TMI Blog2023 (11) TMI 185X X X X Extracts X X X X X X X X Extracts X X X X ..... AEs. Same view was again taken in the case of same assessee for AY 2005-06 Birla Soft India Ltd. [ 2014 (8) TMI 867 - ITAT DELHI] The management and finance functions of assessee were common and centralized; the individual units were only concerned with providing services. Therefore, in such a situation, the uniform rate agreed by assessee with AEs is certainly a rate at entity-level which has no connection or linkage with individual units. There is also merit in the submission of assessee that the assessee had to maintain separate books and computed separate profits of all 5 units just to claim exemption qua some of the eligible units but had there been no exemption, there would not have been any necessity to maintain separate books or even compute separate figures of each unit. Therefore, in the present case, when the authorities have accepted entity-level approach of assessee in other years, there is a gross fallacy in not accepting the same approach in current year in absence of any changed circumstance. Therefore, we are inclined to accept that the entity-level approach applied by assessee deserves to be accepted. We, therefore, reverse the decision of lower-a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom products. Therefore, the assessee s case cannot be compared with this company. We direct the TPO/AO to exclude this company from list of comparables. Infosys Technolgies Ltd. is a giant in software industry and it cannot be compared with small players like assessee. It is also noteworthy that this company has been excluded from list of comparable in assessee s own case by ITAT. Therefore, without mentioning anymore analysis, we are inclined to exclude this company from list of comparables and direct the TPO/AO to do so. Ishir Infotech Ltd. - payments made to outside professional cannot be included in employee cost for the reason that the test of employee cost filter is applied to judge the nature of business. If a company is paying lesser amount of salary to its own staff but paying higher amount to outside professionals, it goes out of service company and does not remain comparable with assessee. Kals Information company is also a product company. It has developed various software products as pointed out by Ld. AR and earning revenue therefrom. Further, it is also claimed by assessee that the company is earning from composite contracts. These business activities of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e by the decision of [ 2014 (3) TMI 1186 - ITAT CHENNAI] for AY 2008-09 - As AR has not been able to bring on record any change in the nature of expenditure so as to not follow the decision of ITAT, Chennai in assessee s own case for AY 2008-09 re-produced earlier. Therefore, we have no reason to deviate from the view taken therein. Respectfully following the same, we uphold AO s action. Disallowance u/s 14A on account of expenditure incurred for earning exempt income - reasonable computation u/s 14A - assessee has earned exempted dividend from mutual funds - HELD THAT:- We agree with the proposition canvassed by Ld. AR that the Rule 8D was not applicable to AY 2007-08 involved in present appeal as held by Hon ble Supreme Court [ 2018 (2) TMI 115 - SUPREME COURT] Therefore, the disallowance computed by AO in terms of part (iii) of Rule 8D cannot stand. But, however, we find that a reasonable disallowance is attracted u/s 14A de hors Rule 8D. It is to be noted that the assessee has earned a very high amount of exempted income and the AO has mentioned, in his words, that the assessee has incurred expenses which are embodied in various indirect expenses debited to P L A/c. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctions undertaken by assessee were not at ALP and an upward adjustment of Rs. 37,69,02,830/- was required. Then, the AO served a draft-assessment order dated 28.12.2010 upon the assessee proposing to make additions/disallowances, namely (i) upward adjustment of transfer-pricing at Rs. 37,69,02,830/- as per TPO s order (ii) re-working of exemption u/s 10A/10B, (iii) capitalization of civil tiling work in leasehold premise, (iv) depreciation on software, and (v) disallowance u/s 14A. With such disallowances/additions, the AO proposed to determine total income at Rs. 65,98,26,453/-. Against draft-assessment order, the assessee filed objection dated 28.01.2011 to Disputes Resolution Panel (DRP). The DRP passed order dated 08.09.2011 u/s 144C(5) of the act whereby the objections of assessee were turned down and the draft assessment order of AO was confirmed. Ultimately, the AO passed final assessment-order dated 15.09.2011 u/s 143(3) having regard to TPO s order u/s 92CA(3) and DRP s order u/s 144C(5). Aggrieved by order of AO, the assessee has come in this appeal. 4. The grounds raised by assessee are as under: 1. The order of the AO passed pursuant to the order of the TPO an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on'ble DRP erred in law and in facts, by accepting/ rejecting companies based on unreasonable comparability criteria. 