EXTRACTED ABOVE, THIS COMPANY IS ALSO ENGAGED IN BUSINESS OF BPO AS A PRODUCT DEVELOPMENT CO MPANY. NOW, THE LAW IS QUITE SETTLED THAT PRODUCT DEVELOPMENT COMPANY CANNOT BE COMPARED WITH THAT OF SOFTWARE DEVELOPMENT COMPANY. FURTHER IT IS ALSO CLEAR THAT THERE IS AMALGAMATION OF HOLOOL INDIA LTD., WITH THE ASSESSEE - COMPANY AS A RESULT OF WHICH TH ERE WERE ABNORMAL PROFITS. THE RELEVANT PART OF THE DECISION IN THE CASE OF INTOTO SOFTWARE INDIA PVT. LTD. , (SUPRA) IS EXTRACTED BELOW: 17. HAVING HEARD BOTH PARTIES AND HAVING CONSIDERED THE MATERIAL AVAILABLE ON RECORD, WE FIND THAT THERE IS NO DISPUT E THAT THE ASSESSEE HAS ACCEPTED THE EXENSYS SOFTWARE SOLUTIONS LIMITED AS ONE OF THE COMPARABLE COMPANIES WHEN PROPOSED BY THE TPO. HOWEVER, THE FACT THAT THERE IS AN AMALGAMATION OF IT (TP) A NO . 462 /B/2013 & CO 149/B /201 5 PAGE 11 OF 25 TWO COMPANIES I.E., EXENSYS SOFTWARE LIMITED AND HOLOOL INDIA LIMITED, T HE RESULTS OF WHICH, HAS RESULTED IN HIGH OPERATING MARGIN CANNOT BE LOST SIGHT FOR. IT HAS BEEN HELD IN MANY CASES BY THIS TRIBUNAL AS WELL AS THE HIGHER FORUMS THAT TO COMPARE A COMPANY WITH ANOTHER COMPANY, BOTH THE COMPANIES HAVE TO BE BROUGHT ON PAR W ITH EACH OTHER AFTER MAKING THE NECESSARY ADJUSTMENTS WHEREVER NECESSARY AND POSSIBLE. HOWEVER, WHERE THERE ARE EXTRAORDINARY EVENTS SUCH AS THIS, THEN THOSE EVENTS HAVE TO BE TAKEN NOTE OF AND WHERE NO ADJUSTMENT CAN BE MADE ON ACCOUNT OF THIS EXTRAORDINA RY EVENT, THEN SUCH COMPANY CANNOT BE CONSIDERED AS A COMPARABLE. THE OBJECTIONS TO THIS COMPANY BY THE ASSESSEE ARE MADE FOR THE FIRST TIME BEFORE THE TRIBUNAL. THE TRIBUNAL BEING THE FINAL FACT FINDING AUTHORITY IS BOUND TO TAKE NOTE OF THE OBJECTIONS OF THE ASSESSEE. AS THE MATERIAL RELIED UPON BY THE LEARNED COUNSEL FOR THE ASSESSEE CLEARLY DENOTES THAT THERE IS AN EXTRAORDINARY EVENT WHICH HAS RESULTED IN THE HIGH OPERATING MARGIN OF THE COMPANY, WE DEEM IT FIT AND PROPER TO REMAND THIS ISSUE TO THE FI LE OF THE ASSESSING OFFICER/TPO FOR RECONSIDERATION. IF IT IS FOUND THAT THERE IS AN AMALGAMATION OF EXENSYS SOFTWARE LIMITED AND HOLOOL INDIA LIMITED AND FORMED AS ONE ENTITY VIZ., EXENSYS SOFTWARE SOLUTIONS LIMITED. DURING THE RELEVANT PREVIOUS YEAR AND THE FINANCIAL RESULT IS THE COMBINED RESULT OF THESE TWO COMPANIES, THEN, WE DIRECT THE ASSESSING OFFICER/TPO TO EXCLUDE THIS COMPANY FROM THE LIST OF COMPARABLES. 17. HAVING HEARD BOTH PARTIES AND HAVING CONSIDERED THE MATERIAL AVAILABLE ON RECORD, WE FIN D THAT THERE IS NO DISPUTE THAT THE ASSESSEE HAS ACCEPTED THE EXENSYS SOFTWARE SOLUTIONS LIMITED AS ONE OF THE COMPARABLE COMPANIES WHEN PROPOSED BY THE TPO. HOWEVER, THE FACT THAT THERE IS AN AMALGAMATION OF TWO COMPANIES I.E., EXENSYS SOFTWARE LIMITED AN D HOLOOL INDIA LIMITED, THE RESULTS OF WHICH, HAS RESULTED IN HIGH OPERATING MARGIN CANNOT BE LOST SIGHT FOR. IT HAS BEEN HELD IN MANY CASES BY THIS TRIBUNAL AS WELL AS THE HIGHER FORUMS THAT TO COMPARE A COMPANY WITH ANOTHER COMPANY, BOTH THE COMPANIES HA VE TO BE BROUGHT ON PAR WITH EACH OTHER AFTER MAKING THE NECESSARY ADJUSTMENTS