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TMI Blog2020 (3) TMI 338X X X X Extracts X X X X X X X X Extracts X X X X ..... USTION OF KALS IFNORMATION SYSTEM LTD FROM FINAL LIST OF COMPARABLES (A) KALs Information System Ltd :- 3. At the very opening of the argument, the Ld. Counsel for the assessee appraised the Bench taking us to the TPO's order at Page-1, Para-3 wherein brief profile of the company has been given and it is evident that the company is carrying out all IT enabled services and no marketing is done by the assessee, no sale of IT products are done by the assessee. The Ld. Counsel also took us through various agreements filed before us wherein it is evident that the assessee is performing only development services relating to software. These facts are clear from the documents annexed at Pages 30 to 31 of the paper book placed before us. That further, it is the contention of the Ld. Counsel for the assessee that most of the risks are undertaken by the AEs only. 4. That with regard to KALs Information System Ltd., the TPO vide Para 19 of his order has held as follows: "19. As regards, objection on product development and objection based on judicial pronouncements, inconsistent approach of the assessee has been discussed in the subsequent paragraphs. Objection of the assessee is therefo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Transfer Pricing Officer while rejecting the objections of the assessee has simply stated that the company is in the business of application software which is similar to the assessee. It is relevant to note, in a number of decisions of different Benches of the Tribunal for the very same assessment year, this company has been rejected as a comparable to a software service provider on the reasoning that it is also involved in development and sale of product. The ratio laid down in these decisions squarely applies to the facts of the present case. Pertinently, in course of hearing, it was brought to our notice by the learned Sr. Counsel for the assessee that the Transfer Pricing Officer relying upon the information sought by another Transfer Pricing Officer in case of some other assessee has utilized it in the present case. Referring to the copy of the said reply at Page-940 of the paper book the learned Sr. Counsel submitted that the export sales figure mentioned in the said reply does not tally with the export sales figure mentioned in the audited annual account of the assessee for the relevant previous year. On factual verification, it is found that such contention of the learned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s order Para 2.2.6.1 starts his observation and the assessee also filed written submission which has been reproduced and finally at Para 2.2.6.2 & 2.2.6.3, the Ld. CIT(Appeals) has held as follows: "2.2.6.2 I have carefully considered the assessee's submission. I find that the learned TPO has not applied the upper turnover filter presumably following the decisions of the honourable Tribunal, which have held that turnover filter is of no relevance in the software industry and there is no relationship of turnover with profit of the company as company with lower turnover has also earned higher profit than the 'company with higher turnover. i agree with the view that turnover may not be a factor in a service industry, however, according to me, size of the company makes difference in undertaking risks. Bigger sized company is in the position to undertake more risks in the business as compared to the smaller size companies. The size of the company can be categorized either on the basis of capital or asset or on the basis of turnover. In this connection, it may not be out of place to mention that the Rule 10TD of the Income Tax Rules provide higher profitability for the companie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenses of Rs. 3,51,30,538/- totaling Rs. 8,82,77,432/- from the export turnover while working out the deduction u/s.10A and u/s.10AA of the Act. 13. The assessee has filed detailed written submissions before the Ld. CIT(Appeals) which was duly considered by the Ld. CIT(Appeals) and thereafter vide Para 2.3.3 & 2.3.4, the Ld. CIT(Appeals) confirmed the decision of the Assessing Officer to reduce the telecommunication expenses from the total turnover. The Assessing Officer was also directed to reduce the telecommunication expenses from the export turnover as well as from the total turnover and the relevant findings of the Ld. CIT(Appeals) is as follows: "2.3.3 I have considered the arguments of the Appellant. The Appellant on the basis of the decision of the Honourable Supreme Court in the case of George Oakes has argued that if all inclusive consolidated sale price is charged then specific category of expenses cannot be reduced from the sale price, when such price is not separately charged in the invoice. I consider this decision of the Honourable Supreme Court is rendered on the dispute on levy of indirect tax, is not helpful in deciding this issue. According to me, provisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... No.3 of the assessee's appeal and Ground No.3 of the Revenue's appeal pertains to "exclusion of expenditure on providing technical services abroad from the turnover while computing deduction u/s.10A/10AA of the Act". Treatment of Expenditure on providing technical services abroad: 16. The Assessing Officer vide Para at Page 7, Para 