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TMI Blog2022 (5) TMI 1407X X X X Extracts X X X X X X X X Extracts X X X X ..... 2017. The only female employee looking after taxation matters of the assessee company fell ill and was unwell from 9th March 2017 until 24th March 2017 and proceeded on leave. The CFO of the company had to travel to Germany to attend to some important and urgent matter in relation to the company restructuring and legal matters. Assessee company being corporate entity has to necessarily act only through human agency. In the midst of flurry of activities and the absence of the concerned staff looking after the taxation matters the due date for filing the appeal before the Hon'ble ITAT came to be lost sight of and the appeal papers came to be not filed within the stipulated period. If the concerned employee single handedly looking after the tax matters and working under aforesaid overwhelming circumstances inadvertently overlooks the last date of filing the appeal it would amount to a reasonable cause so far as the assessee company is concerned. On the backdrop of the aforesaid facts and circumstances it is manifest that there was just and sufficient cause for the delay due to an inadvertent error and there was no negligence or deliberate inaction on our part. ........." 3. Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mechanical application of the filter of 75% export sales by the TPO without appreciating the fact that the said comparable was carrying out the activity predominantly in off shore mode like the appellant and therefore the applicable basic criteria of functions performed, assets/ resources deployed and risks borne were satisfied being similar in nature and therefore comparable. The learned TPO and the DRP erred in not appreciating the fact that export incentives were not taken as operating income of the appellant's design engineering segment and the export filter of 75% was therefore not required to be applied in such a case . The learned DRP and the AO further erred in drawing an incorrect inference that merely because the exports sales figure of Onward Technologies Limited in the relevant previous year was less than that of the preceding year it was not a comparable. * In rejecting Cades Digitech Pvt. Ltd. as a comparable the learned DRP and the AO erred in drawing an incorrect inference that the said comparable carried its major activities on-site as against off shore operations of the appellant company. II. Non TP Issues 1. The learned DRP and the AO erred in confirming ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d DRP and the AO failed to appreciate that the said expenses were not incurred in connection with development of a new product prior to commencement of business but were incurred on an ongoing basis every year for improvisation in existing products manufactured by it by making changes to remain price competitive and technically improvised in tune with the markets requirement. The learned AO merely followed orders passed for the preceding years and came to hold that the expenses represent capital expenditure in the nature of capital asset. 5. The learned DRP and AO erred in confirming disallowance of provision towards cost of software Rs. 14,28,021/- on the inference that the said amount represented excess provision, in-spite of the fact that the said expenses included in the total amount of Rs.2,43,57,884/- had suo motu been disallowed by the appellant u/s 40(a)(i) and therefore no separate disallowance/addition was called for. The learned DRP and AO further failed to appreciate that the said provision had been reversed and had been offered to tax in the subsequent year, and therefore the disallowance in the impugned assessment year resulted in the same amount suffering tax twi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - Particulars Mfg. Activity Trading Export Engg. Services Total (Rs. Crores) Income from Operations 498.525 12.729 39.483 550.737 Add Other Operating Income 2.448 0.290 0.000 2.738 Operating Income (OR) 500.973 13.019 39.483 553.475 Total Expenditure 493.448 12.335 33.716 539.499 Less Interest 13.209 0.187 0.245 13.641 Less Forex Loss 6.136 -0.180 -0.936 5.020 Less Donation 0.0078 0.0002 0.000 0.008 Less Provisions 0.425 0.000 0.000 0.425 Operating Cost (OC) 473.6702 12.3278 34.407 520.405 Operating Profit 27.3028 0.6912 5.076 33.07 OP/OR 5.45% 5.31% 5.97% 5.45% OP/OC 14.75% 7. However, the TPO found that in respect of design engineering services segment and payment of software license fees, the TP study report submitted by the assessee is found to be incorrect and, accordingly, he proceeded with benchmarking of the above international transactions by searching new set of comparables. In respect of Design Engineering Services, the appellant submitted the TP study report adopting TNM Method as the most appropriate metho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... delines 2010, it provides 'foreign sales/total