TMI Blog2021 (7) TMI 192X X X X Extracts X X X X X X X X Extracts X X X X ..... ards selling commission and networking charges is that, there is no basis for such cost allocation - disallowance of networking charges is on the basis that the agreement does not mention about the markup on cost - HELD THAT:- We note that this issue has not been decided by the DRP though objection was raised. Under such circumstance we direct DRP to consider this issue based on various evidences/details filed by assessee having regards to various judicial pronouncements passed by Hon'ble High Courts, in accordance with law. Needless to say that proper opportunity of being heard must be granted to assessee in accordance with law. Addition made on account of outstanding receivables - AR submitted that, as TNMM is used as most appropriate method, the outstanding receivables get subsumed in the working capital adjustment and therefore separate addition is not warranted - HELD THAT:- We note that, the Ld. AO has not looked into various aspects in the light of the evidences filed by assessee. The submission by Ld. AR that under TNMM the working capital adjustment subsumes the outstanding receivables, needs to be verified by the Ld. AO/TPO. Several factors need to be considered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5 GROUNDS RELATING TO LEGAL ISSUES 1. The Orders passed by learned Additional Commissioner of Income Tax Circle- 4(1), Bangalore (hereinafter referred to as AO for brevity), learned Joint Commissioner of Income Tax TP-II, Bangalore (hereinafter referred to as TPO for brevity) and Honorable Dispute Resolution Panel (hereinafter referred to as Honorable DRP) ( AO TPO and DRP collectively referred as lower income tax authorities for brevity) are bad in law and liable to be quashed. 2. The learned Assessing Officer has erred in making a reference to Transfer Pricing Officer for determining arm's length price without demonstrating as to why it was necessary and exdient to do so. The Honorable DRP has erred in confirming the action of the Assessing officer. 3. The lower income tax authorities have erred in a. Making transfer pricing adjustment of ₹ 117,20,60,655/-. b. Passing the order without demonstrating that appellant had motive of tax evasion. c. Not appreciating that there is no amendment to the definition of income and charging or computation provision relating to income under the head Profits Gains of Business or Profess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he lower income tax authorities have erred in: a. Concluding that the network charges were only reimbursement of expenses without appreciating that the AE rendered various value added services on which mark up was levied in addition to certain cost to cost reimbursement; b. Concluding that no mark up should have been paid by the Appellant ignoring the business and commercial realities; c. Concluding that the arm's length mark up on network charges is NIL adopting internal CUP without appreciating that the transactions being compared were themselves international transactions and therefore cannot be considered for comparison; d. Considering and erroneously clubbing incorrect expense heads of Communication costs and Other expenses paid to HP Singapore together with Network Charges and deeming the differential amount of ₹ 12,80,73,476 as adjustment without appreciating the nature of transaction and on ground that details of such payments are not made available; e. Adopting CUP method as the most appropriate method without justifying how the same was the most appropriate method in the facts and circumstance of the case; f. Concluding that arm&# ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd functions responsibilities of executing the work lies with the Appellant; and ii) the entire on-site software development work was performed under the control and supervision of the Appellant. b. Excluding communication charges from export turnover in process of computing deduction u/s. 10A/10AA/10B without reducing the same from total turnover c. Not appreciating that, under similar facts and circumstances of the case, the Honorable High Court of Karnataka and the Bangalore bench of the ITAT as well as other Tribunals have held that if some expenses, for any reason are excluded in arriving at the 'export turnover' the same should also be reduced from 'total turnover'. d. Not appreciating that, under similar facts and circumstances of the case, the Honorable Bangalore bench of the ITAT in case of Mphasis Software Services India Pvt. Ltd. (MSSIP[L) in AY 08 (A group company of Mphasis Group), have held that where entire on-site software development work was performed under the control and supervision of the Appellant, profits attributable to onsite development of software is eligible for deduction u/s. 10A/10B/10AA as the case may be, and the rati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #8377; 77,43,733 towards interest under section 234A even though the return of income was filed within the due date prescribed under the Act. The Appellant denies its liability to pay interest. 12. The lower income tax authorities have erred in levying a sum of ₹ 42,36,34,219/- towards interest under section 234B. On the facts and in the circumstances of the case, interest under section 234B is not leviable. The Appellant denies its liability to pay interest. The Appellant submits that each of the above grounds/sub-grounds are independent and without prejudice to one another. 