TMI Blog2017 (7) TMI 363X X X X Extracts X X X X X X X X Extracts X X X X ..... ation and monitoring of software supplied to the client. Though the said services are technical in nature it does not fall within clause (ii) of subsection (1) of section 80HHE of the Act of providing technical services outside India in connection with the development or production of computer software. It falls under sub-clause (1) of sub-section (1) of Section 80 HHE of the Act. Therefore, the said expenditure cannot be excluded in computing export turn over. In that view of the matter we do not see any merit in this appeal. Disallowance of deduction under Section 10B in respect of on site development work subcontracted to and income derived by the AE - Held that:- This issue is covered in favour of the assessee however, to verify certain facts regarding quantum of work subcontracted to the AE and whether the assessee was having total supervision and control over the work executed by the AE this issue is remitted to the record of TPO / A.O. The Assessing Officer is directed to examine the relevant fact and then decide this issue. Deduction under Section 10B in respect of interest income and profit on sale of assets - Held that:- We find that the interest income from the de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essing Officer has erred in making a reference to Transfer Pricing Officer for determining arm's length price without appreciating that under section 92CA(I), a reference could be made to the Transfer Pricing Officer only in circumstances where the assessing officer considers it necessary or expedient so to do and also without specifying the relevant clause under section 92C(3) which necessitated the reference. The learned Commissioner of Income Tax (Appeals) - IV has erred in confirming the action of the Assessing officer. 3. The learned Assessing Officer, learned Transfer Pricing Officer and Commissioner of lncome Tax (Appeals) - IV have erred in, a. passing the order without demonstrating that appellant had motive of shifting profits outside India by manipulating prices charged in its international transactions; and b. not appreciating that the charging or computation provision relating to income under the head Profits Gains of Business or Profession do not refer to or include the amounts computed under Chapter X and therefore the addition made under Chapter X is bad in law. GROUNDS ON COMPARABLES AND REJECTION OF TP ANALYSIS OF THE APPELLANT 4. The l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ellate proceeding. iii. TP Analysis of Onsite Services Rendered by AE 8. The learned Commissioner of Income Tax (Appeals) - IV has erred in a. adopting CPM as the most appropriate method for evaluating the software development services received by the appellant without justifying how the same was most appropriate method; b. adopting inappropriate methodology and process in arriving at the arm's length price; c. selecting Indian companies having onsite revenues as comparable after selecting AE(a company based in USA) as the tested party. Without prejudice, CIT(A) has erred in rejecting similarly placed Indian companies as comparable on unjustifiable reason; d. not appreciating that appellant has onsite revenue of more than 75% of total revenue and ought to be compared with other Indian companies having more than 75% on site revenues. On such a comparison, the appellant's international transaction relating to receipt of services from AE are at arm's length; and, e. adopting net margin of the comparable in computing the arm's length price without appreciating that under CPM gross margin are to be considered. GROUNDS ON ADJUSTMENT FOR DIF ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ering the provisions of section I0B(4) of the Act. 15. Without prejudice to the above, on the facts and in the circumstances of the case, the learned CIT(A) has erred in: i. computing the disallowance in respect of on-site software development work based on the ratio of software development charges paid to AEs to the total software development expenses; ii. not considering the submissions of the Appellant with respect to the ratio to be adopted for computing the disallowance, i.e. the ratio of software development charges paid to AEs to the total expenses incurred by the unit for developing the software; iii. not appreciating the fact that the aforesaid ratio has been accepted by the assessing officer during the assessment proceedings for AY 2008-09; and, iv. The CIT(A) has erred in reducing the deduction under section l0B of the Act by an amount of ₹ 69,853,035. DISALLOWANCE UNDER SECTION 40(A)(l) IN RESPECT OF COMMISSION PAYMENTS 16. Without prejudice to ground no. I, the learned CIT(A) erred in holding that the services rendered by Mphasis Corporation outside India are in the nature of managerial services and commission paid to MphasiS Corporation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Transfer Pricing Officer in paras 2.3 and 2.4 as under : 2.3 Financial Results of Mphasis BFL, F Y 2004-05 The following are the brief financials of the tax payer as under:- Operating Revenue 247,76,81,000/- Operating Expenses 208,34,13,468/-* Operating Profit (PBIT) 39,42,67,532/- Operating Profit to Revenue 15.91% (*Excluding diminution in the value of investments) 2.4 International Transactions (as mentioned in the 92 CE report) The following are the international transactions entered into by the tax payer with its associated enterprises (as per the 3CEB Report and as per the reference received by the TPO from the Assessing Officer U/S92CA). Rendering of software development and IT consultancy services - ₹ 18,23,60,998/- Receipt of software development, professional and IT consultancy services - ₹ 121,97,06,243/- Reimbursement of Expenses to AEs - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... per the above, the reimbursement of expenses by AEs is towards travel, stay and other similar expenses of the employees of the AEs, the same need not be considered as part of expenses as these expenses are not incurred for rendering of services by the taxpayer. However, the reimbursement of expenses to the AEs is towards travel, stay and other similar expenses of the employees of the taxpayer, the same need to be considered as part of expenses as these expenses are incurred for rendering of services by the taxpayer.. Since, the reimbursement of expenses to AEs of ₹ 1,97,60,359/- is incurred for the purpose of rendering services, it should form part of operating expenses of the taxpayer. Similarly, it should also form part of the revenue. Just because the taxpayer chooses to give a different name as 'reimbursement of expenses', the nature of expense would not change. So, the reimbursement of expenses to AEs is added to the cost as well as the revenue. There are two types of international transactions in this case. The taxpayer takes the services of its subsidiaries and also renders software development services to its AEs. The taxpayer was asked to submit the profit r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... discussed below. Thus it is clear from the international transactions reported by the assessee that there are diversified activity constituting the international transactions. To benchmark its international transactions, the assessee adopted the Transactional Net Margin Method (TNMM) as Most Appropriate Method (MAM) and compared its entity level PLI with comparable prices. The TPO accepted the entire international transactions at arm s length however the CIT (Appeals) held that cost plus method is MAM in the case of the assessee to determine the ALP and accordingly adopted the cost plus method. The CIT (Appeals) then compared the assessee price with the comparable companies and directed the TP Adjustment. Aggrieved by the order of the CIT (Appeals) the assessee raised this issue in this appeal. 