IN INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH C BEFORE SHRI VIJAY PAL RAO, JUDICIAL MEMBER AND SHRI S. JAYARAMAN, ACCOUNTANT MEMBER I.T.(T.P) A. No.17/Bang/2016 (Assessment Year : 2011-12) M/s. Applied Materials India Pvt. Ltd., Unit-5, 3rd Floor, Explorer Building, International Tech Park, Whitefield Road, Bangalore-560 066. . Appellant. PAN AABCA 2635C Vs. Asst. Commissioner of Income Tax, Circle 1(1)(1), Bangalore. .. Respondent. I.T.(T.P) A. No.39/Bang/2016 (Assessment Year : 2011-12) (By Revenue) Assessee By : Shri T. Suryanarayana, Advocate. Respondent By : Shri Sanjay Kumar, CIT-III (D.R) Date of Hearing : 09.08.2016. Date of Pronouncement : 21.9.2016. O R D E R Per Shri Vijay Pal Rao, J.M. : These cross appeals are directed against assessment order dt.20.11.2015 passed under Section 143(3) r.w.s. 144C of Income Tax 2 IT(T.P)A Nos.17 & 39/Bang/2016 Act, 1961 (in short 'the Act') in pursuant to directions of Dispute Resolution Panel (in short DRP ) dt.9.10.2015 for Assessment Year 2011-12. 2. assessee is wholly owned subsidiary of Applied Materials Inc, USA which in turn is supplier of products and services to global semi-conductor industry. assessee-company was incorporated dt.11.7.2003 under provisions of Companies Act, 1956 and is engaged in provision of software development services and engineering services to its Associated Enterprise (AE) Applied Inc as captive service provider. financials of assessee as well as international transactions for year under consideration have been reproduced by 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.23,976,188 Operating Expenditure Rs.1,851,654,510 Operating Profit Rs.211,539,258 OP/OC 11.42% 3 IT(T.P)A Nos.17 & 39/Bang/2016 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 13,610,607 employees on Restricted Stocks Unit granted and remitted to local tax authorities. 3. only dispute in these appeals is regarding Arm s Length Price ( ALP ) of software development services to AE and consequent adjustment by TPO apart from issue of exclusion of expenses incurred in foreign currency while computing deduction under Section 10A of Act. other international transactions have been accepted by TPO at ALP. operating profit claimed by assessee is 11.42%. 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 Nos.17 & 39/Bang/2016 Comparables selected by Assessee and their arithmetic mean: Sl. Name of company NCP NCP NCP Weighted No. 2008-09 2009-10 Average (%) (%) 2010-11 (%) (%) 1 Akshay Software 12.47 -3.16 0.66 3.33 Technologies Ltd. 2 Evoke Technologies Pvt. Ltd. 17.49 15.13 15.16 16.04 3 Helios & Matheson 21.27 10.83 13.94 14.67 Information Technology Ltd. 4 L G S Global Limited 24.63 10.00 4.61 13.31 5 Powersoft Global Solutions 9.96 9.88 16.35 12.26 Ltd. 6 RS Software (India) Ltd. 12.20 21.17 7.71 13.52 7 R Systems International Ltd. 15.97 25.05 27.10 22.14 8 Sasken Communication 20.29 17.09 9.69 18.09 Technologies Ltd. 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 TPO rejected 6 comparable companies from TP Study and accepted 4 companies from set of comparables. TPO has carried out fresh search and added 9 more companies to set of 4 comparables from TP Study. TPO worked out Arithmetic Mean (AM) of 13 comparables as under : 5 IT(T.P)A Nos.17 & 39/Bang/2016 Comparables selected by TPO and their arithmetic mean : Sl. Mark-up on Mark-up on No. Total Costs Total Costs Name of Company (WC unadj) (WC adj) (in %) (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 Systems 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, TPO computed adjusted average PLI at 24.77% and proposed adjustment under Section 92CA of Act of Rs.23,41,94,490 as under : 6 IT(T.P)A Nos.17 & 39/Bang/2016 Computation of arm s length price by TPO and adjustment made : Arm s Length Mean Margin 24.82% Less: Working Capital Adjustment 0.05% Adjusted mean margin of 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/- assessee challenged action of TPO/A.O. before DRP and raised various objections including comparability of certain companies selected by TPO as well as issue of rejection of certain companies selected by assessee in TP Study. DRP rejected 9 companies out of set of 13 comparables selected by TPO on various criteria and filters applied by it. final list of comparables after directions of DRP is as under : Mark-up on Total Mark-up on Total Costs Costs (WC adj) SI. No. Name of Company (in %) (WC unadj) (in %) 1 e-Zest Solutions Limited 21.03 19.97 2 Persistent Systems & Solutions Ltd. 22.12 22.16 7 IT(T.P)A Nos.17 & 39/Bang/2016 3 Persistent Systems Ltd. 22.84 23.60 Sasken Communication Technologies 24.13 25.46 4 Ltd. ARITHMETICAL MEAN 22.53 22.80 Thus both assessee as well as revenue are aggrieved by directions of DRP and filed their cross appeals. assessee and department raised following grounds respectively as under : Assessee's Grounds : 1. Order/ Directions bad in law and on facts 1.1 order passed by Assistant Commissioner of Income Tax, Circle 1(1)(1) [ AO ], under section 143(3) read with section 144C of Income-tax Act, 1961 ('the Act'), is bad in law and on facts and is in violation of principles of natural justice. Without prejudice to generality of above, order issued by AO is bad in law in so far as fact that AO did not issue to Applied Materials India Private Limited ( Appellant or Company ), show cause notice as per proviso to section 92C(3) of Act. 1.2 AO has erred in law in making reference to Additional Commissioner of Income Tax (Transfer Pricing) 1(1) [ TPO ], inter alia, since he has not recorded opinion that any of conditions in section 92C(3) of Act, were satisfied in instant case. Accordingly, order passed by TPO is without jurisdiction 1.3 directions issued by Ld. Dispute Resolution Panel ( DRP/ Ld. Panel ) did not take cognizance of objections raised by Appellant in relation to transfer pricing matters. 1.4 order passed by AO is without jurisdiction, inter alia, in so far as it purports to give effect to invalid directions of Ld. Panel. 1.5 directions issued by Ld. Panel and order passed by AO is without jurisdiction, inter alia, in so far as it purports to give effect to invalid order of TPO. 2. Ld. Panel and AO/ TPO has erred in justifying motive of shifting of profits On facts and in circumstances of case and in law, Ld. Panel and AO/ TPO erred in not demonstrating that motive of Appellant was to shift profits 8 IT(T.P)A Nos.17 & 39/Bang/2016 outside India by manipulating prices charged in international transaction, which is pre-requisite condition to make any adjustment under provision of Chapter X of Act. 3. Determination of arm s length price of international transactions 3.1 Ld. Panel and AO/ TPO erred in rejecting value of international transactions as recorded in books of account, as arm s length price. 3.2 Ld. Panel and AO/ TPO erred in determining new arm s length price in substitution of arm s length price as determined by Appellant. 4. Determination of Net Cost Margin of Appellant 4.1 AO / TPO had grossly erred on facts and in law in benchmarking transactions of Appellant without considering differences in functions performed, assets employed and risk undertaken by Appellant vis- -vis comparable companies. Ld. Panel erred in confirming same. 4.2 Ld. AO / Ld. TPO had erred on facts and in law in not acknowledging that sub-contracting charges, incurred by Appellant, represents arm s length consideration, and thereby was required to be considered as pass-through cost. Ld. Panel erred in confirming same. 5. fresh comparable search undertaken by TPO is bad in law AO/ TPO erred in law in holding that fresh comparability analysis using non contemporaneous data conducted by TPO and further substituting Appellant s analysis with fresh benchmarking analysis on his own conjectures and surmises. Thus, Appellant prays that fresh benchmarking analysis conducted by TPO is liable to be quashed. 