TMI Blog2022 (12) TMI 995X X X X Extracts X X X X X X X X Extracts X X X X ..... y Hon ble Supreme Court in case of HCL Technologies Ltd.(supra). Disallowance of software expenses u/s. 40(a)(i) - HELD THAT:- AO disallowed the expenses by relying in case of Samsung Electronics Co. Ltd [ 2011 (10) TMI 195 - KARNATAKA HIGH COURT] The Ld.AR submitted that this decision has been reversed by Hon ble Supreme Court in case of Engineering Analysis Centre of Excellence Pvt. Ltd [ 2021 (3) TMI 138 - SUPREME COURT] we direct the Ld.AO/TPO to verify the invoices raised against which the payments were made by assessee in the light of principles laid down by Hon ble Supreme Court in the above referred case. The Ld.AO is directed to consider the claim in accordance with law by granting appropriate. Belated remittance of PF/ESI - HELD THAT:- As addition deleted by the Ld.CIT(A) by following the decision in case of CIT vs. Sabari Enterprises [ 2007 (7) TMI 169 - KARNATAKA HIGH COURT] and in the case of Spectrum Consultants India (P.) Ltd. [ 2013 (7) TMI 414 - KARNATAKA HIGH COURT] Subsequently, we note that in case of ESSAE TERAOKA PVT. LTD. [ 2014 (3) TMI 386 - KARNATAKA HIGH COURT] is followed same decision and deleted the disallowance made. - IT(TP)A No. 162/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... comparable to the Appellant's operations by applying the following quantitative and qualitative filters: a. The learned CIT(A) has erred, in law and in facts, by not accepting the Appellant's plea that companies should not be rejected using software development services less than 75% of the total operating revenue as a comparability criterion; b. The learned CIT (A) has erred in law and in facts, by not accepting the Appellant's plea that the companies should not be rejected using employee cost greater than 25% of the turnover as a comparability criterion; c. The learned CIT (A) has erred in law and facts by not accepting the Appellant's plea that the companies should not be rejected using export sales less than 75% of the sales, instead of 25% of the total sales, leading to a narrow comparable set. d. The learned CIT (A) has erred in law and facts by not accepting the Appellant's plea that the companies should not be rejected using related party transactions filter of greater than 25% of the sales without giving any cogent reason for doing so. e. The learned CIT (A) /learned TPO/ AO erred in not applying the upper limit on the sale ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f software services and ITeS rendered by the Appellant. II. Corporate Tax 11. Re-computation of deduction under Section 10AA of the Act - reduction of telecommunication expenses from Export Turnover - INR 16,56,696 11.1 The learned AO/CIT(A) has erred in re-computing the deduction under section 10AA of the Act by reducing the telecommunication expense of INR 77,46,266 (comprising of telephone expenses and telecommunication line charges) from Export Turnover. 11.2 The learned AO/CIT(A) ought to have observed that telephone expenses are incurred for regular operations of the Company and are not specifically attributable to the delivery of IT and IT enabled services in India. 11.3 The learned AO/CIT(A) ought to have observed that it is practically not possible to determine quantum of telecommunication line charges attributable to the delivery of IT and IT enabled services outside India on account of the following: Telecommunication charges are paid for obtaining specific bandwidth capacity. Such bandwidth capacity would be utilized for general business purposes as well as for downloading data / software for rendering IT and IT enabled ser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n under section 10AA on the enhanced income after considering the above disallowance. 12.7 Learned CIT(A) has erred in holding that issue is covered by the jurisdictional Hon'ble High Court of Karnataka in Assessee's own case. 13. Levy of interest under section 234B - INR 7,15,88,232 13.1 The Learned AO has erred in levying interest under section 234B which is consequential to additions made in the assessment order 14. Levi. of interest under section 234D - INR 2,99,796 14.1 The learned AO has erred in levying interest under section 234D which is consequential to additions made in the assessment order 14.2 Notwithstanding and without prejudice to the above, learned AO has erred in levying interest under section 234D even though refund was issued to the Appellant after the date of regular assessment. The appellant craves leave to add, alter, rescind and modify the grounds herein above or produce further documents, facts and evidence before or at the time of hearing of this appeal. For the above and any other grounds which may be raised at the time of hearing, it is prayed that necessary relief may be provided. 