TMI Blog2021 (2) TMI 777X X X X Extracts X X X X X X X X Extracts X X X X ..... the view that it would be just and appropriate to direct the AO to verify the claim of the assessee regarding tax deduction at source, in the light of the evidence produced before the CIT(A) after affording the assessee opportunity of being heard. TDS u/s 195 - Disallowance u/s 40(a)(ia) - disallowing the expenses grouped by the Appellant under Repairs and maintenance towards purchase of application software on the premise that it constitutes royalty - HELD THAT:- Prior to the decision in the case of Samsung Electronics [ 2011 (10) TMI 195 - KARNATAKA HIGH COURT ] rendered by the Hon ble Karnataka High Court on 15.10.2011, the law as interpreted by various judicial forums was that payments for purchase of software were not in the nature of royalty but were in the nature of business profits and if the recipient non-resident did not have a Permanent Establishment in India, there was no obligation to deduct tax at source. Therefore payments to non-resident for purchase of software prior to 15.10.2011 cannot be disallowed u/s.40(a)(ia) of the Act for non deduction of tax at source as on the date of payment to non-resident, there was no such obligation. In view of the above sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l facts and circumstances. We therefore deem it convenient to pass a common order. 2. We shall first take up for consideration the cross appeals for AY 2010-11. The assessee is a subsidiary of VMware International Unlimited Company, Ireland (formerly known as VMware International Limited), which is an affiliate of VMware Inc., USA. It provides software development services [ SWD services for short], Information Technology Enabled Services [ ITES for short] and marketing support services [ MSS services for short] to VMware group companies, as a captive service provider. For all the above services, the Assessee is compensated by the Associate Enterprise (AE) on a cost plus mark up basis. In terms of section 92B of the Income Tax Act, 1961 (Act), the above transactions were international transactions. In terms of section 92 of the Act, any income arising out of an international transaction has to be determined having regard to Arm s Length Price (ALP). The revenue from the international transactions are as follows: Details of international transactions entered into by the Assessee with its AE, as reflected in the TP order are as follows: International T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TPO Methodology adopted TNMM TNMM Profit Level Indicator (PLI) OP/TC OP/OC Database used PROWESS CAPITALINE PROWESS Comparables selected 16 11 Comparables selected by TPO and their arithmetic mean as per TPO order: Sl. No. Comparables Selected by TPO Mark-up on Total Costs (Unadj) 1. ICRA Techno Analytics Ltd. 24.94 2. Infosys Ltd. 44.98 3. Kals Information Systems Ltd. 34.41 4. Larsen Toubro Infotech Ltd. 19.33 5. Mindtree Ltd. 14.83 6. Persistent Systems Solutions Ltd. 15.38 7. Persistent Systems Ltd. 30.35 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g grounds of appeal before Tribunal: 1. The order of the learned CIT(A) is opposed to law and facts of the case. 2. The C1T(Appeals) ought to have considered that that the expenditure incurred in foreign currency, towards telecom charges and other expenses in connection with rendering technical services outside India, to be excluded only from export turnover and not from total turnover for the purpose of computation of deduction u/ s 10A of the Act, since such exclusion is permitted to arrive at the export turnover only as per the definitions given in Sec. 10A and total turnover has not been defined in the same. 3. Whether the C1T(A) is correct in law in following the judgements of jurisdictional High Court in the case of CIT vs. Tata Elxsi Ltd., which has not become final since the same has not been accepted by the Department and SLPs are pending before the Hon'ble Apex Court ? 4. The C1T(A) erred in excluding 2 companies in SWD segment as comparables on functional dissimilarity ? 5. Whether the C1T(A) is right in not appreciating in fact that transfer pricing is not an exact science and no two entities can be exact replicas ? 