6. Comparability Analysis adopted by TPO for determination of arm s length price 6.1 AO/ TPO grossly erred on facts and Ld. Panel erred in confirming benchmarking of transactions of software development services of Appellant with companies operating as full-fledged entrepreneurs without considering differences in functions performed, assets employed and risk undertaken by Appellant vis- -vis comparable companies. 6.2 AO/ TPO erred on facts in rejecting comparable companies arrived at in Transfer Pricing Study without considering functional and risk analysis of Appellant and Ld. Panel also erred in confirming same. 6.3 AO/ TPO erred in law in applying arbitrary filters to arrive at fresh set of companies as comparables to Appellant, without establishing functional comparability and Ld. Panel also erred in confirming same. 6.4 AO/ TPO erred on facts in arbitrarily accepting companies without considering turnover and size of Assessee and comparables. Ld. Panel also erred in confirming same. In view of high turnover of Infosys Ltd, L & T Infotech Ltd., Mindtree Ltd., Persistent Systems Ltd , Sasken Communication Technologies Ltd., and Tata Elxsi Ltd therefore, said companies ought to stand excluded from final list of comparables. 6.5 AO/ TPO grossly erred in law in deviating from uncontrolled party transaction definition as per Income-tax Rules and arbitrarily applying 9 IT(T.P)A Nos.17 & 39/Bang/2016 25% related party criteria in accepting / rejecting comparables and Ld. Panel also erred in confirming same. 6.6 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 specific segmental results and Ld. Panel also erred in confirming same. 6.7 AO/ TPO erred on facts in arbitrarily rejecting companies having export revenues less than 75% of total sales and Ld. Panel also erred in confirming same. 6.8 AO/ TPO erred in rejecting companies having employee cost less than 25% of total sales and Ld. Panel also erred in confirming same. 6.9 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 Ld. Panel also erred in confirming same. 6.10 AO/ TPO erred in facts in arbitrarily rejecting companies based on their financial results without considering functional comparability. 6.11 AO/ TPO also erred on facts in wrongly computing margins of certain companies identified as comparable by TPO. 6.12 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 companies being functionally comparable. Ld. Panel also erred in confirming same. 6.13 AO/ TPO erred in including Sasken Communication Technologies Ltd, Persistent Systems & Solutions Ltd and Persistent Systems Ltd despite these companies being functionally dissimilar to Appellant. Ld. Panel also erred in confirming same. 6.14 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 TPO 7.1 AO/ TPO has erred in law and Ld. Panel further erred in confirming use of data, which was not contemporaneous and which was not available in public domain at time of conducting transfer pricing study by Appellant. 7.2 AO/ TPO erred in law and Ld. Panel further erred in confirming non- application of multiple-year data while computing margin of alleged comparable companies as such data had influence in determining transfer pricing policy of Assessee. 8. Non-allowance of appropriate adjustment to comparable companies by 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 practices, (ii) marketing expenditure adjustment, (iii) research and development expenditure adjustment, (iv) working capital, and (iv) risk profile between Appellant and comparable companies. 10 IT(T.P)A Nos.17 & 39/Bang/2016 9. Variation of 5% from arithmetic mean AO/ TPO erred in law in not granting benefits of proviso to section 92C(2) of Act available to Appellant. 10. Reduction of expenses from export and total turnover for computation of deduction under section 10A of Act 10.1 Ld. Panel erred in upholding action of Ld. AO in reducing sub- contracting charges of Rs. 594,413,108 incurred towards export of computer software from export turnover, without considering fact that these expenses were not incurred for purpose of rendering any technical services outside India. 10.2 Ld. Panel erred in upholding action of Ld. AO in reducing travel expenses incurred in foreign currency amounting to Rs. 9,284,032 incurred towards export of computer software from export turnover, without considering fact that said travel expenses are not incurred for purpose of rendering any technical services outside India. 10.3 Ld. Panel erred in upholding action of Ld. AO in not making corresponding reduction of foreign exchange loss of Rs. 22,010,559 from total turnover after having reduced same from export turnover and not following decision of Hon ble Karnataka High Court in case of Tata Elxsi Ltd vs. ACIT [2011] [349 ITR 198 wherein it was inter alia held that expenses reduced from export turnover ought to be reduced from total turnover as well. 11. Initiation of penalty proceedings Appellant submits that based on facts and circumstances of case, there was no basis for AO to initiate proceedings under section 274 read with section 271 of Act. 12. Relief 12.1 Appellant prays that directions be given to grant all such relief arising from above grounds and also all relief consequential thereto. 12.2 Appellant desires leave to add to or alter, by deletion, substitution or otherwise, any or all of above grounds of objections, at any time before or during hearing of Appeal. 12.3 Further, Appellant prays that adjustment in relation to transfer pricing matters made by learned AO/ TPO and upheld by Ld. Panel is bad in law and liable to be deleted. 11 IT(T.P)A Nos.17 & 39/Bang/2016 Revenue s Grounds : 12 IT(T.P)A Nos.17 & 39/Bang/2016 4. first effective issue is regarding sub-contracting charges being part of operating cost as well as corresponding revenue from AE for purpose of operating income. assessee took plea that sub- contracting charges incurred by assessee are to be treated as pass through cost and therefore shall be excluded from operating profit and operating cost of assessee while computing ALP in respect of software development services segment. TPO as well as DRP did not accept this contention of assessee and considered sub- contracting charges and receipts as part of operating cost and 13 IT(T.P)A Nos.17 & 39/Bang/2016 operating income of assessee for purpose of determining ALP. 5. Before us, learned Authorised Representative of assessee has submitted that for earlier assessment years TPO accepted sub-contracting charges as pass through cost while determining operating profit/margins of assessee. He has also relied upon decision of Delhi Bench of Tribunal in case of DCIT Vs. Cheil Communications India Pvt. Ltd. (2015) 11 taxmann.com 205. Thus learned Authorised Representative has submitted that sub-contract charges ought to be considered as pass through cost and should be excluded both from operating cost as well as operating income of assessee for purpose of computing operating margins of software development segment. Alternatively, learned Authorised Representative has submitted that comparables should also be having sub-contract charges if this is not considered as pass through cost. 6. On other hand, learned Departmental Representative has submitted that while computing margins on cost of software development services segment, assessee itself considered cost of 14 IT(T.P)A Nos.17 & 39/Bang/2016 sub-contracting charges as part of operating cost. Further sub- contracting activity is routine business activity carried out in software development services segment. TPO has applied employee cost filter and cost of employee in case of assessee is more than said filter applied by TPO. Therefore if assessee is getting some of its work from third party it will be part of operating cost of assessee and cannot be excluded. He has further submitted that for Assessment Year 2010-11, DRP decided this issue against assessee. learned Departmental Representative has relied upon orders of authorities below. 