WHEREVER NECESSARY AND POSSIBLE. HOWEVER, WHERE THERE ARE EXTRAORDINARY EVENTS SUCH AS THIS, THEN THOSE EVENTS HAVE TO BE TAKEN NOTE OF AND WHERE NO ADJUSTMENT CAN BE MADE ON AC COUNT OF THIS EXTRAORDINARY EVENT, THEN SUCH COMPANY CANNOT BE CONSIDERED AS A COMPARABLE. THE OBJECTIONS TO THIS COMPANY BY THE ASSESSEE ARE MADE FOR THE FIRST TIME BEFORE THE TRIBUNAL. THE TRIBUNAL BEING THE FINAL FACT FINDING AUTHORITY IS BOUND TO TAKE NOTE OF THE OBJECTIONS OF THE ASSESSEE. AS THE MATERIAL RELIED UPON BY THE LEARNED COUNSEL FOR THE ASSESSEE CLEARLY DENOTES THAT THERE IS AN EXTRAORDINARY EVENT WHICH HAS RESULTED IN THE HIGH OPERATING MARGIN OF THE COMPANY, WE DEEM IT FIT AND IT (TP) A NO . 462 /B/2013 & CO 149/B /201 5 PAGE 12 OF 25 PROPER TO RE MAND THIS ISSUE TO THE FILE OF THE ASSESSING OFFICER/TPO FOR RECONSIDERATION. IF IT IS FOUND THAT THERE IS AN AMALGAMATION OF EXENSYS SOFTWARE LIMITED AND HOLOOL INDIA LIMITED AND FORMED AS ONE ENTITY VIZ., EXENSYS SOFTWARE SOLUTIONS LIMITED. DURING THE RE LEVANT PREVIOUS YEAR AND THE FINANCIAL RESULT IS THE COMBINED RESULT OF THESE TWO COMPANIES, THEN, WE DIRECT THE ASSESSING OFFICER/TPO TO EXCLUDE THIS COMPANY FROM THE LIST OF COMPARABLES. RESPECTFULLY FOLLOWING THE RATIO OF THE DECISION IN THE ABOVE CAS E, WE HOLD THAT EXENSYS SOFTWARE SOLUTIONS LTD., CANNOT BE COMPARED WITH THAT OF THE ASSESSEE - COMPANY ON BOTH GROUNDS OF FUNCTIONALITY OR EVEN ON AMALGAMATION. ACCORDINGLY, WE DIRECT THE AO/TPO TO EXCLUDE THIS COMPANY FROM THE LIST OF COMPAR A BLES. 1 0.1 IGATE SOLUTIONS AND L&T INFOTECH W ERE EXCLUDED BY THE CIT(A) O N THE GROUND THAT TURNOVER IS MORE THAN RS.200 CRORES. THE LEARNED AR OF THE ASSESSEE SEEKS TO EXCLUDE THIS COMPANY FROM THE LIST OF COMPARABLES ON THE GROUND THAT TURNOVER IS MORE THAN 10 TIM ES THE TURNOVER OF THAT OF THE ASSESSEE - COMPANY. RELIANCE IN THIS REGARD IS PLACED ON THE DECISION IN THE CASE OF MCAFEE SOFTWARE INDIA P. LTD. VS. ACIT (TS - 136 - ITT - 2016(BANG). 10.2 AFTER HEARING RIVAL SUBMISSIONS AND PERUSING MATERIAL ON RECORD, WE ARE OF THE CONSIDERED OPINION THAT AS HELD IN THE CASE OF M/S.SOCIETE GENERALE GLOBAL SOLUTION CENTRE PVT. LTD . (SUPRA) AND NTT DATA GLOBAL DELIVERY SERVICES LTD. (SUPRA) , TURNOVER IS NOT A RELEVANT CRITERIA FOR THE PURPOSE OF DECIDING THE COMPARABILITY. FROM A BARE PERUSAL OF RULE 10B(2) OF THE IT IT (TP) A NO . 462 /B/2013 & CO 149/B /201 5 PAGE 13 OF 25 RULES, IT IS CLEAR THAT THE RULE DOES NOT SPECIFY THAT TURNOVER IS NOT ONE OF THE FACTORS FOR DECIDING THE COMPARABILITY. RESPECTFULLY FOLLOWING THE ABOVE DECISION, WE HOLD THAT M/S.IGATE SOLUTIONS AND L&T IN FOTECH CANNOT BE EXCLUDED FROM THE LIST OF COMPARABLES. 10.3 AS REGARDS SATHYAM COMPUTERS, TH IS COMPANY CANNOT BE TAKEN INTO THE LIST OF COMPARABLES AS IT IS ALLEGED THAT THIS COMPANY IS ENGAGED IN THE MANIPULATION OF ITS FINANCIAL DATA AND THEREFORE , FINANCIAL DATA IS UNRELIABLE. THE RATIO OF THE CO - ORDINATE BENCH IN THE CASE OF SUNQUEST INFORMATION SYSTEMS (INDIA) PVT.LTD. (SUPRA) IS SQUARELY APPLICABLE TO THE FACTS OF THE CASE. THEREFORE, WE DIRECT THE AO/TPO TO EXCLUDE THIS COMPANY FROM THE LIST OF COMPARABLES AND CONFIRM THE FINDING OF THE CIT(A). 