TMI Blog2016 (3) TMI 1210X X X X Extracts X X X X X X X X Extracts X X X X ..... the foreign currency from total turnover as well. Disallowance of computer software expenses by treating the same as capital in nature - Held that:- hWen the expenditure in the case of the assessee is towards application software then by following the decision of the co-ordinate bench of this Tribunal in the case of Broadman Communications Technologies Pvt. Ltd. [2015 (6) TMI 1122 - ITAT BANGALORE] we decide this issue in favour of the assessee. - I.T.(T.P) A. No.1456/Bang/2010 - - - Dated:- 9-3-2016 - SHRI ABRAHAM P GEORGE, ACCOUNTANT MEMBER AND SHRI VIJAY PAL RAO, JUDICIAL MEMBER For The Appellant : Shri Ajith Jain, C.A. For The Respondent : Mrs. Neera Malhotra, CIT (D.R) ORDER Per Shri Vijay Pal Rao, J.M. : This appeal by the assessee is directed against the Assessment Order passed under Section 143(3) r.w.s. 144C of the Income Tax Act, 1961 (in short 'the Act') in pursuant to the directions of Dispute Resolution Panel ('DRP') dt.28.9.2010 under Section 144C(5) of the Act for the Assessment Year 2006-07. 2. The assessee has raised the following concise grounds : Transfer Pricing 1. The order passed by the Honourable Dispu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l of the above, the Honourable DRP and the learned AO/TPO have erred in facts and in law in applying the provisions of transfer pricing to the Appellant without appreciating the fact that the Appellant was entitled to tax holiday under section 10A of the Act during the relevant year and therefore there would be not be any motive to shift profits to the other country. Adjustments under Section 10A of the Act 9. The Honourable DRP and the learned AO has erred in law and on facts in concluding that expenditure incurred in foreign currency are to be excluded from the export turnover for the purpose of computation of relief under the section 10A of the Act. 10. The Honourable DRP and the learned AO has erred in law and on facts in upholding that the said expenditure incurred in foreign currency should not be reduced from the total turnover for the purpose of computation of relief under section 10A of the Act even if these are reduced from the export turnover. Others 11. The Learned AO has erred in law in concluding that expenses incurred by the Appellant towards purchase of computer software along with related hardware, which are not of enduring nature, as capital in natu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The assessee has earned an operating profit margin in respect of the software development services at 8.37%. To bench mark its international transactions, the assessee has considered 39 comparables under TNMM as MAM in its T.P. Study analysis. The operating profit margin of these 39 comparables is arrived by the assessee at 12.7% however, the average operating profit margin has been calculated by the assessee by considering the weighted average of three years data as under : Company Name 2004 12 months 2005 12 Months 2006 12 Months Weighted Average A B M Knowledgeware Limited 16.63 3.03 -- 9.00 Aurionpro Solutions Ltd. -- 46.24 -- 46.24 Aztec Software Technology Services Ltd. -4.59 20.79 23.50 18.31 Birlasoft Limtied 11.35 0.40 -- 5.77 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 25.65 Ontrack Systems Ltd. 5.77 7.93 9.57 7.92 Onward Technbologies Ltd. -0.10 -0.17 3.64 1.40 Orient Information Technology Ltd. 7.36 10.35 -41.16 -7.09 Pentasoft Technologies 14.93 6.75 -- 11.98 Powersoft Global Solutions Ltd. 19.58 21.94 -- 20.90 Quintegra Solutions Ltd. 6.25 10.21 10.91 8.42 R S Software Ltd. -1.96 8.00 15.44 7.91 Saksoft Limited 9.37 24.48 23.11 20.39 Software Technology Group Intl. Ltd. 7.36 15.30 -- 11.19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8. Companies with persistent losses. 0 9. Companies functionally dissimilar/different economic circumstances. 1 10. Companies in respect of which information (onsite revenue, employee cost and segmental details) not available. 3 Total Companies Rejected 33 Companies accepted as comparables. 6 Total No. of comparables. 39 Thus the TPO has accepted these comparables selected by the assessee. The TPO has also carried out a fresh search and included 14 more comparable companies in the list of comparables for the purpose of determining the ALP. The list of comparables selected by the TPO including six companies which were accepted from the list of the assessee are as under : Sl. No. Company Name Sales (Rs. Crs.) OP to Total Cost % Provisions written back Adjusted OP/TC % ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ware Systems Ltd. 595.12 27.24 2.17 27.83 18. IGAte Global Solutions Ltd. 527.91 15.61 0 15.61 19. Lanco Global Systems Ltd. 35.63 5.27 0 5.27 20. Megasoft Ltd. 56.15 52.74 0 52.74 Average 20.68 % 20.71 % In the above list of comparables, the companies at S.Nos.1, 3 12, 14, 16 19 are common as were accepted by the TPO from the list of assessee's comparables. Thus the TPO has arrived at Arithmetic Mean (AM) margin of comparables at 20.71%. The TPO has also allowed working capital adjustment of 2.19% and the adjusted AM was computed at 18.49%. Accordingly, the TPO proposed an upward adjustment of ₹ 54,25,32,620 under Section 92CA of the Act. The assessee challenged the action of the TPO/A.O in selecti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng considered the rival submissions and the relevant material on record, we note that during the year under consideration the assessee has undertaken the software development services for its group companies (AEs), therefore, the international transactions