6. Whether the C1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppeal of the revenue are vague and therefore we presume that the grounds of appeal 4 to 12 are in relation to SWD services Segment and therefore proceed to decide the correctness of the CIT(A) in excluding the 6 comparable companies out of the 11 comparable companies chosen by the TPO. 7. ICRA Techno Analytics Ltd: We find that this company was excluded by the CIT(A) for the reason that it is functionally dissimilar to that of the Assessee (pages 17-18 of the CIT(A) s order). It has been held that this company is engaged in a diverse range of IT Solution Services. The company is not a full-fledged software development company and provides such services among its other wide array of IT solution services like Business Analytics, IT Engineering and Business Process Outsourcing. Thus, functionally, the company is different from the Assessee. The learned Counsel for Assessee has placed reliance on the decision of this Hon ble Tribunal in DCIT v. Electronics for Imaging India P. Ltd [(2016) 70 taxmann.com 299 (Bang Trib.)], ACIT v. Broadcom India Research (P.) Ltd [2016] 72 taxmann.com 77 (Bangalore - Trib.) and ITO v. Interwoven Software Services (India) (P.) Ltd. [2016] 74 taxma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onfirms that the company is engaged in development of software and software products. The company holds significant inventories which account for 27% of the total current assets which demonstrates that it is a product development company as against a pure software service provider like the assessee. The functions carried out by the two companies being substantially different, this company ought to stand rejected as a comparable. The company is being consistently excluded from the list of comparables in similar cases. Since the circumstances leading to it being excluded as being functionally dissimilar in the previous assessment continue to remain same, the company ought to remain excluded in the current assessment year. This Tribunal in DCIT v. Electronics for Imaging India P. Ltd [(2016) 70 taxmann.com 299 (Bang Trib.)], ACIT v. Broadcom India Research (P.) Ltd [2016] 72 taxmann.com 77 (Bangalore - Trib.) and ITO v. Interwoven Software Services (India) (P.) Ltd.[2016] 74 taxmann.com 103 (Bangalore - Trib.), directed this company to be excluded in the case of assessees similar to the Assessee herein. We, therefore, find no ground to interfere with the order of CIT(A). 10. Per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al in in DCIT v. Electronics for Imaging India P. Ltd [(2016) 70 taxmann.com 299 (Bang Trib.)], ACIT v. Broadcom India Research (P.) Ltd [2016] 72 taxmann.com 77 (Bangalore - Trib.) and ITO v. Interwoven Software Services (India) (P.) Ltd. [2016] 74 taxmann.com 103 (Bangalore - Trib.), upheld exclusion of this company in a case similar to the Assessee herein. We thus uphold the exclusion of this company. 12. Tata Elxsi Ltd.: This company was excluded by the CIT(A) for the reason that it was functionally dissimilar, by placing reliance on the decision of this Hon ble Tribunal in assessee s own case for the assessment year 2009-10. For FY 2009-10, the company operated under two segments (1) software development services and (2) systems integration and support. The business segment relating to software development and services considered by the TPO as being comparable to the assessee comprises of services such as graphics, imaging image processing, signal processing, routing and switching, VOIP, network management, product design services, innovation design services and visual computing labs which are related to high-end hardware and software product and development activit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xcluded. 14. The learned counsel for the Assessee submitted that in the event the Revenue s appeal is dismissed by upholding the exclusion of the above mentioned companies, the Assessee s appeal to the extent it challenges the order of the CIT(A) with respect to the SWD service segment would not have to be adjudicated as no adjustment would survive and consequently the same would become academic in nature. We accept the said submission and dismiss the relevant grounds of appeal of the assessee as infructuous. 15. The TPO/AO is directed to compute ALP of the SWD services segment in accordance with the directions contained int his order after affording opportunity of being heard to the assessee. 