10.4 THIRDWARE SOLUTIONS WAS EXCLUDED BY THE CIT(A) ON THE GROUND OF MAKING ABNORMAL PROFITS OF MORE THAN 50%. IT IS NOW QUITE SETTLED LAW TO THE EXTENT THAT NO COMPANY CAN BE EXCLUDED ON THE GROUND OF MAKING HIGH PROFITS MARGIN. HOWEVER, IT IS CONTESTED BEFORE US BY THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE THAT THIS COMPANY IS FUNCTIONALLY DIFFERENT FROM THAT OF THE ASSESSEE - COMPANY AS IT IS ENGAGED IN THE BUSINESS OF INFORMATION SERVI CES, CONSULTING AND OUTSOURCING COMPANY. IT ALSO IT DERIVES INCOME FROM SALE OF LICENSES. RELIANCE IN THIS REGARD WAS PLACED ON THE DECISION S OF THE CO - ORDINATE BENCH IN IT (TP) A NO . 462 /B/2013 & CO 149/B /201 5 PAGE 14 OF 25 THE CASE OF KODIAK NETWORKS INDIA PVT. LTD. (SUPRA) , SUNQUEST INFORMATION SYSTEMS (IN DIA) PVT LTD. (SUPRA) AND HYDERABAD BENCH OF TRIBUNAL IN THE CASES OF INTOTO S O FTWARE INDIA PVT.LTD. (SUPRA) AND IVY COMPTECH PVT.LTD. (SUPRA). IT WAS FURTHER SUBMITTED THAT THE DECISION OF THE TRIBUNAL IN THE CASE OF INTOTO S O FTWARE INDIA PVT.LTD. (SUPRA) CA ME TO BE CONFIRMED BY THE HON BLE HIGH COURT IN ITA NO.223 OF 2014. 1 0.5 AFTER HEARING THE RIVAL SUBMISSIONS AND PERUSING MATERIAL ON RECORD, WE HAVE NO REASON TO DIFFER FROM THE RATIO LAID DOWN BY THE ABOVE CO - ORDINATE DECISION S . THEREFORE, RESPECTFULL Y FOLLOWING THIS, WE HOLD THAT THIS COMPANY SHOULD BE EXCLUDED FROM THE LIST OF COMPARABLES ON THE GROUND OF FUNCTIONALITY. ACCORDINGLY, WE DIRECT THE AO/TPO TO EXCLUDE THIS COMPANY FROM THE LIST OF COMPARABLES. 1 0.6 INFOSYS TECHNOLOGIES WAS EXCLUDED F ROM THE LIST OF COMPARABLES BY THE CIT(A) ON THE GROUND THAT ITS TURNOVER EXCEEDS RS.200 CRORES. HOWEVER, IT IS CONTESTED BY THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE THAT THIS COMPANY IS FUNCTIONALLY DIFFERENT FROM THAT OF THE ASSESSEE - COMPAN Y AS IT ENJOYS HIGH BRAND VALUE AND HAS PLACED RELIANCE ON THE DECISION OF THE CO - ORDINATE BENCH IN THE CASE OF MCAFEE SOFTWARE INDIA P. LTD. (SUPRA) , SUNQUEST INFORMATION SYSTEMS (INDIA) PVT. LTD. (SUPRA), AGNITY INDIA TECHNOLOGIES PVT. LTD.(ITA NO.3856/DEL /2010) AND INTOTO SOFTWARE INDIA PVT. LTD. (SUPRA). IT (TP) A NO . 462 /B/2013 & CO 149/B /201 5 PAGE 15 OF 25 10.7 AFTER HEARING RIVAL SUBMISSIONS AND PERUSING MATERIAL ON RECORD, WE ARE OF THE CONSIDERED OPINION THAT INFOSYS INFOSYS CANNOT BE CONSIDERED AS COMPARABLE WITH THAT OF THE ASSESSEE - COMPANY AS IT HAS GOT HIGH BRAND VALUE. NOW THE LAW IS QUITE SETTLED THAT THE COMPANIES WITH HIGH BRAND VALUE CANNOT BE COMPARED WITH THAT OF SOFTWARE DEVELOPMENT COMPANY Y AND RESPECTFULLY FOLLOWING THE SAME, WE HOLD THAT INFOSYS LTD. CANNOT BE WITH THAT OF THE PR ESENT ASSESSEE - COMPANY. THEREFORE, WE DIRECT THE AO TO EXCLUDE THIS COMPANY FROM THE LIST OF COMPARABLES. 