TaxTMI 
TaxTMI 
2016 (6) TMI 583
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....a reference could be made to the Transfer Pricing Officer only in circumstances where the assessing officer considers it necessary or expedient so to do and also without specifying the relevant- clause under section 92C(3) which necessitated the reference. The learned Commissioner of Income Tax (Appeals) - IV ['CIT(A) - IV'] has further erred in confirming the action of the Assessing officer. 3. The learned Assessing Officer, learned Transfer Pricing Officer and Commissioner of Income Tax (Appeals) IV have erred in a. passing the order without demonstrating that appellant had the motive of shifting profits outside India by manipulating prices charged in its international transactions: and, b. not appreciating that the charging or computation provision relating to income under the head "Profits & Gains of Business or Profession" do not refer to or include the amounts computed under Chapter X and therefore the addition made under Chapter X is bad in law. GROUNDS ON COMPARABLES AND REJECTION OF TP ANALYSIS OF THE APPELLANT 4. The learned Assessing Officer and learned Transfer Pricing Officer have erred in a. rejecting the transfer pricing an....
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....g expenses incurred by appellant and commission paid to AE to arrive at the ratio of 10.59 of such expenses on sales and accordingly concluding that it is very high without appreciating that marketing expenses of INR 64,76,000 were incurred for non-AE business only. iii. TP Analysis of Onsite Services Rendered by AE 8. The learned Commissioner of Income Tax (Appeals) - IV has erred in a. adopting CPM as the most appropriate method for evaluating the software development services received by the appellant without justifying how the same was most appropriate method; b. adopting inappropriate methodology and process in arriving at the arm's length price; c. selecting Indian companies having onsite revenues as comparable after selecting AE (a company based in USA) as the tested party. Without prejudice, CIT(A) has erred in rejecting similarly placed Indian companies as comparable on unjustifiable reasons; and. d. adopting net margin of the comparable in computing the arm's length price without appreciating that under CPM gross margin are to be considered. GROUNDS ON ADJUSTMENT FOR DIFFERENCES 9. The learned Assessing Officer....
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....rd of Direct Taxes. 15. FOREIGN TAX CREDIT NOT GRANTED a. The learned CIT(A) has erred in concluding that the appellant has failed to substantiate its claim for foreign tax credit without considering the submission tiled by the appellant. b. The learned CIT(A) has erred in not directing the AO to grant appropriate credit for foreign taxes. 16. INTEREST UNDER SECTION 234B OF THE ACT The learned C IT(A) has erred in confirming the levy of interest under section 234B of the Act amounting to Rs. 10,928,569. 17. INTEREST UNDER SECTION 234D OF THE ACT The learned CIT(A) has erred in confirming the levy of interest under section 234D of the Act amounting to Rs. 128.352. 18. PENALTY UNDER SECTION 271(1)(C) The learned CIT(A) has erred in directing the AO to re-compute the penalty in view of the enhanced total income of the Company. 19. RELIEF a) The Appellant prays that directions be given to grant all such relief arising from the above grounds and also all relief consequential thereto. b) The Appellant craves leave to add to or alter, by deletion, substitution, modification or otherwise, the above grounds of app....
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....AE. Accordingly, the assessee is making payment on selling commission to its AE on cost plus 12%. Similarly, the assessee is also receiving sub- contracts work of software development services from AE which was ultimately meant for the third party as per the contract between the AE and the third party. However, since the work is sub-contracted by the AE to the assessee therefore there is no privity of contract between the assessee and the ultimate recipient of the service. The assessee is undertaking software development from its AE under the sub-contract. The assessee bench marked its international transactions by applying Transactional Net Margin Method ('TNMM') as Most Appropriate Method ('MAM') at entity level. The assessee's margin at entity level is 12.61%. The assessee selected 15 comparables for bench marking its transactions, the details of comparables are as under :- Sl.No. Name of the company 1. Akshay Software Technologies Ltd. 2. Aztec Software and Technologies Services Ltd. 3. Geometric Softweare Solutions Company Ltd. 4. iGate Global Solutions Ltd. 5. Maars Software International Ltd. 6. Mascon Global Ltd. 7. Mel....
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....e with the methodology applied by the assessee as well as by the TPO wherein the entity level result was taken into consideration for determining the ALP. The CIT (Appeals) selected Cost Plus Method ('CPM') as the MAM instead of TNMM. As regards the sales commission paid by the assessee to AE, the CIT (Appeals) held that it was not justified and accordingly the ALP of the commission paid to AE was considered by the CIT (Appeals) at NIL. Accordingly, the entire payment of commission was disallowed under TP Adjustment. As regards the other international transactions with regard to the software development charges paid to the AE, the CIT (Appeals) recomputed the ALP by taking the AEs of the assessee has tested party Thus the CIT (Appeals) selected MAARS Software International Ltd., an Indian Company as comparable to test the price at the hand of the various AEs of the assessee in different countries. The operating margin of the MAARS was computed at 9.61% whereas the operating margin of the AEs of the assessee was recomputed by the CIT (Appeals) by disallowing marketing / selling expenses and accordingly the CIT (Appeals) made a TP Adjustment of Rs. 2,54,18,865 on this accoun....
