Income Tax Appellate Tribunal - Pune
Bmc Software India Pvt. Ltd.,, Pune vs Dcit, Circle 1(1), Pune on 19 August, 2019
IN THE INCOME TAX APPELLATE TRIBUNAL
PUNE BENCH "C", PUNE
BEFORE SHRI R.S. SYAL, VICE PRESIDENT AND
SHRI PARTHA SARATHI CHAUDHURY, JUDICIAL MEMBER
आयकर अपील सं. / ITA No.2549/PUN/2012
िनधा रण वष / Assessment Year : 2008-09
BMC Software India Private DDIT, Circle-1(1),
Limited, Vs. Pune - 411 037
Tower A, ICC Tech Park,
Senapati Bapat Road,
Pune - 411 016
PAN : AABCB6110E
(Appellant) (Respondent)
Assessee by Shri Madhur Agarwal
Revenue by Shri O.A. Mao, CIT
Date of hearing 09-08-2019
Date of pronouncement 19-08-2019
आदेश / ORDER
PER R.S.SYAL, VP :
This appeal by the assessee is directed against the final assessment order dated 25-10-2012 passed by the Assessing Officer (AO) u/s.143(3) r.w.s.144C(13) of the Income-tax Act, 1961 (hereinafter called 'the Act') in relation to the assessment year 2008-09.2
ITA No.2549/PUN/2012
BMC Software India Private Limited I. SOFTWARE DEVELOPMENT SERVICES SEGMENT
2. The first issue espoused in this appeal is the transfer pricing addition of Rs.19,23,02,633/- made by the Assessing Officer (AO) in the international transaction of "Software Development services".
3. Briefly stated, the facts of the case are that the assessee is a wholly owned subsidiary of BMC, USA, which was incorporated in India in the year 2001. The assessee is engaged in providing Software Development services, Information technology enabled services (ITES) and Sale support services solely to BMC group entities. Return was filed declaring total income of Rs.49,30,810/-. The assessee filed Form No. 3CEB declaring four international transactions including the three stated above, in addition to Reimbursement of expenses. The AO referred the matter of determination of the Arm's Length Price (ALP) of the international transactions to the Transfer Pricing Officer (TPO). The TPO accepted the international transactions of Reimbursement of expenses and Rendering of ITES at ALP. Instantly, we are dealing with the international transaction of "Rendering of Software Development services" with transacted value of Rs.1,78,27,24,996/- which was separately processed by the assessee under the Transactional Net Margin Method (TNMM) with Profit Level 3 ITA No.2549/PUN/2012 BMC Software India Private Limited Indicator of Operating profits to Total cost (OP/TC). The assessee selected eight companies as comparable. The assessee worked out its own PLI at 10.76% as against that of comparables at average of 13.59% to show that the transaction was at ALP. The TPO made certain inclusions in or exclusions from the assessee's list of comparables and finalized his own set of comparables comprising of nine companies with adjusted average OP/TC at 26.47%. Applying the same as the arm's length margin, the TPO worked out transfer pricing adjustment of Rs.25,32,54,961/-. The AO proposed this addition in the draft order. The assessee assailed various aspects of the ALP determination of this transaction before the Dispute Resolution Panel (DRP). Vide direction dated 05-09-2012, the DRP made certain adjustments to the list of comparables. Giving effect to the directions given by the DRP, the AO in his final assessment order dated 25-10-2012 computed the amount of transfer pricing addition in the international transaction of Rendering of Software Development services at Rs.19,23,02,633/-, against which the assessee has come up in appeal before the Tribunal.
4. We have heard both the sides and gone through the relevant material on record. In so far as the international transaction of "Rendering of Software Development services" with transacted 4 ITA No.2549/PUN/2012 BMC Software India Private Limited value of Rs.178.27 crore is concerned, it is found as an admitted position that the assessee applied separate TNMM for this transaction which has been accepted by the TPO also as the most appropriate method. Further, there is no dispute on the PLI of OP/TC. The dispute centers around the inclusion/exclusion of certain companies from the final set of comparables.