10.8 FLEXTRONICS WAS EXCLUDED BY THE CIT(A) ON THE GROUND THAT ITS TURNOVER IS MORE THAN RS.200 CRORES. HOWEVER, LEARNED AUTHORISED REPRESENTA TIVE OF THE ASSESSEE ARGUED THAT THIS COMPANY ALSO REQUIRES TO BE EXCLUDED ON THE GROUND OF FUNCTIONALITY AS IT IS FOUND THAT THIS COMPANY HAS GOT SUBSTANTIAL R&D EXPENDITURE. RELIANCE IN THIS REGARD IS PLACED ON THE DECISION IN THE CASE OF SUNQUEST INFOR MATION SYSTEMS (INDIA) PVT. LTD. (SUPRA) AND M/S.INTOTO SOFTWARE INDIA PVT. LTD. (SUPRA). LEARNED DR HA D NOT BROUGHT ON RECORD ANYTHING CONTROVERTING THE FINDINGS OF THE CO - ORDINATE BENCHES IN THE CASES CITED SUPRA. THEREFORE, RESPECTFULLY FOLLOWING THE R ATIO OF THE DECISION IN THE ABOVE CASE, WE DIRECT THE AO/TPO TOP EXCLUDE THIS COMPANY FROM THE LIST OF COMPARABLES. IT (TP) A NO . 462 /B/2013 & CO 149/B /201 5 PAGE 16 OF 25 1 0.9 TATA ELEXSI WAS EXCLUDED BY THE CIT(A) ON THE GROUND OF TURNOVER EXCEEDING MORE THAN RS.200 CRORES. HOWEVER, THE LEARNED AUTHORIZE D REPRESENTATIVE OF THE ASSESSEE ARGUED THAT THIS COMPANY IS FUNCTIONALLY DIFFERENT AS IT IS ENGAGED IN DIVERSE ACTIVITIES THAT ARE DISSIMILAR TO THOSE RENDERED BY THE ASSESSEE - COMPANY. RELIANCE IN THIS REGARD IS PLACED ON THE DECISION OF COORDINATE BENCH IN THE CASE OF KODIAK NETWORKS INDIA PVT. LTD. , SUNQUEST INFORMATION SYSTEMS (INDIA) PVT. LTD. (SUPRA) AND M/S.INTOTO SOFTWARE INDIA PVT. LTD. (SUPRA). LEARNED DR HAS NOT BROUGHT ON RECORD ANYTHING CONTROVERTING THE FINDINGS OF THE CO - ORDINATE BENCHES IN THE CASES CITED SUPRA. THEREFORE, WE DIRECT THE AO/TPO TOP EXCLUDE THIS COMPANY FROM THE LIST OF COMPARABLES. 1 1 . THE ONLY COMPARABLE LEFT IS BODHTREE CONSULTING . THIS COMPARABLE WAS DELETED BY THE CIT(A) AS FUNCTIONALLY DIFFERENT AS IT IS ENGAGED IN PRO VISION OF NICHE IT SERVICES LIKE DATA MANAGEMENT, I - PUBLISHING, DATA CLEANSING ETC. LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE PLACED RELIANCE ON THE DECISION OF THE COORDINATE BENCH IN THE CASE OF KODIAK NETWORKS INDIA PVT. LTD. (SUPRA) . THE RELEVA NT PART OF THE JUDGMENT IS EXTRACTED BELOW: 32. IN THE C.O. THE ASSESSEE HAS ALSO PRAYED FOR EXCLUSION OF BODHTREE CONSULTING LTD., WHICH WAS CONSIDERED AS A COMPARABLE COMPANY BY THE TPO/DRP. BODHTREE CONSULTING LTD. WAS CHOSEN AS A COMPARABLE COMPA NY BY THE ASSESSEE IN ITS TP STUDY AND SAME WAS ACCEPTED AS A COMPARABLE BY THE TPO ALSO. EVEN BEFORE THE DRP, THE ASSESSEE DID NOT CHALLENGE IT (TP) A NO . 462 /B/2013 & CO 149/B /201 5 PAGE 17 OF 25 THE INCLUSION OF THIS COMPANY AS A COMPARABLE. HOWEVER, IN THE CO FILED BEFORE THE TRIBUNAL, THE ASSESSEE HAS SOUG HT TO CHALLENGE THE INCLUSION OF THIS COMPANY AS A COMPARABLE IN GROUND NO.5(D). THE LAW BY NOW IS WELL SETTLED THAT ASSESSEE IS ENTITLED TO RAISE AN OBJECTION REGARDING COMPARABILITY AT ANY STAGE OF PROCEEDINGS AND EVEN IN A CASE WHERE THE ASSESSEE HAS NO T RAISED OBJECTION FOR INCLUDING THE SAME AS A COMPARABLE BEFORE THE LOWER AUTHORITIES, OR THE ASSESSEE HAD CHOSEN IN ITS TP STUDY A COMPANY WHICH IT SEEKS TO EXCLUDE AS A COMPARABLE. THE SPECIAL BENCH OF CHANDIGARH TRIBUNAL IN DCIT V. QUARK SYSTEMS P. LTD . (2010) 38 SOT 307 HAS HELD THAT THE TRIBUNAL IS A FACT FINDING BODY AND THEREFORE HAS TO TAKE INTO ACCOUNT ALL THE RELEVANT MATERIAL AND DETERMINE