7. We have considered rival submissions as well as relevant material on record. Undisputedly, assessee is charging mark up on software development services provided to AE being captive service provider. Therefore assessee is not acting as agent or distributor of AE but is provider of services of its own. It is not case of rendering services of agent without any value addition but assessee is providing software development services to AE and charging margin on same. Therefore cost on software 15 IT(T.P)A Nos.17 & 39/Bang/2016 development activity is incurred by assessee and charging AE on said services with mark up of 10% on cost. cost of sub- contracting in software development services is also charged with 10% mark up to AE. When margin on cost of sub-contracting charges is part of operating revenue of assessee then only cost of sub-contracting activity cannot be excluded as pass through. It would amount to artificially inflate margins of assessee on other revenue from services other than sub-contracting activity. In any case, pass through cost can be considered only when activity of providing services to AE does not involve value addition on part of AE. decision of Delhi Benches of Tribunal in case of DCIT Vs. Cheil Communications India Pvt. Ltd. (supra) would not help case of assessee as in said case activity of assessee was only 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 service to AE and cannot be separated from operating cost and operating revenue of said segment of services. Accordingly, cost of software development services cannot be treated in this fashion as claimed by assessee. 16 IT(T.P)A Nos.17 & 39/Bang/2016 Hence we do not find any merit or substance in contention raised by assessee on this issue. 8. As regards alternative plea raised by ld. AR that comparables should also have similar activity, we find that TPO has applied filter of cost of employee which subsumes outsourcing activity of both assessee as well as comparables. Accordingly, issue is decided against assessee. 9. next ground in assessee's appeal is regarding seeking exclusion of 4 comparable companies retained by DRP. We will deal with comparability of these 4 companies as under : (i) E-Just Solution Ltd. 9.1.1 learned Authorised Representative has submitted that assessee raised objection before DRP for exclusion of this company from set of comparables but DRP has not adjudicated objections of assessee. He has referred objections raised before DRP at page No. 1373 of paper book as well as referred relevant part of Annual Report of this company at page Nos.39, 17 IT(T.P)A Nos.17 & 39/Bang/2016 42 & 50 of Annual Report. learned Authorised Representative has submitted that this company is engaged in diversified activity and reported income under only one segment. Therefore it cannot be considered as comparable of assessee's software development services segment. He has relied upon decision of co-ordinate bench of this Tribunal dt.22.4.2016 in case of Electronics for Imaging India Pvt. Ltd. Vs. DCIT in IT(TP)A Nos.227 & 285/Del/2013. 9.1.2 On other hand, learned Departmental Representative has submitted that main activity of this company is software development services. Therefore insignificant variation in activity if any cannot be determinative factor while computing ALP under Transactional Net Margin Method (TNMM). He has relied upon decision of Delhi Bench of ITAT in case of Toluna India Pvt. Ltd. Vs. ACIT (2014) 151 ITD 177. 9.1.3 We have considered rival submissions as well as relevant material on record. We find that assessee has raised objections against this company before DRP. However DRP did not adjudicate objections raised by assessee. decision of this 18 IT(T.P)A Nos.17 & 39/Bang/2016 Tribunal in case of M/s. Electronics for Imaging India Pvt. Ltd. Vs. DCIT (supra) relied upon by learned Authorised Representative is based on two aspects. (i) information received under Section 133(6) of Act was considered by TPO without sharing with assessee and (ii) nature of activity is KPO. It is pertinent to note that question of BPO and KPO is relevant only in ITES segment and not for software development services segment. On contrary, decision in case of Toluna India Pvt. Ltd. Vs. ACIT (supra), pertains to Assessment Year 2007-08, therefore facts of different year cannot be applied without verification. Accordingly, we set aside this issue of comparability of E-Just Solution Ltd. to record of Assessing Officer / TPO for deciding same after verification of relevant facts as well as considering objections of assessee. (ii) Persistent Systems and Solutions Ltd. (iii Persistent Systems Ltd. 9.2.1 These two companies were part of TP Study analysis however assessee raised objections against these companies before TPO as well as DRP. 19 IT(T.P)A Nos.17 & 39/Bang/2016 9.2.2 Before us, learned Authorised Representative of assessee has submitted that these companies are functionally not comparable to assessee as these are engaged in diversified activity i.e. rendering of software development services and licensing, royalty of software products. Thus without having separate segmental details and data these diversified activities cannot be compared with assessee. He has further pointed out that company Persistent Systems Ltd. also engaged in developing products and therefore activities are not comparable with that of assessee. In support of his contention, he has relied upon decision of this Tribunal dt.24.2.2016 in case of DCIT Vs. Electronics for Imaging India Pvt. Ltd. (supra) and submitted that this company was found to be not comparable with software development services provider. He has further pointed out that in assessee's own case for Assessment Year 2010-11, DRP vide its order dt.24.11.2014 has excluded Persistent Systems and Solutions Ltd. from list of comparables by holding that this company is not comparable to assessee. 20 IT(T.P)A Nos.17 & 39/Bang/2016 9.2.3 On other hand, ld. DR has submitted that TPO as well as DRP has examined functional comparability of these companies and found that these companies are comparable with assessee. These two companies have satisfied all filters applied by TPO and DRP therefore minor variation in activity would not render these companies non-comparable when comparable price is considered under TNMM. 9.2.4 We have considered rival submissions as well as relevant material on record. At outset we note that functional comparability of these two companies have examined by co-ordinate bench of this Tribunal in 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. assessee has grievance against rejection of this company by DRP. ld. AR has submitted that assessee did not raise any objection against this company, however, DRP has rejected said company. Therefore, said company should be retained in list of comparables. 