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M/s TNS India Pvt. Ltd., Hyderabad Versus Dy. Commissioner of Income tax, Circle – 2 (3) , Hyderabad

2015 (5) TMI 45 - ITAT HYDERABAD

Transfer pricing adjustment - Determination of Arm's length price in international Transactions with AEs - Determination of ALP of management fee and licence fee paid to AE as Nil - Non consideration of other receipts as part of operating revenue for computing the margin - Rejection / Selection of comparables - Disallowance of expenses related to operating software and application software - Non consideration of claim of deduction u/s 10A as per the revised return of income - Held that:- Determi .....

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d is allowed for statistical purposes.

Non consideration of other receipts as part of operating revenue for computing the margin - In the objections raised before ld. DRP assessee claimed that the other income shown are also from the operations of the business, hence, should be treated as part of operating revenue. Ld. DRP after considering the submissions accepted assessee’s claim and directed TPO to treat the other income shown by assessee as part of operating revenue. However, the .....

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- We find merit in the submissions of ld. AR. On a perusal of the annual report of the company, it is found that during the year the company has made acquisitions which might have impacted the profit making of the company. - Cosmic Global Ltd - TPO while applying filters for selection of comparable have excluded companies having less than 1 crore turnover from BPO services, revenue earned by this company from BPO services is only ₹ 19.63 lakhs, as claimed by assessee, then, this company ca .....

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on, matter is remitted back to AO/TPO for examining afresh after due opportunity of being heard to assessee. - Infosys BPO Ltd - The Hon’ble Delhi High Court in case of Agnity India Technologies pvt. Ltd., [2013 (7) TMI 696 - DELHI HIGH COURT] has held that Infosys cannot be treated as comparable to other small companies.

Rejection of certain companies by TPO - Accurate Data Convertors Pvt. Ltd.- We are of the view that the issue of comparability of the aforesaid company requires exam .....

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lity of this company to AO/TPO for considering afresh after due opportunity of being heard to assessee. We make it clear, if on examining the information available on record TPO finds that this company satisfies all the filters applied by him, then, he may consider this company as a comparable.

Non consideration of claim of deduction u/s 10A as per the revised return of income - There is no dispute to the fact that assessee has filed a revised return of income before AO revising the c .....

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iled a petition u/s 154 of the Act raising the very same issue before AO, which is still pending. Considering the aforesaid facts, we are inclined to remit this issue back to the file of AO with a direction to consider assessee’s claim as per revised return and in accordance with law after due opportunity of being heard to assessee. This ground is allowed for statistical purposes.

Disallowance of expenses related to operating software and application software - We have considered the .....

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. In view of the above, we direct AO to allow depreciation @ 60% on the software licence fee. This ground is partly allowed. - Decided partly in favour of assessee. - ITA No. 1875/Hyd/2012 - Dated:- 17-4-2015 - Shri B. Ramakotaiah And Shri Saktijit Dey,JJ. For the Petitioner : Shri Deepak Chopra For the Respondent : Smt. G. Aparna Rao ORDER Per Saktijit Dey, J. M. This appeal of assessee is against the assessment order passed u/s 143(3) read with section 92CA(3) and 144C(13) of the IT Act, 1961. .....

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life cycle, from developing products to building brands and marketing communications. The group provides services across the globe. Assessee, on its part, is engaged in rendering a range of comprehensive market research services to domestic and international clients through various offices in different cities across India. Assessee also provides IT enabled back office data processing services (ITES) through its Offshore Research Service Centre (ORSC) at Hyderabad, which is a 100% EoU registered .....

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esearch (MR) services ₹ 8,79,06,893 iii) Payment towards overhead allocation charges and license fees (together referred to as management fees ) • Group overhead allocation fee - ₹ 1,57,74,055 • Asia pacific overhead allocation fee-Rs.1,76,22,000 • Regional management allocation fee- ₹ 1,66,23,495 iv) Payment of trade mark license fee - ₹ 1,19,02,086 v) Payment of business solutions license fee - ₹ 93,96,576 vi) Reimbursement by AEs - ₹ 22,03,17 .....

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comparables. As the weighted average margin of the comparables was found to be within the tolerance band of assessee s profit margin, the price charged by the assessee was found to be within arm s length. During the assessment proceeding, AO noticing that assessee has entered into international transactions with AEs, made a reference to the Transfer Pricing Officer (TPO) to determine the arm s length price (ALP). In course of proceeding before him, TPO called for the books of account, financial .....