THE QUESTION AS PER THE STATUTORY REGULATIONS AND THAT TAX PAYER IS NOT ESTOPPED FROM POINTING OUT A MISTAK E IN THE ASSESSMENT, THOUGH SUCH MISTAKE IS A RESULT OF EVIDENCE ADDUCED BY THE TAX PAYER. WE THEREFORE PROCEED TO DETERMINE THE COMPARABILITY OF BODHTREE CONSULTING LTD. IN THIS REGARD, WE FIND THAT ITAT HYDERABAD BENCH IN IVY COMPUTECH (P) LTD. V. ACIT, (2014) 43 TAXMAN.COM 183 (HYD) TRIB. HAS TAKEN THE VIEW THAT BODHTREE CONSULTING IT(TP)A NO.1302/BANG/2011 & CO NO.92/BANG/2012 LTD. SHOULD NOT BE REGARDED AS A COMPARABLE IN THE CASE OF SOFTWARE DEVELOPMENT SERVICE PROVIDER. THE LD. COUNSEL FOR THE ASSESS EE ALSO BROUGHT TO OUR NOTICE THAT COMPARABILITY OF THIS COMPANY WITH SOFTWARE DEVELOPMENT PROVIDER WAS CONSIDERED BY THIS TRIBUNAL IN MINDTECH INDIA LTD. V. DCIT, ITA NO.70/B/2014 FOR AY 2009 - 10, ORDER DATED 21.8.2014 AND IT WAS HELD AS UNDER: - '14. THE NEXT ASPECT THAT WAS CANVASSED BY THE LEARNED COUNSEL FOR THE ASSESSEE WAS WITH REGARD TO THE EXCLUSION OF THE FOLLOWING COMPARABLES FROM THE LIST OF FINAL COMPARABLES CHOSEN BY THE TPO : 1. BODHTREE CONSULTING LTD : AS FAR AS THIS COMPANY IS CONCERNED, THE SUBMISSION OF THE LEARNED COUNSEL FOR THE ASSESSEE WAS THAT THIS COMPANY MADE EXTRA ORDINARY PROFITS DURING THE PREVIOUS YEAR. OUR ATTENTION WAS DRAWN TO THE FACT THAT THE OPERATING PROFIT / OPERATING COST OF THIS COMPANY JUMPED FROM 17% FOR F Y 2007 - 0 8 TO 56% IN FY 2008 - 09. IT DIPPED IN FY 2009 - 10 TO 40% AND IN FY 2010 - 11 IT BECAME ( - ) 2% AND 5% IN FY 2011 - 12 AND FINALLY TOUCHED ( - ) 9% IN FY 2012 - 13. OUR ATTENTION WAS DRAWN TO THE FACT THAT THE SPECIAL BENCH OF THE TRIBUNAL, MUMBAI, IN THE CASE OF MA ERSK GLOBAL CENTRES (INDIA) P. LTD., IN ITA.7466/MUM/2012, DT 07.03.2014 FOR AY 2008 - 09 HAD AN OCCASION TO CONSIDER THE QUESTION AS TO WHETHER COMPANIES HAVING ABNORMAL PROFITS SHOULD BE IT (TP) A NO . 462 /B/2013 & CO 149/B /201 5 PAGE 18 OF 25 EXCLUDED AS A COMPARABLE. THE SPECIAL BENCH TOOK THE VIEW THAT IT HAS TO BE SHOWN THAT THE HIGH PROFIT MARGIN DOES NOT REFLECT THE NORMAL BUSINESS CONDITIONS AND ONLY IN SUCH CIRCUMSTANCES, HIGH PROFIT MARGIN COMPANIES CAN BE EXCLUDED. OUR ATTENTION WAS DRAWN TO THE DRP'S OBSERVATION IN ITS ORDER ON THE ISSUE WHICH IS AS FO LLOWS : 'BODHTREE : THE ASSESSEE HAS OBJECTED TO SELECTION OF THIS ENTITY ON THE BASIS OF FOLLOWING OBJECTIONS: THE ENTITY HAS FLUCTUATING MARGINS THE COMPANY IS MORE OF A PRODUCT COMPANY RATHER THAN SOFTWARE SERVICE COMPANY. THE PANEL HAS CONSIDERE D THE OBJECTIONS OF THE ASSESSEE. INSOFAR AS THE CONTENTION REGARDING THE REJECTION OF THIS ENTITY ON THE BASIS OF FLUCTUATING MARGIN IS CONCERNED, IN ORDER TO APPRECIATE THE COMPATIBILITY OR OTHERWISE OF THIS ENTITY, IT IS IMPORTANT TO FIRST NOTE THAT THE INDIAN SOFTWARE INDUSTRY USES TWO DIFFERENT MODELS FOR REVENUE RECOGNITION. THE FIRST IS THE TIME AND MATERIAL (T&M) CONTRACTS MODEL IN WHICH CUSTOMER ARE BILLED ON THE BASIS OF HOURS WORKED BY THE EMPLOYEES OF SUPPLIER SOFTWARE COMPANIES. HOURLY RATES AR E AGREED ON BY BOTH PARTIES AND ARE APPLIED TO THE