TaxTMI 
TaxTMI 
2013 (9) TMI 189
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....business. For the A.Y.2007-08, the assessee filed its return of income on 31.10.2007 declaring total income of Rs. 8,39,46,266/- after claiming deduction u/s.10A, amounting to Rs.50,75,75,651/- and deduction u/s.80JJAA amounting to Rs.11,09,95,555/-. In the proceedings u/s.143(3) r.w.s.144C, the Assessing Officer and the TPO proposed certain corporate tax and transfer pricing adjustments to the returned income of the assessee which were incorporated in the draft assessment order dated 20.12.2010, The Assessing Officer made the following additions/disallowances to the total income of the assessee : Sl No. Nature of addition/disallowances Amount (Rs.) Amount (Rs.) 1a Reduction of the following amounts from 'export turnover' for computing deduction u/s.10A of the Act -Data link charges 2,35,08,825 -Certain expenditure incurred in foreign currency 33,09,33,846 1b. Reduction in total 10A deduction (Rs.59,75,75,651 - Rs. 56,01,43,562 3,74,32,089 2. Capitalisation of expenses incurred on purchase of software debited to the Profit & Loss account 3,83,71,306 3. ....
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....ansactions, which is a pre-requisite condition to make any adjustment under the provision of Chapter X of the Act. Comparability analysis adopted by the TPO/DCIT for determination of arm's length price 12. The learned TPO/DCIT grossly erred on facts in benchmarking the transactions of the captive software services of the Appellant with companies operating as full-fledged entrepreneurs, without considering the differences in the functions performed, assets employed and risk undertaken by the Appellant vis-à-vis comparable companies. 13. The learned TPO/DCIT erred on facts in rejecting the comparable companies arrived at in the Transfer Pricing Study, without considering the functional and risk analysis of the Appellant. 14. The learned TPO/DCIT erred in law in applying arbitrary filters to arrive at a fresh set of companies as comparables to the Appellant, without establishing functional comparability. 15. The learned TPO/DCIT grossly erred in law in deviating from the uncontrolled party transaction definition as per the Income-tax Rules,....
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....rable companies. 26. The learned TPO/DCIT erred in law in not granting the benefits of proviso to section 92C(2) of the Act available to the Appellant." Though the assessee has taken various grounds as narrated above, the learned representative mainly argued the grounds relating to turnover filter and filter relating to functionally different companies. 5. The assessee undertook a transfer pricing study for establishing the arm's length price of its international transactions with the Associated Enterprises (AEs). The transfer pricing study was carried out by an independent external consultant in accordance with the provisions of the Act, read with Income-tax Rules 1962. An analysis was undertaken to determine the functions performed, risks assumed and assets utilized (FAR analysis) by the assessee and its AEs in respect of the international transactions between them. Based on the TP study, the independent external consultant concluded that the price charged by the assessee in respect of its international transaction with AEs is at arm's length. The key features of the TP study undertaken for software services are as under ....
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.... NA 21.83% Average (Arithmetic Mean) 11.03% 10.46% 13.55% 10.86% 6. The assessee made various submissions before the TPO to justify the arm's length nature of its international transaction. While determining the ALP of the assessee in relation to the software services to its AEs, the TPO did not accept the economic analysis undertaken by the assessee and conducted a fresh economic analysis and undertook a fresh analysis, for which the TPO chose the following 26 companies as comparables : No. Name of the Company Turnover Gross Margin 1 Accel Transmatic Ltd.(Segment) 9.68 21.11 2 Avani Cimcom Technologies Ltd. 3.55 52.59 3 Celestial Labs Ltd. 14.13 58.35 4 Batamatics Ltd. 54.51 1.38 5 E-Zest Solutions Ltd. 6.26 36.12 6 Flextronics Software Systems Ltd. (Segment) 848.66 25.31 7 Geometric Ltd. (Segment) 158.38 10.71 8 Helio c Matheson Information Technology Ltd. 178.63 36.63 9 iGate Global Solutions Ltd. 747.27 7.49 10 Infosys Technologies Ltd. 13,149.00 40.30 11 Ishir Infortech Ltd. 7.42 30.12 12 KALS In....
