AI Drafter 
TaxTMI 
TaxTMI 
2015 (7) TMI 1049
X X X X Extracts X X X X
X X X X Extracts X X X X
....income under MAT provisions of sec.115JB at Rs. 2,20,24,606/-. During the assessment proceedings u/s 143(3) of the Act, the Assessing Officer (AO) observed that the assessee had entered into an international transaction with its Associated Enterprises (AE) for rendering software development services. The determination of the arms' length price (ALP) of the international transaction was referred to the Transfer Pricing Officer (TPO) u/s 92CA of the Act and on receipt of the order from the TPO, the AO proposed the draft assessment order proposing to make an addition of Rs. 2,79,48,656/- u/s 92CA of the Act. The draft assessment order was forwarded to the assesseeIT( company in response to which assessee expressed its willingness to file an appeal before the CIT(A) and requested the AO to pass final order. The AO therefore, passed final assessment order making addition of the adjustment u/s 92CA of the Act as proposed by the TPO and also making the following disallowances: i. Salary expenses of Mr.Prakash Bare, an expatriate employee on whose behalf income-tax of Rs. 14,85,677/- was paid by the assessee and claimed as an expenditure. ii. Reimbursement of Rs. 9,37,988....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t the assessee wants exclusion on functional dissimilarity and as to how the issues are covered in favour of the assessee by various decisions of the Tribunal. The assessee is seeking exclusion of only three companies i.e. Bodhtree Consulting Ltd., Tata Elxsi (segment) and Infosys Technologies Ltd., from the final list of comparables. It is stated by the learned counsel for the assessee that the assessee itself had adopted all these companies as comparables in its TP study, but however, it had challenged the said companies before the TPO as well as the CIT(A) on functional dissimilarity. The learned Departmental Representative was also heard who relied upon the orders of the authorities below. 6. Having regard to the rival contentions and the material on record, we find that the assessee is a subsidiary of Rambus Ltd., Cayman Islands. Assessee is engaged in the business of rendering software design and development services for its AE in USA. Assessee has accordingly entered into an agreement with its AE for rendering such software development and support services. The financial results of the assessee for the relevant transaction are as under: Particulars Amount (Rs.) O....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r the assessee that the findings of this Tribunal in the case of M/s.Airbus India Operations Pvt. Ltd., are applicable to the case before us. i) As regards Bodhtree Consulting Co., is concerned, the learned counsel for the assessee submitted that though the assessee had selected Bodhtree Ltd. as a comparable company in its T.P. Study, it had challenged it before CIT (Appeals) on the ground of functional dis-similarity but CIT(A) has confirmed the assessment order and now the assessee is challenging its inclusion in the final list of comparables. He submitted that it is to be rejected as a comparable as it is a software product company and not a software development services company like assessee and also as it earns fluctuating profit margin due to the 'revenue recognition' method followed by it as against the 'cost plus' method (CPM)'followed by the assessee. The learned counsel for the assessee placed specific reliance upon the decision of this Tribunal in IT(TP)A No.35/Bang/2014 dated 10/10/2014 in the case of M/s.Airbus India Operations Pvt. Ltd., in support of his contentions. We find that Tribunal in the case of M/s. Airbus India Operations Pvt. Ltd., (cited supra) has ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ble, when factually it is shown that the said company is a software product company and not a software development services company." 16. Respectfully following the decision of the Tribunal referred to above and taking note of the fact that the facts and circumstances under which the aforesaid company was considered by the TPO as comparable with a software development service provider such as the Assessee for identical reasons, we direct the TPO to exclude the aforesaid company from the list of comparable companies for the purpose of computation of ALP." Respectfully following the decision of the Tribunal on similar set of facts, we direct the AO/TPO to exclude Bodhtree Consulting Ltd. from the final list of comparable companies. 8. The other two companies challenged by the assessee are Tata Elxsi Ltd., and Infosys Ltd., For exclusion of the same, the learned counsel for the assessee had relied upon the decision of the Tribunal in the case of Cisco Systems (India) Pvt. Ltd., (supra) and M/s. Airbus India Operations Pvt.Ltd.