TMI Blog2019 (8) TMI 1839X X X X Extracts X X X X X X X X Extracts X X X X ..... ely, whereas the price of these are Rs. 18,426/- per motor, Rs. 312/0 per coil and Rs. 172/- per part. In these factual circumstances, as narrated above, assigning of equal weight age to motors, coils and parts and taking the mean average for computing the capacity utilization will clearly result in distortion of the real picture on this issue. We hold and direct the TPO that the weighted mean of the capacity utilization should be adopted for computing the adjustment for under utilization of capacity, as was taken by the assessee. Comparable selection - Exclusion of NGEF (Hubli) Ltd. - In the case on hand, however, it is not ascertainable as to whether this company, 'NGEF' has satisfied all the filters applied by the TPO. In this factual matrix of the case, we concur with the plea of the learned DR for Revenue that the comparability of this company, 'NGEF', needs to be tested on the touchstone of satisfying all the filters that have been applied for ascertaining the comparability of all other companies - We remand the issue of comparability of 'NGEF' back to the file of the TPO for fresh consideration. Needless to add, the TPO shall accord the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Associated Enterprises (AE) which are used in aviation industry, space industry and industrial controls divisions, etc. For Assessment Year 2010-11, the assessee filed its return of income on 07.10.2010 declaring a loss of (-)Rs. 1,83,75,992/-. The return was processed under section 143(1) of the Act and the case was subsequently taken up for scrutiny for this Assessment Year. A reference under section 92CA of the Act was made by the Assessing Officer (AO) to the Transfer Pricing Officer (TPO) for determination of the arms length price (ALP) of the international transactions entered into by the assessee in the year under consideration. The TPO passed an order under section 92CA of the Act dated 30.01.2014 proposing an adjustment of Rs. 7,26,12,896/- to the international transactions in the manufacturing segment of the assessee company. After receipt of the TPO's order under section 92CA of the Act, the AO passed the draft order of assessment under section 144C of the Act dated 10.03.2014 wherein the assessee's income was determined at Rs. 5,87,24,278/- by making various additions/disallowances, including the TP adjustment of Rs. 7,26,12,896/-. 2.2 Aggrieved by the draft ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , erred in disregarding the adjustment made towards underutilization of capacity. 7. The learned TPO erred in rejecting NGEF (Hubli) Limited as a comparable company on the ground that the comparable company is a government undertaking. 8. The Appellant retains the right to have the benefit of applying the range of +/- 5% in determination of arm's length price. II. Corporate Tax Disallowance of Software Expenses - Rs. (sic)00(sic)791/- 9. The Honorable DRP and the learned Assessing Officer erred in disallowing expenses incurred on availing licenses for operating the ERP software and other software which are in the nature of application software or on availing software maintenance services, by treating it as capital expenditure. 10. The Honorable DRP and the learned Assessing Officer erred in not considering the same as revenue expenditure. 11. The Honorable DRP and the learned Assessing Officer ought to have appreciated the fact that by incurring the said expenditure, the Appellant had acquired merely the license to use the application software/availed software maintenance services and there was no outright purchase of software giving ownership to the Appell ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the following chart which has been reiterated from the transfer pricing orders of Petitioner which evidences that the Petitioner has enjoyed good profitability in the years prior to and succeeding AY 2010-11: It is submitted that this point was taken up before the Hon'ble DRP as can be seen from the DRP directions itself. However, no specific ground in this regard has been raised in Form 36 and therefore this additional ground is being raised to provide more clarity to the ground already raised. 3. Prayer Under the above circumstances, Your Petitioner humbly prays to Your Honors to permit it to file this additional grounds of appeal by exercising the power vested in Your Honors under Rule 11 of the Income-Tax Appellate Tribunal Rules, 1963 (-Rules ) and allow the Petitioner to argue the aforesaid additional grounds of appeal, 4.2.3. Per contra, the learned DR for Revenue opposed the admission of additional ground No. 6A. 4.2.4. We have considered the rival contentions/submissions in respect of the assessee's plea for admission of additional ground No. 6A on the issue of adjustment towards capacity utilization and the erroneous manner of computation th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to capacity utilization and ground No. 7 exclusion of the company NGEF (Hubli) Ltd., as a comparable company. In these circumstances, as laid out above, ground Nos. 1 to 5 and 8 (supra), not being pressed by the assessee in its appeal, are rendered infructuous and are accordingly dismissed as not pressed. 