61. Having considered rival submissions as well as relevant material on record, at outset, we note that DRP has examined functional comparability of this company by considering relevant details as given in annual report of this company. DRP has given finding that entire revenue has been earned by this company from sale of software services and products and in absence of segmental details, it cannot be considered as comparable with software services segment. We find that this company has shown income from sale of software services and products to tune of Rs.6.67 crores. We further note that as per 21 IT(T.P)A Nos.17 & 39/Bang/2016 Schedule 11, entire revenue has been shown under one segment i.e., sale of software services and products. Therefore, no separate segment has been given in respect of software services. Accordingly, composite data of revenue as well as margins of this company pertaining to sale of software services and products cannot be considered as comparable with software development services segment of assessee. In view of above facts and circumstances, we do not find any error or illegality in directions of DRP in excluding this company from list of comparables. This ground of CO is dismissed. (4) Persistent Systems Ltd. 24. We have heard ld. DR as well as ld. AR and considered relevant material on record. assessee raised objections against selection of this company on ground that this company is functionally not comparable as engaged in product development. segmental information for services and product is not available. Further, assessee has also pointed out that there was acquisition and restructuring during year under consideration. 25. DRP has noted fact that this company has reported 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. Further, DRP has noted that as per Note 1 of Schedule 15, this company is predominantly engaged in outsource software development service. Apart from revenue from software services, it also earns income from licence of products, royalty on sale of products, income from maintenance contract, etc. These facts recorded by 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 products, royalty on sale of products as well as income from maintenance contract, etc., same cannot be considered as functionally comparable with assessee. Further, this company also earns income from outsource product development. In absence of any segmental data of this company, we do not find any error or illegality in findings of DRP that this company cannot be compared with assessee and same is directed to be excluded from set of comparables. We further find from Annual Report that there is no change in activity and functions of these companies during year under consideration in comparison to Assessment Year 2010-11. Accordingly, following decisions of co-ordinate benches of this 22 IT(T.P)A Nos.17 & 39/Bang/2016 Tribunal (supra), we direct A.O./TPO to exclude these two companies from set of comparables. (iv) Sasken Communication Technologies Ltd. 9.3.1 ld. AR of assessee has submitted that this company is engaged in development of software products as it has inventories, intangible assets as well as high expenditure on R&D. Therefore this company is functionally not comparable to assessee. ld. AR has referred to 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 assessee when segmental details are not available. He has relied upon decision dt.24.2.2016 of co-ordinate bench of this Tribunal in case of DCIT Vs. Electronics for Imaging India Pvt. Ltd. (supra). 9.3.2 On other hand, learned Departmental Representative has submitted that inventory shown at page 70 of report is very negligible. product launched is for future period and not generated 23 IT(T.P)A Nos.17 & 39/Bang/2016 any revenue during year under consideration. He has relied upon orders of authorities below. 9.3.3 We have considered rival submissions as well as relevant material on record. co-ordinate bench of this Tribunal in case of DCIT Vs. Electronics for Imaging India Pvt. Ltd. (supra) has considered comparability of this company in paras 27 to 29 as under : (5) Sasken Communication Technologies Ltd. 27. assessee raised objection that this company has revenue from software services, software products and other services. DRP has come to conclusion that this company earned revenue from 3 segments. However, no segmental information is available. Accordingly, DRP directed AO to exclude this company from comparables. 28. We have heard ld. DR as well as ld. AR and considered relevant material on record. DRP has reproduced break-up of revenue in impugned 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, segmental operating margins are not available. Therefore, in absence of segmental relevant data and particularly operating margins, this composite data cannot be considered as comparable with assessee for software development services segment. Accordingly, we do not find any error or illegality in findings of DRP. 24 IT(T.P)A Nos.17 & 39/Bang/2016 We further note that DRP has not adjudicated objections of assessee whereas for Assessment Year 2010-11, DRP rejected this company as comparable. Accordingly, we set aside this issue to record of A.O./TPO to verify relevant facts and compare with facts recorded by Tribunal in case of DCIT Vs. Electronics for Imaging India Pvt. Ltd. (supra) for Assessment Year 2010-11 and then decide issue after giving opportunity of hearing to assessee. 11. next ground of assessee's appeal is regarding seeking inclusion of some of comparables in 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 assessee in TP Study however TPO rejected this company on ground that its functions appear to be more in nature of support services or ITES. DRP has confirmed rejection on different ground by applying filter that 25 IT(T.P)A Nos.17 & 39/Bang/2016 expenditure in foreign currency was higher when compared to its total revenue. Thus DRP was of view that this company was predominantly engaged in on site development of software. ld. AR has submitted that such filter was neither applied by TPO nor sought to be applied by assessee. Therefore DRP was not asked to apply this filter. Secondly DRP did not arrive at finding that said company was in fact engaged in on site development of software. finding of DRP are based mainly on assumption that because of its expenditure in foreign currency was high it must have been engaged in on site development of software. ld. AR has further contended that this filter of on site development services have been applied by DRP without giving opportunity of filing its objections to assessee. Thus ld. AR has submitted that rejection of said company by applying filter not applied by TPO is liable to be set aside. He has relied upon decision of this Tribunal dt.29.6.2015 in case of M/s. Arowana Consulting Ltd. Vs. ITO in IT(TP)A No.235/Bang/2015. 26 IT(T.P)A Nos.17 & 39/Bang/2016 12.2 On other hand, learned Departmental Representative has referred to page Nos.15 and 20 of Annual Report and submitted that this company has shown product and stock in accounts therefore in absence of segmental reporting it cannot be considered as functionally comparable with assessee. 