TMI Blog2023 (12) TMI 1227X X X X Extracts X X X X X X X X Extracts X X X X ..... ation of adjustment is not in accordance to the sound principles of transfer pricing rules. We direct the Ld.AO/TPO to consider the segments of the assessee under the receipt of business development services from its AE denovo in accordance with law. Needless to say that proper opportunity of being heard must be granted to assessee. Grant of depreciation at the rate of 60% on NMS CG/TX Cards, switches, etc., on the ground that these items do not come within the definition of computers - HELD THAT:- Identical issue has been considered by Coordinate Bench of this Tribunal for A.Y. 2015-16 [ 2022 (8) TMI 1343 - ITAT BANGALORE] we direct the Ld.AO to allow the depreciation at 16% on the CG/TX Cards, switches etc. TDS u/s 195 - grant of deduction of tax paid outside India in respect of which no foreign tax credit is eligible in India by holding that the same would be outside the scope of Section 40(a)(ii) - HELD THAT:- We direct the Ld.AO to verify the amount of foreign tax credit paid that is attributable to the income accruing / arising in India and to allow the same. Accordingly in the light of the decisions relied by Coordinate Bench of this Tribunal hereinabove in as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Latin American subsidiaries are mere captive service providers with limited risks and perform the business activities on behalf of the Appellant and are compensated on a cost-plus markup. 7. The learned AO/ learned TPO/ Hon'ble CIT(A) erred in not appreciating that if the business development expenses are apportioned to the Latin American subsidiaries, such costs would be cross charged back to the Appellant with mark-up, thereby resulting in additional loss of income to the Appellant in India and tax base erosion in India. 8. That therefore, the adjustment determined by the learned TPO runs counter to the provisions of Section 92(3) of the Act. 9. The learned AO/ learned TPO/ Hon'ble CIT(A) erred in ignoring the fact that the reason for setting up of data centres/ servers/warehousing facilities in the Latin American countries are purely based on commercial expediency and a business-centric decision taken by the Appellant, and that in fact, the subsidiaries are set up after conclusion of contract between the Appellant and third party customers. 10. That in any event, the adjustment determined by the learned TPO in an adhoc manner, without following a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enhance user experience. The Assessee enters into contracts with telecom operators in India and abroad, for providing services to customers of telecom operators. In respect of customers situated outside India, once the contact is signed with the customer, the Assessee establishes subsidiaries in the respective countries for furtherance of its business. The subsidiaries retain a return on cost for the services provided and transfer the rest of the proceeds to the Assessee. The subsidiaries operate on a cost plus model for the services rendered. DETAILS OF THE RELEVANT INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE ASSESSEE: Services Value Outcome of the TP Order Receipt of business development services from Onmobile USA Rs. 55,40,02,623/- Adjustment of Rs. 19,53,70,849/- Receipt of technical support services from LATAM affiliates Rs. 21,62,80,953/- Accepted to be at arm s length. B. On a reference made by the Assessing Officer ( AO ) to the TPO, the TPO passed an order dated 29.01.2016 under Sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t arm s length. G. ANALYSIS DONE BY THE TPO The TPO held that the services of Onmobile USA are availed not just by the Assessee, but also by the other affiliates, and therefore, the costs incurred in that regard are to be shared by the 4 entities. Accordingly, the TPO apportioned 1/5th of the expenses to the Assessee and determined the remaining 4/5th of the consideration paid as a TP adjustment. H. The CIT(A) vide the order dated 30.01.2023 rejected the contentions of the Assessee, by holding that Onmobile USA is providing services to LATAM subsidiaries, and that the services of Onmobile USA are required by the LATNAM subsidiaries in order to carry out the Assessee s business in those territories. Therefore, the TPO s action in apportioning the costs was upheld. The Ld.TPO thus proposed an adjustment of Rs. 44,32,02,099/-. On receipt of the transfer pricing order, the draft assessment order was passed by the Ld.AO. A draft assessment order dated 30.03.2016 was passed by the Ld.AO incorporating the aforesaid TP adjustment. The Ld.AO also proposed to disallow the depreciation claimed at the rate of 60% on certain computer equipments and instead proposed to allow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ricing provisions. In fact, Section 92(3) of the Act, specifically prohibits determination of TP adjustment which has the effect of reducing the income chargeable to tax in India. By virtue of the adjustment, the Ld.TPO has in effect acted contrary to Section 92(3) of the Act. The Ld.AR submitted that the adjustments made u/s. 92CA are without understanding the business model of assessee. Reliance in this regard is placed on the decision of the Hon ble Bombay High Court in the case of CIT v. Merck Ltd. reported in [2016] 73 taxmann.com 23 and the decision of the Hon ble Delhi Bench of this Tribunal i n the case of Mercer Consulting India (P.) Ltd. v. DCIT reported in [2016] 72 taxmann.com 323. 4.3 The Ld.AR further submitted that the method followed by the assessee has resulted in more profits being retained in India, and therefore, the assumption of shifting of profits is without any basis. It is submitted that if cost of availing business development services are apportioned to the LATAM subsidiaries, such costs would be cross charged back to the assessee with mark-up to that extent. If done so, the Assessee would be liable to pay the LATAM subsidiaries an additio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and - CIT v. Kodak India (P.) Ltd. reported in [2017] 79 taxmann.com 362 (Bombay). 