7. Ground No. 6 Additional Ground No. 6A/Under utilization of capacity 7.1.1. In these grounds/additional ground (supra), the assessee contends that the TPO erred in not appreciating the fact that the losses incurred by the assessee in the manufacturing segment was mainly due to under utilization of capacity and that both the TPO and DRP had erred in computing the capacity utilized by the assessee. 7.1.2. According to the learned AR, the TPO had denied the assessee capacity utilization adjustment, not because it was not applicable, but because the TPO found that the capacity utilization of the assessee, as given in Appendix - 9 of the TP Study was 72.40% as against 76.43% of the comparable companies and since there was not much difference between the two, capacity utilization adjustment was not warranted. In this regard, the learned AR submitted that the TPO has misund ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at Appendix - 9 and 10 of its TP Study. The TPO has examined the same, in the course of proceedings referred to him under section 92CA of the Act and has apparently accepted the veracity of the numbers mentioned therein, as he has quoted from the above Charts/Appendix (supra). Since the TPO has himself accepted the figures/numbers stated in the Appendix - 9 and 10, the figures stated therein cannot be doubted at this stage. 7.3.2. In our view, the only difference between the contentions of the assessee and the TPO was on whether the mean average of capacity utilization should be adopted or whether the capacity utilization of only Motors should be adopted. In the factual matrix of the case, as discussed above, we find merit in the contentions put forth by the learned AR of the assessee that the capacity utilization of only the main product, i.e., the Motors, should be considered. The other two components, namely, coils and parts, in our considered opinion, are only incidental components and cannot by any stretch of imagination be equated and treated on par with the main product, i.e., Motors. The installed capacity of Motors, Coils and Parts are 38,000, 80,000 and 3,82,000 respe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot this company 'NGEF' satisfies all the filters that are normally applied in comparability analysis. 8.3.1. We have considered the rival contentions and perused the material on record; including the judicial pronouncements cited. We find that the TPO has rejected this company, 'NGEF', on the ground that it is a government company; which proposition has been negated by the decision of this Tribunal in the case of IKA India (P) Ltd., Vs. ACIT (supra); wherein the Co-ordinate Bench at para 17 of its order; following the decision of the Hon'ble Madras High Court in the case of Same Deutz Fahr India (P) Ltd., (2018) 405 ITR 345 (Mad), held that there is no reason why a government company cannot be treated as a comparable if it passes the filters adopted. 8.3.2. In the case on hand, however, it is not ascertainable as to whether this company, 'NGEF' has satisfied all the filters applied by the TPO. In this factual matrix of the case, we concur with the plea of the learned DR for Revenue that the comparability of this company, 'NGEF', needs to be tested on the touchstone of satisfying all the filters that have been applied for ascertaining the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... held the AO's view 9.3.2. On a perusal of the judicial pronouncements cited by the learned AR (supra), we find that a Co-ordinate Bench of this Tribunal in its order in IT(TP)A No. 551/Bang/2015 dated 27.11.2015 has considered the issue and held that these software expenses are revenue in nature; at paras 30 to 44 of its order which is extracted hereunder:- 30. The next ground of appeal is with respect to disallowance of software expenses. The facts with regard to this issue are that the assessee has incurred expenses towards purchase of application software (i.e. obtaining or renewing the licenses for use of certain application software) and has deducted tax at source in respect of such payment towards application software. According to the assessee, the incurrence of such expenditure is necessary to carry on the business activities more effectively and efficiently leaving the capital base untouched. The said expenditure being revenue in nature has been charged off in the year in which it was incurred i.e. FY 2008-09. The breakup of software expenses is as under;- 31. License fees: The assessee company has paid an amount of Rs. 1,766,184 to Moog IFSC [Moog Irelan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... censes for