5. In order to analyze the comparability or otherwise of the companies under challenge, it is sine qua non to first understand the functional profile of the assessee under this transaction. A copy of the assessee's Transfer Pricing study report has been placed at page 37 onwards of the paper book. Internal page no. 16 of the T.P. study report gives an insight into the nature of transaction of provision of Software Development services. It has been set out in para 4.2.1 that the assessee provides Software Development services to BMC US, BMC Israel. PNet Inc. under respective Software Development service agreements on Cost plus 10% mark-up basis. It has further been elaborated that under the agreements with BMC overseas entities, the assessee is required to provide Software services (including development and testing of software) in accordance with the specifications provided by the BMC overseas entities from time to time. Then, there is functional analysis of the 5 ITA No.2549/PUN/2012 BMC Software India Private Limited Software Development services at pages 18 and 19 of the Transfer Pricing study report and it has been shown in a tabular statement that both the assessee as well as its Associated Enterprises are engaged in Research and development; Conceptualization & design; Functional specification/requirement analysis; Coding, documentation, testing; Quality control; Modification of existing products; and Customer Support. Conceptualization of the required Software products is performed by BMC overseas entities and the assessee based on the requirements of the clients and the market. Based on the product conceptualization, the functional specifications and requirement analysis for the software to be developed is jointly undertaken by the assessee and BMC overseas entities. The part relating to Coding and development of the software modules is largely done by the assessee. Since the software are to be developed for the ultimate customers of BMC overseas entities, the assessee also sometimes directly liaises with the customers to understand their exact requirements.
6. We have also gone through the Software Development and Information Technology Enabled Services Agreement (Agreement) dated 01-09-2001 entered into between assessee and BMC Software Inc., USA, which was amended from time to time in the years 2002, 6 ITA No.2549/PUN/2012 BMC Software India Private Limited 2003 and 2004. A copy of such Agreement has been placed on record. Definition clause in the Agreement defines "Services" to have the meaning as set forth in Appendix-A. Such an Appendix, in turn, lists various services to be performed by the assessee. Software Development services have been primarily shown at point
(a) - Production of Computer Software by way of architecturing, engineering, design, development, testing and support of software; and partly at point (b) concerning support services to the above. Clause II of the Agreement provides that: `To enable BMC India to render Services, BMC shall grant a non-exclusive and personal license to BMC India to use any and all intellectual property owned by BMC that may be required by BMC India to provide the Services.' Clause V of the Agreement further provides that : `BMC and BMC India hereby agree that any activities of BMC India that result in the creation of intellectual property rights, including all inventions, designs, and work of authorship, are the property of BMC and shall be and hereby are assigned to BMC.' Clause II para 2.2 describes `Relationship of Parties' by explaining that : `The relationship created pursuant to this Agreement is one of the Independent contractor between BMC, as the party receiving the 7 ITA No.2549/PUN/2012 BMC Software India Private Limited services of an independent contractor and BMC India, as the independent contractor providing such services.'
7. In view of the above factual panorama, it is palpable that the nature of services provided by the assessee under the international transaction of rendering of Software Development services is chiefly to develop computer software, as an independent contractor, from beginning till end for and on behalf of its Associated Enterprises to be used by their ultimate customers abroad, on cost plus 10%. Almost all the stages are jointly by the assessee in consultation with its AE. BMC USA is responsible for marketing the products obtained from the assessee. The assessee plays for its 10% mark-up as an independent contractor irrespective of the fact whether the software developed by it is sold, abandoned or re- worked. The assessee renders software development services with the help of intellectual property owned by its AE and further the intellectual property rights in the software developed by the assessee vest in the AE. With the above understanding of the functional profile of the assessee under this transaction, we now proceed to examine the comparability or otherwise of the companies under challenge.
8 ITA No.2549/PUN/2012
BMC Software India Private Limited
(i) Bodhtree Consulting Ltd. :
8.1. The TPO treated Bodhtree Consulting Ltd. as one of the comparables. The assessee objected to its inclusion on the ground of functional dissimilarity, extraordinary financial events and fluctuating profit margins. The TPO rejected the assessee's contention of business restructuring during the year and also held the same to be functionally similar inasmuch as it was having only one identifiable reportable segment of `Software development services'. The assessee is aggrieved by the inclusion of this company in the final list of comparables.