TOTAL HOURS WORKED TO ARRIVE AT THE REVENUE THAT IS TO BE RECOGNIZED. THE SECOND IS THE FIXED PRICE PROJECT MODEL (FPP). UNDER THE FIXED PRICE PROJECT MODEL, THE TOTAL CONTRACT PRICE IS AGREED UPON BETWEEN THE PARTIES. BILLING MAY BE DONE EITHER AT THE END OF THE CONTRACT OR OVER THE PERIOD OF THE CONTRACT ON THE BASIS OF THE AGREED MILESTONE FOR BILLING. IN THIS RESPECT, THE BASIS OF REVENUE RECOGNITION BY THIS ENTITY CAN BE SEEN FROM THE ANNUAL REPORT AS BELOW: 3. REVENUE RECOGNITION : REVENUE FROM SOFTWARE DEVELOPMENT IS RECOGNISED BASED ON SOFTWARE DEVELOPED AND BILLED TO CLIENTS. FROM PERUSAL OF THE ABOVE, IT IS SEEN THAT THIS ENTITY IS ENGAGED IN BUILDING REVENUES THROUGH FIXED PRICE PROJECT MODEL. AS IS A NATURAL COROLLARY IN SUCH TYPE OF REVENUE RECOGNITION, SOME PART OF THE EXPENDITURE MAY BE BOOKED IN ONE YEAR, FOR WHICH THE REVENUE MAY HAVE BEEN RECOGNISED IN THE EARLIER OR SUBSEQUENT YEAR. THEREFORE, IT IS BUT NATURAL THAT THERE IS SOME FLUCTUA TION IN THE PROFITABILITY MARGIN OF SUCH ENTITY. MERELY BECAUSE OF SUCH FLUCTUATIONS, AN ENTITY ENGAGED IN THE DEVELOPMENT IT (TP) A NO . 462 /B/2013 & CO 149/B /201 5 PAGE 19 OF 25 OF SOFTWARE, BEING FUNCTIONALLY COMPARABLE TO THE ASSESSEE, CANNOT BE REJECTED ONLY ON THIS GROUND.' 14. THE LEARNED COUNSEL FOR THE ASSESSEE DREW OUR ATTENTION TO THE FACT THAT BODHTREE CONSULTING ADMITTEDLY FOLLOWS A FIXED PRICE PROJECT MODEL WHEREBY REVENUES FROM SOFTWARE DEVELOPMENT IS RECOGNIZED BASED ON SOFTWARE AND BILLED TO CLIENTS. IN SUCH BUSINESS MODEL EXPENDITURE FOR DEVELO PING SOFTWARE WOULD BE BILLED IN AN EARLIER YEAR BUT THE REVENUE WOULD BE RECOGNIZED IN A SUBSEQUENT YEAR. IT WAS HIS SUBMISSION THAT THIS FACT IS RECOGNIZED BY THE DRP IN ITS ORDER. ACCORDING TO HIM THIS CIRCUMSTANCE WOULD BE SUFFICIENT TO SHOW THAT THE M ARGIN REFLECTED OF THIS COMPANY DOES NOT REFLECT THE NORMAL BUSINESS CONDITION. 15. THE LEARNED DR PLACED RELIANCE ON THE REASON GIVEN BY THE DRP IN ITS ORDER. 16. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. THE SPECIAL BENCH OF THE ITAT IN THE CASE OF MAE RSK GLOBAL CENTRES (SUPRA) HAD AN OCCASION TO DEAL WITH THE QUESTION AS TO WHETHER HIGH PROFIT MARGIN MAKING COMPANIES SHOULD BE EXCLUDED AS A COMPARABLE. THE SPECIAL BENCH AFTER CONSIDERING SEVERAL ASPECTS HELD IN PARA 88 OF ITS ORDER THAT THE POTENTIAL C OMPARABLE COMPANIES CANNOT BE EXCLUDED MERELY ON THE GROUND THAT THEIR PROFIT IS ABNORMALLY HIGH. THE SPECIAL BENCH HELD THAT IN SUCH CASES IT WOULD REQUIRE FURTHER INVESTIGATION TO ASCERTAIN THE REASONS FOR UNUSUALLY HIGH PROFIT AND IN ORDER TO ESTABLISH WHETHER THE ENTITIES WITH SUCH HIGH PROFITS CAN BE TAKEN AS COMPARABLE OR NOT. IN THE LIGHT OF THE AFORESAID DECISION OF THE SPECIAL BENCH AND IN VIEW OF THE ADMITTED POSITION THAT THE ASSESSEE FOLLOWS FIXED PRICE PROJECT MODEL WHERE REVENUES FROM SOFTWARE DEVELOPMENT IS RECOGNIZED BASED ON SOFTWARE DEVELOPED AND BILLED TO CLIENTS, THERE IS A POSSIBILITY OF THE EXPENDITURE IN RELATION TO THE REVENUE BEING BOOKED IN THE EARLIER YEAR. THE RESULTS OF BODHTREE FROM FY 2003 