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2023 (11) TMI 185 - AT - Income TaxTP Adjustment - TPO rejected the ‘entity-level’ benchmarking done by assessee, instead made ‘unit-level’ comparison i.e. PLI of each unit was compared with the PLI of external comparables - 'principle of res judicata' OR ‘principle of consistency' - HELD THAT:- Admittedly, the transactions done by assessee are not “closely-related” but they are identical. As decided in CIT Vs. Birlasoft India Limited [2011 (6) TMI 1035 - ITAT DELHI] rejected “unit-level” comparison done by department and accepted assessee’s claim of “entity-level” comparison on the grounds that the assessee had provided ‘identical services’ from all units; there were no significant functional difference in the services; the services were rendered by various units to the same AEs; and the terms and conditions for rendering such services by all units were governed by one single agreement entered into between assessee and AEs. Same view was again taken in the case of same assessee for AY 2005-06 Birla Soft India Ltd. [2014 (8) TMI 867 - ITAT DELHI] The management and finance functions of assessee were common and centralized; the individual units were only concerned with providing services. Therefore, in such a situation, the uniform rate agreed by assessee with AEs is certainly a rate at entity-level which has no connection or linkage with individual units. There is also merit in the submission of assessee that the assessee had to maintain separate books and computed separate profits of all 5 units just to claim exemption qua some of the eligible units but had there been no exemption, there would not have been any necessity to maintain separate books or even compute separate figures of each unit. Therefore, in the present case, when the authorities have accepted entity-level approach of assessee in other years, there is a gross fallacy in not accepting the same approach in current year in absence of any changed circumstance. Therefore, we are inclined to accept that the ‘entity-level’ approach applied by assessee deserves to be accepted. We, therefore, reverse the decision of lower-authorities and direct the AO to apply ‘entity-level’ approach as claimed by assessee. Internal benchmarking with Mumbai Unit denied - AR submitted that under TNMM, there can be ‘internal benchmarking’ as well as ‘external benchmarking’ and it is judicially settled that the former should be preferred over later - HELD THAT:- From analysis of Rule 10B as interpreted in the judicial rulings cited above, it is clear that ‘internal comparison’ is allowed by law and the same is preferrable also. But, as contended by Ld. DR for revenue, the DRP has given a clear-cut basis for rejecting the claim of ‘internal comparison’. Needless to mention that the claim of ‘internal comparison’ cannot be allowed merely because the law permits or merely on the basis of mathematical analysis; the assessee has to prove the functional and economic comparability. The DRP has clearly noted that the assessee has failed to do so. We do not find anything wrong in the findings of DRP which are re-produced in foregoing paragraph. Therefore, we are not inclined to make any interference with the order of DRP. The claim of ‘internal benchmarking’ is therefore devoid of merit and dismissed. Certain ‘external comparables’ have been wrongly used; they are liable to be excluded - HELD THAT:- Avani Cincom Technologies - As there is a substantial difference in the business of assessee and this company. While the assessee is engaged in providing software/outsourcing services, this company is a product company and catering to specific segments of customers like travel, insurance, etc. Therefore, the assessee is not comparable to this company. We, therefore, direct the TPO/AO to exclude this company from comparable list. Celestial Bio-Labs Ltd. is a product company and secondly, it is developing software for a specific segment, namely bio-technology, pharma, healthcare and clinical research. The name of company “Celestial Labs Limited” also gives some indication that the company is engaged in laboratory or bio-tech related activity. Therefore, its business is completely different from assessee’s business, thus be excluded from list of comparables. Flextronics Software Systems Ltd. company is firstly a product-cum-service company whereas the assessee is a service company only. Secondly, the revenue model of this company is also unique in as much as the company also earns by way royalty from products. Therefore, the assessee’s case cannot be compared with this company. We direct the TPO/AO to exclude this company from list of comparables. Infosys Technolgies Ltd. is a giant in software industry and it cannot be compared with small players like assessee. It is also noteworthy that this company has been excluded from list of comparable in assessee’s own case by ITAT. Therefore, without mentioning anymore analysis, we