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PO undertook a search himself by applying some additional filters which yielded 20 comparables including some selected by assessee with arithmetic mean PLI of 29.16%. The final comparables selected by TPO with their OP to OC are as under: S.No. Name of the comparable company Total income (Rs. in crores) PBIT/ Cost% 1 Accential Technologies Ltd. 51.04 44.50 2 Acropetal Technologies Ltd. (seg.) 20.80 35.30 3 Aditya Birla Minacs 183.17 -0.55 4 Asit C Mehta 4.82 9.10 5 Caliber Point Business Solutio .....

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.84 106.82 18 R System International Ltd. (seg) 21.33 4.30 19 Spanco Ltd. (seg) 42.27 8.94% 20 Wipro Ltd. 1158.80 30.23 Arithmetic Mean 29.16 2.2 After allowance of 0.43% towards working capital adjustment, the adjusted arithmetic mean PLI was worked out at 28.73% and the ALP of international transaction was determined at ₹ 144,94,01,963 and after excluding there from non AE sales of ₹ 56,58,92,732, the ALP of sales with AEs was determined at ₹ 88,35,09,231 as against price rec .....

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d if at all any such services were rendered by AEs whether assessee derived any benefit there from. Thus, TPO being of the view that there is no necessity for making payment towards intra group services determined the ALP of such services at Nil. However, the TPO did not make any separate adjustment on this account since the amount in question already got merged in the adjustment made to the price received on account of transactions pertaining to sale of services. In consequence of the order pas .....

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order, assessee filed objections before the Dispute Resolution Panel (DRP) both on TP issues as well as corporate tax issues. 2.3 As far as assessee s objections with regard to TP issues are concerned, ld. DRP granted partial relief to assessee by accepting assessee s claim that other income of ₹ 28,69,633 is to be treated as part of operating revenue for computation of PLI. The DRP also accepted assessee s objections with regard to two of the selected comparables, namely, Mold Tek Techno .....

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DRP, AO finalized the assessment as per the impugned assessment order. Being aggrieved of the additions made, assessee is before us raising as many as 20 grounds. 3. Ground No. 1 to 15 are on TP issues where as ground No. 16 to 20 are on corporate tax issues. As far as TP issues are concerned, ground no. 1 being of general nature, no specific adjudication is necessary. As far as other grounds on TP issues are concerned, ld. AR at the time of hearing confined his argument to ground Nos. 3, 4, 9, .....

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TPO however rejected assessee s claim and determined ALP of such services at Nil by observing that assessee has failed to substantiate the need for services and further assessee failed to prove whether services were actually rendered and assessee derived any benefit from such services. Of course, the TPO did not make any separate adjustment while determining the ALP of such services at Nil. Ld. DRP though upheld the determination of ALP at Nil, a direction was given to exclude such expenditure .....

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/01/14 for AYs 2003-04 to 2005-06 held as under: 16. We have considered the issue. We are unable to accept the contention of the Assessing Officer/TPO with reference to the services provided by AEs. Assessee has provided the agreements which were entered not during the year but in earlier year and has been paying the service fee termed as management fee accordingly. This claim is not arising for the first time in this year but, is also there in earlier years and later years. Assessee is part of .....

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s no dispute with reference to services being provided by the group companies to assessee and assessee also paid various other amounts including royalty. As submitted by assessee, even though some correspondence was placed on record with reference to the advise given to assessee, providing a concrete evidence with reference to the services in the nature of specific activities is difficult, like proving the role of an anesthesian in an operation conducted by a surgeon. There may be an evidence of .....

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p as well as the services provided and benefit obtained which were not contradicted. The Assessing Officer did not believe the same in the absence of concrete evidence. Unless the Assessing Officer steps into assessee s business premises and observes the role of these companies/ assessee s business transactions, it will be difficult to place on record the sort of advice given in day-to-day operations. What sort of evidence satisfies the AO is also not specified. Assessee has already placed lot o .....

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r facts where the TPO also determined the ALP at Nil, has held as under : 21. The position emerging from the above decisions is that it is not necessary for assessee to show that any legitimate expenditure incurred by him was also incurred out of necessity. It is also not necessary for assessee to show that any ITA.No.944/H/07, 194 & 74/H/08, 793/H/09, 654,655/H/10 & 7/H/2012 TNS India Pvt. Ltd. expenditure incurred by him for the purpose of business carried on by him has actually result .....

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ve incurred the same or that in the view of the Revenue the expenditure was unremunerative or that in view of the continued losses suffered by assessee in his business, he could have fared better had he not incurred such expenditure. These are irrelevant considerations for the purpose of Rule lOB. Whether or not to enter into the transaction is for assessee to decide. The quantum of expenditure can no doubt be examined by the TPO as per law but in judging the allowability thereof as business exp .....