10. The ld. AO and Hon'ble DRP erred in law and in facts, by rejecting certain comparable companies identified by the assessee for having different accounting year (i.e. companies having accounting year other than March 31 or companies whose financial statements were for a period other than 12 months). 11. The ld. AO and Hon'ble DRP have erred in law and in facts, by determining the arm s length margin/price using only F.Y. 2006-07 data which was not available to the assessee at the time of complying with the transfer pricing documentation requirements. 12. The ld. AO and Hon'ble DRP have erred, in law and in facts, by applying the turnover Rs. 1 crore as a comparability criterion. 13. The ld. AO and Hon'ble DRP have erred, in law and in facts, by rejecting certain comparable companies identified by the assessee as having economic performance contrary to the industry behavior (e.g. companies which showed a diminishing revenue trend). 14. The ld. AO and Hon'ble DRP erred, in law and in facts, by rejecting certain c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ennai Unit II, and Bangalore SBU STP Unit (Units claiming deduction u/s 10A/10B), when such items were not, in the first place, included in the export turnover of the said Units. b. Without prejudice to ground (a) above, the ld. AO has erred in excluding telecommunication expenditure incurred in connection with the delivery of computer software outside India from the export turnover of Chennai Unit II and Bangalore SBU STP Unit (Units claiming deduction u/s 10A/10B) to the extent of the expenditure incurred in Indian rupees. c. Without prejudice to ground (a) and (b) above, the ld. AO has erred in holding that while telecommunication expenditure incurred in connection with the delivery of computer software outside India should be excluded from export turnover of Units claiming deduction u/s 10A/10B, but not from total turnover of the said Units. 22. The ld. AO erred in considering expenditure incurred towards civil and tilling expenditure as capital in nature as the same does not result in any enduring benefit to the company. 23. The ld. AO erred in considering expenditure incurred by the assessee toward software license fees for application/project specific software ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 418 Covansys Deutschland GMBH, Germany Export of software development and support services 28154191 Covansys SRI, Italy Export of software development and support services 596207 Covansys S L. Spain Export of software development and support services 11083994 Covansys Netherland B.V. Export of software development and support services 1045739 Covansys Canada, Inc Export of software development and support services 4484863 Covansys Netherland B.V. Reimbursement of travel, communication expenses etc. 8174789 On actual basis Covansys Corpn, USA Reimbursement of travel, communication expenses etc. 132223196 Covansys UK Ltd. Reimbursement of travel, communication expenses etc. 11900559 Covansys Belgium NV Reimbursement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Instead he made unit-level comparison i.e. PLI of each unit was compared with the PLI of external comparables. Secondly, the assessee claimed that internal comparables of assessee must be preferred over external comparables but the TPO rejected. Thirdly, the TPO modified the list of external comparables . While the assessee adopted 28 external comparables, the TPO made certain inclusions/exclusions and came to finalize a set of 26 comparables. Ultimately, the TPO accepted unit-level approach; computed mean PLI of 26 external comparables at 25.44%; and thereby recommended upward adjustment of Rs. 37,69,02,830/- for first 2 loss-making units of Bangalore (Rs. 14,32,37,643 for Bangalore Unit-I + Rs. 23,36,65,188/- for Bangalore SBU). Brief details of the working made by TPO, in Para 21 at Page 99, is as under: Bangalore Unit-I: Total Sales 39,48,33,177 Less: Loss(-) 7.95 on cost 7.95 on cost becomes 7.95/92.05 = 8.64 on sales 3,41,13,586 Total cost 42,89,46,763 Add: Arm s Length Profit (25.44 on cost) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cribes definition of transaction as under: Transaction includes a number of closely-linked transactions. (ii) Rule 10B(1)(e) itself prescribes for benchmarking of international transaction by comparing net profit earned by the enterprise ; the said Rule reads, at the relevant time, as under: 10B.(1) For the purposes of sub-section (2) of section 92C, the arm's length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely : (a) to (d) XXX (e) transactional net margin method, by which,- (i) the net profit margin realised by the enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base; (ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base; (iii) the net profit margin referred to in sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt case is the assessee-company, is required to be compared with the net profit margin earned by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction. Therefore, according to Ld. AR, the law permits entity-level comparison. 