TO 2008 EXCLUDING FY 2007 AS GIVEN BY THE LEARNED COUNSEL FOR THE ASSESSEE WERE ALSO PERUSED. PERUSAL OF THE SAME SHOWS, THAT THERE HAS BEEN A CONSISTENT CHANGE IN THE OPERATING MARGINS. THE CHART FILED BY THE ASSESSEE IN THIS REGARD IS GIVEN AS AN ANNEXURE TO THIS ORDER. IT APPEARS TO US THAT THE REVENUE RECOGNITION METHOD FOLLOWED BY THE ASSESSEE IS THE REASON FOR THE DRASTIC VARIATION IN THE PROFIT MARGINS OF THIS COMPANY. IN THE GIVEN CIRCUMSTANCES, WE ARE OF THE VIEW THAT IT WOULD BE SAFE TO EXCLUDE BODHTREE CONSULTING FROM THE FINAL LIST IT(TP)A NO.1302/BANG/2011 & CO NO.92/BANG/2012 OF IT (TP) A NO . 462 /B/2013 & CO 149/B /201 5 PAGE 20 OF 25 COMPARABLES CHOSEN BY THE ASSESSEE. WE HOLD AND DIRECT ACCORDINGLY.' 33. THE LD. COUNSEL FOR THE ASSESSEE FILED BEFORE US A CHART SHOWING THE FLUCTUATION MARGINS OF BODHTREE CONSULTING LTD., WHICH ARE AS F OLLOWS: - 34. AS CAN BE SEEN FROM THE ABOVE ANALYSIS, THIS COMPANY HAS ERRATIC MARGINS AND GROWTH OVER THE YEARS. THE MARGINS OF BODHTREE ARE CONSISTENTLY CHANGING. THIS REFLECTS THAT THE REVENUE RECOGNITION POLICY FOLLOWED BY BODHTREE IS NOT PROPER AND IS RESULTING IN CONSISTENT CHANGE IN MARGINS. FURTHER, THE GROWTH RATE OVER THE YEARS IS ALSO FLUCTUATING TO EXTREMES. FURTHER, GROWTH IN REVENUES IS NOT SUPPORTED BY GROWTH IN EXPENSES. IN SOME CASES, EXPENSE GROWTH IS HIGHER THAN THE REVENUE GROWTH. ALSO S ALARY COST RATIO IS WIDELY FLUCTUATING. THESE CIRCUMSTANCES ARE PECULIAR IN NATURE AND REQUIRE FURTHER ANALYSIS, WITHOUT WHICH THIS COMPANY SHOULD BE REJECTED AS A COMPARABLE. 35. WE ARE OF THE VIEW THAT THE BASIS ON WHICH THE ASSESSEE SEEKS TO EXCLUDE BO DHTREE CONSULTING LTD. IN THIS YEAR IS ACCEPTABLE AND ACCORDINGLY BODHTREE CONSULTING LTD. IS DIRECTED TO BE EXCLUDED FROM THE LIST OF COMPARABLE COMPANIES. WE HOLD ACCORDINGLY. LEARNED DR HAD NOT CONTROVERTED THE FINDINGS OF THE TRIBUNAL. HENCE, WE HAV E NO OPTION BUT TO FOLLOW THE DECISION OF THE CO - ORDINATE BENCH. ACCORDINGLY, WE UPHOLD THE EXCLUSION OF THIS COMPANY FROM THE LIST OF COMPARABLES. 12. GROUND NO.5 WAS NOT PRESSED BY THE REVENUE. GROUND NOS.6, 7 AND 8 RELATES TO COMPUTATION OF DEDUCTION U /S 10A OF THE ACT. THE CIT(A) DIRECTED THE AO TO RECOMPUTED THE DEDUCTION ALLOWABLE U/S 10A OF THE ACT AFTER REDUCING THE TELECOMMUNICATION CHARGES AND EXCHANGE FLUCTUATION LOSS FROM TOTAL TURNOVER ALSO. IT (TP) A NO . 462 /B/2013 & CO 149/B /201 5 PAGE 21 OF 25 13. WE HEARD RIVAL SUBMISSIONS AND PERUSED MATERIAL ON RECORD. THE HON'BLE HIGH COURT OF KARNATAKA IN THE CASE OF TATA ELXI LTD (349 ITR 98) HELD THAT EXPENSES INCURRED TOWARDS FREIGHT, TELE - COMMUNICATION CHARGES, ETC., SHOULD BE EXCLUDED BOTH FROM EXPORT TURNOVER AS WELL AS FROM TOTAL TURNOVER. THE HON' BLE HIGH COURT HELD AS FOLLOWS: FROM THE AFORESAID JUDGMENTS, WHAT EMERGES IS THAT, 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. SECTI ON 10 - A IS A BENEFICIAL SECTION. IT IS INTENDED TO PROVIDE INCENTIVES TO PROMOTE 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, HAV ING 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 