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 Income-tax Appellate Tribunal to decide the appeal according to law. The Appellant prays accordingly. Brief facts of the case are as under: 2. The assessee is a company and engaged in the business of software development, providing information technology enabled services, BPO including call centre services. It filed its return of income on 06/10/2010 declaring total income of ₹ 288,31,65,79 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 475,78,65,788 6. Selling Commission 93,53,07,973 7. Software support annual maintenance charges,communication charges and other expenses such as technical and professional services. Use of server and software 196,48,07,913 8. Operating expenses allocation 14,00,25,260 9. General administration expense allocation 17,18,67,704 10. Reimbursement of various expenses 19,02,96,505 11. Recovery of various expenses 2,37,26,352 7. The segmental results of the revenue generated under SWD and ITES segment and IT Outsourcing Support Services are as under: Segmental Results Description Application Services (SWD) (Rs.) ITES (Rs.) IT O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 13. Thus the adjustments proposed by the Ld. TPO are as under: Particulars TP Adjusment Selling Commission 93,53,07,973 Network Charges 22,75,19,231 National Interest on receivable 92,33,451 Total 117,20,60,655 14. On receipt of the transfer pricing order the Ld. AO in the draft assessment order made following additions: recomputed deduction under section 10 A/10 B/10 AA of the Act; while computing export turnover/total turnover, the Ld. AO reduced forex gain on hedging and telecommunication expenditure incurred in foreign currency; disallowed depreciation on computer peripherals by restricting it to 15% as against 60% claimed by assessee; assessee had made an additional claim vide letter dated 05/04/2013, wherein certain inadvertent computational errors were pointed out under the deduction computed for section 10A/10B/10AA. Assessee had claimed depreciation on goodwill arising due to merger of Mphasis Finesolutions into assessee and assessee claimed de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee are structured under 2 categories being-: type I: composite contracts of performing both offshore and on-site services entered by assessee with the end customer and offshore work sub contractor to assessee type 2 composite contracts for performing both offshore and on-site services entered by the assessee with the end customer and on-site work subcontracted to AE type III-composite contracts for performing both offshore and on-site services entered by assessee with the end customer and offshore work assigned to the assessee. 25. It was been submitted that the payments made towards selling commission by assessee to its AE are at a percentage of total revenues as per the transfer pricing policy of Mphasis Ltd. The Ld. AR also submitted that the international transaction pertaining to providing offshore software development services to AE and availing of marketing and on-site services are considered closely linked to the activity of providing software development services and hence the same has to be analysed by using combined transaction approach. It was also submitted that, the margin earned by assessee are comparable to margins earned by other service ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... set the Ld. AR submitted that margin has been found to be at arms length by using TNMM as most appropriate method. However adjustment was made in respect of outstanding receivables that exceeded 180 days at 14.74% without adopting LIBOR as a basis for benchmarking. 32. Ld. AR submitted that, as TNMM is used as most appropriate method, the outstanding receivables get subsumed in the working capital adjustment and therefore separate addition is not warranted. 33. The Ld. CIT. DR placed reliance on various decisions of coordinate benches of this Tribunal wherein, this issue is remanded to Ld. AO for verification in accordance with law based on the evidences filed by assessee. 34. We have perused submissions advanced by both sides in light of records placed before us. 35. We note that, the Ld. AO has not looked into various aspects in the light of the evidences filed by assessee. The submission by Ld. AR that under TNMM the working capital adjustment subsumes the outstanding receivables, needs to be verified by the Ld. AO/TPO. Several factors need to be considered before coming to the conclusion that the receivables from AE needs to be separately benchmarked. Most important ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r for purpose of determining the deduction under section 10A/10AA/10B of the Act. Hon'ble High Court in assessee's own case (supra) observed as under: 17. A plain reading of the said notice would make it clear that the Assessing Officer has himself accepted that it was only some part of the software development which was carried out 'on-site' by the assessee, meaning thereby that the other part of the contract was carried out by the assessee 'off-shore' i.e., at its site or workplace in India. Such being the position, we are of the clear opinion that it was not the entire contract which was passed on to the AE by the assessee but some part of it was done by the assessee itself in India as 