12.2 Then, the Ld. AR submitted that in following decisions, the above legal provisions have been interpreted and entity-level comparison has been upheld: (i) Sony Ericsson Mobile Communication India Pvt. Ltd. Vs. CIT 374 ITR 118 (Delhi HC) : Relevant Paras of decision are extracted below: 80 .. Rule 10A in clause (d) states that for the purpose of this Rule and Rules 10AB and 10E, the term transaction' would include a number of closely linked transactions . This Rule in positive terms declares that the legislative intent is not to deviate from the generic rule that singular includes plural. The meaning or definition of the expression transaction' in clause (d) to Rule 10A read with sub-section (1) to Section 92C, therefore, does not bar or prohibit clubbing of closely connected or intertwined or continuous transactions. This is discernible also from sub-rule (2) to Rule 10B quoted above. The sub- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xibility of applying the compatibility criteria and enhanced availability of comparables. Net profit record/data is assessable and within reach. It is readily and easily available, entity-wise in the form of audited accounts. The TNM Method is a preferred transfer pricing arm's length principle for its proficiency, convenience and reliability. Ideally, in TNM Method preference should be given to internal or in-house comparables. In absence of internal comparables, the taxpayer can and would need to rely upon external comparables, i.e. comparable transactions by independent enterprises. For several reasons, database providers, it is apparent, have the requisite information and data of external comparables to enable comparability analysis of the controlled and uncontrolled transactions with necessary adjustment to obtain reliable results under TNM Method. This method also works to the benefit and advantage of the tax authorities in view of convenience and easier availability of data not only from third party providers, but on their own level, i.e. assessment records of other parties. 91. In case the tested party is engaged in single line of business, there is no bar or proh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing Officer is 14.01% whereas assessee has disclosed arithmetic mean of its international transaction with associate enterprises carried out in all the three STP units at 10.91%. This operating profit disclosed by the assessee is within the tolerable band provided in the proviso appended to sec. 92C(2) and, therefore, no adjustment is required. 10. Before adverting to the facts whether as a standalone unit for the purpose of determining the ALP relating to international transaction is right or wrong, we have a glance over the details placed on record by the learned counsel for the assessee in a tabular form at page 158 of the paper book exhibiting the transaction of each unit with related parties and unrelated parties. The first STP unit is Noida Unit. It has shown OP over TC with respect to related parties at 8.42%. In the case of unrelated parties, it has shown OP over TC at (-) 30.57%. The total result is 2.11%. Similarly at Noida-2, the operating profit is 26.17% in the case of related parties, it (-)25.82% in the case of unrelated parties and 17.11% is the overall result. At Chennai, it is (-)20.12% for related parties, (-)26.97% for unrelated parties and overall result i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sment year 2006-07, ITAT has upheld the benchmarking of internal international transactions with unrelated parties for testing the ALP of assessee with its related parties. We have a glance over such result compiled at page 158 of the paper book, the operating profit margin with respect to unrelated transaction is minus 14.10% whereas the assessee is showing operating profit with related parties at 14.33%. The overall result shown by the assessee is 10.91%. Even if we examine this result within the right of the ITAT s order for assessment year 2006-07, then also no adjustment is required in the result of international transaction shown by the assessee. Learned First Appellate Authority has taken into consideration all these aspects elaborately and we do not see any reason to interfere in his findings. In view of the above, ground No.1 is rejected. (iii) DCIT Vs. Birla Soft India Ltd. - ITA No. 4713/Del/2011 for AY 2005-06: Relevant Paras of decision are extracted below: 68. For AY 2004-05, while deciding in favour of the assessee, the Tribunal found that there was no significant functional difference in the software development and maintenance services rendered by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relating to the assessee s international transactions, was incorrect. The action of the CIT(A) in accepting this contention of the assessee is hereby upheld and confirmed. The ld. CIT (A), in our considered opinion, for the above discussion, has rightly concluded that the benchmarking of the transactions should be based on the aggregation at the entity level and not at the unit level. This finding of the ld. CIT (A) is endorsed. Accordingly, Ground No.9 is rejected. (iv) Further, reliance is placed on following decisions wherein, according to Ld. AR, entity-level comparison is upheld for benchmarking: - Toyota Kirloskar Motor (P) Ltd. vs. ACIT ITA No.1315/Bang/2011- Upheld by Hon'ble Karnataka High Court in 172/2013. - McCann Erickson India Pvt. Ltd. vs. Addl. CIT (ITA No.5871/Del/2011) - Avery Dennison India Pvt Ltd vs. ACIT (ITA No. 4868/Del/2014) - Demag Cranes Components (India) P. Ltd. vs. DCIT - Cummins India Ltd. Vs. Addl CIT (ITA No.1616/PN/2011) - Skechers USA Canada Inc. (Appeal No. AP-2012-073) Canadian International Trade Tribunal - Atul Ltd. V. ACIT (ITA No. 3118/Ahd/2010) - Thyssen Krupp Industries India Pvt. Ltd. vs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... authorities have rejected sales/billing rates of Bangalore Units while accepting the sales/billing rates of other units. This is a clear contradiction and patently wrong. (v) It is submitted that the assessee is providing services to all AEs as a single entity from 5 units and ordinarily there would have been no necessity to maintain separate books of each unit. But some of those units were eligible for exemption u/s 10A/10B and others were not eligible, therefore in order to compute exemption u/s 10A/10B, the assessee had to maintain separate books of account and compute separate profit of each unit. Only because of maintenance of separate books of account, the lower authorities have gained a misunderstanding that some of the units have not generated sufficient profitability/PLI and prompted to make adjustment under transfer pricing for those units, which is not correct. (vi) It is submitted that the TPO/AO has matched unit-level profitability of assessee with entity-level profitability of external comparables; this in itself is apparently wrong. In fact, the unit-wise comparison done by TPO/AO proceeds on an invalid assumption that the Functions performed, Assets u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 14. We have considered rival contentions of both sides and perused the orders of lower authorities in the light of legal provisions and judicial rulings cited before us as above. At first, we note that the assessee and revenue are in agreement on (i) TNMM as most appropriate method , and (ii) OP/OC% as PLI for working of TNMM. Hence, there is no dispute to that extent. Now, the controversy is in a very narrow compass. While the assessee claims entity-level benchmarking, the authorities claim unit-level benchmarking. Admittedly, the transactions done by assessee are not closely-related but they are identical. In Sony Ericsson Mobile Communication India Pvt. Ltd. (supra) relied upon by Ld. AR, it is accepted that in case the tested party is engaged in single line of business, there is no bar or prohibition from applying the TNMM on entity-level basis. Then, in CIT Vs. Birlasoft India Limited ITA No. 4001/Del/2009 for AY 2004-05 (supra) , in Para No. 11 to 14 of order of ITAT re-produced earlier, both of the first-appellate authority as well as ITAT rejected unit-level comparison done by department and accepted assessee s claim of entity-level comparison on the grou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fit making units. There is also merit in the submission of assessee that the assessee had to maintain separate books and computed separate profits of all 5 units just to claim exemption qua some of the eligible units but had there been no exemption, there would not have been any necessity to maintain separate books or even compute separate figures of each unit. At this stage, we also find that the TPO/AO has made unit-wise comparison of assessee with entity-level comparison of external comparables which again is faulty. If the TPO/AO is very serious in making unit-wise comparison, he must have collected unit-wise comparable external data and then made comparison, which is not so in present case. The matter does not stop here. We also find a strong merit in assessee s submission qua the revenue s approach in dealing assessee s case from year to year. Ld. AR has filed copies of TPO orders for subsequent assessment-years, namely AY 2008-09 and 2009-10, wherein the TPO has accepted entity-level approach adopted by assessee without any objection. It is true that the principle of res judicata is not applicable to tax proceedings but it is also true that the principle of cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) : 10. Clause (i) of Rule 10B(e) stipulates that net profit margin from an international transaction with an AE is computed in relation to cost incurred or sales effected or assets employed etc. Clause (ii) material for the present purpose. It provides that the net profit margin realized by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base. The base of this provision takes one back to clause (i) which refers to cost incurred or sales effected or assets employed or to be employed. On splitting clause (ii) into two parts, it divulges that the reference is made to internal and external comparables. One part of clause (ii) refers to the net profit margin realised by the enterprise from a comparable uncontrolled transaction and the other part talks of the net profit margin realised by an uncontrolled enterprise from a comparable uncontrolled transaction . It transpires that whereas the first part refers to the profit