TMI Blog2022 (5) TMI 1407X X X X Extracts X X X X X X X X Extracts X X X X ..... sessing 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 purposes. Comparability - As regard to the exclusion of two comparables, namely, Onward Technologies Limited and Cades Digitech Pvt. Ltd., we find from reading of the orders of lower authorities that the company Onward Technologies Limited came to be rejected by the TPO as well as by the ld. DRP on the ground that the said company fails to meet 75% export to total turnover filter. It is settled law that the filter of 75% of the export to total turnover is most appropriate filter. In these circumstances, we confirm the action of the lower authorities from excluding this company from the list of the comparables. Similarly, the company Cades Digitech Pvt. Ltd. had been excluded the TPO/ld. DRP from the list of comparables by recording a finding that this company is engaged in off shore operations. These findings remain uncontroverted. A company engaged in on-site operations is incomparable with assessee which is engaged in off ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. Considering the above submissions of the ld. AR and no objection from the side of ld. DR for condoning the delay, we find it is a fit case to condone the delay of 11 days and admit the appeal for adjudication. 4. The appellant raised the following grounds of appeal :- Being aggrieved by the assessment order passed u/s 143(3) r.w.s 144C(13) of the Income Tax Act,1961 finalised by the learned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... parable. 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 the disallowance of the weighted deduction of Rs.3,38,82,341/- claimed under Section 35(2AB) of the Income Tax Act,1961 in relation to in-house Research and Development (R D) activity of the appellant by drawing an incorrect inference that such expenditure namely product testing, validation and prototyping represented capital asset and therefore such capita ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 twice. The appellant craves leave to add to, alter, amend or withdraw the grounds of Appeal. 5. Briefly, the facts of the case are as under : The appellant is a company incorporated under the provisions of the Companies Act, 1956. It is engaged in the business of manufacture and sale of air conditioning systems and its part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the above international transactions, the Assessing Officer referred the matter to the TPO for the purpose of benchmarking the above international transactions u/s 92CA(1) of the Act. On receipt of the reference from the Assessing Officer, the TPO had proceeded with benchmarking of the international transactions. In the process, the TPO had called upon the assessee to furnish the segment-wise profitability of the appellant company. In compliance, the appellant submitted the segment-wise profitability, which reads as under :- :- 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. on the ground that the company fails to meet the filter 75% exports to total sales, as exports are less than 75% of total sales. As regards to the Infotech Enterprises, the same was rejected by the TPO by stating that the Related Party Transactions are more than 41.26%. The TPO also rejected Autoline Design Software Ltd. on the ground that no Annual Report was filed by the assessee company. The TPO also rejected Cades Digitech Pvt. Ltd. on the ground that the said comparable was merged with Axis Aerospace and Technology Ltd. on 12.09.2011. The appellant has aggrieved by the exclusion of two comparables i.e. (i) Onwards Technologies and (ii) Cades Digitech Pvt. Ltd. Then, the TPO had proceeded with identifying different set of comparables by applying the filters mentioned at page no.4 of the TPO s order and finally selected following comparables whose average PLI was 24.87%, which are as under :- Sr. No. Name of the Company PLI% 1 XS Cad India Pvt. Ltd. (Transcend Design) 20.93 2 Pentamedia Graphics Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gn) 20.93 20.20 2 Pentamedia Graphics Ltd. 12.20 7.71 3 Genesys International Corporation Ltd. 29.93 24.47 4 Acropetal Technolofies Ltd. 15.12 15.12 5 Tata Elxi Ltd. 12.62 12.62 6 E Clerx Services Ltd. 58.40 58.44 Average 24.87 23.09 9. Accordingly, the TPO suggested upward ALP adjustments of Rs.2,86,90,000/- in respect of international transactions and also suggested upward adjustment of Rs.1,80,65,636/- in respect of software license fees as against the total expenditure of Rs.7,04,59,511/-. Therefore, the TPO suggested upward adjustments of Rs.4,67,55,636/- vide order dated 18.01.2016. On receipt of the TPO s order, the Assessing Officer passed draft assessme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 incurred R D facility outside India cannot be allowed as deduction as the object of the provisions of section 35(2AB) only promote R D in India. Further, the ld. DRP held that the appellant is not eligible to claim deduction u/s 35(2AB) in respect of amount which is inexcess to the amount approved by the DSIR. Accordingly, the ld. DRP directed the Assessing Officer to restrict the amount of deduction u/s 35(2AB) only to Rs.5.16 crores as against Rs.15.006 crores claimed by the assessee and allowed by Assessing Officer to the extent of Rs.11.626 crores. Accordingly, the ld. DRP made an enhancement of Rs.6.466 crores. 12. The assessee company also objected the disallowance of revenue expenditure of Rs.1,95,30,000/- incurred on product development expenses claimed as revenue expenditure on the ground that the said exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 purposes. 17. As regard to the exclusion of two comparables, namely, Onward Technologies Limited and Cades Digitech Pvt. Ltd., we find from reading of the orders of lower authorities that the company Onward Technologies Limited came to be rejected by the TPO as well as by the ld. DRP on the ground that the said company fails to meet 75% export to total turnover filter. It is settled law that the filter of 75% of the export to total turnover is most appropriate filter. In these circumstances, we confirm the action of the lower authorities from excluding this company from the list of the comparables. Similarly, the company Cades Digitech Pvt. Ltd. had been excluded the TPO/ld. DRP from the list of comparables by recording a finding that this company is engaged in off shore operations. These findi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hether 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/- was claimed as revenue expenditure. However, the Assessing Officer had treated the same as capital expenditure and allowed the depreciation thereon. The explanation given before the Assessing Officer is that the expenditure was incurred to improve the existing products. The true nature of the expenditure had not been doubted by the Assessing Officer. Undisputedly, the appellant is in the business of manufacturing of automotive components since 1999. As result of this expenditure, no new asset has been created nor new product did actually materialize. The expenditure was only incurred for the purpose of facilitating the existing business of manufacturing of automotive components and enabling the management to conduct the business operations more efficiently and productively. The Hon ble S ..... X X X X Extracts X X X X X X X X Extracts X X X X
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