16. INFORMATION TECHNOLOGY ENABLED SERVICES SEGMENT While the Revenue has raised ground No. 11, in terms of which it is challenging the action of the CIT(A) in excluding companies which are allegedly functionally similar, specific comparable whose exclusion in challenged by the Revenue is not specified. The grounds of appeal are vague and hence, we are of the view that Revenue has not challenged the order of CIT(A) in so far as this segment is concerned. Since we have held th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of arm s length price by TPO and the adjustment made: Arm s Length Mean Margin 24.80% Operating cost ₹ 15,31,18,416/- Arm s Length Price (ALP): 124.80% of Operating Cost ₹ 19,10,91,783/- Price Received ₹ 16,55,05,334/- Short fall being adjustment u/s. 92CA ₹ 2,55,86,449/- 18. The Addition suggested by the TPO was incorporated in the draft order of Assessment by the AO. The Assessee did not file any objection to the draft assessment order before the Dispute Resolution Panel (DRP) but filed appeal against the final assessment order before the CIT(A). The CIT(A) passed an order dated 21.11.2017 partly allowing the Assessee s appeal. Pertinently, the CIT(A) accepted the contention of the Assessee and directed exclusion of the following companies: 1. Asian Business Exhibition Conference Ltd. 2. HCCA Business Services Pvt. Ltd. 3. Killick Agencies Mktg. Ltd. However, the CIT(A) rejected the contention of the Assessee that Hindustan Housing C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee. This Tribunal in DCIT v. Electronics for Imaging India P. Ltd [(2016) 70 taxmann.com 299 (Bang Trib.)] and ITO v. Interwoven Software Services (India) (P.) [2016] 74 taxmann.com 103 (Bangalore - Trib.) directed this company to be excluded as a comparable in the case of assessees similar to the Assessee herein. Therefore, this company ought to remain excluded from the final list of comparables for the MSS segment. 22. Killick Agencies Mktg. Ltd.: This company was excluded by the CIT(A) for the reason that it is functionally dissimilar to the Assessee, and therefore does not warrant any interference by this Hon ble Tribunal. This Tribunal in DCIT v. Electronics for Imaging India P. Ltd [(2016) 70 taxmann.com 299 (Bang Trib.)] and ITO v. Interwoven Software Services (India) (P.) [2016] 74 taxmann.com 103 (Bangalore - Trib.) directed this company to be excluded as a comparable in the case of assessees similar to the Assessee herein. 23. The learned Counsel for Assessee submitted that in the event the Revenue s appeal is dismissed by upholding the exclusion of the above companies, the Assessee s appeal to the extent it challenges the order of the CIT(A) with respect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 234B of the Act being purely consequential in nature and a direction to the AO give consequential effect would be sufficient to dispose off the said ground. 27. Ground Nos.2.1 and 2.2 raised by the assessee reads as follows: 2.1 The learned CIT(A) erred in law and facts by upholding the action of the Deputy Commissioner of Income Tax, Circle 12(5), Bangalore ( learned AO ) in not providing an allowance for expenditure amounting to INR 1,37,875 which was disallowed during the assessment proceedings for the Assessment Year ( AY ) 2009-10, despite the fact that the Tax Deducted at Source ( TDS ) on such expenditure was deducted and paid in January 2010 i.e., during the AY 2010-11. 2.2 The learned CIT(A) has erred in not apricating the fact that the Appellant has submitted requisite evidence on deduction and payment of TDS on the expenses amounting to INR 1,37,875, which was disallowed during the assessment proceedings for the AY 2009-10, and thereby erred in holding that no details and documentary evidence are filed establishing its claim. 28. As far as the above grounds are concerned, the AO disallowed the claim for deduction made by the assessee while computing in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e had made payments to the non-resident during the period 01.04.2009 to 31.03.2010. It is the submission of the learned Counsel for the assessee that prior to the decision of Hon ble Karnataka High Court referred to above, payments made for purchase of software were not considered as in the nature of royalty and therefore the assessee cannot be held as an assessee in default for the period prior to the pronouncement of the decision of the Hon ble Karnataka High Court in the case of Samsung Electronics Ltd., (supra) dated 15.10.2011. In this regard, learned Counsel for the assessee placed reliance on the following decisions: 1. ITO Vs. Clear Water Technology Services (P) Ltd., (52 taxmann.com 115) 2. ACIT Vs. Aurigene Discovery Technologies Ltd., (decision of the ITAT - Bangalore Bench dated 23.11.2016 in ITA No.1479/Bang/2015) 3. CIT Vs. NGC Networks (India) Pvt. Ltd (decision of the Bombay High Court dated 29.01.2018 in ITA No. 397/2015) 4. M/s. Herbalife International India Pvt. Ltd [IT(TP)A Nos.1679/Bang/2012 184/Bang/2013 32. We have considered the submissions of the learned Counsel for the assessee and we find that on an identical issue for Assessment Year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 20 taxmann.com 846). 