margin from internal comparable uncontrolled transactions, the second part refers to profit margin front an external comparable uncontrolled transac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arable uncontrolled transaction, or a number of such transactions, is computed having regard to the same base, as is referred to in Rule 10B(e)(i), with reference to cost incurred, or sales effected, or assets employed, or to be employed; that in Clause (ii) of the said Rule, reference is made to internal and external comparables; that as per this Rule, what is to be compared is profit from a comparable uncontrolled transaction; that the word comparable may encompass internal comparable or external comparable; that the Rule provides that preference is to be given to internally comparable uncontrolled transactions vis- -vis externally comparable uncontrolled transactions; that this is so, because the Rule refers first to the net profit margin realized by the enterprise (internal) from a comparable uncontrolled transaction and thereafter, it talks of new profit margin realized by an unrelated enterprise (external) from a comparable uncontrolled transaction; that thus, where a potential comparable is available in the shape of an uncontrolled transaction of the same assessee, it is likely to have a higher degree of comparability vis - vis comparables identified amongst the uncontroll ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bove, Ld. AR contended that in the present case of assessee, internal benchmarking is available and the same must be accepted. To support this, Ld. AR submitted that if the unit-level benchmarking is treated as valid, then the Mumbai Unit of assessee must be considered as an appropriate internal comparable for the reason that Mumbai Unit is providing identical services pre-dominantly to unrelated parties . Ld. AR has filed a statement marked as Annexure-I to Written- Submission, showing analysis of PLI of all units with break-up of transactions with related parties and unrelated parties . Drawing our attention to the working provided therein, Ld. AR pointed out that the Mumbai Unit has done 94% business with unrelated parties and a miniscule business of just 6% with related parties . Ld. AR submitted that Mumbai Unit is assessee s internal comparable, hence it would be the best yardstick for benchmarking. Then, he submitted that the PLI of Bangalore Unit-I at (-)7.95% and Bangalore SBU at (-)0.25% is within safe harbour range of (-)/(+)5% of (-)4.97% PLI of Mumbai Unit. Therefore, the transactions undertaken by Bangalore Unit-I and Bangalore SBU must be considered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le to other units. Further, it also can be seen from the above that only Mumbai Unit has relatively (of its turnover) very low employee cost, when compared to other units, indicating that difference between billing to the customers/AEs and amount paid to employees (quality of resource) is different. The assessee did not produce complete details regarding the functional comparability of Mumbai Unit, vis- -vis other units of the assessee and also whether economic circumstances are also comparable. Whether any peculiar economic circumstance in Mumbai Unit that resulted in loss is also not clear from the facts submitted by the assessee. As the assessee did not provide complete functional comparability for internal TNMM, it is the considered opinion of the DRP that internal TNMM cannot be applied and no interference is required in the action of the AO/TRP in applying external TNMM based on sound comparability analysis. 19. We have considered rival submissions. From analysis of Rule 10B as interpreted in the judicial rulings cited above, it is clear that internal comparison is allowed by law and the same is preferrable also. But, as contended by Ld. DR for revenue, the DRP has giv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ishir Infotech Ltd. 30.12 12. KALS Information Systems Ltd. (Seg) 30.55 13. LGS Global Ltd. (Lanco Global Solutions Ltd.) 15.75 14. Lucid Software Ltd. 54.85 15. Media Soft Solutions Ltd. 3.66 16. Megasoft Ltd. (Seg) 23.11 17. Mindtree Ltd. 16.90 18. Persistent Systems Ltd. 24.52 19. Quintegra Soloutions Ltd. 12.56 20. R.S.Software (India) Ltd 13.47 21. R.Systems International Ltd. (Seg) 15.07 22. Sasken Communication Technologies Ltd.(Seg) 22.16 23. S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... industry. The software tools developed by company are proprietary in nature and using patent. Thus, this company is a product company owning intangible property . As per annual report, this company has developed a de novo drug design tool called CELSUITE and protected its IPR under Copyright/Patent Act. Based on its silico expertise, the company has developed a molecule to treat leucoderma and multiple cancer. The company has outlined its future plans in the field of bio-technology. The company has come out with a public issue of shares wherein it has explained business as clinical research. Ld. AR placed reliance on several decisions where this company has been excluded from comparable due to functional dis-similarity, the most prominent decision being