(cited supra) wherein it was held that Tata Elxsi and Infosys Ltd., are functionally dissimilar as compared to software development services provi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the set of comparables, on the grounds of turnover and brand attributable profit margin. The TPO, however, rejected these objections raised by the assessee on the grounds that turnover and brand aspects were not materially relevant in the software development segment. 11.2 Before us, the learned Authorised Representative contended that this company is not functionally comparable to the assessee in the case on hand. The learned Authorised Representative drew our attention to various parts of the Annual Report of this company to submit that this company commands substantial brand value, owns intellectual property rights and is a market leader in software development activities, whereas the assessee is merely a software service provider operating its business in India and does not possess either any brand value or own any intangible or intellectual property rights (IPRs). It was also submitted by the learned Authorised Representative that :- (i) the co-ordinate bench of this Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. in ITA No.227/Bang/2010 has held that a company owning intangibles cannot be compared to a low risk captive service provider who does not own a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ucts. It is also seen that the break-up of revenue from software services and software products is not available. In this view of the matter, we hold that this company ought to be omitted from the set of comparable companies. It is ordered accordingly." The decision rendered as aforesaid pertains to A.Y. 2008-09. It was affirmed by the learned counsel for the Assessee that the facts and circumstances in the present year also remains identical to the facts and circumstances as it prevailed in AY 08-09 as far as this comparable company is concerned. Respectfully following the decision of the Tribunal referred to above, we hold that Infosys Ltd. be excluded from the list of comparable companies." 26.3 ........ "26.4 Tata Elxsi Ltd.:- As far as this company is concerned, it is not in dispute before us that in assessee's own case for the A.Y. 2007-08, this company was not regarded as a comparable in its software development services segment in ITA No.1076/Bang/2011, order dated 29.3.2013. Following were the relevant observations of the Tribunal:- II. UNREASONABLE COMPARABILITY CRITERIA : 19. The learned Chartered Accountant pleaded that out o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nics Software Systems Ltd., in the list of comparables. He reiterated the contents of para 14.2.25 of the TPO's order. He also read out the following portion from the TPO's order : "Thus as stated above by the company, the following facts emerge : 1. The company's software development and services segment constitutes three sub-segments i) product design services; ii) engineering design services and iii) visual computing labs. 2. The product design services subsegment is into embedded software development. Thus this segment is into software development services. 3. The contribution of the embedded services segment is to the tune of Rs. 230 crores in the total segment revenue of Rs. 263 crores. Even if we consider the other two sub-segments pertain to IT enabled services, the 87.45% (›75%) of the segment's revenues is from software development services. 4. This segment qualifies all the filters applied by the TPO." Regarding Flextronics Software Systems, the following extract from page 143 of TPO's order was read out by him as his submissions: "It is very pertinent to mention here that the compa....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... with the same and direct the AO/TPO to follow the directions of the CIT(A) while computing the ALP. 12. As regards ground of appeal No.3(g), the learned counsel for the assessee submitted that the assessee is challenging the rejection of otherwise comparable companies rejected by the TPO on account of working capital adjustment. At the time of hearing, this bench asked the learned counsel for the assessee, if the average arithmetic margin of the comparables after exclusion of the above mentioned companies would fall within + or -5% of the assessee's margin. The learned counsel for the assessee submitted that if these companies are excluded, the assessee's margin would fall within + or -5% of the average arithmetic margin of the comparable companies and therefore there would not arise any occasion for any adjustment on account of ALP adjustment and the assessee would not seek their inclusion seriously for this year. Taking the same into consideration, we are not inclined to go into the grounds of appeal raised by the assessee for inclusion of the companies as it would only result in academic exercise at this stage. Therefore, the ground of appeal No.3(g) is rejected as not conte....