2. The revenu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... round No. 7.1: The learned AO/ learned TPO/ Hon'ble CIT(A) erred in not appreciating the fact that negative working capital adjustment should not be allowed. Ground No. 8.3: The Hon'ble CIT(A) has given conflicting directions while adjudicating on the accept/reject of the comparable companies, being, Datamatics Global Services Ltd., Genesys International Services Ltd., ICRA Techno Analytics Ltd., Infosys Ltd., Sasken Communication Technologies Ltd. and Spry Resources India Pvt. Ltd.. In doing so, the Hon'ble CIT(A) has erred in: a. Not appreciating the fact that ALP can be computed even on the basis on a smaller set of comparables. b. Holding that a larger set of comparables takes care of the differences between the comparables as compared to a smaller set of the comparables selected based on strict comparability c. Holding that the companies selected by the learned TPO are appropriate comparables for determination of the ALP. Ground No. 9.3: The Hon'ble CIT(A) has erred in suo moto rejecting the following companies that ought to be included as comparables for IT Enabled Services: a. Informed Technologies India Ltd. b. Jinda ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ernational transactions exceeding Rs. 50 crores and therefore the case was referred to the transfer pricing officer. 5.2 Upon receipt of reference u/s. 92CA, the Ld.TPO called upon assessee to file the details of international transactions. Assessee in response submitted as under: International transactions Value (INR) Software Development Services (SWD) 63,42,22,695 IT Enables Services (ITES) 311,86,03,072 5.3 The Ld.TPO observed that assessee used OP/OC and computed the PLI at 15.79% for SWD as well as ITES segment. It used TNMM as the most appropriate method to determine the arms length price of the transaction. In the TP documentation the assessee used 9 comparables for both the segments. The comparables selected by the assessee under SWD segment are as under: SI.No Name of the Company (M/s.) Wt.Avg (%) 1 Acropetal Technologies Ltd. 26.19 2 Akshay Software Technologies Ltd. -0.17 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... % 3 ICRA Techno Analytics Ltd. 24.05% 4 Infosys Ltd. 49.67% 5 Larsen Toubro Infotech Ltd. 33.52% 6 Mindtree Ltd. 22.79% 7 Persistent Systems Ltd. 34.89% 8 R S Software (India) Ltd. 25.59% 9 Sasken CommunicationTechnologies Ltd. 21.24% 10 Spry Resources India Pvt Ltd. 19.01% AVERAGE 28.71% ITES Segment: SI.No. Company Name Adjusted Margins FY 2011-12 1. Accentia Technologies Ltd. 8.19% 2. Universal Print Systems Ltd. 53.61% 3. Informed Technologies India Ltd. 5.50% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in respect of corporate tax issues. 5.10. Against the order passed by the Ld.CIT(A), the assessee filed present appeal before this Tribunal. 6. At the outset, the Ld.AR submitted, vide Notes to the arguments filed during the course of hearing, that the effective grounds of appeal that the assessee wish to argue are as under: The Additional Grounds of Appeal filed by the assessee on 26.7.2019. Ground Nos. 7.1 7. Exclusion of Companies - SWD Segment - Ground No. 8.1 Exclusion of Companies - SWD Segment - Additional Ground No. 8.3 Exclusion of Companies - ITES Segment - Ground No. 9.2 Inclusion of Companies - ITES Segment - Additional Ground No. 9.3 Negative Working Capital - Additional Ground No. 7.1 Deduction under Sec. 10AA - Ground No. 11 Disallowance of Software Expenses under Sec. 40(a)(i) Ground No. 12 7. Based on the above submissions of the assessee, we restrict our opinion in respect of the above grounds. All other grounds that has not been argued by the Ld.AR are dismissed as not pressed. 8. Ground no. 7 The Ld.AR submitted that ground no. 7 as well as Ground no. 7.1 raised by the assessee in application date ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se of M/S.Software AG Bangalore Technologies Pvt.Ltd. and therefore we are inclined to delete the negative working capital adjustment. In determining ALP under TNMM, the correct approach would be to look at the costs incurred by the assessee only and should not impute any additional cost as done by TPO, which indirectly enhances the ALP artificially. The contrary view expressed in decision cited by the learned DR takes the view that Working capital adjustment is required in all cases as any credit extended to customers will result in cash locked up and will result in the assessee borrowing money from the banks and incur additional cost towards interest on these borrowings which cost will have effect on the price charged. It is the reasoning in these decisions that under TNM method that every ingredient of profit margins of comparable companies are analysed, whether it is positive or negative. The decision proceeds on the basis of effect on price owing to working capital requirement. We are of the view that working capital adjustment itself is computed on the basis of outstanding current assets and liabilities at the year end. It means that other things being equal, an entity having ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Computer hardware 2 Leasehold improvements 3 Furniture fixtures 4 Office equipments 5 Electrical equipments Intangible Assets Altisource India does not own any non-routine intangibles and accordingly does not own trade secrets or undertake research and development activities on its account that would lead to the development of non-routine intangibles. Assessee has submitted that, it does not own any non-routine intangibles and does not own any trade secrets or undertake any research and development activities on this account that would lead to the development of non-routine intangibles under ITES