Tevapharm India Ltd. Vs. ACIT, ITA No. 7584/Mumbai/2021, approved by Delhi High Court in ITA No. 816/2017. (ii) Ld. DR relied upon the order of TPO/AO. (iii) We have carefully considered the submissions of both sides and find that this company has an altogether different business. Firstly, it is a product company and secondly, it is developing software for a specific segment, namely bio-technology, pharma, healthcare and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore. Therefore, the scale of operations has day-night difference. Being a giant, this company has all bargaining powers at its command which the assessee does not have. In several assessees, this company has been excluded from list of comparables on this very basis that it is a giant. Even in assessee s own case for AY 2011-12, the ITAT Indore has excluded this company in ITA No. 179/Ind/2016. (ii) Ld. DR could not controvert Ld. AR s submissions though he dutifully supported the orders of lower authorities. (iii) We have given our careful consideration. There can hardly be any dispute that the Infosys is a giant in software industry and it cannot be compared with small players like assessee. It is also noteworthy that this company has been excluded from list of comparable in assessee s own case by ITAT. Therefore, without mentioning anymore analysis, we are inclined to exclude this company from list of comparables and direct the TPO/AO to do so. 21.5 Ishir Infotech Ltd.: (i) Ld. AR submitted that the TPO has himself adopted employee cost/total revenue filter greater than 25% as one of the yardstick for selecting comparable. But this company has spent Rs. 29,35,065/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s developed various software products as pointed out by Ld. AR and earning revenue therefrom. Further, it is also claimed by assessee that the company is earning from composite contracts. These business activities of assessee are not controverted by Ld. DR. Therefore, we feel appropriate to exclude this company from comparable and directly accordingly to TPO/AO. 21.7 Lucid Software Ltd.: (i) Ld. AR submitted that this company is functionally dis-similar. The company is engaged in development of software products. It has amortized product development expenses of Rs. 18,66,703/- during the year ended 31.03.2007. The company has in-house software development facility. It is a software product company and even the software services are being provided by using in-house developed softwares. Ld. AR relied upon several rulings in which the company has been excluded from the list of comparables due to functional similarity. This company has also been excluded from list of comparables by ITAT, Indore in assessee s own case of AY 2011-12 in ITA No. 179/Ind/2016. (ii) Ld. DR relied upon the orders of lower authorities. (iii) On a careful consideration, we find sufficient difference ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... own case of AY 2011-12 in ITA No. 179/Ind/2016. (ii) Ld. DR dutifully supported the orders of lower-authorities though he could not controvert the submissions of Ld. AR. (iii) We have considered rival submissions of both sides. On a careful consideration, we find that this company is one of big market players in software sector. The turnover of company is manifold of assessee s turnover. The company is not comparable to assessee and such a view has already been taken by ITAT, Indore in assessee s own case for other year. Therefore, we are inclined to exclude this company from comparable. The TPO/AO is directly accordingly. 22. To sum up, we decide the various issues raised before us, as under: (i) The entity-level comparison claimed by assessee is accepted. (ii) The internal bench-marking claimed by assessee rejected. (iii) 9 external comparables are fit for exclusion. The same are directed to be excluded. The AO shall modify assessment-order in accordance with these directions/conclusions and in case of necessity, take assistance from the assessee or TPO. Ground No. 20 and 21: 23. These grounds relate to re-working of exemption u/s 10A/10B done by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 14.08.2018 accepting the viewpoint decided by Hon ble Supreme Court: 5. The issue has been examined by the Board and it is clarified that freight, telecommunication charges and insurance expenses are to be excluded both from export turnover and total turnover , while working out deduction admissible under section 10A of the Act to the extent they are attributable to the delivery of articles or things or computer software outside India. 