04. The relevant portion of the CIT(A) order is extracted as under : Disallowance of expenses under 40(a)(i) / 40(a)(ia) : 5.1. As regards disallowance of expenses under 40(a)(i)/40(a)(ia), it has been submitted that the company had determined the rate of tax to be deducted and following the judgments that were prevalent at the time of tax deduction, Supreme Court in the case of Tata Consultancy Services and jurisdictional Tribunal in the case of Samsung Electronics Co. Ltd, the appellant submitted that the said judgment shall not be applicable since it was pronounced on 15/10/2011 and Velankani Mauritius Ltd., whereas the liability to deduct tax for the appellant was the F.Y. 2010-11. The appellant has relied on the judgment of Cochin Tribunal in the case of Kerala Vision Ltd and Agra Tribunal in the case of Virola International, wherein it was held that - The law amended was undoubtedly retrospective in nature but so far as tax withholding liability is concerned, it depends on the law as it existed at the point of time when payments, from which taxes ought to have been withheld, were made. The tax-deductor cannot be expected to ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... simply purchased software delivered along with computer hardware for utilization in the day-to-day business. 5.3. Relying on the above deci sion, the I T A T ' C ' B e nc h , Bangalore upheld the order of the CIT(A) who had observed that the Assessee did not have the benefit of the clarification brought about by the retrospective amendment that the payments tantamount to payment for royalty and consequently tax was to be de ducted u/ s 194J. T he law as it existed on the date when the payment for obtaining the software was made, has not categorically laid down that tax is required to be deducted. It is impossible to fasten liability for deducting tax at source retrospectively. 5.4 In view of the above decisions, it is correct to say that it is not possible to faste n liability for de ducting tax at source retrospectively as tax is to be deducted at source at the time when the payment is credited or made. When purchase of software was made the assessee did not have the benefit of the clarification brought about by the retrospective amendment. The contention of the appellant is correct that the software payment disallowed by the AO did not warrant withholding of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... RCs with sales invoices for the FY 2009-10. There was a difference in the total revenue as recorded in the financial statements and the total of the FIRCs. The AO sought reasons for difference between the revenue recorded in the financial statements amounting to INR 1,68,51,47,369 vis- -vis revenue as per the invoices raised amounting to INR 1,76,86,10,350. 36. In response to the same, it was submitted by the Assessee that it works on cost plus model, wherein the invoices are raised based on an estimated cost after adding the agreed percentage of mark-up on the same on a monthly basis. However, at the year-end, the actual costs were lesser than the estimated cost and therefore the excess amount invoices had to be reversed on account of audit adjustments. Such audit adjustment was made to reverse the excess revenue, to the extent overstated. A reconciliation of revenue as per invoices with the financial statements was also submitted during the assessment proceedings and the same is given below: Particulars Amount (INR) Amount (INR) Total invoice value 1,76,86,10,350 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion method which is on the basis of associated costs incurred towards rendering the services. In this regard, the revenue recognition policy of the Assessee as mentioned in Note L (iv) of the financials which is reproduced below was brought to our notice : (vi) Revenue recognition- Revenue from Research and development is recognised as services are rendered, on cost plus basis, and billed as per the terms of the Master Services Agreement dated November 01, 2007 between the Company and VMware Bermuda Limited, Bermuda. Revenue from Marketing support services is recognised as services are rendered, on a cost plus basis, based on services rendered and billed as per the terms of the Master Services Agreement dated November 01, 2007 between the Company and VMware International Ltd, Ireland. Revenue from IT Enabled services is recognised as services are rendered, on a cost plus basis, based on services rendered and billed as per the terms of the Master Services Agreement dated November 01, 2007 between the Company and VMware International Ltd, Ireland. 