'off-shore' work and the remaining part was sub-contracted to the AE for 'on-site' work. It may be relevant to notice here that the subcontracted part carried out 'on-site' outside India by the subcontractor, did not have the personnel of the assessee but admittedly the supervision and control (with regard to the quality and specifications of the work to be done) was with the assessee through its Project Manager, as would be clear from the terms ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; work done would, in such a case, be made by the assessee to the AE and not by the end customer, who would make the entire payment of ₹ 10 crores to the assessee. There could be a marginal difference in the expenses which the assessee would have incurred if it would have carried out the 'on-site' work through its own personnel as against the payment which is made to the AE for doing such work, but such decision of passing on part of the work to be done by a sub-contractor (AE) or not, has to be taken by the assessee as a prudent businessman keeping in view the business necessities and the comparative cost effectiveness and it is not for the Courts or the Income Tax authorities to decide the same. Even by executing the contract as per the given example, the benefit of foreign exchange being brought into the country would still be there and thus the object of insertion of Section 10A would be achieved. 20. The question which now remains to be answered by this Court is that would it be permissible for the benefit under Section 10A to be given to the assessee if the 'on-site' work carried outside the country is not done through its own personnel. For this, w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re is no denial of the fact that even the 'on-site' work of computer software development has been done under the direct supervision and control of the assessee through the AE, which would be nothing but on behalf of the assessee 'itself'. As indicated in the said Circular, 'itself' would not mean that personnel of the assessee will have to carry out the work. However, it should be the product of the assessee and since in the present case, the ownership of the product (software), after payment by the assessee for the work done by the AE, would be of the assessee, the same would be nothing but the product of the assessee and not a product of AE. The other Circular dated 17.1.2013 on which the learned counsel for Revenue has relied upon, also does not anywhere specify that the personnel of the assessee should only be deputed for carrying on the work. Even otherwise, the Circulars issued by the CBDT cannot over ride the provisions of the Act. If the main Section of the Act does not provide for the benefit to be given only to such units or exporters who carry out 'on-site' work through its own personnel, the same cannot be read into the provisions of Sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f computer software is executed by the assessee itself through its own personnel. The sub-contracting of On site part of the software development to other entity and the resultant profit is not covered in Explanation 3 to Section 10A of IT Act and such profits and gains would not qualify for deduction under section 10A of IT Act. From the discussion on relevant paras of the MSA, it is further brought on record that the execution of off-shore part of the contract had got nothing to do with the onsite work executed from abroad by the AEs. The execution of off shore part of the contract was on a separate channel and the AEs were never involved in any implementation of the product developed by the assessee in India. The AEs worked independently with its own personnel and created its own intellectual properties i.e., software product (Deliverables). Hence it is abundantly clear that the assessee never involved either directly or indirectly in the on-site software development activity executed by the AEs. Even if it is involved administratively for coordination between the AEs and its clients in getting the contract executed, the assessee shall not be eligible for deduction s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alf of the assessee, would be eligible for deduction under Section 10A of the Act. 42. Based on the above observations by Hon'ble High Court, we direct the Ld. AO to verify the MSA having regard to the contract entered into by assessee with the foreign clients. In the event the services rendered by AE's under the total supervision of assessee and that the entire risk in respect of these contracts are owned by assessee then the expenditure deserves to be included for the purposes of computing deduction under section 10A/10AA/10B of the Act as they are attributable to rendering of services to foreign clients. Accordingly this ground raised by assessee stands allowed for statistical purposes. 43. Ground No. 9 is in respect of disallowance of depreciation on computer peripherals at 60% and restricting it to 15%. Admittedly, this issue stands settled by decision of Hon'ble Special Bench in case of DCIT vs. Datacraft India Ltd. reported in (2010) 40 SOT 295. 44. We therefore direct the Ld. AO to grant depreciation on the computer peripherals at 60%. Accordingly this ground raised by assessee stands allowed. Ground No. 10 are in respect of the additional ..... X X X X Extracts X X X X X X X X Extracts X X X X
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