are inclined to exclude this company from list of comparables and direct the TPO/AO to do so. Ishir Infotech Ltd. - payments made to outside professional cannot be included in employee cost for the reason that the test of “employee cost filter” is applied to judge the nature of business. If a company is paying lesser amount of salary to its own staff but paying higher amount to outside professionals, it goes out of service company and does not remain comparable with assessee. Kals Information company is also a product company. It has developed various software products as pointed out by Ld. AR and earning revenue therefrom. Further, it is also claimed by assessee that the company is earning from composite contracts. These business activities of assessee are not controverted by Ld. DR. Therefore, we feel appropriate to exclude this company from comparable and directly accordingly to TPO/AO. Lucid Software Ltd. be excluded as sufficient difference in this company and assessee noticed. Tata Elxi is functional dis-similar in the business with assessee. Even the TPO has also accepted this by mentioning in his report “TNMM does not call for strict product comparability and it also allows some diversity in functional comparability.” Being a functionally dis-similar, this company cannot be considered as comparable to assessee. Wipro Ltd. company is one of big market players in software sector. The turnover of company is manifold of assessee’s turnover, thus we are inclined to exclude this company from comparable. Re-working of exemption u/s 10A/10B - exclusion in numerator (i.e. Export Turnover) but not in denominator - HELD THAT:- As relying on HCL Technologies case [2018 (5) TMI 357 - SUPREME COURT] if the deductions on freight, telecommunication and insurance attributable to the delivery of computer software under Section 10A of the IT Act are allowed only in Export Turnover but not from the Total Turnover then, it would give rise to inadvertent, unlawful, meaningless and illogical result which would cause grave injustice to the Respondent which could have never been the intention of the legislature. Also Circular No. 4/2018 dated 14.08.2018 stating freight, telecommunication charges and insurance expenses and expenses incurred in foreign exchange for providing the technical services outside India to be excluded from both “export turnover- and “total turnover-while computing deduction admissible under section 10A - Decided in favour of assessee. Nature of expenses - civil and tiling expenditure - revenue or capital expenditure - HELD THAT:- As noteworthy here that the assessee has himself capitalized expenses in books of account which itself shows that the expenditure cannot be in the nature of repair or maintenance. We find that the AO has carefully invoked the provision of Explanation 1 to section 32(1) by making a sufficient note in assessment-order. Consequently, we uphold AO’s action. The assessee fails in this ground. Nature of expenses - licensed software - revenue or capital expenditure - HELD THAT:- As assessee agreed that this issue stands covered against assessee by the decision of [2014 (3) TMI 1186 - ITAT CHENNAI] for AY 2008-09 - As AR has not been able to bring on record any change in the nature of expenditure so as to not follow the decision of ITAT, Chennai in assessee’s own case for AY 2008-09 re-produced earlier. Therefore, we have no reason to deviate from the view taken therein. Respectfully following the same, we uphold AO’s action. Disallowance u/s 14A on account of expenditure incurred for earning exempt income - reasonable computation’ u/s 14A - assessee has earned exempted dividend from mutual funds - HELD THAT:- We agree with the proposition canvassed by Ld. AR that the Rule 8D was not applicable to AY 2007-08 involved in present appeal as held by Hon’ble Supreme Court [2018 (2) TMI 115 - SUPREME COURT] Therefore, the disallowance computed by AO in terms of part (iii) of Rule 8D cannot stand. But, however, we find that a ‘reasonable disallowance’ is attracted u/s 14A de hors Rule 8D. It is to be noted that the assessee has earned a very high amount of exempted income and the AO has mentioned, in his words, that the assessee has incurred expenses which are embodied in various indirect expenses debited to P&L A/c. We also find that this issue has also cropped in other years in assessee’s case. As mentioned earlier, in the consolidated order for AY 2011- 12 to 2013-14 [2023 (4) TMI 1263 - ITAT INDORE] the ITAT Indore has remanded this issue back to AO. We find that the assessee has filed a copy of order [2014 (3) TMI 1186 - ITAT CHENNAI] for AY 2008-09 in assessee’s own case wherein the ITAT has upheld disallowance of Rs. 35 lakhs on ‘reasonable computation’ u/s 14A de hors Rule 8D. We find it most appropriate to remit this issue back to the file of AO for a fresh consideration. Ground allowed for statistical purpose.
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