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ayment has been demonstrated to have been incurred or laid out for the purposes of business, it is no concern of the TPO to disallow the same on any extraneous reasoning. As provided in the OECD guidelines, he is expected to examine the international transaction as he actually finds the same and then make suitable adjustment but a wholesale disallowance of the expenditure, particularly on the grounds which have been given by the TPO is not contemplated or authorised. 23. Apart from the legal pos .....

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ous losses. The comparative position over a period of 5 years from 1998 to 2003 with relevant figures have been given before the CIT (Appeals) and they are referred to in a tabular form in his order in paragraph 5.5.1. In fact there are four tabular statements furnished by assessee before the CIT (Appeals) in support of the reasons for the continuous losses. There is no material brought by the revenue either before the CIT (Appeals) or before the Tribunal or even before us to show that these are .....

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costs . 17. Respectfully following the above, we are of the opinion that the TPO went beyond his jurisdiction in denying the payment out-rightly, whereas, his role is limited to determining the ALP. In the guise of determination of ALP, the TPO cannot question the business decision of payment and determine that no services were rendered. In that view of the matter, the direction of the TPO cannot be upheld at all. 17.2 Be that as it may, the TPO also invoked Rule 10B to analyse the transactions .....

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idering that also, denial of management fees is not proper on the part of the TPO/ Assessing Officer. Considering the above, we are of the opinion that the action of the TPO in determining the ALP at NIL is not according to the provisions of law and also on facts. Therefore, we direct him to allow the claim. 18. However, as seen from the pricing pattern of the agreement, the methodology prescribed is not as fixed percentage of assessee s turnover/ net receipts. The costs are ITA.No.944/H/07, 194 .....

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ost incurred by AEs. This requires examination as TPO/AO denied the claim itself. Therefore, in order to verify the pricing methodology as prescribed in the agreement and payment of the amounts, the matter is restored to the file of the Assessing Officer to examine this aspect and allow the amounts, if the payment is according to pricing methodology agreed between the parties. Therefore, while allowing the ground on the question of claim of management fees as such, the quantification thereof is .....

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um of management fee and licence fee with reference to agreement between the parties. This ground is allowed for statistical purposes. 7. In ground No. 4, assessee has raised the issue of non consideration of other receipts of ₹ 28,69,633 as part of operating revenue for computing the margin. 8. We have heard the parties and perused the materials on record. As can be seen from the financial statements of the assessee, during the year assessee earned certain income which was shown as other .....

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should be treated as part of operating revenue. Ld. DRP after considering the submissions accepted assessee s claim and directed TPO to treat the other income shown by assessee as part of operating revenue. However, the directions of ld. DRP were not implemented by AO in the final assessment order. In our view, when ld. DRP has specifically directed TPO to treat the other income shown by assessee as part of operating revenue for computing PLI, AO/TPO are duty bound to comply to the directions o .....

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bjected to by assessee. 9.1. Accentia Technologies Ltd.: Ld. AR submitted before us that this company is functionally different as it is engaged in healthcare research management services and software products. Further, company s segmental information is not available in public domain. Ld. AR submitted, the company is also not comparable as it is an exceptional year of operation for the company due to extraordinary event. Further explaining, it was submitted during the relevant PY, Geo Soft Tech .....

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sition. Thus, it was submitted the company cannot be treated as comparable. In support of such contention, assessee relied upon the decision of ITAT, Hyderabad Bench in case of HSBC Electronic Data Processing India Pvt. Ltd. Vs. CIT, ITA NO. 1647/Hyd/12 dated 24/10/14. He also submitted that in assessee s own case for AY 2009-10, the Tribunal has excluded this company from the list of comparables. 9.2 The ld. DR though agreed that the company has been held to be not a comparable with a ITES comp .....

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ld. AR. On a perusal of the annual report of the company, it is found that during the year the company has made acquisitions which might have impacted the profit making of the company. Therefore, in our view, this company cannot be treated as a comparable to assessee. We are supported in our view by the order of the coordinate bench for the same AY in case of HSBC Data Processing India P. Ltd. Vs. ACIT (supra). We, therefore, direct AO/TPO to exclude this company. 10. Acropetal Technologies Ltd. .....

