TMI Blog2015 (7) TMI 1049X X X X Extracts X X X X X X X X Extracts X X X X ..... he transfer pricing order. Income tax of employee - whether treated as business expenditure or personal liability of the employee and is not the liability in the hands of the assessee-company ? - Held that:- Remuneration and the income-tax thereon paid on behalf of the employee therein, is an allowable expenditure u/s 37 of the Act. See Tata Yadogawa Ltd. vs. CIT [2010 (9) TMI 715 - Jharkhand High Court] and ABN Amro Bank vs. JCIT (2005 (6) TMI 218 - ITAT CALCUTTA-E) - Decided against revenue Disallowance of reimbursement of software expenses - Held that:- Since the issue is covered in favour of the revenue by the decision of the jurisdictional High Court, in the case of Samsung Electronic Co. Ltd. (2011 (10) TMI 195 - KARNATAKA HIGH COURT ) we see no reason to interfere with the order of the CIT(A) in making disallowance. - Decided against revenue Deduction u/s 10A - Held that:- The direction of the CIT(A) to reduce the expenditure incurred in travel, telecommunication etc., both from export turnover as well as total turnover for the purpose of computation of deduction u/s 10A of the Act as confirmed in the case of CIT vs. Tata Elxsi (2011 (8) TMI 782 - KARNATAKA HIGH COU ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TPO, the AO proposed the draft assessment order proposing to make an addition of ₹ 2,79,48,656/- u/s 92CA of the Act. The draft assessment order was forwarded to the assesseeIT( company in response to which assessee expressed its willingness to file an appeal before the CIT(A) and requested the AO to pass final order. The AO therefore, passed final assessment order making addition of the adjustment u/s 92CA of the Act as proposed by the TPO and also making the following disallowances: i. Salary expenses of Mr.Prakash Bare, an expatriate employee on whose behalf income-tax of ₹ 14,85,677/- was paid by the assessee and claimed as an expenditure. ii. Reimbursement of ₹ 9,37,988/- to M/s.Rambus Incorporation on account of Oracle license for failure of non-deduction of tax at source though it was in the nature of fees for technical services. iii. Telecommunication expenses of ₹ 37,66,683/-; insurance of ₹ 2,14,056/- which are attributable to the delivery of software outside India; and expenditure of ₹ 28,18,006/- incurred towards travelling and conveyance holding it to be for providing technical services outside India while computing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t however, it had challenged the said companies before the TPO as well as the CIT(A) on functional dissimilarity. The learned Departmental Representative was also heard who relied upon the orders of the authorities below. 6. Having regard to the rival contentions and the material on record, we find that the assessee is a subsidiary of Rambus Ltd., Cayman Islands. Assessee is engaged in the business of rendering software design and development services for its AE in USA. Assessee has accordingly entered into an agreement with its AE for rendering such software development and support services. The financial results of the assessee for the relevant transaction are as under: Particulars Amount (Rs.) Operating Revenues* 29,40,41,810 Operating Expenses 28,06,01,229 Operating (Profit)/Loss 1,34,40,581 Op Profit on cost% 4.79% *Excluding other income The most appropriate method (MAM) adopted by the assessee in its T.P. Study and accepted by the TPO is, TNMM. The assessee in it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , it had challenged it before CIT (Appeals) on the ground of functional dis-similarity but CIT(A) has confirmed the assessment order and now the assessee is challenging its inclusion in the final list of comparables. He submitted that it is to be rejected as a comparable as it is a software product company and not a software development services company like assessee and also as it earns fluctuating profit margin due to the revenue recognition method followed by it as against the cost plus method (CPM) followed by the assessee. The learned counsel for the assessee placed specific reliance upon the decision of this Tribunal in IT(TP)A No.35/Bang/2014 dated 10/10/2014 in the case of M/s.Airbus India Operations Pvt. Ltd., in support of his contentions. We find that Tribunal in the case of M/s. Airbus India Operations Pvt. Ltd., (cited supra) has considered the comparability of Bodhtree Consulting Ltd., with the assessee therein, and at para 15 and 16 of its order held as under: 15. BODHTREE CONSULTING LTD.: This company is listed at Sl.No.3 in the final list of comparables chosen by the TPO which is set out in para-4 of this order. The comparability of this company with a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with a software development service provider such as the Assessee for identical reasons, we direct the TPO to exclude the aforesaid company from the list of comparable companies for the purpose of computation of ALP. Respectfully following the decision of the Tribunal on similar set of facts, we direct the AO/TPO to exclude Bodhtree Consulting Ltd. from the final list of comparable companies. 8. The other two companies challenged by the assessee are Tata Elxsi Ltd., and Infosys Ltd., For exclusion of the same, the learned counsel for the assessee had relied upon the decision of the Tribunal in the case of Cisco Systems (India) Pvt. Ltd., (supra) and M/s. Airbus India Operations Pvt.Ltd.(cited supra) wherein it was held that Tata Elxsi and Infosys Ltd., are functionally dissimilar as compared to software development services provider. 