9 of his order on the issue has held as follows: "09. Treatment of expenditure on providing technical services abroad The assessee has incurred certain expenses in relation to the providing of technical services abroad. These expenses incurred in foreign exchange need to be: reduced from the Export Turnover computed. The assessee has not done the same. On the contrary, the assessee has claimed that it is not in the business of rendering technical services abroad and that there are no expenses to be reduced from Export Turnover. This issue has come from last many year following my predecessors, it is hereby ordered that the expenses incurred in relation to providing technical services need to be reduced from the Export Turnover. The expenses in foreign currency in relation to providing technical services has been given by the assessee at Rs. 1,066,6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rable High Court held that the certificate issued by the CA showed that the said amounts was received for providing technical services whereas the Appellant does not render technical services. In other words, the Appellant has argued that the provision of the software development service is not a technical service. 2.4.5 I do not agree with the Appellant's argument that the decision in the case of Infosys is not applicable to it or that the software development service is not a technical service. For this purpose, it may be necessary to appreciate the meaning of the expression 'technical service', which is used in the clause (iv) to Explanation 2 of Section 10A. Honourable Mumbai ITAT in the case of TUV Bayren (India) Ltd vs DCIT (2012) 23 taxmann.com 127 (Mum) has held that 'technical service' means a service requiring scientific knowledge or experience. Honourable AAR in the case of CAT Geodata GmBh, in re (2012) 346 ITR 549 (AAR) has held that the services are technical in nature, when special skills or knowledge or education are required for the provision of such services. Example 5 in the MOU to India-USA DTAA provides that computer software development ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is order and given his finding at Page 8.1 wherein the disallowance worked out at Rs. 13,759,414/- u/s.14A read with rule 8D. Out of this amount Rs. 3,20,508/- was already disallowed by the assessee and hence, the balance amount of Rs. 1,34,38,906/- was disallowed out of the total expenses claimed by the assessee. 21. The Ld. CIT(Appeals) discussed this issue vide Para 2.6.1 onwards of his order and given his final findings at Para 2.6.5 and 2.6.6 by observing as follows: "2.6.5 I have considered the facts and relevant provisions of the law. I find that the learned AO has invoked the provisions of the Rule 8D without discussing as to why he is not satisfied on the correctness of the claim of the deduction of Rs. 3,20,508. It is settled that invoking of the provisions of the Rule 8D is not automatic and section 14A(2) require the AO to record his satisfaction for invoking the Rule 8D. Further, the satisfaction of the AO has to be an objective satisfaction and cannot be his subjective satisfaction. According to me, the AO's satisfaction need not be express as there is no provision in the Act for recording express satisfaction in the assessment Order. However, if the AO's s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance sheet, whose copy has been placed in the paper book, that as against Investments of Rs. 176.57 crore, the assessee's Shareholders' fund stands at Rs. 509.29 crore. Thus, it is evident that the Shareholders' fund is far in excess of the amount ofinvestments. The Hon'ble Karnataka High Court in CIT & Anr vs. Microlabs (2016) 383 ITR 490 (Kar) has held that when investments are made from a common pool and non-interest bearing funds are more than the investment in tax free securities, no disallowance of interest expenditure u/s 14A can be made. This view has been taken by following the judgment of the Hon'ble Bombay High Court in CIT vs. HDFC Bank Ltd. (2014) 366 ITR 515 (Bom). It is further observed that this issue is now no more res integra in view of the judgment delivered by the Hon'ble Supreme Court in Godrej & Boyce Manufacturing Company Ltd. vs. DCIT (2017) 394 ITR 449 (SC), upholding the view of the lower authorities that when interest free funds in the form of share capitaland reserves etc. are more than the amount of investment, then no disallowance of interest can be made u/s 14A. Respectfully following the precedents, we order to delete the disallowance und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0.1 onwards and the assessee filed detailed submissions before the Assessing Officer which reads as under: "Based on the above facts it can be concluded that the services rendered at onsite were at all times integral part of servies rendered offshore and belonged to the STPI/ SEZ undertakings situated in India. It was the STPI/ SEZ undertakings situated in India which were responsible for the software development, coding, testing and delivery. Further, it can also be seen that all the profits ascribed towards on site software services were related to and formed integral part of STPI/SEZ undertakings in India as all the resources who were deputed onsite always belonged to the STPI/SEZ undertakings situated in India. Hence, it can be established that there is a direct and intimate nexus between the onsite employees and