2021 (3) TMI 1403 - AT - Income Tax

Transfer Pricing Appeal: Inclusion of Comparables Upheld, Communication Expenses Deductible, Software Import Disallowance

The Tribunal partly allowed the appeal, upholding the inclusion of certain comparables for Transfer Pricing adjustments while excluding others based on ... TP Adjustment - Comparable selection - HELD THAT:- Companies functionally dissimilar with that of assessee need to be deselected. Deduction u/s 10AA - reducing the communication expenses and insurance charges from the export turnover while determining the adjusted export turnover for computing the eligible deduction u/s 10AA - HELD THAT:- DRP following the jurisdictional High Court judgment in the case of CIT v. Tata Elxsi Ltd [2011 (8) TMI 782 - KARNATAKA HIGH COURT] directed the AO to reduce the impugned expenses both from the export turnover as well as the total turnover. Further, the judgment of the Hon’ble Karnataka High Court has been upheld by the Hon’ble Supreme Court in the case of CIT v. HCL Technologies Ltd.[2018 (5) TMI 357 - SUPREME COURT]. TDS u/s 195 - disallowance by invoking the provisions of section 40(a)(i) on import of software taxes were deductible at source u/s. 195 - whether the software was purchased for use, the transaction was in the nature of purchase of product and there were no taxes deductible at source - HELD THAT:- This issue is covered by the latest judgment of the Hon’ble Supreme Court in the case of Engineering Analysis Centre of Excellence (P.) Ltd. [2021 (3) TMI 138 - SUPREME COURT] wherein it was held that transaction relating to software are in the nature of sale and not license, no copyright or part of any copyright is licensed to the assessee. The non-resident owner continues to have proprietary rights in the software and use of software by the Indian company is limited to making back-up copy and redistribution. So payment received for sale of computer software is business income. As such, software purchased is in the nature of purchase and sale of product and no TDS is deductible. Accordingly, we allow this ground of appeal by the assessee. Nature of expenditure - expenditure on purchase of software - HELD THAT:- As software expenditure has to be treated as revenue expenditure. Accordingly there is no question of granting any depreciation and purchase of software has to be allowed as a deduction, though there was no TDS made by the assessee. Issues Involved:1. Transfer Pricing (TP) Adjustment on Inclusion/Exclusion of Comparables2. Reduction of Communication Expenses and Insurance Charges from Export Turnover for Deduction u/s 10AA3. Disallowance under Section 40(a)(i) for Import of Software4. Disallowance of Depreciation on Software5. Treatment of Software Purchase ExpenditureDetailed Analysis:1. Transfer Pricing (TP) Adjustment on Inclusion/Exclusion of ComparablesThe primary issue revolves around the inclusion and exclusion of specific comparables for determining the Arm's Length Price (ALP).Genesys International Corporation Ltd.:- Assessee's Argument: The company should be excluded due to its high profit margin fluctuations (50.08% for FY 2011-12 and 108.28% for FY 2010-11), making it incomparable.- Revenue's Argument: High profit margins alone do not warrant exclusion unless functional dissimilarity is proven.- Tribunal's Decision: The Tribunal upheld the inclusion of Genesys International Corporation Ltd., citing that high profit margins alone are not grounds for exclusion.Infosys Ltd. and Mindtree Ltd.:- Assessee's Argument: These companies have high turnovers, brand value, and own significant intangibles, making them incomparable.- Revenue's Argument: The assessee also benefits from the brand value of its parent company, thus making these companies comparable.- Tribunal's Decision: The Tribunal directed the exclusion of Infosys Ltd. and Mindtree Ltd., referencing previous rulings that excluded such companies due to their size and brand value.Larsen & Toubro Infotech Ltd.:- Assessee's Argument: The company should be excluded due to its high turnover.- Revenue's Argument: High turnover alone does not justify exclusion.- Tribunal's Decision: The Tribunal excluded Larsen & Toubro Infotech Ltd., referencing previous decisions that found it not comparable due to its software product segment.Persistent Systems Ltd.:- Assessee's Argument: The company should be excluded due to high turnover and mergers during the year.- Revenue's Argument: High turnover and mergers do not justify exclusion.- Tribunal's Decision: The Tribunal excluded Persistent Systems Ltd., noting it was a software product company without segmental information on software development services.Inclusion of Comparables:- R S Software (India) Ltd.: Excluded due to its onsite operations.- Akshay Software Technologies Ltd.: Excluded due to high trading income and foreign currency expenditure.- Thinksoft Global Services: Excluded as it primarily provides software validation and verification services.- Nucleus Software Export Ltd.: Excluded due to involvement in software product development without segmental details.2. Reduction of Communication Expenses and Insurance Charges from Export Turnover for Deduction u/s 10AA- Issue: Whether communication expenses and insurance charges should be reduced from export turnover for computing the deduction u/s 10AA.- Tribunal's Decision: The Tribunal upheld the DRP's direction to reduce these expenses from both export turnover and total turnover, aligning with the Karnataka High Court's judgment in CIT v. Tata Elxsi Ltd. and the Supreme Court's ruling in CIT v. HCL Technologies Ltd.3. Disallowance under Section 40(a)(i) for Import of Software- Issue: Disallowance of Rs.3,59,439 for non-deduction of TDS on software import.- Tribunal's Decision: The Tribunal allowed the appeal, referencing the Supreme Court's judgment in Engineering Analysis Centre of Excellence (P.) Ltd. v. CIT, which held that such transactions are in the nature of sale, not license, and thus no TDS is deductible.4. Disallowance of Depreciation on Software- Issue: Disallowance of depreciation on software.- Tribunal's Decision: The issue was rendered infructuous due to the Tribunal's decision on the nature of software expenditure being revenue.5. Treatment of Software Purchase Expenditure- Issue: Whether the expenditure on software purchase should be treated as capital or revenue.- Tribunal's Decision: The Tribunal held that the software expenditure should be treated as revenue expenditure and allowed as a deduction, despite no TDS being made by the assessee.Conclusion:The appeal by the assessee was partly allowed, with specific directions on the inclusion/exclusion of comparables, treatment of expenses for deduction u/s 10AA, and the nature of software purchase expenditure.