X X X X Extracts X X X X
X X X X Extracts X X X X
....his issue before the CIT(A) are placed. It is stated therein that the amount of Rs. 14,85,677/- was debited to profit and loss account of the assessee during the year under consideration on account of tax of indian income of the expatriate employee and as per the agreement between the assessee and the employee Mr.Prakash Bare, the income-tax liability on his salary is to be borne by the company and therefore it is the liability contractually agreed upon by the assessee and is wholly and exclusively for the purpose of business of the assessee and is an allowable deduction u/s 37 of the Act. The learned counsel for the assessee placed reliance upon the following decisions in support of his contention that it is an allowable expenditure: i. Tata Yadogawa Ltd. vs. CIT (2011) 196 Taxman 353 (Jharkhand) and ii. ABN Amro Bank vs. JCIT (2005) 96 TTJ Kol. 1041 The learned Departmental Representative, however, supported the orders of the authorities below and submitted that the employee has to pay his personal income-tax and it cannot be held to be a liability of the assessee-company and therefore it is not allowable as a business expenditure u/s 37 of the Act. 18. Having regard ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ke royalty etc., and any one time payment for the know-how would fall within the expression 'lump sum' if it is fixed and specified in the agreement, although it may be payable in instalments." Further, the Special Bench of the Tribunal at Calcutta in the case of ABN Amro Bank (cited supra) was seized of similar issue i.e. whether tax and interest on the offshore remuneration paid by the assessee therein to its expatriate employee is allowable as business expenditure and at paras.23 to 34 of its order, the Tribunal has held as under: "23. Tax deducted at source in respect of remuneration paid outside India to the expatriate employees: As pointed out earlier, the assessee had neither deducted nor paid any tax in respect of the remuneration paid to the expatriate employees. It is the claim of the assessee that expatriate employees are paid remuneration net of taxes all over the world. The assessee has taken into account the tax perquisite while working out the tax deductible in respect of remuneration paid to expatriate employees. In asst. yr. 1994-95 in the written submissions filed before the CIT(A), reproduced by him in the appellate order, we find a reference....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... (ICB) Expatriate salary-- System--General. In order to ensure that changes in local taxes and social security regulations do not influence the application of this policy a net salary system is effective for all ICBs. The net base salary is defined as a base salary less tax, social security, schooling and housing expenses. It includes typical expatriate allowances. Net Guarantee/Gross up The ICB's salary is a net salary which means that tax, social security premiums, etc., related to the employment income will be for account of the bank. Exception is made for the Line of Business Bonus. Tax and social security premiums from other personal income are not for account of the bank. We, thus, submit that it is the bank's responsibility and obligation to bear the Indian taxes on offshore remuneration of expatriate employees rendering services in India. In the computation of remuneration and tax of the expatriate employees (for the purpose of deduction of tax at source) apart from salary also included is the local taxable remuneration being inter alia the perquisite value on account of rent-free accommodation, utilities and the additional remune....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... respect of the tax component of the salary also if the salary is found to be deductible as per the directions of the Tribunal for asst. yr. 1996-97 (supra), which has also been adopted by us. So, however, no deduction will be permissible in asst. yrs. 1992-93 to 1994-95 by operation of Section 40(a)(i) of the IT Act, 1961. The claim for the said assessment years shall have to be disallowed for the reason of non-deduction of tax. So, however, the deduction shall have to be considered for asst. yr. 1995-96 as per proviso to Section 40(a)(i). 25. Thus, subject to verification that the claim of remuneration and tax deductible has not been taken into account under Section 44C in regard to the expatriate employees, the deduction relating to asst. yrs. 1992-93 to 1994-95 would be permissible in asst. yr. 1995-96 as per proviso to Section 40(a)(i). For asst. yr. 1995-96, the assessee has paid the tax and, therefore, Section 40(a) is not attracted. The assessee shall be entitled to deduction in respect of remuneration as well as the tax paid pertaining to asst. yr. 1995-96. It is pertinent to mention that the objection raised by the Revenue about the assessee having failed to esta....