4.7 The Ld.DR on the contrary relied on the orders passed by authorities below. He submitted that all these details that have been argued by the Ld.AR has not been considered by the Ld.TPO and therefore it needs verification. We have perused the submissions advanced by both sides in the light of records placed before us. 4.8 We note that the Ld.TPO has not considered the agreements between the assessee and its AE and the nature of the transaction entered into, the services rendered by the assessee to its AE and the benchmarking method adopted by the assessee on a consistent basis. In the interest of justice, we remand this issue back to the Ld.AO/TPO to consider the claim of assessee by analysing all the details vis- -vis the contracts and the functions performed by the assessee in respect of the services rendered. 4.9 It is also noted that the assessee has received certain services from its AE which has been treated by the Ld.TPO at arms length by the assessee. However, the Ld.TPO has apportioned 1/5th of the expenses once again to the assessee and proposed a TP adjustm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncluded items like NMS CG/TX cards, switches, etc. The AO following the earlier years orders, allowed depreciation only @ 15% treating the additions as part of telecom equipment as they relate to functioning of mobile phones. The DRP confirmed the disallowance. 25. The ld. AR submitted that the issue is covered by the decision of coordinate Bench of the Tribunal in assessee's own case for the AY 2008-09 to 2011-12 and the Hon'ble High Court of Karnataka has affirmed the decision of the Tribunal for AY 2008-09. 26. We have considered the rival submissions and perused the material on record. The coordinate Benches of the Tribunal have been consistently holding that CG/TX cards and switches, etc. are part of computers and therefore depreciation is to be allowed @ 60%. The relevant observations of the Tribunal in assessee's own case for AY 2008-09 which is confirmed by the jurisdictional High Court is extracted below:- 10.6.1 We have heard both parties and perused and carefully considered the material on record including the judicial decisions cited. The issue for our consideration is whether MRBs are to be classified as 'plant and machinery' or ' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to as 'components', while external hardware devices are usually called 'peripherals'. Together, they all fall under the category of computer hardware. 'Software', on the other hand, consist of the programs and applications that run on computers. Because software runs on computer hardware, software programs often have 'system requirements', that list the minimum hardware required for the software to run. 31.1 In short, Router is a hardware device that routes data (hence the name) from a local area network (LAN) to another network connection. A router acts like a coin sorting machine, allowing only authorized machines to connect to other computer systems. Most routers also keep log files about the local network activity. Now the question is whether this machine can be used independent of Computer. If yes, then it cannot be called Computer Hardware in all circumstances. 31.2 When Computer Hardware , is used as a component of the computer, it becomes part and parcel of the computer, as in the case of operating software in the computer. In such a situation, hardware in question can be considered as a part of a computer and hence a ' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase of router mania Technologies (supra). In this case it was observed that the router is a device which links or connects the computers for the exchange of relevant data. In reaching the conclusion that router is not eligible for depreciation at the rate applicable to computer, the Bench noticed that the router at its own does not perform any logical, arithmetical or memory functions by manipulations of electronic, magnetic or optical impulses. 33. We prefer the view taken in the case of Samiran Majumdar (supra) over that in the case of Router mania Technologies (supra) ; With utmost respect, the Mumbai Bench had taken a narrow view on this issue, by holding that only a device which can perform logical, arithmetical or memory functions by manipulations of electronic impulses etc. is computer. It has restricted the meaning of computer only to the CPU of the computer and pulled out the input and output devices from the ambit of computer. No doubt the function of the computer, as one composite unit, is to perform logical, arithmetical or memory functions etc., but it is not only the equipment which performs such functions that can be called as computer ; All the input and output ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g heard both the parties and having gone through the material on record, we find that this issue is more or less covered by the decision of the Special Bench in the case of Datacraft India Ltd. (cited supra) wherein it has been held that as long as the functions of the computer are performed along with other functions and the other functions are dependent upon the functions of the computer it is a computer entitled to the higher rate of depreciation. The Special Bench has also stated that all the input and output devices of the computer such as key board, mouse, monitor, etc are to form part of the block of computers. In the case before us also the ATM machine is doing both the logical, arithmetic and memory functions by manipulations of electronic magnetic or optical impulses giving debit or credit cash and thereafter dispenses the cash and gives a printed receipt. Thus as can be seen, the computer is an integral part of the ATM machine and on the basis of the information processed by the ITA No.353(Bang)/2010, computer in the ATM machine only, the mechanical functions of the dispensation of cash or deposit of cash is done. Its functions are not limited to the location at which it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1,101 less 3,97,38,075), no deduction was claimed by the Assessee. It is submitted that to the