8.2. We find from the Annual report of this company that it: "has only one segment, namely, Software development. Being a software solutions company, which is engaged in providing open and end-to-end web solutions, software consultancy, design and development of solutions, using the latest technologies." Thus, it can be seen that this company is providing end-to-end solutions and also consultancy, which is not the case with the assessee company. 8.3. The ld. AR submitted that Bodhtree Consulting Ltd. cannot be considered as comparable because of a different model of revenue recognition. He invited our attention towards the Annual 9 ITA No.2549/PUN/2012 BMC Software India Private Limited report of this company, in which it has been specifically reported under the head 'Revenue recognition', that: "Revenue from software development is recognized based on software developed and billed to clients." The ld. AR submitted that the costs incurred by this company in respect of the projects pending completion at the end of the year are booked at the time of incurring, but, the income is recognized on the raising of bills, thereby distorting the figure of operating profit for a particular year. In contrast to that, the ld. AR submitted that the assessee was recognizing revenue from software development side by side without waiting for the completion of the project.
8.4. Ordinarily, if some software development project is incomplete at the end of the year, there may arise two situations , viz., the first, in which the expenses incurred in respect of such software development may be capitalized, which appears to be a more rational manner of depicting the true and fair view of the profitability of the enterprise; and the second, in which such expenses may be straightway taken as revenue costs for the year of its incurring itself, which may not reflect a true and fair view of the profits on year to year basis. The contention of the ld. AR is that whereas Bodhtree falls into the second situation, the assessee falls 10 ITA No.2549/PUN/2012 BMC Software India Private Limited in the first. Though the contention that Bodhtree was accounting for expenses in the year of incurring but considering income only on the conclusion of the project in the subsequent year sounded a little awkward, we attempted to find out the amount of capitalized expenses in respect of incomplete projects at the end of the year. Ex facie, we could not find out any such capitalized value of work-in- progress in the balance sheet of the company on standalone basis nor the ld. DR could point out any. This prima facie shows that the expenses incurred in respect of incomplete projects of software development at the end of the year, but billed in the subsequent year, were, in fact, treated as expenses for the current year alone. In the same manner, expenses incurred in the preceding year(s) for the contracts of software development remaining incomplete at the end of the year also must have been included in the expenses of the last year(s) alone, but, the income got recognized on the raising of bills in the current year.
8.5. Under the mercantile system of accounting, income is recognized at the time of its accrual and the expenses become deductible when liability to pay is incurred. The dates of actual payment of expenses or receipt of income become insignificant. This is also called `Matching concept', as per which income is 11 ITA No.2549/PUN/2012 BMC Software India Private Limited recognized with the incurring of expenses. To put it simply, if income does not accrue from a particular transaction, the expenses incurred for such transaction are excluded from the Trading and Profit & loss account by taking them to Balance sheet. To illustrate, if there is an incomplete contract worth Rs.100 for doing a particular work, and the assessee has incurred Rs.60 on this project till the close of the year, but the income is to be recognized only on the completion of the project, an event to take place in the subsequent year, then, the amount of Rs.60 is not considered as expenditure for the year, but is taken to the Balance sheet as closing work-in-progress, which becomes opening work-in-progress for the subsequent year and the income is finally computed from such project/contract in the next year on the raising of bill of Rs.100/- after allowing deduction for the expenses incurred in the earlier year at Rs. 60 and the further expenses incurred in the year of raising of the bill. In this way, profit for the earlier year in which expenses of Rs.60 were incurred and the next year in which bill is raised for Rs.100 on completing the work, gives true and fair view of the profitability of that enterprise for both the years. If an enterprise, instead of capitalizing Rs. 60 in the first year, claims deduction in the year of incurring itself but recognizes income of Rs.100 in the 12 ITA No.2549/PUN/2012 BMC Software India Private Limited next year, then profit of both the years, will not give a fair view. Bodhtree is following the model