39. The learned counsel submitted that the invoices raised by the Assessee are based on the cost incurred after addin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the learned counsel for the Assessee that the reasons for difference in revenue recorded in the financial statements vis- -vis revenue as per the invoices raised are on account of the following: a) True up/down of cost b) Foreign exchange fluctuation a) True-up/down of costs The Assessee follows a cost-plus model and the invoices are raised based on costs after adding the agreed mark-up to such costs. Such costs initially considered at the time of raising invoices may be subsequently trued up/down on the basis of AS at the time of audit. Similarly, there may be cases where certain items are recorded as cost at the time of raising invoices, but subsequently removed from the cost base in accordance with the AS. For instance, at the time of raising the invoices on monthly basis, service tax credit/ VAT refund receivable from revenue authorities was recorded as an expense in the books. The invoices were raised by applying the agreed mark-up on the cost including service tax credit /VAT refund receivable. Given that the service tax is recoverable, the same was reclassified as an asset in the balance sheet at the time of statutory audit in accordance with the AS ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fer pricing methodology. b) Foreign exchange fluctuation It was submitted that due to different exchange rates followed at the time of raising the invoice and recording of revenue in the financial statements, the revenue recorded in the financial statements was lower than the amount of revenue as per the invoices raised. It was pointed out that during the year under consideration, the Assessee had received certain advance from its overseas group Company in USD against services. At the time of receiving such advances in USD, it was converted in INR currency based on the exchange rate prevailing at that point in time. Subsequently, during the said year, the Assessee raised its invoices in USD based on the exchange rate prevailing at the time of raising such invoices. As per the AS, the Assessee is required to record revenue in its financial statements based on the exchange rate that prevailed at the time of receiving the advance and not at the time of raising the invoice. Accordingly, the amount of revenue recorded in the financial statements was lower than the amount of revenue as per the invoices raised. The above facts were explained by way of the following illustrat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubject matter of Chapter X of the IT Act, then the other general provisions of the Act cannot be applied simultaneously. The AO, having considered the transaction being international transaction and making a reference to the TPO for determination of the ALP cannot go back to the provisions of sec.40A(2) for determining the reasonableness of the price paid by the assessee . (Emphasis added) 42. It was thus submitted that the revenue authorities erred in adding the revenue to the taxable income as suppression of income when the same has been adjudicated by the learned TPO. It was also submitted that similar explanation given by the Assessee during the course of assessment proceedings for AY 2013-14 on similar matter was examined by the AO and no addition was made in the final assessment order in respect of the aforesaid issue for the said year. The learned DR relied on the order of the CIT(A). 43. After hearing the rival submissions, we are of the view that the issue has to be remanded to the AO for fresh consideration. The assessee works on a cost + mark-up as its margin. The revenue that the assessee shows in the financial statements is dependent on cost and if du ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /TC) 13.23% Comparison of the TP studies done by the Assessee and TPO: Assessee TPO Methodology adopted TNMM TNMM Profit Level Indicator (PLI) OP/TC OP/TC Database used PROWESS CAPITALINE PLUS PROWESS CAPITALINE PLUS Comparables selected 16 13 Comparables selected by TPO and their arithmetic mean: Sl. No. Name of the Company Mark-up on Total Costs (WC Unadj) (in %) 1 Acropetal Technologies Ltd. (seg) 31.98 2 e-Zest Solutions Ltd. 21.03 3 E-Infochips Ltd. 56.44 4 Evoke Technologies Pvt. Ltd. 8.11 5 ICRA Techno Analytics Ltd. 24.83 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... companies as the same is operating in nature. In view of the reliefs granted by the CIT(A), the TP adjustment made to the SWD services segment would stand deleted. 