extent no credit is available to the Assessee under Sections 90, 90A, 91 of the Act read with Rule 128 of the Income Tax Rules, 1962, deduction of the unclaimed foreign tax paid, ought to be allowed. It is submitted that taxes paid outside India in respect of which no credit is claimed in India does not constitute taxes on income as defined under explanation 2 to Section 40(a)(ii) of the Act. Accordingly, the Assessee is rightly entitled to the claim of deduction, as allowed by the CIT(A). Reliance in this regard is placed on the following decisions: - Reliance Infrastructure Ltd. v. CIT : reported in (2016) 76 taxmann.com 257 (Bombay) at pages 44 and 45 of the case law compilation; - Virmati Software and Telecommunication Ltd. v. DCIT : Order dated 05.03.2020 passed by the Ahmedabad Bench of Hon ble Tribunal in ITA No. 1135/Ahd/2017 at page 56 of the case law compilation; and - Tata Consultancy Services Ltd. v. ADIT : reported in (2020) 121 taxmann.com 190 (Mumbai-Trib.) at pages 71 and 72 of the case law compilation. Further reliance is also placed on the decision of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5, and any subsequent assessment year means income tax chargeable under the provisions of this Act, and in relation to any other assessment year income-tax and super-tax chargeable under the provisions of this Act prior to the aforesaid date [and in relation to the assessment year commencing on the 1st day of April, 2006, and any subsequent assessment year includes the fringe benefit tax payable under Section 115WA] Amounts not deductible 40. Notwithstanding anything to the contrary in Section 30 to the following amounts shall not be deducted in computing the income chargeable under the head Profits and gains of business or profession . (a) In the case of any assessee - (i), (ia), (ib), (ic)** ** ** (ii) Any sum paid on account of any rate or tax levied on the profits or gains of any business or profession or assessed at a proportion of, or otherwise on the basis of, any such profits and gains. [Explanation 1. - For the removal of doubts, it is hereby declared that for the purposes of this sub-clause, any sum paid on account of any rate or tax levied includes and shall be deemed always to have included any sum eligible for relief of tax under Section 90 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax paid to the Uganda Government in respect of such income? The Court while answering the question in the negative observed that it is not aware of any commercial principle/practice which lays down that the tax paid by one on one's income is allowed as a deduction in determining the income for the purposes of taxation. (k) It is axiomatic that income tax is a charge on the profits/ income. The payment of income tax is not a payment made/incurred to earn profits and gains of business. Therefore, it cannot be allowed an as expenditure to determine the profits of the business. Taxes such as Excise Duty, Customs Duty, Octroi etc., are incurred for the purpose of doing business and earning profits and/or gains from business or profession. Therefore, such expenditure is allowable as a deduction to determine the profits of the business. It is only after deducting all expenses incurred for the purpose of business from the total receipts that profits and/or gains of business/ profession are determined. It is this determined profits or gains of business/profession which are subject to tax as income tax under the Act. The main part of Section 40(a)(ii) of the Act does not allow deduc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld apply wherever it occurs in the Act. It is not even urged by the Revenue that the context of Section 40(a)(ii) of the Act would require it to mean tax paid anywhere in the world and not only tax payable/ paid under the Act. (n) However, to the extent tax is paid abroad, the Explanation to Section 40(a)(ii) of the Act provides/clarifies that whenever an Assessee is otherwise entitled to the benefit of double income tax relief under Sections 90 or 91 of the Act, then the tax paid abroad would be governed by Section 40(a)(ii) of the Act. The occasion to insert the Explanation to Section 40(a)(ii) of the Act arose as Assessee was claiming to be entitled to obtain necessary credit to the extent of the tax paid abroad under Sections 90 or 91 of the Act and also claim the benefit of tax paid abroad as expenditure on account of not being covered by Section 40(a)(ii) of the Act. This is evident from the Explanatory notes to the Finance Act, 2006 as recorded in Circular No.14 of 2006 dated 28th December, 2006 issued by the CBDT. The above circular inter alia, records the fact that some of the assessee who are eligible for credit against the tax payable in India on the global income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clear that it is declaratory in nature and would have retrospective effect. This is not even disputed by the Revenue before us as the issue of the nature of such declaratory statutes stands considered by the decision of the Supreme Court in CIT v. Vatika Township (P) Ltd. [2014] 367 ITR 466/227 Taxman 121/49 taxmann.com 249 and CIT v. Gold Coin Health Foods (P.) Ltd. [2008] 304 ITR 308/172 Taxman 386 (SC). (r) In the above facts and circumstances, question (iii)(a) is answered in the negative i.e. against the Revenue and in favour of the applicant assessee. Question (iii)(b) is answered in the negative i.e. against the Revenue and in favour of the applicant assessee. 49. The Hon'ble Bombay High Court in the case of Reliance Infrastructure Ltd (supra) has laid down the ratio that to the extent tax paid in foreign country on income which has arisen/accrued in India, has to be considered in the nature of expenditure incurred or arisen to earn income and is to be allowed as a deduction. In the given case it is submitted that out of the foreign taxes paid no credit was claimed to an extent of Rs. 9,32,85,133/-. Of the said foreign tax paid how much is attributable to the incom ..... X X X X Extracts X X X X X X X X Extracts X X X X
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