TURNOV ER 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 ASSESSEE, 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 CO MPONENT 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 FORMULA. IN VIEW OF THE COMMONALITY, THE UNDERSTANDING SHOULD ALSO BE THE SAME. IN OTHER WO RDS 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 INC LUDES EXPORT TURNOVER. THE COMPONENTS OF THE EXPORT TURNOVER IN THE NUMERATOR & THE DENOMINATOR CANNOT BE DIFFERENT. THEREFORE, THOUGH THERE IS NO DEFINITION OF THE TERM TERM 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 IT (TP) A NO . 462 /B/2013 & CO 149/B /201 5 PAGE 22 OF 25 DENOMINATOR. THOUGH WHEN A PARTICULAR WORD IS NOT DEFINED BY THE LEGISLATURE AND AN 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 SAID FORMULA, EXPORT TURNOVER IS DEFINED, AND WHEN THE TOTAL TURNOVER INCLUDES EXPORT TURNOVER, THE VERY SAME MEANIN G 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 T HE TOTAL TURNOVER, WHEN THE EXPORT TURNOVER IS A COMPONENT OF TOTAL TURNOVER, SUCH AN INTERPRETATION WOULD RUN COUNTER TO THE LEGISLATIVE INTENT AND IMPERMISSIBLE. IF THAT WERE THE INTENTION OF THE LEGISLATURE, THEY WOULD HAVE EXPRESSLY STATED SO. IF THEY HAVE NOT CHOSE TO EXPRESSLY DEFINE WHAT THE TOTAL TURNOVER MEANS, THEN, WHEN THE TOTAL TURNOVER INCLUDES EXPORT TURNOVER, THE MEANING ASSIGNED BY THE LEGISLATURE TO THE EXPORT TURNOVER IS TO BE RESPECTED AND GIVEN EFFECT TO, WHILE INTERPRETING THE TOTAL TU RNOVER 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 TURNVER IIIIIIIIIIIII IIIIIII (EXPORT TURNOVER + DOMESTIC TURNOVER) TOTAL TURNOVER 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 SECTION 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. SINCE THE CIT(A) HAS ONLY FOLLOWED THE RATIO LAID DOWN BY THE HON'BLE JURISDICTIONAL HIGH COURT, WE DO NOT INTERFERE WITH THE ORDER OF THE CIT(A). 14. IN THE RESULT, APPEAL FILED BY THE REVENUE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. IT (TP) A NO . 462 /B/2013 & CO 149/B /201 5 PAGE 23 OF 25 15. CROSS OBJECTIONS ARE FILED BY THE ASSES SEE. THE ASSESSEE RAISED THE FOLLOWING GROUNDS OF CROSS OBJECTIONS: IT (TP) A NO . 462 /B/2013 & CO 149/B /201 5 PAGE 24 OF 25 IT (TP) A NO . 462 /B/2013 & CO 149/B /201 5 PAGE 25 OF 25 16. GROUND NOS.1 TO 4 OF CROSS OBJECTIONS ARE NOT PRESSED BY THE LEARNED AUTHORIZED REPRESENTATIVE OF THE ASSESSEE. AS REGARDS OTHER GROUNDS OF CROSS OBJECTIONS ARE CON CERNED, THEY ARE WITH REGARD TO SELECTION OF COMPARABLES. SINCE ISSUES RAISED IN THE CROSS OBJECTIONS HAVE BEEN DEALT BY US IN THE REVENUE S APPEAL, THE CROSS OBJECTIONS ARE DISMISSED. 17. IN THE RESULT, THE CROSS OBJECTIONS OF THE ASSESSEE ARE DISMISSED . ORDER PRONOUNCED IN THE OPEN COURT ON 10 TH MARCH , 201 7 SD/ - SD/ - (VIJAY PAL RAO) (INTURI RAMA RAO) JUDICIAL MEMBER ACCOUNTANT MEMBER PLACE : B EN GAL URU D A T E D : 10 /0 3 /2017 SRINIVASULU, SPS COPY TO : 1 APPELLANT 2 RESPONDENT 3 CIT(A) - 4 CIT 5 DR, ITAT, BANGALORE. 6 GUARD FILE BY ORDER ASSISTANT REGISTRAR INCOME - TAX APPELLATE TRIBUNAL BANGALORE