of booking expenses at the time of their incurring notwithstanding the raising of bills in next year. This shows that the revenue recognition model of Bodhtree Consulting Ltd. is quite different from the assessee in as much as unless the software is fully developed and billed, it will go on debiting expenses to the Profit and loss account but the invoice will be raised only in the year of completing the project. This leads to fluctuating margins from year to year. The Hon'ble Gujarat High Court in Pr. CIT Vs. Allscripts (India) Private Ltd. (2016) 288 CTR 675 (Gujarat) considered the fluctuating margins of this company from the F.Ys. 2005-06 to 2012-13 which have been tabulated in para 6 of the judgment, viz., 13.87%, 80.15%, 19.89%, 62.27%, 33.42%, (-) 4.46%, 3.29% and (-)11.53%. Considering the fluctuating profit margins based on an altogether different revenue recognition model, the Hon'ble High Court upheld the exclusion of this company from the list of comparables. Respectfully following the precedent, we order to delete this company from the list of comparables. 13 ITA No.2549/PUN/2012
BMC Software India Private Limited
(ii) e-Infochips Limited :
9.1. The TPO proposed the inclusion of this company in the set of comparables, which was resisted by the assessee contending that the same was engaged in Software Development and IT Enabled Services, which was their only reportable business segment. The TPO rejected the contention of the assessee. No relief was allowed by the DRP. The assessee is against the inclusion of this company in the list of comparables.
9.2. After considering the rival submission and perusing the relevant material on record, we find from the Annual Report of this company, whose copy is available in the paper book, that its P & L Account shows `Income from software services & Products' as one unit at Rs. 24,02,78,099/-. Schedules 7 gives break up of this income with "Income from Software Services" at Rs. 21.03 crore and "Consultancy Charges" at Rs. 2.16 crore. Segmental information of this company is available on page 36 of its Annual Report, which states that: "The Company is primarily engaged in Software Development and I.T. enabled services which is considered the only reportable business segment". This indicates that the revenues from Software Development and ITES have been clubbed by this company which also includes Consultancy charges. 14 ITA No.2549/PUN/2012
BMC Software India Private Limited No doubt Consultancy charges in relation to Software Development are part of Software Development, but the inclusion of ITES in the overall segment frustrates the comparability. We are currently dealing with the international transaction of `Provision of Software Development services' and the international transaction of ITES by the assessee is a separate one which has also been benchmarked distinctly. In our considered opinion, e-Infochips Bangalore Ltd., having a pool of both software development and ITES segments into a common segment cannot be considered as comparable on entity level with the international transaction of `Software development' of the assessee. We, therefore, order the exclusion of this company from the list of comparables.
(iii) e-Zest Solutions Ltd. :
10.1. This comparable was proposed for inclusion by the TPO in his final set of comparables. The assessee objected to this move on the basis of functional differences by pointing out that this company was engaged in software services as well as sale of software products. Not satisfied, the TPO considered it as comparable, which was countenanced by the DRP.
15ITA No.2549/PUN/2012
BMC Software India Private Limited 10.2. We have heard both the sides and gone through the relevant material on record. A copy of the Annual Report of this company, placed on record by the ld. AR, has also been gone into. In Notes to accounts, under the head `Generic Names of Principle products/Service of company', it has been mentioned as `Computer Software Development'. Though the assessee stated before the TPO that this company was also engaged in software products, but we are unable to find any signs of software product from the Annual accounts of this company. Neither there is any sale of software product, nor any such product has been referred to in the Annual accounts. Thus it is evident that it is a pure software development company like the assessee.
10.3. The ld. AR invited our attention towards the Balance sheet of this company to show that it had shown Inventories at Rs.11,80,308/-. Schedule G to the Balance sheet gives the description of `Inventories' by mentioning it as "Work-in-process". This shows that unlike Bodhtree, this company adopted a proper revenue recognition model by identifying income only on its earning and keeping the expenses as work in process to be taken over to the next year till the raising of the bill on the completion of 16 ITA No.2549/PUN/2012 BMC Software India Private Limited the project. We, therefore, uphold the inclusion of this company in the list of comparables.