in question are related to the software development services segment. At the outset we find that the comparability of these two companies examined by the Tribunal in the case of Goldman Sachs Services Pvt. Ltd. (supra), which in our view it is applicable in the case of the assessee where the international transactions are only in the software development services. We note that the Tribunal in the case of Goldman Sachs Services Pvt. Ltd. (supra), has examined the functional comparability of this company in paras 8.1 to 8.5.2 as under : 8.1 Accel Transmatics Ltd. The assessee contends that this company is not a pure software development service company but rather it is a product development company and has a different functional profile from the assessee who is providing only software development to its AEs. It is submitted that this company is engaged in business application products in the healthcare and education seg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss Software India Pvt. Ltd. (supra) wherein these companies were held to be not functionally comparable with that of a pure software developer like the Assessee. 12 The following were the relevant observations of the Tribunal on the aforesaid comparable companies in the case of Triology E-Business Software India Pvt. Ltd.(supra): (d) KALS Information Systems Ltd. As far as this company is concerned, the contention of the assessee is that the aforesaid company has revenues from both software development and software products. Besides the above, it was also pointed out that this company is engaged in providing training. It was also submitted that as per the annual report, the salary cost debited under the software development expenditure was ₹ 45,93,351. The same was less than 25% of the software services revenue and therefore the salary cost filter test fails in this case. Reference was made to the Pune Bench Tribunal's decision of the ITAT in the case of Bindview India Private Limited v. DCI, ITA No. 1386/PN/10 wherein KALS as comparable was rejected for AY 2006-07 on account of it being functionaly different from software companies. The relevant extra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d its annual report for financial year 2005-06 from which the DRP noted that the business activities of the company were as under. (i) Transmatic system - design, development and manufacture of multi function kiosks Queue management system, ticket vending system (ii) Ushus Technologies - offshore development centre for embedded software, net work system, imaging technologies, outsourced product development (iii) Accel IT Academy (the net stop for engineers)- training services in hardware and networking, enterprise system management, embedded system, VLSI designs, CAD/CAM/BPO (iv) Accel Animation Studies software services for 2D/3D animation, special effect, erection, game asset development. 4.3 On careful perusal of the business activities of Accel Transmatic Ltd. DRP agreed with the assessee that the company was functionally different from the assessee company as it was engaged in the services in the form of ACCEL IT and ACCEL animation services for 2D and 3D animation and therefore assessee's claim that this company was functionally different was accepted. DRP therefore directed the Assessing Officer to exclude ACCEL Transmatic Ltd. from the final lis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... man Sachs Services Pvt. Ltd. (supra) and hold that M/s. Accel Transmatics Ltd. and M/s. KALS Information Systems cannot be considered as functionally comparable with the assessee. Accordingly, we direct the A.O./TPO to exclude these two companies from the set of comparables for determination of ALP. 11.1 Flextronics Software Ltd. (Seg.) : This company was selected by the TPO. The assessee objected the inclusion of this company in the list of comparables on the ground that there was extra-ordinary events of amalgamation during the year under consideration and further this company provides and engaged in wide range of services and does not report separate segmental results. This company is also a product oriented company. The learned Authorised Representative has further submitted that the functional comparability of this company has been examined and decided by the Hyderabad bench of the Tribunal dt.29.11.2013 in ITA No.1445/Hyd/2010 in the case of CES Pvt. Ltd. Vs. DCIT and the finding of the Tribunal has been confirmed by the Hon'ble High Court of Andhra Pradesh Telangana in ITA No.442 of 2014. 11.2 On the other hand, the learned Departmental Representative has rel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal comparability has been examined by the TPO and it was found that this company is in the same business activity. 13.3 Having considered the rival submissions as well as the relevant material on record, we note that the co-ordinate bench of this Tribunal in the case of Goldman Sachs Services India Pvt. Ltd. (supra) has examined the functional comparability of this company in para 10 to 10.2.3 as under :- 10. Megasoft Ltd. 10.1 The learned Authorised Representative of the assessee submitted that this company is a product development company and is therefore functionally different from the assessee in the case on hand who is purely a provider of software development services to its AEs. It is submitted that this company has three divisions; one of which, is, XIUS Division is completely into product development and has various products such as XIUS WISE, XIUS Voise, XIUS Roaming, XIUS Infinet, etc. customises its own products and only passes on right in the