12.3 We have considered rival submissions as well as relevant material on record. As regards decision of co-ordinate bench in case of Arowana Consulting Ltd. Vs. ITO (supra), Tribunal has dealt with only 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 said company for reason that its employee cost was more than 89% of its total operating expenditure. We find that assessee had employee cost in excess of 90% of its operating expenditure. In our opinion, it is normal to have high percentage of employee cost in software development company, especially so, when company is involved in development of software for clients at site of clients. Reason given by DRP, in our opinion, was not correct. Higher employee cost is normal feature for software development company for simple reason that it is skill oriented business. skill-set required for employees in case of assessee, required knowledge of Arabic also, making it all more scarce. In any case, for A. Y. 2009-10, M/s. Akshay Software Technologies Ltd was considered as proper comparable and not excluded. In his order dt.07.01.2015 for A. Y. 2009-10, after applying onsite revenue filter of 50%, TPO himself had considered M/s. Akshay Software Technologies Ltd, as proper comparable. As to argument of Ld. DR that Related Party Transaction, volume of M/s. Akshay Software Technologies was not provided by assessee, leading 27 IT(T.P)A Nos.17 & 39/Bang/2016 to its rejection, we find that assessee had at para 5.172 and 5.173 of its objections before DRP, submitted that RPT of said company was 4.33% only, compiling figures from previous years data available in Annual Report of Financial Year 2010-11 of said company. This working stands unrebutted. We are, therefore of opinion that assessee has to succeed in its claim that M/s. Akshay Software Technologies Ltd, is proper comparable. We direct TPO to include said company as comparable along with two comparables, namely, M/s. R. S. Software (India) Ltd and M/s. Thinksoft Global Services Ltd, and rework mean PLI. ALP adjustment, if any, required shall be based on such mean PLI, after considering working capital adjusted. Ordered accordingly. Ground 12 of 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 that DRP had at para 2.9 of its directions dated 26.11.2014 directed inclusion of foreign exchange gain / loss as part of operating expenditure and not other way. Therefore, said ground is ill conceived and dismissed. Therefore other than employee cost issue of functional similarity was not before Tribunal in said case. However, we note that as per financial results reported in Annual Report at page 2 and 15, income shown in profit and loss account is from software services and products. Further as per schedule 10 at page 20 of 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 absence of segmental results and operation margin, this company cannot be 28 IT(T.P)A Nos.17 & 39/Bang/2016 considered as functionally comparable. Accordingly, we reject this ground of assessee. (ii) LGS Global Ltd. 13.1 TPO rejected this company on ground that Annual Report did not give break up of employee cost and thus he could not compute its employee cost factor. DRP upheld rejection on basis that separate details of employee cost were not available. 13.2 Before us, ld.AR of assessee has submitted that this company has shown purchase and employee cost under composite head which is 83.91% of sale. Therefore this company satisfied employee cost of 25% of total sales. learned Authorised Representative has pointed out that in case of service provider major component is employee cost and there is hardly any purchases therefore even if employee cost is not separately reported, composite of purchase and employee cost constitute 83.91% of sales. Thus he has submitted that this company should be included in list of comparables. 29 IT(T.P)A Nos.17 & 39/Bang/2016 13.3 On other hand, learned Departmental Representative has relied upon orders of authorities below and submitted that there is no dispute that this company has not reported employee cost separately and therefore it is not possible to ascertain employee cost and to apply employee cost filter. Further this company has also shown its goodwill in its balance sheet and therefore intangible assets renders this company non-comparable to assessee. 13.4 We have considered rival submissions as well as relevant material on record. This company has shown purchases and personnel cost at page 39 of Annual Report as combined expenditure as under : Purchases & Personnel Cost : Rs.250,61,55,607. Therefore cost of employee is not separately reported by this company. Further it is not clear whether goodwill is self-generated or acquired intangible asset. Accordingly, this issue is set aside to record of Assessing Officer/TPO to verify relevant facts to ascertain employee cost and then decide functional comparability. Needless to say information under Section 133(6) 30 IT(T.P)A Nos.17 & 39/Bang/2016 may be obtained for purpose of ascertaining annual employee cost of this company. 14. assessee is also seeking inclusion of couple of companies which were selected by TPO but rejected by DRP as under : (i) Evoke Technology Ltd. (ii) R S Software (India) Ltd. 14.1 We have heard learned Authorised Representative as well as learned Departmental Representative and considered relevant material on record. These two companies were selected by TPO in set of comparables however DRP has rejected these companies on ground that company Evoke Technology Ltd. is having low margin and company R S Software (India) Ltd. is engaged in on site activity. Both assessee as well as revenue are seeking inclusion of these companies in list of comparables. Accordingly, when assessee as well as revenue are seeking inclusion of these two companies, we direct TPO to include these two companies in list of comparables. 31 IT(T.P)A Nos.17 & 39/Bang/2016 15. revenue is also seeking inclusion of some of companies in list of comparables which were reflected by DRP. We will deal with issues one by one as under : (i) Acropetal Technologies Ltd.(Seg.) 16.1 DRP rejected this company on ground of employee cost filter. ld. DR has submitted that TPO has applied employee cost filter and this company satisfies same. 16.2 On other hand, learned Authorised Representative of assessee has submitted that total employee cost of this company is 11.51 of total operating revenue therefore it fails employee cost filter of 25%. Further he has pointed out that this company also fails software development services revenue filter of 75%. He has referred details at page Nos.39 and 53 of Annual Report and submitted that 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 rejoinder ld. DR has submitted that TPO has considered only Information Technology transactions segment and 32 IT(T.P)A Nos.17 & 39/Bang/2016 therefore it satisfies software development services income filter as well as employee cost filter. 16.4 We have considered rival submissions as well as relevant material on record. As per segmental reporting at page 53 of Annual Report income from Information Technology Services is Rs.81.40 Crores out of total income of Rs.141 Crores. Therefore revenue from Information Technology transactions services is less than 75% and consequently this company does not satisfy filter of information technology revenue applied by TPO itself. Accordingly, we do not find any reason to interfere with order of DRP for this issue. (ii) Icra Techno Analytic Ltd. 17.1 We have heard learned D.R. as well as learned A.R. and considered relevant material on record. DRP has rejected this company by recording fact as under : We examined annual report from which it is evident that entire revenue has been shown under service segment which indicates that revenue from software development, consultancy, licensing and sub- licensing, annual maintenance charges for software support. WEB 33 IT(T.P)A Nos.17 & 39/Bang/2016 development and hosting has been reported in one segment, thus in absence of segmental information, we concur with view of DRP in preceding year and accordingly direct Assessing Officer to exclude this company from comparables. 