(iv) Helios & Matheson Information Technology Ltd. : 11.1. The TPO proposed to include this company in the list of comparables which was objected by the assessee contending that it was a super profit making company and was also having a different turnover filter. The TPO did not accept the contention of the assessee and included it in the list of comparables, which got concurrence from the DRP.
11.2. We have heard both the sides and gone through the relevant material on record. A copy of the Annual report of this company has been placed on record. Profit and loss account of the relevant Division of this company has been placed at page 60 of the Annual report, which shows "Income - revenue from operations" at Rs.2,18,26,36,019/-. The elaboration of such revenue from operations has been given in Schedule l as "Income from software sales and services" at Rs.2,13,37,41,527/- in addition to Other income and Dividend income. Segmental reporting has been discussed at page 66 of the Annual report to indicate that "The company is operating in a single segment". It, therefore, transpires 17 ITA No.2549/PUN/2012 BMC Software India Private Limited that the income of this company is not only from software services but also from software sales. This shows that the company is engaged into the business of software products as well. There is hardly any need to state difference between the software product company and a software development company. Whereas a software product company would develop a product and then earn revenue from its sale over a period, a simplicitor software development company would render software development services not leading to creation of any software product in its hands and earn revenue from such rendition of services only. The assessee is only a software development service provider, though such service may lead to creation of some product but the same is meant for its AE and not the assessee. Au contraire, Helios and Matheson is also engaged in software products, rendering it unfit for comparison. As the assessee is not engaged in any software product business and is confined only to rendering software development services, we, therefore, exclude this company from the list of comparables.
(v) KALS Infosystems Ltd. :
12.1. The TPO proposed to include this company in the list of comparables. The assessee objected to the same by contending that 18 ITA No.2549/PUN/2012 BMC Software India Private Limited it was functionally different as also engaged in Software products. The TPO rejected the assessee's contention by observing that nothing was mentioned in the Annual Report of the company about the sale of products. The DRP upheld the action of the AO in the draft order, incorporating the inclusion of this company in the final set of comparables by the TPO. Aggrieved thereby, the assessee is in appeal before the Tribunal.
12.2. We have heard both the sides and gone through the relevant material on record. We have perused the Annual report of this company, a copy of which is available in the paper book. Note no.1 to the Notes to the Financial statements provides background of this company by stating that: "The company is engaged in Development of Software and Software products since its inception. The company consisting of STPI unit engaged in Development of Software and Software products and a Training Centre engaged in training of Software professionals on online products.' Segmental information has been given at page 19 of the Annual Report, which shows segmental revenues from "Application Software" and "Training". Profit and loss account of this company has been set out at page 14 of the Annual Report. First item under the head "Income" is "Sales, Services & Training" with the figure of 19 ITA No.2549/PUN/2012 BMC Software India Private Limited Rs.2,19,82,589/-. Break-up of this amount has been given in Schedule No.12 showing `Income from Software Development - Export' - Rs.2,05,40,685/-; `Translation and Interpretation' - Rs.5,07,985/-; and `Training receipts' - Rs.9,33,919/-. Under the head "Operating Expenses", an item worth Rs.27,19.495/- has been shown with narration of "Software Consumption from Inventory". Balance sheet of this company shows `Inventories' at Rs.85,77,723/-. The above information clearly deciphers that Kals Information Technology Systems Ltd. is not only engaged in providing Software Development Services but is also dealing in Software products under the relevant segment. As the assessee is not engaged in the business of Software products but is rendering only Software services on captive basis, in our considered opinion, this company cannot be considered as comparable. The Hon'ble jurisdictional High Court in CIT vs. PTC Software (I) Pvt. Ltd. (2017) 395 ITR 0176 (Bom) has held that a Software product company cannot be compared with a company providing software services. As Kals Information Technology Systems Ltd. is engaged in selling of software products which is different from the activities undertaken by assessee, namely, rendering of software service only 20 ITA No.2549/PUN/2012 BMC Software India Private Limited to its AEs, we hold the same to be incomparable and accordingly direct to exclude it from the final list of comparables.