use, of certain application software and as this expenditure was incurred with the prime objective of carrying on the business activities more effectively and profitably leaving the capital base untouched. b. The test of enduring benefit is more prone to failure in the case of computer software where the pace of advancement is so rapid that whatever technology is installed today becomes obsolete within a short time. c. No portion of the application software was custom made software and all of them had been purchased off the shelf. Further, the assessee was merely a licensee and the right to use the software was subject to the conditions mentioned in the license agreement. d. Software acquired under a license on terms and conditions whereby ownership is retained by the licensor and where such software only adds to the efficient running of day to day operation of business, cannot be held to be expenditure of capital nature as they were only copyrighted articles. All rights, title and interest in or to the programs or documentation, modifications, enhancements and derivatives shall at all times remain the property of or vest on the licensor. Thus the ownership te ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pended wholly and exclusively for the purpose of the business; and d. It should not be in the nature of capital expenditure. 40. The ld. counsel for the assessee submitted that in the instant case, all the above conditions are satisfied and thus the application software expenditure including maintenance expenses is revenue in nature and is eligible for deduction under section 37(1) of the Act. Attention was invited to the fact that the assessee has only acquired the requisite licenses to use the application software and hence the ownership and the intellectual properties of the software continue to remain with the licensor. 41. Reliance was placed on the decision of the Special Bench Delhi in the case of Amway India Enterprises v. DCIT, 301 ITR 1 (AT)(Det)(SB), wherein certain tests had been laid down for ascertaining whether the expenditure on purchase of software is to be treated as revenue or capital. The below tests are cumulative and not mutually exclusive. In case the transaction of purchase of software satisfies all the tests mentioned below, it will be considered as a capital expenditure. 42. The ld. counsel for the assessee submitted that in the instant ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reference:- 2. Whether on the facts and in the circumstances of the case, the Tribunal is right in law in setting aside the disallowance of software expenses claimed by the assessee even though the said expenditure is capital in nature? 9.3.4. At para 6 of its order (supra), the Hon'ble High Court, while dismissing Revenue's ground raised on this issue, citing its own earlier decision in the case of CIT Vs. IBM India Ltd., (2013) 357 ITR 88 (Kar), rejected Revenue's stand; holding as under:- 6. In view of the aforesaid decision rendered by this Court treating the computer or software expenses as revenue expenditure, no substantial question of law arises for our consideration. 9.3.5. Respectfully following the decision of the Hon'ble Karnataka High Court in ITA No. 510/2016 dated 31.07.2018 in the assessee's own case for Assessment Year 2009-10, we also hold that these software expenses of Rs. 16,91,755/- incurred towards payments towards licence fees for usage of leased licences and application are revenue in nature and are to be allowed as deduction. While giving effect to this order, the AO is also directed to withdraw the depreciation allowe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is no longer res integra, and has been decided in favour of the assessee and against revenue by the decision of the Hon'ble Apex Court in the case of CIT V. HCL Technologies Ltd. (2018) 93 taxmann.com 33 (SC); wherein at paras 19 to 21, it has been held as under:- 19. In the instant case, if the deductions on freight, telecommunication and insurance attributable to the delivery of computer software under Section 10A of the IT Act are allowed only in Export Turnover but not from the Total Turnover then, it would give rise to inadvertent, unlawful, meaningless and illogical result which would cause grave injustice to the Respondent which could have never been the intention of the legislature. 20. Even in common parlance, when the object of the formula is to arrive at the profit from export business, expenses excluded from export turnover have to be excluded from total turnover also. Otherwise, any other interpretation makes the formula unworkable and absurd. Hence, we are satisfied that such deduction shall be allowed from the total turnover in same proportion as well. 21. On the issue of expenses on technical services provided outside, we have to follow the same princ ..... X X X X Extracts X X X X X X X X Extracts X X X X
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