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head onsite development expenses which suggest that the company provide substantial onsite services and also could have outsourced services. Thus, it was submitted the company cannot be considered as comparable. In support of such contention, ld. AR relied on the decision of ITAT in case of HSBC Electronic Data Processing India Pvt. Ltd. Vs. CIT, ITA NO. 1647/Hyd/12 dated 24/10/14, Triology E Business Services Software Ltd. vs. DCIT, ITA 1054/Bang/2011 and Hello Soft India Pvt. Ltd. ITA No. 645 .....

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ces and software development services. Therefore, the services provided by the company are in the nature of high end services coming within the category of knowledge process outsourcing (KPO) whereas assessee is providing low end (BPO) services. In fact, TPO himself in his order has stated that companies providing high end (KPO) services cannot be treated as comparable to ITES (BPO) service providers. Considering these aspects the coordinate bench in case of HSBC Electronic Data Processing India .....

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submitted, such low employee cost is suggestive of the fact that the company does not provide BPO services by itself but outsources the work. He further submitted, the segmental details as available from the financials of the company reveal that the revenue earned from BPO services is only ₹ 19.63 lakhs. Hence, it cannot be considered as a comparable to assessee. 11.1 Ld. DR, however, supported the reasoning of the TPO on the selection of this company. 11.2 We have considered the submissi .....

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ces is less than 1 crore. As can be seen, the TPO while applying filters for selection of comparable have excluded companies having less than 1 crore turnover from BPO services. It is the contention of ld. AR before us, in the assessment year under consideration revenue of this company from BPO services is only ₹ 19.63 lakhs. Hence, it fails the less than 1 crore BPO services turnover applied by TPO. We find that this aspect has not been verified properly before selecting the company as co .....

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2. Eclerx Services Ltd.: ld. AR objecting to selection of this company, submitted before us, the company is engaged in KPO services in the field of data analytics, operations management and audit reconciliation. It was submitted, the business model of the company as per its own admission are completely different from the BPO services provided by assessee. In this context, ld. AR referred to the annual report of the company. Thus, ld. AR submitted, the company cannot be treated as comparable to a .....

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es but it also earned super normal profits due to extraordinary event. For the aforestated reasons, the coordinate bench in case of HSBC Electronic Data Processing India Pvt. Ltd. Vs. CIT (supra) following the decisions in some other cases excluded this company. Respectfully following the view expressed by coordinate bench we direct AO/TPO to exclude this company from the list of comparables. 13. Genesys International Corporation Ltd.: Objecting to selection of this company, ld. AR submitted, th .....

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icrosoft, Nokia, Digital Globe and Google Earth, which provide geo data. In fact it was submitted, the company is exclusive reseller for Navteq Data for enterprise space in India. Thus, it was submitted the company is not at all a comparable to assessee. In support of such contention, he relied upon a decision of the coordinate bench in case of HSBC Electronic Data Processing India Pvt. Ltd. Vs. CIT (supra). 13.1 The ld. DR justified the selection of aforesaid company by relying upon the finding .....

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engaged in providing services related to human resources and does not require skilled man power. Moreover, it is further revealed that this company is also involved in R&D services and owns intangibles. Thus, as can be seen, this company being totally different in its functionality cannot be a comparable to assessee. For the very same reason, the coordinate bench in case of HSBC Electronic Data Processing India Pvt. Ltd. Vs. CIT (supra) has held that this company cannot be comparable to a B .....

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in the field of managed security services and infrastructure outsourcing. That besides, the company has considerably high turnover of about 495 crores for the relevant PY compared to assessee s turnover of 113 crores. Thus, it was submitted, the company cannot be treated as comparable to assessee. As far as Wipro Ltd. is concerned, ld. AR submitted, the company is functionally different as it owns significant intangibles and the information on the intangibles relating to the BPO segment is not .....

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o companies. 14.1 Ld. DR, submitted that as the TPO has selected these two companies on valid reasoning, there is no need to exclude them. 14.2 We have considered the submissions of the parties and perused the materials on record. As can be seen, in case of Hyundai Motors India Engg. P. Ltd. Vs. ITO (supra) these two companies were excluded by applying the turnover filter considering the fact that assessee s turnover was only ₹ 15 crores. However, in the present case, assessee s turnover i .....

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o such low turnover compaines, applying the same logic he should not object to high turnover companies also, when the difference in turnover is more or less within the same range. Thus, in our view, HCL Comnet and Wipro cannot be considered to be uncomparable to assessee only on the basis of turnover. However, assessee s claim of functional difference of the companies requires examination. As could be seen, in case of HSBC Electronic Data Processing India Pvt. Ltd. Vs. CIT (supra) the coordinate .....