(vi) Maars Software International Ltd.:
13.1. In addition to the assessee seeking exclusion of the above five companies, a prayer has also been made for inclusion of Maars Software International Ltd. , which was excluded by the TPO on the ground that it was predominantly an on-site service provider having different features vis-a-vis the assessee providing offshore services only. Considering the view taken by him in the preceding years, the TPO ordered to exclude this company from the list of comparables, which was upheld by the ld. DRP. The assessee is aggrieved by the exclusion of this company.
13.2. After considering the rival submissions and perusing the relevant material on record, we find that the TPO excluded this company by relying on his similar action taken for earlier years. This company came up for consideration before the Tribunal in assessee's own case for the A.Y. 2006-07. Vide order dated 16-03- 2016, copy provided at page 743 onwards of the paper book, the Tribunal in ITA Nos.1425/PUN/2010 considered this company at page 22 of its order. Considering on site development impacting 21 ITA No.2549/PUN/2012 BMC Software India Private Limited operating margins differently vis-a-vis a company providing offshore services, the Tribunal held that Maars Software International Ltd. was liable to be excluded from the list of comparables. It is further noted that this company once again came up for consideration before the Tribunal in assessee's own case for the A.Y. 2007-08. Vide its order dated 01-03-2019 in ITA No.1646/PUN/2011, copy available at page 773 onwards of the paper book, the Tribunal examined the comparability of this company in para 24.1 of its order and directed to include it in the list of comparables on the ground that its principal business was that of software development.
13.3. Now it is seen that there are two orders of the Tribunal in assessee's own case for two earlier years dealing with the comparability or otherwise of this company. Whereas in the earlier order, the reason for upholding the exclusion was onsite service model of this company, which was not there in the later year. As for the instant year also, the reason given by the TPO for the exclusion of this company is onsite service model, we follow the earlier order of the Tribunal citing this as a valid reason for its exclusion from the list of comparables. Following the precedent and without going 22 ITA No.2549/PUN/2012 BMC Software India Private Limited further deep into it, we uphold the exclusion of this company from the list of comparables.
14. The assessee has then sought risk adjustment. It was pointed out that the TPO did not grant any risk adjustment which was upheld by the ld. DRP.
15. Having heard both the sides and gone through the relevant material on record, we find that similar issue came up for consideration before the Tribunal in assessee's own case for the A.Y. 2006-07. In para 44 of its order, the Tribunal has restored the matter to the file of AO/TPO for computing the risk adjustment after granting reasonable opportunity of hearing to the assessee. In the absence of any distinguishing feature having been brought to our notice by the ld. DR, respectfully following the precedent, we-set aside the impugned order on this score and remit the matter to the file of AO/TPO to follow the directions given by the Tribunal in its order for the A.Y. 2006-07.
II. SALES SUPPORT SERVICES SEGMENT
16. The assessee declared an international transaction of "Rendering of sales support services" with transacted value of 23 ITA No.2549/PUN/2012 BMC Software India Private Limited Rs.2,47,84,351/- The assessee applied the TNMM as the most appropriate method for its benchmarking. Computing its own OP/TC at 8.84%, the assessee worked out average adjusted margin of comparables at 15.24% to demonstrate that its transaction was at ALP. As against the assessee choosing seven companies as comparables, the TPO expanded the list and recommended a transfer pricing adjustment of Rs.33,09,723/-. The DRP made certain alterations to the list of comparables. The AO, giving effect to the direction of the DRP, recomputed the average adjusted margin of comparables at 13.20%. This led to the transfer pricing addition of Rs.14,78,560/- in the international transaction of Sales Support services, aggrieved by which the assessee has come up before the Tribunal.
