2021 (11) TMI 1129 - AT - Income Tax

Tribunal adjusts transfer pricing, allows deductions under Section 80JJAA, and permits education cess as business expense.

The Assistant Commissioner of Income Tax, Circle - 6 (1) (1), Bengaluru. Versus M/s. SAP Lab Pvt. Ltd.

The Tribunal partly allowed the assessee's appeal, directing the Transfer Pricing Officer to recompute the Arm's Length Price, the Assessing Officer to ... TP Adjustment - comparable selection - assessee in engaged in the business of provision of Software Development Services (SWD services), to its wholly owned holding company - HELD THAT:- Companies functionally dissimilar with that of assessee is directed to be deleted. Deduction u/s 80JJAA - AO denied the claim of the assessee for deduction as that persons working in software units cannot be regarded as workmen as contemplated by the provisions of section 80JJAA AND Deduction under section 80JJAA cannot be allowed in respect of additional wages paid to employees who are working in 10A units because under the provisions of 80A(4) of the Act, the assessee cannot enjoy benefits both under sections 10A and 80JJAA of the Act in respect of the same income. - DRP also took the view that, the assessee has not given Form 10DA for each 10A unit separately - HELD THAT:- As assessee has accepted the decision of the DRP in so far as ground No.6.1 is concerned and is willing to give the details as per each unit. The deduction can therefore be considered for each 10A unit separately. The assessee is directed to furnish the necessary details in this regard and the AO may examine the same in accordance with law. As in assessee’s own case for Assessment Year 2007-08 [2016 (6) TMI 1333 - ITAT BANGALORE] sub-section 1 of 80JJAA clearly show that the deduction is given on profits and gains derived from industrial undertaking engaged in manufacture of production of article or thing. It is only for quantification of the amount that 30% is applied. In our opinion the deduction is very much linked to the profits of the undertaking. We are therefore unable to accept this line of argument taken by the counsel. In the result, we hold that assessee is not eligible for deduction u/s.80JJAA of the Act, in respect of its units 2 , 3 and 4. However, denial of such claim in respect of unit-1, where it was not claiming any deduction, in our opinion is incorrect. We, therefore set aside the orders of authorities below for the limited purpose of quantifying the eligible deduction u/s.80JJA in respect of Unit-1. Employees engaged in software industry cannot be regarded as workmen for the purpose of section 80JJAA - Thus ground should be decided in the light of the directions given above by the AO afresh after affording opportunity of being heard to the assessee. Adjustment made under section 40(a)(ia) in arriving at the profits from business eligible for a deduction under section 10A - HELD THAT:- There is no dispute regarding genuineness of the expenditure that was disallowed and the fact that the said expenditure is otherwise allowable as deduction in computing income from business. In such circumstances, even if the expenditure is disallowed u/s.40(a)(i) of the Act, the result will be that the disallowance will go to increase the profits of the business which is eligible for deduction u/s.80-IC of the Act and consequently the deduction u/s.10A of the Act should be allowed on such enhanced profit consequent to disallowance u/s. 40(a)(i) of the Act. In this regard, we find that two High Courts viz., in the case of CIT v. Gem Plus Jewellery India Ltd.[2010 (6) TMI 65 - BOMBAY HIGH COURT] and ITO vs. Kewal Construction[2013 (7) TMI 291 - GUJARAT HIGH COURT] have taken the view that when disallowance u/s. 40(a)(ia) of the Act goes to enhance the profits that are eligible for deduction under Chapter VIA of the Act, the deduction under Chapter VIA should be allowed on such increased profit. This position has also been now confirmed by the CBDT in its Circular No.37/2016 dated 02.11.2016. In view of the aforesaid decisions and the CBDT Circular No.37/2020, we are of the view that there is no merit in ground no.4 raised by the revenue. Exclusion of expenses incurred in foreign currency from total turnover and export turnover while computing deduction u/s.10A - HELD THAT:- Taking into consideration the decision rendered in the case of CIT v. Tata Elxsi Ltd [2011 (8) TMI 782 - KARNATAKA HIGH COURT] we are of the view that communication charges