17.2 We further note that Tribunal in case of DCIT Vs. Electronics for Imaging India Pvt. Ltd. (supra) has considered comparability of this company in paras 14 to 16 as under : (1) ICRA Techno Analytics Ltd. (seg) 14. At outset, we note that apart from having related party revenue at 20.94% of total revenue, this company was also found to be functionally not comparable with software development services segment of assessee. DRP has given its finding at pages 13 to 14 as under:- Having heard contention, on perusal of annual report, it is noticed by us that segmental information is available for two segments i.e., services and sales. However, it is evident from annual report that service segment comprises of software development, software consultancy, engineering services, web development, web hosting, etc. for which no segmental information is available and therefore, objection of assessee is found acceptable. Accordingly, Assessing Officer is directed to exclude above company from comparables. 15. We find that facts recorded by 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 development & hosting and substantially diversified itself into domain of business analysis and business process outsourcing, then same cannot be regarded as functionally comparable with that of assessee who is rendering software development services to its AE. 16. In view of above facts, we do not find any error or illegality in findings of DRP that this company is functionally not comparable with that of pure software development service provider. Nothing has been brought before us to show that facts recorded by DRP as well as by co-ordinate bench of this Tribunal are not 34 IT(T.P)A Nos.17 & 39/Bang/2016 correct. Accordingly, in view of decision of co-ordinate bench of this Tribunal in case of DCIT Vs. Electronics for Imaging India Pvt. Ltd. (supra), we do not find any error or illegality in order of DRP on this issue. (iii) Infosys Ltd. 18. We have heard learned D.R. as well as learned A.R. and considered relevant material on record. At outset, we note that co-ordinate bench of this Tribunal in case of DCIT Vs. Electronics for Imaging India Pvt. Ltd. (supra) has considered this issue in para 17 as under : (2) Infosys Ltd. 17. assessee objected against selection of this company on ground that this company has big name and brand value and therefore it has bargaining power. It also contended that turnover of this company is Rs.21,140 crores, which is 442 times higher than assessee. Following decision of this Tribunal in case of DCIT Vs. Electronics for Imaging India Pvt. Ltd. (supra) , we do not find any reason to interfere with directions of DRP on this issue. 35 IT(T.P)A Nos.17 & 39/Bang/2016 (iv) L&T Infotech Ltd. 19. We have heard learned D.R. as well as learned D.R. and considered relevant material on record. DRP rejected this company by recording facts at page 15 as under : We further find that comparability of this company has been considered by co-ordinate bench of this Tribunal in case of DCIT Vs. Electronics for Imaging India Pvt. Ltd. (supra) in paras 62 to 65 as under : 36 IT(T.P)A Nos.17 & 39/Bang/2016 62. assessee has raised objection against this company on basis of high turnover in comparison to assessee. It was also contended that related party transaction (RPT) of this company is 18.66%. DRP rejected objections of assessee on ground that TPO has applied 25% filter of RPT and annual report of company does not show any other services rendered other than software development services provided by this company. Thus DRP held that software development segment is comparable to assessee and therefore this company has to be retained as comparable. 63. We have heard ld. AR as well as ld. DR and considered relevant material on record. ld. AR has submitted that this company is having 18.66% RPT and further this company earns revenue from both services and products. Thus, ld. AR submitted this company is also in software products and therefore cannot be considered as good comparable. He has further contended that in series of decisions, Tribunal has applied 15% RPT filter and since this company is having more than 15% RPT, same cannot be considered as good comparable. 64. On other hand, ld. DR has submitted that TPO has applied RPT filter of 25% and therefore only for this company, RPT cannot be reduced to 15%. Further, DRP has examined annual report of this company and found that this company earns revenue from software development services and accordingly is comparable. 65. We have considered rival submissions and relevant material on record. We find that in normal circumstances tolerance range of RPT should not be more than 15%. In case of assessee, availability of comparable is not issue and therefore we do agree with view taken by coordinate Benches of Tribunal that threshold limit of tolerance range should not exceed 15% as far as RPT revenue is concerned. Therefore, we direct AO/TPO to apply 15% RPT filter in respect of all comparables. In view of facts recorded by DRP as well as decision of co- ordinate bench, we do not find any reason to interfere with directions of DRP. 37 IT(T.P)A Nos.17 & 39/Bang/2016 (v) Tata Elxsi Ltd. (Seg.) : 20. We have heard learned Departmental Representative as well as learned Authorised Representative and considered relevant material on record. DRP has rejected this company by discussing fact at page 16 as under : We further note that DRP has also recorded fact that export revenue of this company is 73.30% which is less than 75% applied by TPO. Therefore this company does not qualify export earning filter applied by TPO. Further co-ordinate bench of this Tribunal in case of DCIT Vs. Electronics for Imaging India Pvt. Ltd. (supra) has considered this issue in paras 30 to 33 as under : 30. assessee has raised objections against this company on ground that company is functionally different from assessee. Though TPO has considered software development and services segment of this company as comparable to that of assessee, however, assessee contended that even within software segment, this company is engaged in diverse activities. assessee placed reliance on information in 38 IT(T.P)A Nos.17 & 39/Bang/2016 annual report under Directors Report and submitted before DRP that even under software development services segment, this company is engaged in various diversified activities including product design service, innovation design, engineering service, visual computing labs, etc. assessee also placed reliance on decision of Mumbai Bench of Tribunal in case of Telcordia Technologies Pvt. Ltd. v. ACIT, 137 ITD 1 (Mum). 31. DRP found that this company is not functionally comparable with assessee company as it is engaged in diversified activities even in software development services. DRP has followed decision of Mumbai Bench of Tribunal in case of Telcordia Technologies Pvt. Ltd. (supra). 