17. We have heard both the sides and gone through the relevant material on record. The assessee has set out nature of Sales support services on page 27 of its T.P. study report by indicating that as against BMC, US mainly conceptualizing the marketing and advertisement strategy for its products, the sales support staff of the assessee was responsible for identifying any new opportunities in India either through channel partners or directly through customers. We have also gone through the Agreement referred to hereinabove 24 ITA No.2549/PUN/2012 BMC Software India Private Limited through which the assessee rendered the services. Appendix-A to the Agreement gives the nature of sales support services under point
(h) as: "Sales support services to market and sell BMC products in India and the Asia Pacific Region, either directly or through channel partners".
18.1. Armed with the above understanding of the functional profile of the assessee under the international transaction of `Rendering of sales support services', we now proceed to examine the comparability or otherwise of TSR Darashaw Limited which has been challenged by the assessee in the instant appeal. The TPO included this company by observing that he selected this company in the earlier years as well. The DRP did not agree with the contention of the assessee and upheld the inclusion. The assessee is aggrieved by such inclusion.
18.2. We have heard both the sides and gone through the relevant material on record. At this stage, it is relevant to mention that the TPO has referred to the inclusion of this company in the list of comparables for earlier years. On a specific query, the ld. AR contended that the Tribunal in its order for the A.Y. 2006-07 upheld the inclusion of this company. He, however, contended that the 25 ITA No.2549/PUN/2012 BMC Software India Private Limited business profile of this company underwent a change later on as has been recognized by the Pune Benches of the Tribunal in its later order passed in the case of Honeywell Turbo Technologies (India) Pvt. Ltd. Vs. DCIT for the A.Y. 2008-09 (ITA No.2584/PUN/2012 dated 10-02-2017), a copy of which has been placed on record. The ld. AR invited our attention towards para 24 of the later order accepting change in profile of this company in comparison to earlier years and accordingly holding it to be not includible in the list of comparables. It was, therefore, prayed that the changed business profile of TSR Darashaw be considered, which is relevant for the year and it should be removed from the list of comparables following the decision of the co-ordinate bench in the case of Honeywell Turbo Technologies (India) Pvt. Ltd. (supra). The ld. DR did not dispute the position as put forth on behalf of the assessee.
18.3. We have heard both the sides and gone through the relevant material on record. We have also gone through the Annual report of this company for the year under consideration, a copy of which has been placed on record. On perusal of such Annual Report, it emerges that this company on an overview is a broking and investment banking house. Apart from 'Pay Roll and Trust Fund 26 ITA No.2549/PUN/2012 BMC Software India Private Limited activity (Pay Roll), its other segments are: 'Registrar and Transfer Agent activity (R&D)' and 'Records management activity (Records).' Under the 'Pay Roll' segment, this company undertakes pay roll and employee trust fund administration and management. When we compare the nature of the functions carried out by this company with the marketing support services rendered by the assessee to its AEs, we find that both are a way apart from each other. There can be no logical comparison between a pay roll services rendered by a company to its clients along with Registrar and Transfer Agent activity and Records management activity (Records) with the marketing support services rendered by the assessee to its AEs. This company is, therefore, directed to be excluded from the final set of comparables.
19. The ld. AR submitted that if TSR Darashaw Limited is excluded from the list of comparables, then he will not be pressing for the inclusion/exclusion of other companies as has been agitated in the instant appeal. In view of our decision on the exclusion of TSR Darashaw, we do not propose to consider other companies from the angle of comparability.
27ITA No.2549/PUN/2012
BMC Software India Private Limited
20. To sum up, we set aside the impugned order on the issue of transfer pricing addition in the international transactions of Rendering of software development services and Rendering of sales support services and remit the matter to the file of AO/TPO for the fresh determination of their ALPs in consonance with our above directions. Needless to say, the assessee will be allowed a reasonable opportunity of hearing in such fresh proceedings.
21. Ground no. 15 is against the inclusion of revenue from sales support division in export and total turnover and other income in total turnover while re-computing deduction us/ 10A of the Act. This ground was not pressed by the ld. AR. The same is, therefore, dismissed.
22. Another ground raised in this appeal is against the computation of deduction u/s.10A by reducing foreign currency expenses from export turnover (without excluding the same from the total turnover of the STP unit).