9. Having regard to the rival contentions and the material on record and the decisions cited by the learned counsel for the assessee, we find that the Tribunal in the cases cited supra relied upon by the learned counsel for the assessee, has held that the Tata Elxsi is not engaged solely in the software development services but that the ser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... functionally comparable to the assessee in the case on hand. The learned Authorised Representative drew our attention to various parts of the Annual Report of this company to submit that this company commands substantial brand value, owns intellectual property rights and is a market leader in software development activities, whereas the assessee is merely a software service provider operating its business in India and does not possess either any brand value or own any intangible or intellectual property rights (IPRs). It was also submitted by the learned Authorised Representative that :- (i) the co-ordinate bench of this Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. in ITA No.227/Bang/2010 has held that a company owning intangibles cannot be compared to a low risk captive service provider who does not own any intangible and hence does not have an additional advantage in the market. It is submitted that this decision is applicable to the assessee's case, as the assessee does not own any intangibles and hence Infosys Technologies Ltd. cannot be comparable to the assessee ; (ii) the observation of the ITAT, Delhi Bench in the case of Agnity India Technologies Pvt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and circumstances in the present year also remains identical to the facts and circumstances as it prevailed in AY 08-09 as far as this comparable company is concerned. Respectfully following the decision of the Tribunal referred to above, we hold that Infosys Ltd. be excluded from the list of comparable companies. 26.3 .. 26.4 Tata Elxsi Ltd.:- As far as this company is concerned, it is not in dispute before us that in assessee s own case for the A.Y. 2007-08, this company was not regarded as a comparable in its software development services segment in ITA No.1076/Bang/2011, order dated 29.3.2013. Following were the relevant observations of the Tribunal:- II. UNREASONABLE COMPARABILITY CRITERIA : 19. The learned Chartered Accountant pleaded that out of the six comparables shortlisted above as comparables based on the turnover filter, the following two companies, namely (i) Tata Elxsi Ltd; and (ii) M/s. Flextronics Software Systems Ltd., deserve to be eliminated for the following reasons : (i) Tata Elxsi Ltd., : The company operates in the segments of software development services which comprises of embedded product design services, industrial desi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es and iii) visual computing labs. 2. The product design services subsegment is into embedded software development. Thus this segment is into software development services. 3. The contribution of the embedded services segment is to the tune of ₹ 230 crores in the total segment revenue of ₹ 263 crores. Even if we consider the other two sub-segments pertain to IT enabled services, the 87.45% ( 75%) of the segment's revenues is from software development services. 4. This segment qualifies all the filters applied by the TPO. Regarding Flextronics Software Systems, the following extract from page 143 of TPO's order was read out by him as his submissions: It is very pertinent to mention here that the company was considered by the taxpayer as a comparable for the preceding assessment year i.e., AY 2006- 07. When the same was accepted by the TPO as a comparable, the same was not objected to it by the taxpayer. As the facts mentioned by the taxpayer are the same and these were there in the earlier FY 2005-06, there is no reason why the taxpayer is objecting to it. How the company is functionally similar in the earlier FY 2005-06 but the sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the comparables after exclusion of the above mentioned companies would fall within + or -5% of the assessee s margin. The learned counsel for the assessee submitted that if these companies are excluded, the assessee s margin would fall within + or -5% of the average arithmetic margin of the comparable companies and therefore there would not arise any occasion for any adjustment on account of ALP adjustment and the assessee would not seek their inclusion seriously for this year. Taking the same into consideration, we are not inclined to go into the grounds of appeal raised by the assessee for inclusion of the companies as it would only result in academic exercise at this stage. Therefore, the ground of appeal No.3(g) is rejected as not contested by the assessee for the above reasons. 13. As regards ground No.3(f), learned counsel for the assessee submitted that the AO/TPO while considering the working capital adjustment to be made while computing the ALP, has arrived at the working capital adjustment in the case of the assessee at 5.97%, but while giving effect to the working capital adjustment, has restricted the said adjustment to 1.71%. The learned counsel for the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctually agreed upon by the assessee and is wholly and exclusively for the purpose of business of the assessee and is an allowable deduction u/s 37 of the Act. The learned counsel for the assessee placed reliance upon the following decisions in support of his contention that it is an allowable expenditure: i. Tata Yadogawa Ltd. vs. CIT (2011) 196 Taxman 353 (Jharkhand) and ii. ABN Amro Bank vs. JCIT (2005) 96 TTJ Kol. 1041 The learned Departmental Representative, however, supported the orders of the authorities below and submitted that the employee has to pay his personal income-tax and it cannot be held to be a liability of the assessee-company and therefore it is not allowable as a business expenditure u/s 37 of