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....oviso to section 92C(2) of the Act. 7. The assessee appealed against the draft assessment order before the DRP. However, the DRP agreed with the views of the Assessing Officer/TPO and rejected the contentions raised by the assessee. Thus the adjustments were confirmed by the DRP vide directions dated.14.09.2011. The final assessment order was passed on 13.10.2011, by making TP adjustment of Rs.49,23,67,720/-, which was arrived at as under, considering the computation of ALP, price received vis-à-vis the Arm's length price : Computation of Arm's Length Price: The arithmetic mean of the PLI is taken as the arm's length margin. Based on this, the ALP of the software development services rendered by the taxpayer to its AE(s) is computed as under : Arithmetic mean PLI : 25.14% Less : Working capital adjustment : 0.64% Adjusted Arithmetic mean PLI : 24.50% Arm's Length Price : Operating cost Rs.519,84,56,000 Arm's Length Margin 24.50% of the operating cost Arm's ....
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....see's profit margin would fall within the ALP. For taking lower turnover limit of Rs. 200 crores, Ld. AR has relied on the ITAT Bangalore decision in case of Genesis Integrating Systems (ITA 1231/B/2010) and Triology E-business (ITA 1054/B/2011) order dated 23.11.2012. It may be submitted that in the case of Genesis, the assessee's turnover was merely Rs. 8 crores, it was held that the turnover filter (upper limit) of Rs. 200 crores (being 25 times of the tested company) should be applied to exclude the super big companies, as comparables. For this basis, a mere reference has been made to Dun and Bradstreet study of 2005 of software industry in India, which has categorisied the software companies of India on the basis of turnover in order to study their financial trends over the period of study (two years). In case of Triology also, the turnover was of only Rs. 48 crores, and hence turnover filter of Rs. 200 crores was adopted. 4.2 It is submitted that in both these cases, turnover filter has been used for the upper limit of the comparables. Further, the Dun and Bradstreet study (D & B Study) cannot be followed to adopt both the upper and lower limit of turnover as a rigid compartm....
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....ed, mutatis mutandis to the software industry which depends primarily on manpower resources and the manpower cost to operating cost is universally and generally 60-70%, irrespective of the scale of operations/turnover. 4.3 While the upper limit of turnover adopted in Genesis and Triology, based on D & B Study may appear reasonable and logical filter in the given facts of those cases, it would be absurd to discard a comparable having Rs. 210 crores against the turnover of Rs. 190 crores of the tested company, for the sake of conforming to the unreliable D & B study, which is not basically and fundamentally relevant to adopting a turnover filter for the transfer pricing study. Even other-wise, the Tribunal orders do not lay down any all encompassing principle to be universally applied, at least not with regard to the lower turnover limit in a case of with turnover of Rs. 598 crores, as that of the assessee. The case laws may be applied only in cases having similar turnover for the sake of upper turnover margin of Rs. 200 crores as filter. As explained above, there is no finding even in the D&B study that such segments of software industry conform to any fixed rate or range of prof....
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....thmetic Mean 17.77 It is ordered accordingly. Filter based on functional difference : 11. The learned chartered accountant pleaded that out of the above six comparables short-listed as comparables based on the turnover filter, the following two companies, namely (i) Tata Elxsi Ltd; and (ii) M/s. Flextronics Software Systems Ltd., deserve to be eliminated for the following reasons : Tata Elxsi Limited (seg) : The company operates in the segments of software development & services segment which comprises of embedded product design services, industrial design and engineering services and visual computing labs & system integration services segment. There is no sub services break up/information provided in the annual report or the databases based on which we could compute the margin from software services activity only. The company has also in its response to the notice u/s 133(6 stated that it cannot be considered as comparable to any other software services company due to its complex nature. Accordingly, the Appellant wishes to submit that Tata Elxsi should be excluded from the list of comparables. ....
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.... policy of charging depreciation on its assets on a "straight line basis" at a higher rate as against most of the company adopted by the learned TPO, which either follow "written down value" method of depreciation or charge depreciation at lower rates in comparison to the assessee. Given the above, as stated under Rule 10B of the Income tax rules 1962, there is a need to make appropriate depreciation adjustment to eliminate the difference in the accounting policies of the Appellant and the comparable companies. 13. The Appellant's contentions find support in the following rulings: • Mentor Graphics (Noida) Pvt. Ltd. v. Dy. Commissioner of Income tax [(2007) 109 ITD 101 (Delhi)] (Page 573-576 of Paperbook II) • E-gain Communication Pvt. Ltd. v. ITO [2008-TIOL-282-ITAT-PUNE] (Page 581-584 of Paperbook II) • Schefenacker Motherson Ltd. v. Income Tax Officer [2009-TIOL-376-ITAT-DEL] (Page 585- 586 of Paperbook II) • 24/7 Customer.com Pvt. Ltd. v. DCIT [ITA No. 227/Bang/2010] 14. The Appellant wishes to submit detailed depreciation adjustment calculation as follow: Step 1: Depreciation charged by companies selected by TPO was ....