X X X X Extracts X X X X
X X X X Extracts X X X X
....m pertains to. It is only when the claim is considered and found allowable but for provisions of Section 40(a) that the same can be allowed in the year of payment. Since the claim for asst. yrs. 1990-91 and 1991-92 is not established to have been made and considered in earlier years, the benefit is not permissible in asst. yr. 1995-96 merely because the tax has been paid in the year under appeal. The benefit of the proviso to Section 40(a)(i) is thus not available to the assessee for which no claim is made in the respective assessment years. Therefore, the claim of the assessee does not fall for consideration in asst. yr. 1995-96 on the basis of provisions ofSection 40(a) read with proviso. The disallowance pertaining to asst. yrs. 1990-91 and 1991-92 in regard to the remuneration and the tax component in asst. yr. 1995-96 is upheld. 28. Interest : That leaves us to consider the interest paid by the assessee under Section 201(1A). Before proceeding to consider this issue, we would like to make it clear that for asst. yrs. 1992- 93 to 1994-95, interest paid by the assessee was neither claimed in the course of assessment proceedings nor in the grounds of appeal befo....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ue relating to the claim of interest is peculiar in this case insofar as the interest is on account of income-tax, which the assessee was required to deduct at source and pay to the Government. We have dealt with this issue relating to the remuneration and tax component on the remuneration and in principle agreed that the assessee would be entitled to deduction subject to the verification as laid down in the order. It would appear that when the assessee is entitled to deduction on account of income-tax, the same principle would apply to the interest charged for non-payment of tax--the interest being compensatory in nature. 32. For appreciation of the issue in proper perspective, it would be relevant to consider as to whether the income-tax is allowable as a deduction. If income-tax is allowable as a deduction, the interest payable on such tax being compensatory in nature may qualify for deduction. Interest on sales-tax of compensatory nature is allowable as a deduction not merely because it is not penal in character but because the sales-tax is chargeable on the commodities sold by the assessee as an incidence of business. The interest is thus allowable as part of tax. In ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....year. 195A. Where, under an agreement or other arrangement, the tax chargeable on any income referred to in the foregoing provisions of this Chapter is to be borne by the person by whom the income is payable, then, for the purposes of deduction of tax under those provisions, such income shall be increased to such amount as would, after deduction of tax thereon at the rates in force for the financial year in which such income is payable, be equal to the net amount payable under such agreement or arrangement. 200. Any person deducting any sum in accordance with the provisions of Sections 192 to 194, Section 194A, Section 194B, Section 194BB, Section 194C, Section 194D, Section 194E, Section 194EE, Section 194F, Section 194G, Section 194H, Section 194-I, Section 194J, Section 194K,Section 194L, Section 195, Section 196A, Section 196B, Section 196C and Section 196D shall pay within the prescribed time, the sum so deducted to the credit of the Central Government or as the Board directs. 201(1). If any such person and in the cases referred to in Section 194, the principal officer and the company of which he is the principal officer does not deduct or after dedu....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s to be deposited within the time prescribed in the Central Government account and any loss or profit in the business of the assessee has nothing to do with deposit of the TDS amount." Reference may be made to the definition of tax under the DTAA. Article 3(d) reads as under : "(d) the term "tax" means Indian tax or Netherlands tax as the context requires, but shall not include any amount which is payable in respect of any default or omission in relation to the taxes to which this Convention applies or which represents a penalty imposed relating to those taxes;" It is evident from the above definition that even DTAA does not cover such a levy. It may also be pertinent to mention that income-tax paid by the assessee does not qualify for deduction as such. This view is supported by the decision of the Supreme Court in the case of Smt. Padmavati Jaikrishna v. Addl. CIT . In the case of East India Pharmaceutical Works Ltd. v. CIT their Lordships of the Supreme Court held that the interest paid on the overdraft utilized for payment of income-tax is also not allowable as a deduction as it is not an expenditure laid out wholly and exclusively for the purposes of business....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... appeal is partly allowed. IT(TP)A No.61/Bang/2015 (Revenue's appeal): 26. In the revenue's appeal, the only grievance of the revenue is against the direction of the CIT(A) to reduce the expenditure incurred in travel, telecommunication etc., both from export turnover as well as total turnover for the purpose of computation of deduction u/s 10A of the Act and also in directing the AO to allow depreciation at the rate of 60% on Circuit Test Boards as against 25% allowed by the AO. On the ground Nos.1 and 2 relating to the deduction u/s 10A of the Act, we find that the issue is covered in favour of the assessee by the decision of the jurisdictional High Court in the case of CIT vs. Tata Elxsi (349 ITR 98) which has been followed by the CIT(A) in allowing relief to the assessee. The only argument raised by the learned Departmental Representative is that the judgment has not become final and the department has filed appeals before the Hon'ble Supreme Court. However, since the issue is covered in favour of the assessee by the decision of the jurisdictional High Court which has neither been stayed nor set aside, we see no reason to interfere with the order of the CIT(A). The revenu....