the Act. 18. Having regard to the rival contentions and the material on record, we find that the Hon ble Jharkhand High Court in the case of Tata Yadogawa Ltd. (cited supra) was considering the case of a company which has entered into a technical collaboration agreement with an Austrian company, ESW to acquire know-how for certain consideration in terms of which taxes, if any, on payment of consideration were also to be borne by the assessee therein. The assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owable as business expenditure and at paras.23 to 34 of its order, the Tribunal has held as under: 23. Tax deducted at source in respect of remuneration paid outside India to the expatriate employees: As pointed out earlier, the assessee had neither deducted nor paid any tax in respect of the remuneration paid to the expatriate employees. It is the claim of the assessee that expatriate employees are paid remuneration net of taxes all over the world. The assessee has taken into account the tax perquisite while working out the tax deductible in respect of remuneration paid to expatriate employees. In asst. yr. 1994-95 in the written submissions filed before the CIT(A), reproduced by him in the appellate order, we find a reference to the policy of the assessee in regard to the payment of remuneration to its employees working in all branches around the world. Since it is relevant for deciding the issue on hand, it will be worthwhile to reproduce the same: For the year under consideration the appellant paid ₹ 35,86,781 (Pl. refer attachment 1 for details) as the tax deductible at source from the total remuneration of the expatriate employees taxable in India unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al security premiums, etc., related to the employment income will be for account of the bank. Exception is made for the Line of Business Bonus. Tax and social security premiums from other personal income are not for account of the bank. We, thus, submit that it is the bank's responsibility and obligation to bear the Indian taxes on offshore remuneration of expatriate employees rendering services in India. In the computation of remuneration and tax of the expatriate employees (for the purpose of deduction of tax at source) apart from salary also included is the local taxable remuneration being inter alia the perquisite value on account of rent-free accommodation, utilities and the additional remuneration/benefit of the tax borne. In effect, the total taxable remuneration is thus increased/ grossed up to include the tax deductible on the offshore remuneration. This methodology of increasing/grossing up the amount of tax has been done in accordance with the provisions of Section 195A of the Act. The amount by which the income is thus grossed up is in the nature of a taxable perquisite under Section 17(2) in the hands of the employee and thereby an allowable expenditure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st. yr. 1995-96 as per proviso to Section 40(a)(i). 25. Thus, subject to verification that the claim of remuneration and tax deductible has not been taken into account under Section 44C in regard to the expatriate employees, the deduction relating to asst. yrs. 1992-93 to 1994-95 would be permissible in asst. yr. 1995-96 as per proviso to Section 40(a)(i). For asst. yr. 1995-96, the assessee has paid the tax and, therefore, Section 40(a) is not attracted. The assessee shall be entitled to deduction in respect of remuneration as well as the tax paid pertaining to asst. yr. 1995-96. It is pertinent to mention that the objection raised by the Revenue about the assessee having failed to establish as to whether the services have been rendered by the expatriate employees in regard to the PE of the assessee in India, we find, is uncalled for. If the employees have not rendered services in India, for which the remuneration had been received abroad, then how is it that the assessee was under an obligation to deduct tax from their remuneration. The very fact that the assessee has accepted its obligation to deduct taxes from the salary paid to the expatriate employees is, in our view, s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is made in the respective assessment years. Therefore, the claim of the assessee does not fall for consideration in asst. yr. 1995-96 on the basis of provisions ofSection 40(a) read with proviso. The disallowance pertaining to asst. yrs. 1990-91 and 1991-92 in regard to the remuneration and the tax component in asst. yr. 1995-96 is upheld. 28. Interest : That leaves us to consider the interest paid by the assessee under Section 201(1A). Before proceeding to consider this issue, we would like to make it clear that for asst. yrs. 1992- 93 to 1994-95, interest paid by the assessee was neither claimed in the course of assessment proceedings nor in the grounds of appeal before the CIT(A) or before us. The claim was however, made in asst. yr. 1995-96. Thus, at the very outset the claim of interest pertaining to the period falling in asst. yrs. 1990-91 to 1994-95 is disallowable in any case for the reason that no such claim has ever been made for the relevant years. 29. We now proceed to consider if the claim is otherwise allowable. At the cost of repetition, it is stated that the assessee had not deducted tax in respect of remuneration paid to expatriate employees for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rinciple would apply to the interest charged for non-payment of tax--the interest being compensatory in nature. 