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....is a ratio of its gross block of 25% as against 10% of the comparable companies. The assessee has not stated the depreciation as a percentage of operational cost nor has any evidence been placed on record to show that the difference in depreciation is due to any operational reasons. As discussed (supra), there could be several reasons for difference in depreciation between companies like, rates of depreciation, age of the assets etc., and therefore adjustment towards depreciation can be granted only if there are operational differences that affect comparability. We remit the issue of depreciation raised by the assessee in the additional grounds to the file of the Assessing Officer/TPO with direction to examine and consider the claim for adjustment towards depreciation in the light of our observations from paras 19.3 to 19.8 of this order and to dispose the matter expeditiously after affording adequate opportunity of being heard to the assessee. It is ordered accordingly." Apart from the above Tribunal decision, the other decisions of Delhi and Pune benches of the ITAT have also taken similar view regarding depreciation adjustment. Hence, following the above decision, we are dire....
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.... 516,52,67,202 ALP (%) 24.50% 24.50% ALP - (A) 647,20,77,720 643,07,57,666 Price charged in the international transaction -(B) 594,15,42,822 594,15,42,822 Operating revenue -(c) 597,97,10,100 597,97,10,100 Revenue from non-AE transaction D= (c) -(b) 3,81,67,118 ALP of international transaction E= (A) -(D) 643,39,10,602 643.07,57,666 Adjustment F=(E) - (B) 59,23,67,720 48,92,14,784 Margins 15.07% 15.77% 19. The learned DR submitted that if any arithmetical mistakes are there, this may be sent back to the Assessing Officer for reappraisal of the claim of the assessee. 20. We have heard the rival submissions and considered the facts and materials on record. As this mistake has to be verified at the level of the Assessing Officer, we accept the contention of the learned DR and restore this issue back to the file of the Assessing Officer for doing the needful adjustment. 21. Now let us turn to the corporate tax issues. Regarding the computation of deduction u/s.10A of the Act, the assessee has taken the following grounds : 3. The learned DCIT has erred, in law and in fac....
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....ort turnover. Therefore the formula for computation of the deduction under section 10A, would be as under : Profits of the business of the undertaking x Export turnover Total turnover (Export turnover + domestic turnover) 11. In that view of the matter, we do not see any error committed by the Tribunal in following the judgements rendered in the context of Section 80HHC in interpreting Section 10A when the principle underlying both these provisions is one and the same. Therefore, we do not see any merit in this appeals." 24. We have heard the learned DR and considered the facts and materials on record. The decision of the Hon'ble Karnataka High Court in assesee's own case has been filed on record. The Hon'ble High Court has allowed the claim of the assessee. In a nutshell, this issue has been decided in favour of the assessee by the Hon'ble High Court for the assessment year 2004-05. Respectfully following the same, we also allow this ground of appeal of the assessee....
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.... CIT [2008] 111 ITD 112 has laid out the following principles in determining the issue of deductibility of software expenses, which was upheld by the Delhi High Court as well (TS-639-HC-2011). Extract of the case law is produced before the Tribunal. It has been held by the Delhi High Court as under: "Having regard to the fact that software becomes obsolete with technological innovation and advancement within a short span of time, it can be said that where the life of the computer software is shorter (say less than 2 years), it may be treated as revenue expenditure, Any software having its utility to assessee for a period beyond 2 years can be considered as accrual of benefit of enduring nature. However, that by itself will not make expenditure incurred on software as capital in nature and the functional tests as discussed above will also need to be satisfied" The Delhi High Court, in the case of CIT v. Asahi India Safety Glass Ltd. (TS-640-HC-2011)held that expenditure incurred for licence fee, annual technical support fee, etc does not result in creation of new asset or a new source of income for the assessee and hence, would be revenue in nature (ex....