32. We have heard ld. DR as well as ld. AR and considered relevant material on record. We find that this company even in software development segment is engaged in diversified activities of product design services, innovation design, engineering services, visual computing labs, etc. We further note that in case of Telcordia Technologies Pvt. Ltd. (supra), Mumbai Bench of Tribunal vide its order dated 11.5.2012 in para 9.7 has held as under:- 7.7 From facts and material on record and submissions made by learned AR, it is seen that Tata Elxsi is engaged in development of niche product and development services which is entirely different from assessee company. We agree with contention of learned AR that nature of product developed and services provided by this company are different from assessee as have been narrated in para 6.6 above. Even segmental details for revenue sales have not been provided by TPO so as to consider it as comparable party for comparing profit ratio from product and services. Thus, on these facts, we are unable to treat this company as fit for comparability analysis for determining arm s length price for assessee, hence, should be excluded from list of comparable parties. 33. No contrary view has been brought to our notice regarding comparability of this company with that of pure software development service provider. Accordingly, in view of decision of Mumbai Bench of Tribunal in case of Telcordia Technologies Pvt. Ltd. (supra), we do not find any reason to interfere with finding of DRP. 39 IT(T.P)A Nos.17 & 39/Bang/2016 In view of facts recorded by DRP as well as thedecision of Tribunal in case of DCIT Vs. Electronics for Imaging India Pvt. Ltd. (supra), we do not find any error or illegality in directions of DRP to exclude this company form set of comparables. 21. revenue is also seeking inclusion of following companies which were rejected by DRP. (i) Evoke Technology Pvt. Ltd. (ii) Mindtree Limited (Seg.) (iii) R S Software India Pvt. Ltd. 21.1 At time of hearing, learned Authorised Representative of assessee has submitted that assessee has no objections if these three companies are restored to set of comparables as assessee did not raise any objection before DRP but DRP rejected this company suo moto. 21.2 In view of fact that both revenue as well as assessee are seeking inclusion of these companies in set of comparables, we set aside directions of DRP qua these 40 IT(T.P)A Nos.17 & 39/Bang/2016 comparables and restore these three companies to set of comparables. 21.3 As we have directed to exclude certain companies as well as include some of companies in set of comparables therefore TPO/A.O is required to recompute ALP on basis of final set of comparables after giving effect to this order. Needless to say benefit of tolerance range of +/- 5% as per proviso to section 92C(2) be also considered. 22. next ground of assessee's appeal is regarding exclusion of sub-contracting charges from export turnover while computing deduction under Section 10A of Act. 22.1 Assessing Officer has reduced sub-contracting charges incurred by assessee from export turnover while computing deduction under Section 10A of Act. DRP though has allowed claim of assessee so far as travelling expenses incurred in foreign currency by directing Assessing Officer to exclude same from total turnover as well as by following decision of Hon'ble jurisdictional High Court in case of CIT Vs. Tata Elxsi Ltd. 349 ITR 98 41 IT(T.P)A Nos.17 & 39/Bang/2016 however, not allowed claim in respect of sub-contracting charges which were reduced from export turnover. 22.2 learned Authorised Representative of assessee has submitted that sub-contracting charges ought not to have been reduced from export turnover as assessee is engaged in export of computer software outside India and not in provisions of technical services outside India. Therefore said sum were not required to have been reduced from export turnover. 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. sums were not incurred for rendering technical services outside India. Therefore same is not required to be reduced from its export turnover for purpose of computing deduction under Section 10A of Act. Alternatively, learned Authorised Representative has submitted that if above sums are to be reduced from its export turnover they should also be reduced from total 42 IT(T.P)A Nos.17 & 39/Bang/2016 turnover in view of judgment of Hon'ble jurisdictional High Court in case of CIT Vs. Tata Elxsi Ltd. (supra). 22.3 On other hand, ld. DR has relied upon orders of authorities below. 22.4 We have considered rival submissions as well as relevant material on record. DRP has directed Assessing Officer that travel expenses incurred in foreign currency should also be excluded from export turnover while computing deduction under Section 10A of Act by following Hon'ble jurisdictional High Court in case of Tata Elxsi Ltd. (supra). We do not find any contradictions in proposition of law applicable in respect of definition of turnover and total turnover as laid down by Hon'ble High Court in case of Tata Elxsi Ltd. (supra). similar issue has been raised by revenue regarding exclusion of telecommunication and travel expenses from export turnover which is also covered by decision in case of Tata Elxsi Ltd. (supra). Hon'ble High Court while dealing with definition of export turnover as well as total turnover as per provisions of section 10A has held as under : 43 IT(T.P)A Nos.17 & 39/Bang/2016 10. Bombay High Court had occasion to consider meaning of word 'total turnover' in context of Section 10-A, in 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) proportion between export turnover in respect of articles or things, or, as case may be, computer software exported, to total turnover of business carried over by under-taking is applied to profits of business of undertaking in computing profits of business of undertaking in computing profits derived from export. In other words, profits of business of undertaking are multiplied by export turnover in respect of articles, things or, as case may be, computer software and divided by total turnover of business carried or by undertaking. formula which is prescribed by sub-section (4) of section 10A is as follows: Profits of Export turnover in respect business of X of articles or things or Profits derived from undertaking computer software export of articles or things = or Computer software Total turnover of business carried on by undertaking total turnover of business carried on by undertaking would consist of turnover from export and turnover from local sales. export turnover constitutes numerator in formula prescribed by sub-section (4). Export turnover also forms constituent element of denominator inasmuch as export turnover is part of total turnover. export turnover, in numerator must have same meaning as export turnover which is constituent element of total turnover in denominator. legislature has provided definition of expression "export turnover" in Explanation 2 to section 10A by which expression is defined to mean consideration in respect of export by undertaking of articles, things or computer software received in, or brought into India by assessee in convertible foreign exchange but so as not to include inter alia freight, telecommunication charges or insurance 44 IT(T.P)A Nos.17 & 39/Bang/2016 attributable to delivery of articles things or software outside India. Therefore in computing export turnover Legislature has made specific exclusion of freight and insurance charges. submission which has been urged on behalf of Revenue is that while freight and insurance charges are liable to be excluded in computing export turnover, similar exclusion has not been provided in regard to total turnover. submission of Revenue, however, misses point that expression "total turnover" has not been defined at all by Parliament for purposes of section 10A. However expression "export turnover" has been defined. definition of "export turnover" excludes freight and insurance. Since export turnover has been defined be Parliament and there is specific exclusion of freight and insurance, expression "export turnover" cannot