2017 (11) TMI 1832 - AT - Income Tax

Tribunal upholds DRP's decision on deduction; Assessee's appeals partly allowed addressing Transfer Pricing, TDS Credit, and more.

The Revenue's appeal for A.Y 2009-10 was dismissed as the Tribunal upheld the DRP's decision regarding deduction u/s 10A. The assessee's appeals for A.Y ... Deduction u/s 10A - direction of the DRP to delete the addition made by the AO reducing the implementation expenditure and internet connectivity charges from the export turnover only for the purpose of deduction u/s 10A - HELD THAT:- Both the parties agreed that this issue is covered in favour of the assessee by the decision Tata Elxsi Ltd [2011 (8) TMI 782 - KARNATAKA HIGH COURT] wherein it has been held that if any expenditure is excluded from the export turnover, then the same should also be excluded from the total turnover while computing the deduction u/s 10A of the Act and the DRP has followed similar decisions to direct the AO to reduce the same from the total turnover as well. TP Adjustment - consider internal TNMM also for benchmarking of the assessee’s international transactions - HELD THAT:- In view of the decisions in the assessee’s own case. [2016 (10) TMI 1266 - ITAT HYDERABAD] , we direct the AO to consider only the segmental results of the AEs transactions and also consider the internal TNMM for the purpose of bench marking assessee’s transactions of software development services before arriving at the ALP. Reimbursement of expenses on cost to cost basis - HELD THAT:- In the earlier A.Y, the TPO had included the reimbursement of cost to the operating cost of the international transaction for arriving at the ALP, but in the relevant A.Y, the AO treated it as a separate international transaction and has added a markup of 10% to make the adjustment. We find that, before the TPO, the assessee has made detailed submissions that the reimbursement of the expenditure is done both by the assessee as well as its AEs without any in markup and therefore, there should not be any adjustment on such account. He submitted that this reimbursement of expenditure is mostly on the travel cost of the deputed employees both of the assessee as well as its AEs. In view of the decision of the Coordinate Bench in the assessee’s own case in the earlier A.Ys on similar set of facts, we hold that the reimbursement of expenditure cannot be treated as a separate international transaction with a markup on the same. Therefore, the adjustment on account of such transaction is deleted. Addition/adjustment made on account of corporate guarantee fee - HELD THAT:- We find that this issue is covered in favour of the assessee by the decision of the various Benches of the Tribunal and particularly in the case of Rain Cements [2017 (11) TMI 1750 - ITAT HYDERABAD] wherein it has been held that the amended provision is applicable only w.e.f. A.Y 2013-14 and not for the period prior thereto. Both of us i.e. A.M and JM are signatory to the said decision. Therefore, we allow this ground of appeal and delete the addition/adjustment made on account of corporate guarantee fee. Deduction u/s 10A - net income from sale of 3rd party licenses was credited to the P&L A/c. - AO observed that the profit derived from trading of 3rd party license is not the profit derived from the software development and export, the same is eligible for deduction u/s 10A and is therefore, to be excluded from the profit eligible for deduction u/s 10A - HELD THAT:- Except for relying on the contentions made before the AO, the learned Counsel for the assessee has not been able to demonstrate as to how it will be eligible for deduction u/s 10A or as to how it is derived from software development and export. Since the same has been excluded both from the export as well as from the total turnover, the net result is “Nil” and there is no prejudice caused to the assessee. In view of the same, we do not see any reason to interfere with the order of the AO on this issue and the assessee’s ground of appeal rejected. Issues Involved: Deduction u/s 10A, Transfer Pricing (TP) Adjustments, Reimbursement of Expenses, Corporate Guarantee, TDS Credit, Bad Debts, Penalty Proceedings.Issue-wise Detailed Analysis:1. Deduction u/s 10A:The Revenue's appeal contested the DRP's direction to delete the addition made by the AO by reducing implementation expenditure and internet connectivity charges from the export turnover for the purpose of deduction u/s 10A. The Tribunal upheld the DRP's decision, referencing the Karnataka High Court's ruling in Commissioner Of Income-Tax And Another vs. Tata Elxsi Ltd and the jurisdictional High Court's decision in BA Continuum. It was affirmed that if any expenditure is excluded from the export turnover, it should also be excluded from the total turnover while computing the deduction u/s 10A. Consequently, the Revenue's appeal was dismissed.2. Transfer Pricing (TP) Adjustments:The assessee's appeal involved multiple grounds related to TP adjustments. The primary issue was the rejection of the internal TNMM by the TPO, which was used by the assessee to determine the ALP for transactions with its AEs. The Tribunal referred to its previous decisions in the assessee's own case for earlier A.Ys, where it was held that internal TNMM cannot be ignored. The Tribunal directed the AO to consider only the segmental results of AE transactions and the internal TNMM for benchmarking the assessee’s transactions of software development services. Grounds related to TP adjustments were remanded to the AO for reconsideration.3. Reimbursement of Expenses:Regarding the reimbursement of expenses on a cost-to-cost basis, the Tribunal found that this issue was covered in favor of the assessee by previous decisions. It was held that such reimbursements do not require any markup and should not be treated as a separate international transaction. Consequently, the adjustment on account of such transactions was deleted.4. Corporate Guarantee:The assessee argued that corporate guarantees should not be considered an international transaction as per section 92B of the Act for the relevant period. The Tribunal agreed, referencing decisions from various benches and specifically the case of Rain Cements, which held that the amended provision is applicable only from A.Y 2013-14. Therefore, the addition/adjustment made on account of corporate guarantee fee was deleted.5. TDS Credit:The assessee's ground regarding the allowance of TDS credit was remitted to the AO with a direction to allow the same in accordance with law after verification of the assessee’s claim.6. Bad Debts:The AO had excluded the net income from the sale of third-party licenses from the profit eligible for deduction u/s 10A. The Tribunal noted that the exclusion was made from both the export and total turnover, resulting in no prejudice to the assessee. Therefore, the assessee’s ground of appeal was rejected. For A.Y 2010-11, there was a discrepancy in the figure of bad debts written off. The Tribunal remanded the issue to the AO for verification and adjudication in accordance with law.7. Penalty Proceedings:The grounds related to the initiation of penalty proceedings u/s 271(1)(c), 271AA, and 271BA were dismissed as premature.Summary of Judgments:- Revenue’s Appeal for A.Y 2009-10: Dismissed.- Assessee’s Appeals for A.Y 2009-10 & 2010-11: Partly allowed.Order Pronounced: The order was pronounced in the Open Court on 30th November, 2017.