form of licenses. The learned Authorised Representative also submitted that this company fails the Related Party Transaction (RPT) filter of 15% and is a super profit company. In support of the assessee's conten ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or Assessment Year 2006-07 (supra), we hold and direct that this company, namely, Megasoft Ltd. is to be excluded from the list of comparable companies for software development services segment of the assessee. There is no dispute that this company is following a different financial year in comparison to the assessee as this company is following the calendar year as accounting year whereas the assessee is following the financial year as its accounting year. Therefore, the data of this company are not contemporaneous to the assessee. Following the earlier order of this Tribunal in the case of Goldman Sachs Services Pvt. Ltd. (supra), we direct the A.O./TP to exclude this company from the list of comparables. 14.1 Persistent System Ltd.: This company is selected by the TPO. The assessee objected the inclusion of this company on the ground of functionally different and engaged in the product development and design services. The learned Authorised Representative of the assessee has submitted that the functional comparability of this company has been examined by the Hyderabad Tribunal in the case of CES Pvt. Ltd. (supra) and the finding of this Tribunal has been upheld by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9;ble Delhi High Court and the Hon'ble High Court has confirmed the finding of the Tribunal by observing in paras 5 6 as under : The Tribunal has observed that the assessee was not comparable with Infosys Technologies Ltd., as Infosys Technologies Ltd. was a large and bigger company in the area of development of software and, therefore, the profits earned cannot be a bench marked or equated with the respondent, to determine the results declared by the respondent-assessee. In paragraph 3.3 the Tribunal has referred to the difference between the respondent-assessee and Infosys Technologies Ltd. For the sake of convenience, we are reproducing the same :- Basic Particular Infosys Technologies Ltd. Agnity India Risk Profile Operate as full-fledged risk taking entrepreneurs. Operate at minimal risks as the 100% services are provided to AEs. Nature of Services Diversified-consulting, application design, development, re-engineering and maintenance system integration, package evaluation and implementation and business process manageme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee which is provider of capital service to AE. Accordingly, we direct the A.O./TPO to exclude this company from the list of comparables. 16.1 The assessee has also filed an additional ground which reads as under : 1. The ld. TPO has, in his fresh study, erred in selecting Tata Elxsi Limited as comparable to the appellant. This company cannot be retained as comparable, merely because this was initially selected by the appellant in its transfer pricing documentation. The Hon'ble DRP has also erred in confirming the order of the TPO in this regard. The said ground is independent and without prejudice to the other grounds of appeal preferred by the appellant. The appellant craves leave to add, alter, vary, omit, substitute or amend the above grounds of appeal, at any time before or at, the time of hearing, of the appeal, so as to enable the Hon'ble ITAT to decide this appeal according to law. 16.2 We have heard the rival submissions on the admissibility of this ground. The learned Authorised Representative of the assessee has submitted that though Tata Elxsi Ltd. (Seg.) was selected by the assessee in its T.P. Study however, this company is not fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as 11 to 11.3.2 as under : 11. Tata Elxsi Ltd. 11.1 The learned Authorised Representative of the assessee submitted that this company is a product company and it has several core practices which encompass product design services, industrial design and engineering services for automotive and consumer goods; animation and visual effects including content development and system integration services. It is also submitted that appropriate segmental information is not available in respect of the software development segment which have different segments. In support of the assessee's contention that this company ought not to have been included in the set of comparable companies to the assessee who is a non-provider of software development services to its AEs, the learned Authorised Representative placed reliance on the decision of a co-ordinate bench of this Tribunal in the case of Ariba Technologies India Pvt. Ltd. in IT(TP)A No. 1179/Bang/2010 dt. 19.12.2014 for Assessment Year 2006-07. 11.2 Per contra, the learned Departmental Representative supported the order of the TPO in including this company in the list of comparable companies to the assessee in the case on hand ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. should be rejected as a comparable. 18. In view of the aforesaid decision, we hold that Tata Elxsi has to be excluded from the list of comparable chosen by the TPO. 11.3.2 Following the aforesaid decision of the co-ordinate bench of this Tribunal in the case of Ariba Technologies India Pvt. Ltd. for Assessment Year 2006-07 (supra), we hold and direct that this company, namely, Tata Elxsi Ltd. shall be excluded from the set of comparable companies for the software development segment of the assessee.' In view of the facts as discussed above as well as the decision of the co-ordinate bench, we direct the A.O./TPO to exclude this company from the list of comparables. 