and expenses incurred in foreign exchange should be excluded both from export turnover and total turnover. We are of the view that as of today, law declared by the Hon'ble High Court of Karnataka which is the jurisdictional High Court is binding on us. Moreover, the order of the Hon’ble Karnataka High Court has been upheld in the case of CIT v. HCL Technologies Ltd. [2018 (5) TMI 357 - SUPREME COURT] The ground of the revenue is therefore dismissed. Allowance of deductible expenses education cess - HELD THAT:- This issue is settled by APTEAN INDIA PVT. LTD. VERSUS THE DY. COMMISSIONER OF INCOME TAX, CIRCLE-1 (1) (2) , BENGALURU. [2020 (11) TMI 958 - ITAT BANGALORE] wherein it was held that education cess and secondary and higher education cess is deductible as business expenditure under section 37 (1) of the Act for determining the assessed income. As per TATA STEEL LIMITED case [2019 (12) TMI 750 - ITAT MUMBAI]education cess and secondary and higher education cess is not in the nature of tax which is not deductible expenditure. Following the decisions referred to above, we allow the additional ground of appeal. Issues Involved:1. Transfer Pricing Adjustment2. Deduction under Section 80JJAA3. Exclusion of Expenses Incurred in Foreign Currency from Total Turnover and Export Turnover4. Deductibility of Education CessIssue-wise Detailed Analysis:1. Transfer Pricing Adjustment:The primary issue in the assessee's appeal concerns the determination of the Arm’s Length Price (ALP) for the international transaction of rendering Software Development Services (SWD services) to its Associated Enterprises (AEs). The assessee used the Transaction Net Margin Method (TNMM) and selected Operating Profit/Operating Cost (OP/OC) as the Profit Level Indicator (PLI). The assessee's OP/OC was 5.08%, and it selected 16 comparable companies with an average profit margin of 9.90%. The Transfer Pricing Officer (TPO) accepted TNMM but chose 13 different comparable companies, resulting in an average profit margin of 24.82%. This led to an addition of Rs. 198,69,63,348 to the assessee's income.The assessee sought exclusion of Persistent Systems Ltd. and Sasken Communication Technologies Ltd. and inclusion of FCS Software Solutions Ltd. based on the ITAT Bangalore Bench's decision in a similar case. The Tribunal upheld the exclusion of Persistent Systems Ltd. and Sasken Communication Technologies Ltd. and inclusion of FCS Software Solutions Ltd., directing the TPO to compute the ALP accordingly.2. Deduction under Section 80JJAA:The assessee claimed a deduction under Section 80JJAA amounting to Rs. 4,26,67,792, which was denied by the AO on two grounds: (1) software unit employees were not considered as workmen, and (2) deduction under Section 80JJAA could not be claimed for 10A units due to Section 80A(4). The DRP upheld the AO's decision, emphasizing the need for unit-wise computation. The Tribunal directed the AO to consider the deduction for each 10A unit separately, following the assessee's willingness to provide unit-wise details. The Tribunal also upheld the decision that software industry employees could not be regarded as workmen for Section 80JJAA purposes, based on a previous ruling.3. Exclusion of Expenses Incurred in Foreign Currency from Total Turnover and Export Turnover:The Tribunal addressed the issue of excluding expenses incurred in foreign currency from both total turnover and export turnover while computing the deduction under Section 10A. Citing the Karnataka High Court's decision in CIT v. Tata Elxsi Ltd. and the Supreme Court's affirmation in CIT v. HCL Technologies Ltd., the Tribunal upheld the exclusion of such expenses from both total and export turnover.4. Deductibility of Education Cess:The Tribunal considered the additional ground regarding the deductibility of education cess. Citing the ITAT Bangalore Bench's decision in Capten India Pvt. Ltd. and other precedents, the Tribunal held that education cess and secondary and higher education cess are deductible as business expenditures under Section 37(1). The additional ground of appeal was allowed.Conclusion:The assessee's appeal was partly allowed, with directions for the TPO to recompute the ALP, the AO to consider unit-wise deductions under Section 80JJAA, and the inclusion of education cess as a deductible expense. The revenue's appeal was dismissed, upholding the DRP's decisions on risk adjustment and exclusion of foreign currency expenses from total turnover.