7. Before us, the learned Authorised Representative of the assessee has submitted that when the assessee is engaged in the diversified activity of international transactions then TNMM would be the MAM for the purpose of determining the ALP. He has further contended that the CIT (Appeals) not only adopted cost plus method but also took the Associated Enterprise (AE) of the assessee as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ricing, the entity level margin of the assessee cannot be considered for the purpose of bench marking the international transactions when the assessee is having both international as well as third party transactions. Though there is a strength in the contention of the learned Authorised Representative that in view of the complexity of the transactions between the assessee and its AEs as well as the third party transactions in which the assessee has to pay the selling commission to the AE, the assessee adopted entity level operating margin for the purpose of bench marking its international transactions. However, this method is not permitted as per the provisions and rules of the transfer pricing under Income Tax Act and I.T. Rules and therefore to that extent, we find that the learned CIT (Appeals) was justified in rejecting the methodology applied by the assessee as well as by the TPO. Once the CIT (Appeals) has rejected the entity level profit margin of the assessee for the purpose of bench marking the international transactions with ALP, the CIT (Appeals) was required to redo exercise of determination of ALP as per the provisions of transfer pricing. Instead of following the prop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in foreign currency. 11. We have heard the learned Authorised Representative as well as learned Departmental Representative and considered the relevant material on record. The Assessing Officer while working out deduction under Section 10B has reduced the expenditure incurred in foreign currency from the export turnover. The learned Authorised Representative of the assessee has submitted that expenditure in question though incurred in foreign currency but it was not in respect of providing technical services. He has further contended that this expenditure was incurred regarding work done by the AE and therefore it is not an expenditure incurred by the assessee for providing technical services. In support of his contention, he has relied upon the decision of Hon'ble jurisdictional High Court in assessee's own case for the Assessment Year 2003-04 and submitted that vide order dt.1.8.2014 in ITA No.1075 of 2008 and 196 of 2009 the Hon'ble High Court has decided this issue in favour of the assessee. 12. On the other hand, the learned Departmental Representative has relied upon the orders of the authorities below. 13. Having considered the rival submissions as well ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g of software such a turnover do not fail within clause (ii) of subsection (1) of section 80HHE of the Act. Such a turnover falls within sub-clause (i) of subsection (1) of Section 80HHE of the Act, that is export out of India of computer software or its transmission from India to a place outside India by any means. The expenditure incurred in the from of foreign exchange for such services cannot be excluded in computing the export turnover as it forms part of the export turnover. In the instant case as is clear from the order of the Assessing Authority, he proceeds on the assumption that the assessee is a company engaged in rendering technical services outside India in connection with production of said software. Therefore the expenditure incurred in foreign exchange in providing such technical services outside India of ₹ 62.7 lakhs was excluded in computing the export turnover and total turnover for arriving at deduction under Section 80HHE of the Act The assesee is engaged in the business of export out of India of computer software and its transmission to places from India outside India. Before a computer software is exported, the Software Engineers of the assessee would h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f of the assessee, it cannot be said that there is no nexus between off-shore development and on-site development. In view of the above discussion, we are of the opinion that in the facts of the present case, the income earned by the assessee through on-site development of software by the AE on behalf of the assessee would be eligible for deduction under Section 10A of the Act. Therefore prima facie this issue is covered in favour of the assessee however, to verify certain facts regarding quantum of work subcontracted to the AE and whether the assessee was having total supervision and control over the work executed by the AE this issue is remitted to the record of TPO / A.O. The Assessing Officer is directed to examine the relevant fact and then decide this issue in the light of decision of Hon'ble jurisdictional High Court (supra). 16. Ground No.14 is regarding disallowance of deduction under Section 10B in respect of interest income and profit on sale of assets. 17. We have heard the learned Authorised Representative as well as learned Departmental Representative and considered the relevant material on record. We find that the interest income from the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case. 2. On the facts and in the circumstances of the case the learned CIT (A) erred in holding that the expenditure incurred in foreign currency for development of software outside India amounting to ₹ 142,97,85,329 is to be excluded from the total turnover as well, for computation of deduction u/s 10B of the IT Act whereas such exclusion is permitted to arrive at the export turnover only as per the definitions given in section 10B of the IT Act and total turnover has not been defined in section 10B of the Act. 3. The CIT (A) ought to have appreciated that the decision of Hon'ble High Court of Karnataka in the case of M/s Tata Elxsi Ltd. on the issue of computing deduction u/s 10A by excluding the above expenses from export turnover and total turnover as well, has not reached finality in view of the pending Department's SLP before the Hon'ble Supreme Court. 4. For these and other grounds that may be urged at the time of hearing, it is prayed that the order of the CIT (A) in so far as it relates to the above grounds may be reversed and that of the Assessing Officer may be restored. 5. The appellant craves leave to add, alter, amend and ..... X X X X Extracts X X X X X X X X Extracts X X X X
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