17. Ground No. 7 is regarding the benefit of tolerance range of +/- 5% as per the proviso to Section 92C(2) of the Act. If the difference of the price of the international transactions and average price of the comparables is within the tolerance range then the benefit of proviso to Section 92C(2) of the Act is available to the assessee. Accordingly, we direct the A.O./TPO that while computing the ALP after excluding certain comparables as directed by us, the benefit of the proviso to Section 92C(2) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ofits on the basis of turnover was accepted as a method of arriving at export profits. In the case of section 80HHC, the export profit is to be derived from the total business income of the assessee, whereas in section 10-A, the export profit is to be derived from the total business of the undertaking. Even in the case of business of an undertaking, it may include export business and domestic business, in other words, export turnover and domestic turnover. To the extent of export turnover, there would be a commonality between the numerator and the denominator of the formula. If the export turnover in the numerator is to be arrived at after excluding certain expenses, the same should also be excluded in computing the export turnover as a component of total turnover in the denominator. The reason being the total turnover includes export turnover. The components of the export turnover in the numerator and the denominator cannot be different. Therefore, though there is no definition of the term 'total turnover' in section 10A, there is nothing in the said section to mandate that, what is excluded from the numerator that is export turnover would nevertheless form part of the den ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee and the ld. DR on the issues raised in concise ground Nos.12 13. Taking into consideration the decision rendered by the Hon ble High Court of Karnataka in the case of CIT v. Tata Elxsi Ltd [2012] 349 ITR 98 (Karn), we are of the view that it would be just and appropriate to direct the Assessing Officer to exclude telecommunication charges, internet charges etc., both from export turnover and total turnover, as has been prayed for by the assessee in concise ground No.13. In view of the acceptance of the alternative prayer in concise ground No.13, we are of the view that no adjudication is required on concise ground No.12. 31. Gr.No.8 to 11 raised by the Assessee in the concise grounds of appeal reads as follows: 8. The Hon ble DRP has erred in law and on facts in upholding the AO s reasoning in disallowing an amount of ₹ 1,09,16,141 being expenditure for acquiring the rights to use application software. 9. The Hon ble DRP has erred in law and on facts in upholding the AO s reasoning that expenditure on software is capital in nature even though the Appellant has submitted that it has acquired only the right to use the software and not the right to own the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le High Court on the aforesaid question of law held as follows : 9. The second substantial question of law relates to application of the amount utilized for projects of Software in a sum of ₹ 33,14,298/-. The Tribunal on consideration of the material on record and the rival contentions held, when the expenditure is made not only once and for all but also with a view to bringing into existence an asset or an advantage for the enduring benefit, the same can be properly classified as capital expenditure. At the same time, even though the expenses are once and for all and may give an advantage for enduring benefit but is not with a view to bringing into existence any asset, the same cannot be always classified as capital expenditure. The test to be applied is, is it a part of company's working expenses or is it expenditure laid out as a part of process of profit earning. Is it on the capital layout or is it an expenditure necessary for acquisition of property or of rights of a permanent character, possession of which is condition on carrying on trade at all. The assessee in the course of its business acquired certain application software. The amount is paid for applicatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fice and MS windows was not disputed by the Assessing Officer. He also pointed out that the AO did not dispute the contention before CIT(A) that the Assessee had not made double deduction once in the profit and loss account and again in the computation of total income nor has the Assessee claimed depreciation on the capitalized value of the software expenditure incurred on purchase of application software. According to him therefore the claim of the Assessee had to be allowed. The learned DR relied on the order of the CIT(A) and further submitted that the issue may be set aside to the AO for a consideration afresh in the light of the submissions made by the Assessee before the Tribunal. 21. We have considered the rival submissions and are of the view that in the light of the submissions before CIT(A) and the remand report of the AO before CIT(A), it is clear that the revenue does not dispute the fact that there was no double claim of expenditure either in the form of a debit in the profit and loss account and thereafter a deduction claimed in the computation of total income. The revenue has also not disputed the fact that the expenditure in question though capitalized in the boo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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