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....onal judgments: • Toyota Kirloskar Motors Pvt. Ltd. - Karnataka High Court (ITA No.174/ 2009 dated 23rd March, 2011) • Robert Bosch Engineering & Business Solutions Ltd. v. Asstt. CIT [IT Appeal No. 980 (Bang.) of 2008, dated 11-9-2009] Non-jurisdictional judgments: • ITO v. Spice Communications Ltd. [2010] 35 SOT 78 (Delhi) • Spice Elastic (P.) Ltd. [IT Appeal No. 5161(Mum.) of 2008 - AY 2004-05] 29. Per contra, the learned DR submitted that the software can be an operating software or an application software. Sometimes, the software is a part and parcel of hardware like car and the corroborator. At best, the matter can go back to the Assessing Officer to bifurcate the software expenses as capital and revenue. 30. In his rejoinder, the learned chartered accountant submitted that he has no objection if the Tribunal is restoring this issue back to the Assessing Officer to reappraise this issue with respect to the expenditure of Rs. 10 lakhs and above. 31. We have heard the rival submissions and considered the facts and materials on record. We deem it fit and proper to restore this issue back to the file of the Assessing....
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....ross total income of the assessee should include profits and gains derived from an industrial undertaking engaged in the manufacture or production of an article or thing; • The eligible undertaking should not have been formed as a result of splitting-up or reconstruction of a business already in existence; • The eligible undertaking should employ at least 100 workmen. Further, the additional employees should be in excess of 10% of the workforce as on the last day of the immediately preceding previous year; • The 'regular workman' should - * not be a casual workman * not be a worker employed through contract labour * be employed for at least 300 days during the previous year • An audit report should be furnished along with the return of income. If the above conditions are fulfilled, the eligible assessee would be able to claim 30% of the 'additional wages' as a deduction, which would be over and above the expenditure on wages w....
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....aws wages exceeding one thousand six hundred rupees per mensem or exercises either by the nature of the duties attached to the office or by reason of the powers vested in him, functions mainly of a managerial nature." Thus, the definition of 'workman' is very comprehensive. The definition clearly specifies the persons included therein and those excluded. Further, the main part of the definition refers to various types of workers and includes those engaged in skilled and technical work as well. • The Appellant wishes to submit that the deduction is claimed in respect of the salary paid to software engineers who carry out software development work. Since they are employed to carry out work in a technical capacity, they would fall within the purview of the definition of workmen. Further, the Appellant itself excludes those employees who are predominantly engaged in carrying out of administrative, managerial and supervisory functions and no deduction has been claimed in relation to remuneration paid to such workmen. • "Technical"  ....
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....mployed mainly in a managerial or administrative capacity; or (b) he has to be employed in a supervisory capacity should be drawing wages exceeding one thousand six hundred rupees per mensem Based on the above exclusion conditions, the Appellant wishes to submit that it excludes employees engaged in a managerial or administrative capacity, or those engaged in a supervisory capacity and drawing wages exceeding Rs 1,600 per month. • Further, we wish to emphasize that the mere fact that a person draws wages exceeding Rs 1,600 per month does not by itself disentitle that person from being regarded as a 'workman'. The person must be necessarily also employed in a 'supervisory capacity'. • Mere performance of some supervisory duties would not result in the exclusion of the employee from the definition of workman. Further, in determining whether a person is employed in a supervisory capacity or otherwise, the mere designation is not decisive of the nature of employment. ....
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....have also been brought out in the following judicial precedents, on which we wish to place reliance: • Arkal Govind Raj Rao v Ciba Geigy of India Ltd, Bombay (1985) Supreme Court [2 LU 401]) • All India Reserve Bank Employees' Assn v Reserve Bank of India (1965) Supreme Court [2 LU 175, 188] • We also wish to highlight the judgement of the Hon'ble Bangalore Tribunal in the case of Texas Instruments (India) (P.) Ltd (115 TTJ 976), which is engaged in the development of computer software. The Hon'ble Tribunal held that the employees of the company were workmen' for the purposes of section 8OJJAA and the company which was engaged in the development of computer software was eligible for deduction under section 80JJA (copy of the case law is enclosed at page 540-548 of the Paperbook II). • It would be pertinent to note the objectives with which section 80JJAA was introduced into the tax legislation. Section 80JJAA was introduced into the by the Finance (No 2) Act, 1998, to be operative from April 1, 1999. The Finance Minister's speech as well as the memorandum explaining the provisions of the Finance Bill refer to deduction being intro....