sales' as one of the quantitative filter. Similarly, the appellant company also objected before the TPO exclusion of comparable 'Cades Digitech Pvt. Ltd.' on the ground that the said company had not been merged with Axis Aerospace and Technology Ltd. in financial year 2011-12. However, the TPO rejected the same by holding that the decision of merger was taken in the year 2011 and the process of merger must have been going on much before that date. The appellant company also objected the inclusion of (a) Pentamedia Graphics Ltd., (b) Genesys International Corporation Ltd., (c) Acropetal Technologies Ltd., (d) Tata Elxi Ltd., (e) E Clerx Services Ltd. on the ground of functionality differences. However, the TPO had rejected the contention of the appellant placing reliance on the definition given in Rule 10TA(g) of the Rules in the context of Safe Harbour Rules and classified the comparables as Knowledge Process Outsourcing (KPO) and finally chosen the following comparables whose average PLI was computed at 24.87% after adjusting working capital adjustments arrived at average PLI of the comparable at 23.09%, which reads as under :- Sr. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions. The ld. DRP also confirmed the inclusion of 5 companies i.e. (a) Pentamedia Graphics Ltd., (b) Genesys International Corporation Ltd., (c) Acropetal Technologies Ltd., (d) Tata Elxi Ltd., (e) E Clerx Services Ltd. as such fell within the definition of software companies as defined under the Safe Harbour Rules. As regards the software license fees, the ld. DRP considering the fact that during the course of proceedings before him, the assessee could substantiate with supporting evidences for the balance of amount of Rs.1,80,65,636/- and directed the TPO to make addition only to the extent of Rs.14,28,021/-. 11. The appellant also objected the disallowance of 3,38,82,341/- claimed under the provisions of section 35(2AB) incurred in relation to the in-house Research & Development (R&D) activity of the assessee on the ground that the Assessing Officer ought not to have segregated the expenditure incurred R&D into two parts i.e. incurred within in-house R&D facility and incurred outside the R&D facility placing reliance on the decision of the Hon'ble Gujarat High Court in the case of CIT vs. Cadila Healthcare Ltd., 214 Taxman 672. However, the ld. DRP confirmed the expenditure in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ional Corporation Ltd. in the list of comparables on the ground of functionality difference. 16. We have carefully gone through the orders of the TPO as well as the ld. DRP, we find that the lower authorities had included this four companies merely because these companies fall under the characterization of software companies as well as KPO companies as defined under Rule 10TA(g) of the Safe Harbour Rules. At the outset, we find that Safe Harbour Rules are applicable from 18.09.2013, we have serious doubt as to how the definitions given in Safe Harbour Rules can be applied for characterization of a particular company for the purpose of identification of set of comparable entities. Therefore, we are of the considered opinion that the lower authorities fell into serious error in holding these comparables are KPO companies placing reliance on the definition given in Safe Harbour Rules. Therefore, we remand issue back to the file of the Assessing Officer/TPO to examine the comparability of these comparables afresh without placing reliance on the definition given under Safe Harbour Rules. Thus, this issue raised in the respective grounds of appeal stands partly allowed for statistical ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unting to Rs.9,61,80,237/-." 19. Respectfully following the decision of the Co-ordinate Bench of this Tribunal in assessee's own case (supra), we uphold the action of the lower authorities in disallowing the expenditure incurred on in-house R&D facility. Accordingly, this issue stands dismissed. 20. The issue raised in Ground of appeal no.4 challenges the decision of the lower authorities in holding that the expenditure incurred on product development expenses is "capital expenditure". This issue is also covered by the Co-ordinate Bench of this Tribunal in assessee's own case for the assessment year 2011-12, wherein, the Co-ordinate Bench of this Tribunal held as under :- "8. We heard the rival submissions and perused the material on record. The issue in the present appeal relates to whether or not the expenditure incurred on testing and validation of the products is capital in nature. During the previous year relevant to the assessment year under consideration, the appellant incurred expenditure of Rs.2,45,34,542/- on testing and validation, out of which a sum of Rs.1,02,94,971/- was recovered from the customers and balance of product development expenditure of Rs.1,42,39,571/ ..... X X X X Extracts X X X X X X X X Extracts X X X X
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