23. Having heard both the sides and gone through the relevant material on record, it is seen that the AO while computing deduction u/s.10A excluded foreign currency expenses from `export turnover' without giving any corresponding effect to the amount of `total 28 ITA No.2549/PUN/2012 BMC Software India Private Limited turnover'. Formula for computation of deduction has been set out in sub-section (4) of section 10A providing that computation of the amount of profits derived from export of the eligible products shall be done by considering the same proportion as export turnover in respect of such products bears to the total turnover to the profits of the business of the undertaking. There are three components involved in the computation of eligible profits. Apart from the profits of the business of the undertaking, there is a one component of export turnover and another of total turnover. The term "export turnover" has been defined in Explanation 2(iv) to section 10A as consideration in respect of export of articles or things etc. received or brought into in India but does not include freight, telecommunication charges or insurance attributable to the delivery of articles or things etc. outside India incurred in foreign exchange in providing the technical services outside India. The term "total turnover" has not been specifically defined in the definition clause of section 10A contained in Explanation 2. However, it goes without saying that `total turnover' comprises of `export turnover' and domestic turnover. For example, if export turnover is Rs.100 and domestic turnover is Rs.80, then total turnover would be Rs.180 (Rs.100 + Rs.80), which is sum total of both the export and 29 ITA No.2549/PUN/2012 BMC Software India Private Limited domestic turnovers. If certain portion relevant to export of goods, say Rs.10, is not to be considered as part of export turnover of Rs.100, it is but natural that the amount of export turnover would come down to Rs.90. In that case, total turnover would be Rs.170 (Rs.90 as export turnover + Rs.80 as domestic turnover). Adverting to the facts of the instant case, we find that since the amount of foreign currency expenses has been held by the AO himself as not forming part of `export turnover', the sequitur is that the same would also not form part of `total turnover', as there cannot be two different figures of `export turnover', one as an independent numerator in the formula and the other constituting part of total turnover in the denominator. To put it simply, foreign currency expenses which have been excluded by the AO from the ambit of `export turnover' would also require exclusion from `total turnover'. The Hon'ble Delhi High Court in CIT Vs. Genpact India (2011) 203 Taxman 632 (Del) has held that any exclusion from export turnover should also be reduced from total turnover for the purpose of deduction u/s.10A. We, therefore, overturn the impugned order on this score and allow the ground of appeal.
24. Ground relating to charging of interest is consequential and the ground for initiation of penalty u/s.271(1)(c) is premature. 30 ITA No.2549/PUN/2012
BMC Software India Private Limited
25. In the result, the appeal is partly allowed.
Order pronounced in the Open Court on 19th August, 2019.
Sd/- Sd/-
(PARTHA SARATHI CHAUDHURY) (R.S.SYAL)
JUDICIAL MEMBER VICE PRESIDENT
पुणे Pune; दनांक Dated : 19th August, 2019
सतीश
आदेश क ितिलिप अ िे षत/Copy
षत of the Order is forwarded to:
1. अपीलाथ / The Appellant;
2. यथ / The Respondent;
3. The CIT(A)-13, Pune
4. The Pr.CIT-V, Pune
5. िवभागीय ितिनिध, आयकर अपीलीय अिधकरण, पुणे "सी" / DR 'C', ITAT, Pune;
6. गाड फाईल / Guard file.
आदेशानुसार/ ार BY ORDER, // True Copy // Senior Private Secretary आयकर अपीलीय अिधकरण ,पुणे / ITAT, Pune Date
1. Draft dictated on 09-08-2019 Sr.PS
2. Draft placed before author 19-08-2019 Sr.PS
3. Draft proposed & placed before JM the second member
4. Draft discussed/approved by JM Second Member.
5. Approved Draft comes to the Sr.PS Sr.PS/PS
6. Kept for pronouncement on Sr.PS
7. Date of uploading order Sr.PS
8. File sent to the Bench Clerk Sr.PS
9. Date on which file goes to the Head Clerk
10. Date on which file goes to the A.R.
11. Date of dispatch of Order.
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