have different meaning when it forms constituent part of total turnover for purposes of application of formula. Undoubtedly, it was open to Parliament to make provision to contrary. However, no such provision having been made, principle which has been enunciated earlier must prevail as matter of correct statutory interpretation. Any other interpretation would lead to absurdity. If contention of Revenue were to be accepted, same expression viz. "export turnover" would have different connotation in application of same formula. submission of Revenue would lead to situation where freight and insurance, though it has been specifically excluded from "export turnover" for purposes of numerator would be brought in as part of "export turnover" when it forms element of total turnover as denominator in formula. construction of statutory provision which would lead to absurdity must be avoided." special bench of Tribunal, in case of ITO v. Sak Soft Ltd. [2009] 313 ITR (AT) 353/ 30 SOT 55 (Chennai) also had occasion to consider meaning of word 'total turnover'. After referring to various judgments of High Court as well as Supreme Court held as under: "53. For above reasons, we hold that for purpose of applying formula under sub-section (4) of Section 10-B, freight telecom charges or insurance attributable to delivery of articles or things or computer software outside India or expenses, if any, incurred in foreign exchange in providing technical services outside India are to be excluded both from export turnover and 45 IT(T.P)A Nos.17 & 39/Bang/2016 from total turnover, which are numerator and denominator respectively in formula." formula for computation of deduction under Section 10-A would be as under: Profits of business X export turnover Total turnover From aforesaid judgments, what emerges is that, there should be uniformity in ingredients of both numerator and denominator of formula, since otherwise it would produce anomalies or absurd results. Section 10-A is beneficial section. It is intended to provide incentives to promote exports. incentive is to exempt profits relatable to exports. In case of combined business of assessee, having export business and domestic business, legislature intended to have formula to ascertain profits from export business by apportioning total profits of business on basis of turnovers. Apportionment of profits on basis of turnover was accepted as method of arriving at export profits. In ease of Section 80HHC, export profit is to be derived from total business income of assessee, whereas in Section 10-A, export profit is to be derived from total business of undertaking. Even in case of business of undertaking, it may include export business and domestic business, in other words, export turnover and domestic turnover. export turnover would be component or part of denominator, other component being domestic turnover. In other words, to extent of export turnover, there would be commonality between numerator and denominator of formula. In view of commonality, understanding should also be same. In other words, if export turnover in numerator is to be arrived at after excluding certain expenses, same should also be excluded in computing export turnover as component of total turnover in denominator. reason being total turnover includes export turnover. components of export turnover in numerator and denominator cannot be different. Therefore, though there is no definition of term 'total turnover' in Section 10-A, there is nothing in said Section to mandate that, what is excluded from numerator that is export turnover would nevertheless form part of denominator. Though when particular word is not defined by legislature and 46 IT(T.P)A Nos.17 & 39/Bang/2016 ordinary meaning is to be attributed to same, said ordinary meaning to be attributed to such word is to be in conformity with context in which it is used. When statute prescribes formula and in said formula, 'export turnover' is defined, and when 'total turnover' includes export turnover, very same meaning given to export turnover by legislature is to be adopted while understanding meaning of total turnover, when total turnover includes export turnover. If what is excluded in computing export turnover is included while arriving at total turnover, when export turnover is component of total turnover, such interpretation would run counter to legislative intent and impermissible. If that were intention of legislature, they would have expressly stated so. If they have not chosen to expressly define what total turnover means, then, when total turnover includes export turnover, meaning assigned by legislature to export turnover is to be respected and given effect to, while interpreting total turnover which is inclusive of export turnover. Therefore, formula for computation of deduction under Section 10-A, would be as under: Export turn over Profits of business of X (Export turnover + domestic turn over) undertaking Total Turn Over 11. In that view of matter, we do not see any error committed by Tribunal in following judgments rendered in context of Section 80HHC in interpreting Section 10- when principle underlying both these provisions is one and same. Therefore, we do not see any merit in these appeals. substantial question of law framed is answered in favour of assessee and against revenue. Following decision of Hon'ble jurisdictional High Court , alternative plea of assessee regarding sub-contracting charges therefore allowed and ground of revenue s appeal stand dismissed. 47 IT(T.P)A Nos.17 & 39/Bang/2016 23.1 next ground is regarding exclusion of forex loss from export turnover while computing deduction under Section 10A of Act. Assessing Officer has reduced amount of forex loss from export turnover while computing deduction under Section 10A of Act. ld. AR of assessee has submitted that sum was reduced from export turnover while computing deduction available under Section 10A , it must also be correspondingly be reduced from its total turnover in view of ratio of judgment of Hon'ble jurisdictional High Court in case of Tata Elxsi Ltd. (supra). 23.2 On other hand, learned Departmental Representative has relied upon orders of authorities below. 23.3 We have considered rival submissions as well as relevant material on record. It is pertinent to note that turnover is considered on mercantile basis and not on realization basis. Therefore any loss on account of fluctuation of forex rate would be business loss and should have effect of reduction of profits and corresponding eligible profits for deduction under Section 10A of Act. Such loss cannot be reduced from export turnover based on invoices and loss on realization is 48 IT(T.P)A Nos.17 & 39/Bang/2016 business loss not affecting turnover. Therefore we direct Assessing Officer to recompute deduction under Section 10A by considering profit after loss on Forex fluctuations on realization and not by reducing export turnover. In any case, if loss is excluded from export turnover then corresponding total turnover should also be reduced by such amount as per decision of Hon'ble jurisdictional High Court in case of Tata Elxsi Ltd. (supra). 24. In result, appeal of assessee as well as revenue are partly allowed. Order pronounced in open court on 21st Sept.,2016. Sd/- Sd/- (S. JAYARAMAN) (VIJAY PAL RAO) Accountant Member Judicial Member *Reddy gp Copy to : 1. Appellant 2. Respondent 3. C.I.T. 4. CIT(A) 5. DR, ITAT, Bangalore. 6. Guard File. By Order Asst. Registrar, ITAT, Bangalore M/s. Applied Materials India Pvt. Ltd. v. Asst. Commissioner of Income-tax, Circle 1(1)(1), Bangalore