32. For appreciation of the issue in proper perspective, it would be relevant to consider as to whether the income-tax is allowable as a deduction. If income-tax is allowable as a deduction, the interest payable on such tax being compensatory in nature may qualify for deduction. Interest on sales-tax of compensatory nature is allowable as a deduction not merely because it is not penal in character but because the sales-tax is chargeable on the commodities sold by the assessee as an incidence of business. The interest is thus allowable as part of tax. In this case the assessee has paid remuneration to the expatriate employees. The assessee as an employer has undertaken to pay taxes on their behalf. Since the income of the expatriate employees is liable to tax, the assessee would be obliged to file the returns of income and discharge the obligations which, but for the agreement of employment with the assessee, the expatriate employees had to discharge. The monetary consequence of failure to discharge the obligation on behalf of the expatriate employees may, in certain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Any person deducting any sum in accordance with the provisions of Sections 192 to 194, Section 194A, Section 194B, Section 194BB, Section 194C, Section 194D, Section 194E, Section 194EE, Section 194F, Section 194G, Section 194H, Section 194-I, Section 194J, Section 194K,Section 194L, Section 195, Section 196A, Section 196B, Section 196C and Section 196D shall pay within the prescribed time, the sum so deducted to the credit of the Central Government or as the Board directs. 201(1). If any such person and in the cases referred to in Section 194, the principal officer and the company of which he is the principal officer does not deduct or after deducting fails to pay the tax as required by or under this Act, he or it shall, without prejudice to any other consequences which he or it may incur, be deemed to be an assessee-in-default in respect of the tax : Provided that no penalty shall be charged under Section 221 from such person, principal officer or company unless the AO is satisfied that such person or principal officer or company, as the case may be, has without good and sufficient reasons failed to deduct and pay the tax. (1A) Without prejudice to the provisions of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imposed relating to those taxes; It is evident from the above definition that even DTAA does not cover such a levy. It may also be pertinent to mention that income-tax paid by the assessee does not qualify for deduction as such. This view is supported by the decision of the Supreme Court in the case of Smt. Padmavati Jaikrishna v. Addl. CIT . In the case of East India Pharmaceutical Works Ltd. v. CIT their Lordships of the Supreme Court held that the interest paid on the overdraft utilized for payment of income-tax is also not allowable as a deduction as it is not an expenditure laid out wholly and exclusively for the purposes of business as contemplated by Sub-section (1) of Section 37 of the IT Act, 1961. On the basis of the above principle of law, the interest paid by the assessee as an assessee-in-default of the tax is not eligible for deduction as expenses incurred for purposes of business. The decisions relied upon by the learned counsel for the assessee are accordingly inapplicable to the facts of this case. 19. We find that in both the above decisions, it has been held that remuneration and the income-tax thereon paid on behalf of the employee therein, is an allow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10A of the Act, we find that the issue is covered in favour of the assessee by the decision of the jurisdictional High Court in the case of CIT vs. Tata Elxsi (349 ITR 98) which has been followed by the CIT(A) in allowing relief to the assessee. The only argument raised by the learned Departmental Representative is that the judgment has not become final and the department has filed appeals before the Hon ble Supreme Court. However, since the issue is covered in favour of the assessee by the decision of the jurisdictional High Court which has neither been stayed nor set aside, we see no reason to interfere with the order of the CIT(A). The revenue s grounds No.1 and 2 are rejected. 27. As regards ground No.3 relating to the rate of depreciation at 60% on circuit test boards, brief facts are that during the assessment proceedings, the AO, while considering the claim of the assessee of ₹ 2,57,232/- towards payment of customs duty on purchase of circuit test boards, held that it is capital expenditure and that depreciation thereon is to be allowed at 25%. Before the CIT (Appeals), the assessee claimed that Circuit Test Boards are used as specialized functional accessory to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r software. The Hon'ble Delhi High Court in the case of BSES Rajadhani Powers Ltd. has held that computer accessories and peripherals form integral part of computers. For coming to this conclusion the Hon'ble Delhi High Court considered the decision of ITAT in the case of Expeditors Intl. (India) P. Ltd. Vs. CIT reported in (2008) 118 TTJ 652. The Special Bench of the Tribunal in the case of Datacraft India (supra) has held that when a devise is used as part of the computer in its functions, then it would be termed as computer . It was further held that the predominant function of the device determines its classification . In the case before us, the assessee had submitted before CIT (Appeals) that the Circuit Test Boards are used as a specialized functional accessory to the computer systems . The CIT (Appeals) has accepted this contention of the assessee and following the decisions cited supra, held the circuit test boards to be accessories and peripherals of computers and further held that the customs duty paid for purchase of such circuit test boards also qualifies for depreciation at the rate of 60%. We find that the CIT(A) has followed the precedents to allow dep ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