6. Similarly, expenses incurred in foreign exchange for providing the technical services outside India are to be excluded from both export turnover- and total turnover-while computing deduction admissible under section 10A of the Act. Thus, all charges/expenses specified in Explanation 2(iv) to section 10A of the Act, are liable to be excluded from total turnover also for the purpose of computation of deduction u/s 10A of the Act. 7. Accordingly, henceforth, appeals may not be filed by the Department on the above settled issue, and those already filed may be withdrawn/ not pressed upon. 26. In view of finality of controversy by Hon ble Supreme Court as well circular issued by CBDT, this issue is decided in favour of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1968-69 but subsequently, the law of section 32(1) has been amended by inserting aforesaid Explanation 1 which clearly prescribes that if any capital expenditure is incurred by the assessee on the construction of any structure or doing of any work in or in relation to, and by way of renovation or extension of, or improvement to, any building not owned by him but taken on lease or other right of occupancy, then, the assessee shall be treated as owner qua such structure or work. The necessary effect of this amendment is such that the assessee shall be entitled to the deduction of depreciation and not as revenue expenditure. After hearing, Ld. AR filed a Written-Note on 04.08.2023 acknowledged by office of ITAT through Inward No. 679 on the non-applicability of Explanation 1 to section 32(1). In the said note, Ld. AR has mentioned that the expenditure on renovation was in the nature of repair and maintenance and therefore the Explanation 1 does not apply. Further, the AR has prayed to allow deduction u/s 30(a)(i) on the strength of repair/maintenance citing certain judicial rulings. 31. On a careful examination of assessment-order, we find that the AO has also, in Para No. 5.6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... disallowance had also been made in the earlier assessment years, so, the written down value gets enhanced in view thereof. 17. In lower appellate proceedings, the assessee s arguments have met the same fate. 18. Before us, in the course of hearing, the assessee submits that the authorities below have wrongly capitalized the impugned software expenditure. In support, it has neither filed any cogent evidence nor case law against the special bench decision in Amway India Enterprises (supra). So, the impugned capitalization cannot be interfered with on mere asking. Accordingly, we affirm the findings of the CIT(A) in capitalizing the software expenses of Rs. 78,67,240/-. 35. Ld. AR, however, submitted that the aforesaid order of ITAT, Chennai was passed following the decision of Special Bench in Amway India Enterprises Vs. DCIT 111 ITR 112 as mentioned therein. But at that time, the ITAT, Chennai was not having benefit of the decision in Madras High Court in CIT Vs. Southern Roadways Ltd. 304 ITR 84 in favour of assessee. Ld. AR also relied upon decisions in Asahi India Safety Glass Ltd. (2011) 15 taxmann.com 382 (Delhi HC) and Oracle India Pvt. Ltd. 221 Taxman 249 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecision of ITAT, Chennai in assessee s own case for AY 2008-09 re-produced earlier. Therefore, we have no reason to deviate from the view taken therein. Respectfully following the same, we uphold AO s action. The assessee fails in this ground. Ground No. 24: 38. This ground relates to the disallowance u/s 14A on account of expenditure incurred for earning exempt income. 39. The AO has, in Para No. 4 of assessment-order, noted that during the year, the assessee has earned exempted dividend of Rs. 4,39,50,738/- from mutual funds; this fact/figure is also evident from exemption claimed by assessee u/s 10(35) in Income-tax Computation sheet filed at Page No. 290 of Paper-Book. Therefore, the AO invoked section 14A for making disallowance and Rule 8D for computing the amount of disallowance. The AO noted that the magnitude of the transactions in mutual funds clearly exhibits that the assessee has to deploy a team of professionals either in full or part to earn such high dividend income. The exercise would necessarily have an intrinsic cost which gets hidden in the overall cost of assessee. The AO also noted that he has reason to believe that the assessee has to incur a mino ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8D. It is to be noted that the assessee has earned a very high amount of exempted income and the AO has mentioned, in his words, that the assessee has incurred expenses which are embodied in various indirect expenses debited to P L A/c. We also find that this issue has also cropped in other years in assessee s case. As mentioned earlier, in the consolidated order for AY 2011- 12 to 2013-14, the ITAT Indore has remanded this issue back to AO. Further, on perusal of Paper-Book filed by assessee, we find that the assessee has filed a copy of order dated 03.03.2014 of ITAT, Chennai in ITA No. 1205/Mds/2013 for AY 2008-09 in assessee s own case wherein the ITAT has upheld disallowance of Rs. 35 lakhs on reasonable computation u/s 14A de hors Rule 8D; the relevant para of ITAT is reproduced below: 11. We have heard both parties and gone through the case file. We make it clear that the impugned assessment year is 2008-09 with relevant accounting period 1.4.2007 to 31.3.2008. The first legal question which arises for our consideration is if at all section 14A is held applicable; whether or not the impugned disallowance can be computed under rule 8D which was notified on 24.3.2008 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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