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....India Ltd. in ITA No.532/Bang/2013 vide order Dt.30.7.2015 wherein the co-ordinate bench found that the functional comparability of the company cannot be considered as good comparable. He has further submitted that even otherwise this company is having its revenue from sale of products, sale of services to subsidiaries and therefore in the absence of segmental results, this company cannot be considered as a good comparable for software development services of the assessee. 5. Exensys Software Solutions Ltd. : The learned Authorised Representative of the assessee has submitted that the comparability of this company has also been considered by the co-ordinate bench of this Tribunal in the case of Kodiak Network India Ltd. (supra) as well as ITO Vs. Vendo Technology Pvt. Ltd. in ITA No.1374/Bang/2011 vide order dt.19.9.2014. 6. Sasken Network Systems Ltd. : The learned Authorised Representative of the assessee has submitted that the comparability of this company has also been considered by the co-ordinate bench of this Tribunal in the case of Kodiak Network India Ltd. (supra) as well as ITO Vs. Vendo Technology Pvt. Ltd. in ITA No.1374/Bang/2011 vide order dt.19.9.2014. 7.1 F....
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....escribed by the assessee, the learned Departmental Representative has submitted that the Geometric Software Solutions Ltd. was selected by the assessee and therefore the assessee cannot seek the exclusion of the same. She has further contended that the TPO has applied RPT filter of 25% which is also upheld by this Tribunal in various decisions. She has relied upon the decision of the Tribunal in the case of Curam Software International Ltd. Vs. ITO 149 ITD 458 (ITA No.1280/Bang/2012). Thus the learned Departmental Representative has submitted that the TPO has applied a filter of 25% RPT which is acceptable. 11.1 Flextronics Software System Ltd. : The learned Departmental Representative has submitted that the Tribunal in the case of Sunquest Information System Ltd. (supra) has observed that this company is also in the software development product service. However, there was no sale of software product during the year. Further, the TPO has considered the segmental data of this company as computed in the Annexure B of the T P order. When the TPO has considered the segmental data, then, this company is functionally comparable. Similarly in the case of Thirdware Solutions Ltd.,....
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.... certain expenses which we find is not permitted under the provisions of transfer pricing. Not only changing the tested party from the assessee to its AE, the CIT (Appeals) has also selected a domestic company as a comparable to the AE of the assessee. Therefore the entire exercise of determining the ALP by the CIT (Appeals) is contrary to the provisions of transfer pricing under the I.T. Act. Hence in view of the facts and circumstances of the case, we set aside the impugned order of the authorities below and remit the issue to the record of the Assessing Officer / TPO for deciding the matter afresh by considering the segment-wise data of the assessee and then compare the same with the comparable companies in the light of various decisions relied upon by the assessee. We find that in the series of decisions, this Tribunal has come to a conclusion that the threshold limit of the RPT should not be more than 15% in normal circumstances where there is no difficulty in selecting the comparable companies. Therefore we direct the TPO to apply the RPT filter at 15% instead of 25% and then consider the comparability of the companies. Since the assessee did not fully co- operate with the au....
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....de freight, telecommunication charges or insurance attributable to the delivery of the articles or things or computer software outside India or expenses, if any, incurred in foreign exchange in providing the technical services outside India. What is relevant to be noticed as per this provision is that the consideration in respect of export of computer software received in or brought into India by the assessee in convertible foreign exchange is an export turnover and what is excluded from this clause is (a) freight, (b) telecommunication charges or insurance attributable to the delivery of the articles or things or computer software outside India (c) expenses, if any, incurred in foreign exchange in providing the technical services outside India. Explanation (3) inserted by Finance Act, 2001 with effect from 1.4.2001 explains that the profits and gains derived from on site development of computer software including services for development of software, outside India shall be deemed to be the profits and gains derived from the export of computer software outside India. Thus, it is clarified by the legislature by inserting explanation (3) to Section 10A that the profits and gains deri....
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....s SLP before the Hon'ble Supreme Court. 4. For these and other grounds that may be urged at the time of hearing, it is prayed that the order of the CIT (Appeals) in so far as it relates to the above grounds may be reversed and that of the Assessing Officer may be restored. 5. The appellant craves leave to add, alter, amend and/or delete any of the ground mentioned above." 16.1 We have heard the rival submission and perused the material on record. The Hon'ble Karnataka High Court in the case of CIT v M/s Tata Elxsi Ltd. & Others had held that while computing the exemption u/s 10A, if the export turnover in the numerator is to be arrived at after excluding certain expenses, the same should also be excluded from the total turnover in the denominator. The relevant finding of the Hon'ble jurisdictional High Court reads as follows:- "...........Section 10A is enacted as an incentive to exporters to enable their products to be competitive in the global market and consequently earn precious foreign exchange for the country. This aspect has to be borne in mind. While computing the consideration received from such export turnover, the expenses incurred towards freight, teleco....
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....date that, what is excluded from the numerator that is export turnover would nevertheless form part of the denominator. When the statute prescribed a formula and in the said formula, 'export turnover' is defined, and when the 'total turnover' includes export turnover, the very same meaning given to the export turnover by the legislature is to be adopted while understanding the meaning of the total turnover, when the total turnover includes export turnover. If what is excluded in computing the export turnover is included while arriving at the total turnover, when the export turnover is a component of total turnover, such an interpretation would run counter to the legislative intent and impermissible. Thus, there is no 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". 16.2 The Hon'ble Mumbai High Court in the case of Gem Plus Jewellery India Ltd. (supra), in identical circumstances, held that since the export turnover forms part of the total turnover, if an item is excluded from the export turnover, the same should also be reduced....