the Indian STPIs/SEZs executing the project which in turn establishes the direct and intimate connection to the development of software done abroad. Based on the above facts it can be concluded that all the profits' ascribed towards onsite software services were related to and formed integral part of STP / SEZ undertakings in India and hence we request your hon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ourse of assessment proceedings, the assessee had given a complete list of all 100%onshore projects which included DTM projects also. The revenue thereon had been identified at Rs. 36.07 crores and the profit from such DTM and 100% onshore activities had been worked out at Rs. 4,66,96,777/- for AY.2008-09. This amount had been disallowed form the 10A claimed by the assessee for AY 2008-09. A.Y. 2009-10, the revenue has not had to identify specific SOWs containing DTM and onshore projects. The assessee has itself come forward to identify all such 100% onshore and DTM projects. As such, the factual identification of DTM and 100% onshore projects has not been required. The assessee has submitted the facts of Rs. 63.26crores of revenue from 100% onshore projects which included the DTM projects also. As such, the task before revenue has become simpler. For A.Y. 2010-11, the revenue has not had to identity specific SOWs containing DTM and onshore projects. The assessee has itself come forward to identify all such 100 % onshore and DTM projects. As such, the factual identification of DTM and 100 % onshore projects has not been required. The assessee has submitted the facts of Rs. 63 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of the documents can lead to drawing of adverse inference u/s 114 of the Evidence Act. Therefore, in the case of the failure to establish the direct and intimate nexus with the SEZ such contracts could be presumed to be of bodydhopping contracts. 2.5.26 In view of the above discussion and in absence of the supporting evidence produced by the Appellant, I hold that the amount of Rs. 3,42,46,639 is the body shopping activity, which is derived from the supply of technical manpower and not derived from the export of software. Therefore, the deduction u/s 10A or u/s 10AA is not available on such profits. Accordingly, I confirm the decision of the learned AO to deny the deduction u/s.10A or u/s.10AA on Rs. 3,42,46,639/- 26. The Ld. Counsel for the assessee submitted that this issue is covered by the decision in assessee's own case in ITA No.342/PUN/2014 for assessment year 2009-10 (supra.) wherein vide Para 46 and 47, the Tribunal has held as follows: "46. Ground No.7 of the assessee's appeal is against reduction in the amount of deduction u/s.10A by a sum of Rs. 2,41,23,133/- on the premise that the assessee is in the business of Deputation of Technical Manpower (DTM) and/or r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... between the eligible undertaking and some income, the same is profit of the business of undertaking, even if may not be derived from the export of computer software etc. Without accepting, even if we presume the contention of the ld. DR as correct that income from DTM and onsite software services rendered abroad cannot be considered as derived from the export of computer software, it, in any case, will have to be regarded as `profits of the business of the undertaking'. In view of the foregoing discussion, we uphold the impugned order on this score." Respectfully following the decisions of the Tribunal mentioned hereinabove on the issue, we set aside the order of the Ld. CIT(Appeals) on this issue and allow this ground of the assessee. Thus, ground No.4 raised in appeal by the assessee is allowed. 27. Ground No.5 of the assessee's appeal relates to "foreign exchange fluctuation gain directly credited to the reserves". Foreign exchange fluctuation gain directly credited to the reserves:- 28. The Assessing Officer discussed this issue vide Para 12 of his order and held the amount of forex gain Rs. 2,01,99,730/- as taxable in the current year and accordingly, liable to be inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6 which is extracted as follows: "2.7.6 In this case, the learned AO has not examined as to how much fluctuation gain is on the capital account and how much is on the revenue account. The Appellant is also not forthcoming on this issue. Therefore, I direct the learned AO to ascertain the amount of the foreign exchange gain towards the capital account and towards the revenue account. Accordingly, the addition pertaining to the foreign exchange gain on the capital account would be deleted and addition pertaining to the foreign exchange gain on the revenue account would be confirmed." 30. The Ld. Counsel for the assessee submitted that this issue may be restored to the file of the AO/TPO for fresh adjudication as per law. 31. The Ld. DR did not raise any objection with regard to the prayer of the Ld. AR of the assessee. 32. We have perused the case records and analyzed the facts and circumstances in this case. We have also given considerable thought to the findings of the First Appellate Authority wherein at the very outset, the Ld. CIT(Appeals) observed that Assessing Officer has not examined as to how much fluctuation gain is on the capital account and how much is on the revenu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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