48. The learned Counsel for Assessee submitted that if Revenue s appeal in SWD services segment are decided against the Revenue then he would not press for adjudication the grounds raised by the assessee on SWD services segment in its appeal. As far as Revenue s appeal is concerned, the first aspect which we notice is that the grounds of appeal are general and vague with no reference to any particular company that was excluded by the CIT(A) as not comparable with assessee. In ground No.4, there is a reference to 2 companies in SWD service segment but there is no name of any company specified therein. In ground No.9, there is a reference to ICRA Technoanalytics Ltd., have been excluded by applying turnover filter which is factually incorrect. This company was excluded on the ground that income from SWD service segment was less than 75% of the total revenue. Since the grounds of appeal of the Revenue with reference to SWD segments being ground Nos. 4 to 12 are dismissed. In view of the dismissal of Revenue s grounds of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... adjustment. On appeal by the assessee, the CIT(A) accepted the contention of the Assessee and directed the exclusion of Asian Business Exhibition Conferences Ltd. However, the CIT(A) rejected the contention of the Assessee seeking exclusion of ICC International Agencies Ltd. and consequently upheld its inclusion. The CIT(A) agreed with the contention of the Assessee as regards the inclusion of gains arising on account of foreign exchange fluctuation while computing the margin of the Assessee and the comparable companies as the same is operating in nature. In view of the reliefs granted by the CIT(A), the TP adjustment made to the MSS segment would stand deleted. Revenue has appealed against the relief granted by the CIT(A) by challenging certain independent comparable companies rejected by the CIT(A). The Revenue has specifically challenged the exclusion of ICRA Techno Analytics Ltd. vide ground No. 9 and exclusion of 2 companies as being functionally dissimilar vide ground No. 4. However, the specific 2 comparables whose exclusion is challenged by the Revenue is not specified. Ground No.13 with regard to this segment is also vague. Hence, the appeal of the Revenue with regard ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o.2 was not pressed for adjudication. Hence, dismissed. Ground 3 raised by the Assessee is with regard to disallowance of expenses on purchase of application software for non-deduction of taxes under section 40a(ia) of the Act. The issue is identical to the issue raised by the assessee in Assessment Year 2010-11. The payment to the non-resident in this Assessment Year is also prior to the decision of Hon ble Karnataka High Court in the case of Samsung Electronics Ltd., (supra). For the reasons stated in the order for Assessment Year 2010-11 is deleted and ground No.3 is allowed. 53. In Ground No. 4, the assessee has challenged the order of CIT(A) upholding the order of AO in not granting allowance for depreciation on the expenses considered as capital expenditure for the Assessment Years 2009-10 and 2010-11 and in holding that no details and documentary evidence were filed establishing its claim. In the assessment order passed for AY 2009-10 and AY 2010-11, certain expenses were disallowed by holding the same to be capital in nature. The details of the same are mentioned below: Particulars AY 2009-10 Amount (in INR ) AY 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Particulars Amount (INR) Amount (INR) Total invoice value 266,03,75,806 Add: Reversal of previous year adjustment 8,32,60,734 Less: Current year audit adjustment (10,46,27,639) (2,13,66,905) Less: Forex adjustment (5,24,81,597) Revenue as per financial statements 258,65,27,304 The AO made an adjustment of INR 7,38,48,502 as additions to revenue being differential revenue as per invoices(₹ 266,03,75,806) vis- -vis financial statements(₹ 258,65,27,304). 55. The submissions made before the Tribunal are identical to the submissions made as in AY 2010-11 and are therefore not being repeated. We are of the view that the facts and circumstances under which the issue arises being identical, it would be just and appropriate to remand the issue to the AO for fresh consideration on the lines indicated in the order for AY 2010-11 incorporated in th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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