segment, it is submitted that it owns the regular business assets like computer hardware, furniture, fixtures etc. Risks assumed It is submitted that assessee under both the segments is a risk mitigated company and except for foreign exchange fluctuation risk, service liability risk (ITES segment), it does not bear any significant risk in rendering the services to its AE. Characterisatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... O. The functional profile of me Assessee and that of the Assessee in the case of Agilis Information Technologies India (P.) Ltd. (supra), is identical inasmuch as the said company was also involved in providing SWD services to its AE and the TPO had chosen some comparable companies which were also chosen by the TPO in the case of the Assessee for the purpose of comparability. In the aforesaid decision the Tribunal held on the comparability of the 3 companies which the Assessee seeks to exclude as follows: (a) Infosys Ltd., was excluded from the list of comparable companies by following the decision of the Hon'ble Delhi High Court in the case of CIT v. Agnity India Technologies (P) Ltd. [2013] 36 taxmann.com 289/219 Taxman 26 (Delhi). The discussion is contained in paragraphs 4.5 to 4.7 of the Tribunal's order. The Tribunal accepted that Infosys Ltd. is a giant risk taking company and engaged in development and sale of software products and also owns intangible assets and therefore not comparable with a software development service provider such as the Assessee in that case. (b) Larsent Tourbro Infotech Ltd., was excluded from the list of comparable companies b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bjection is at pages 711-713 of the Assessee's paper book. According to the Assessee this company is engaged in providing Geographical Information Services comprising of Photogrammetry, Remote Sensing, Cartography, Data Conversion, state of the art terrestrial and 3D geocontent including location based and other computer based related services. Pagc-38 of the Annual report 2012 containing the above description was brought to the notice of the TPO, Attention of the TPO was invited to the directors report to the shareholders at page ii of the annual report 2012, wherein the Directors have informed the shareholders that the company continued in its journey, to be innovators and leaders in the fields of location based services related geoplatforms and advanced survey techniques. There is no segmental reporting because it is stated in the annual report that this company is only in one segment viz., GIS based services and therefore there is no requirement of segmental reporting. It was also submitted that this company owns substantial intangibles equivalent to 10.42% of its total turnover. 32. The TPO however has regarded this company as a comparable company by observing that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d this aspect and proceeded on the basis that the presence of intangible assets would not be significant. Rule 10B(2) of the Income Tax Rules, 1962 (Rules) specifically provides that for the purposes of sub-rule (1) of Rule 10B, the comparability of an international transaction with an uncontrolled transaction shall be judged with reference to the following, namely:- a) the specific characteristics of the property transferred or services provided in either transaction; b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions; In the given facts and circumstances, we are of the view that Genesys International Corporation Ltd., cannot be considered as a comparable company and the said company should be excluded from the final list of comparable companies. We hold accordingly. 9.9 Nothing contrary has been brought to our notice by the Ld.DR in order to deviate from the above view. Respectfully following the same, we direct the Ld.TPO to exclude the following comparables. Genesys International Services Ltd. Infosys Ltd. Larsen Toubro Infotech Ltd. Persistent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10. Ground no. 11 is in respect of recomputation of deduction u/s. 10AA of the Act by reducing telecommunication expenses from the export turnover. Both sides submitted that this issue is no longer resintegra in lieu of the decision of Hon ble Supreme Court in case of HCL Technologies Ltd. reported in (2018) 93 taxmann.com 33. 10.1 Accordingly, we direct the Ld.AO / TPO to compute the deduction u/s. 10AA of the Act in accordance with the principles laid down by Hon ble Supreme Court in case of HCL Technologies Ltd.(supra). Accordingly this ground raised by assessee stands allowed. 11. Ground no. 12 is raised by assessee in respect of the disallowance of software expenses u/s. 40(a)(i) of the Act. The Ld.AR submitted that during the year under consideration, the assessee debited sum of Rs. 1,48,09,404 towards software expenses paid to non-residents. The Ld.AO disallowed the above expenses under section 40(a) (i) of the Act for non-deduction of tax. The Ld.AO held that the payments made by the assessee were towards right to use, and the same would be classified as royalty , both under the Act and under the respective tax treaties of the payee's. 11.1 The Ld.A ..... X X X X Extracts X X X X X X X X Extracts X X X X
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