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company and its brand and intangibles enjoy a premium pricing. Ld. AR submitted, for brand value of Infosys it cannot be a comparable to assessee. In support of such contention, ld. AR relied upon the decision of Hon ble Delhi High Court in case of Agnity India Technologies pvt. Ltd., ITA No. 1204/2011. He also submitted that in assessee s own case for AY 2009-10, ITAT has held the aforesaid company not to be a comparable to assessee. 15.1 Ld. DR, however, supported the reasoning of TPO 15.2 Hav .....

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d similar view. In the aforesaid view of the matter, we direct AO/TPO to exclude this company from the list of comparables. Ground No. 9 is accordingly disposed of. 16. In Ground No. 10, assessee has objected to rejection of certain companies by TPO. Though in the ground raised, assessee has challenged the rejection of 10 comparables, but, at the time of hearing before us Ld. AR confined his argument to only two of the companies, namely, Accurate Data Convertors Pvt. Ltd. and Informed Technologi .....

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himself called for information from the said company. Though, as per the information submitted by the said company, it satisfies all the filters applied by TPO but the company has not been included in the list of comparables without assigning any reasons. In support of his contention, ld. AR referred to the information submitted by the company in response to notice issued u/s 133(6) by TPO, a copy of which is placed at page 439 of assessee s paper book. 16.2 Ld. DR on the other hand submitted b .....

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lity of the aforesaid company requires examination considering assessee s claim that as per the information submitted in response to the notice u/s 133(6), the company satisfies all the filters applied by TPO. We, therefore, restore the matter back to the file of the TPO to examine the issue after due opportunity of being heard to assessee. 17. Informed Technologies Ltd.: Ld. AR submitted, the only reason for which the TPO considered this company as uncomparable is because the revenue earned by .....

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hus, as the revenue earned by this company from export is more than 25% it cannot be excluded as a comparable. To substantiate his claim, ld. AR referred to the financials of the company as submitted at page 470-475 of the paper book. 17.1 Ld. DR, however, supported the reasoning of TPO. 17.2 We have considered the submissions of the parties and perused the materials on record. It is very much evident from the order of TPO that he has rejected this company solely for the reason that revenue from .....

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said company as comparable, we think it appropriate to restore the issue of comparability of this company to AO/TPO for considering afresh after due opportunity of being heard to assessee. We make it clear, if on examining the information available on record TPO finds that this company satisfies all the filters applied by him, then, he may consider this company as a comparable. 17.3 We direct the AO/TPO to compute the ALP of the international transaction entered into by assessee with its AEs kee .....

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u/s 10A of the Act for an amount of ₹ 1,47,74,443 for its off-shore research service centre (ORSC). However, subsequently, finding mistake in the deduction claimed u/s 10A of the Act, assessee filed a revised return on 31/03/2010 revising its claim of deduction u/s 10A of the Act, to ₹ 6,81,37,974. In the draft assessment order, AO however rejected assessee s claim of deduction u/s 10A. The DRP while deciding the objections raised by assessee against the draft assessment order, dire .....

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aiming deduction u/s 10A of the Act. Further, during the assessment proceeding assessee has also submitted a revised Form 56F. In our view, AO without examining assessee s claim of deduction u/s 10A as per the revised return could not have proceeded to allow the claim as per the original return when he does not dispute the fact that the revised return is a valid return as per the provisions of section 139(5) of the Act. In course of hearing, ld. AR brought to our notice that assessee has also fi .....

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and allowing depreciation @ 25%. 22. Briefly the facts are, during the assessment proceeding, AO noticed that in the profit & loss a/c, assessee has debited an amount of ₹ 2,21,29,855 towards computer maintenance charges. From the break-up submitted by assessee, it was noticed by AO that assessee has claimed an amount of ₹ 1,00,99,916 on account of licence fee. AO asked assessee to explain why the expenditure claimed should not be disallowed as it is in the nature of capital exp .....

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P, allowed depreciation @ 25% on the software licence fee by mentioning that it falls in the block of intangible assets. 23. We have considered the submissions of the parties and perused the materials on record. It is very much evident from record that the software licence fee has been paid towards operation as well as application software. That being the case, the rate of depreciation applicable is 60% (as applicable to computer) and not 25% as allowed by AO. Moreover, this issue is more or les .....

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case of Amway India Ltd. Vs. DCIT (supra), whether a particular expenditure in relation to acquisition of software will be revenue or capital, cannot be decided by either the ownership test or enduring benefit test. The functional test has also to be applied. ITAT Special Bench went on to lay down certain tests for deciding whether the expenditure incurred has to be treated as revenue or capital. In the present case, assessee has not brought any material on record to establish that by applying .....

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