TaxTMI 
TaxTMI 
2016 (8) TMI 79
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....n law, the Ld. AO erred in holding that the quality audit expense for certification is not in the nature of revenue expenditure and thereby disallowing sum of Rs. 3,60,220. 3. That on the facts and circumstances of the case and in law, the Ld. AO erred in disallowing sum of Rs. 1,80,120 for purchase of software under section 40 (a) of the Act holding such payment to be covered under the head fee for technical services / royalty and thereby holding that the assessee was required to withhold taxes on such payment. 4. That on the facts and circumstances of the case and in law, the Ld. AO erred in treating the payment of Rs. 1,68,17,587 towards Retention Bonus as capital expenditure to be spread over five years and thereby allowing deduction of Rs. 42,04,257, being only 1/5th of the expenditure. II. Transfer Pricing Grounds 5. That on the facts and in the circumstances of the case and in law, the order passed by the Ld. AO is bad in law and void ab-initio. 6. The Ld. AO/Ld. TPO erred on facts and circumstances of the case in determining the arm's length adjustment under section 92CA(3) of the act, to the Assessee's international transactions and thereby making an....
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.... any opportunity of being heard on subjective grounds taken by him. 12. The Ld. AO/TPO erred in law in not giving the full effect to the directions of DRP. 13. The learned TPO and the learned AO erred in not allowing the benefit of range of +/- 5% as provided in proviso to Section 92C(2) of the Act to the Appellant, while determining the arm' s length price. 14. The Ld. AO erred in determining interest U/S 234B and 234C of the Income Tax Act." 2. Briefly stated the facts of this case are : a reference has been made by the AO under section 92CA (3) of the Income-tax Act, 1961 (for short 'the Act') to the Transfer Pricing Officer (TPO) to determine the Arm's Length Price (ALP) in respect of the international transactions entertained into by the assessee during the financial year 2007-08. Assessee company is a provider of engineering and technology application solution and concentrates on using its domain knowledge to provide solution to wide range of industries viz. energy, environment, financial services, health care, life sciences, national security, space, telecommunications, transport, etc. 3. Assessee company engaged in the profession of software development s....
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....e than 25% of the total income, companies having employee cost to total cost of 25%; related party transaction is considered at 25% and used the data for financial year 2007-08 for benchmarking the international transaction. 8. By applying the aforesaid filters, the ld. TPO, out of 25 comparables chosen by the assessee for benchmarking its international transaction, accepted 5 comparables only and proposed to select 10 comparables having arithmetic mean at 27.02%. After considering the objections raised by the assessee, TPO has chosen 10 final comparable companies having mean margin of 26.79%. The ld. TPO also considered the segmental result of Kals Information System Ltd., R System International and Sasken Communication Technologies Ltd. and consequently made an adjustment of Rs. 9,06,20,898/- between the difference in ALP and the price charged by the assessee from its Associated Enterprises (AEs) for export services. 9. Assessee carried the matter before the DRP by raising objection to certain comparables selected by ld. TPO viz. : i. Aarman Software Private Limited ii. Ace Software iii. Bells Softech Limited iv. CG-VAK Software & Exports Limited ....
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....blic domain at that time; that the assessee cannot be estopped to seek exclusion of the comparables from the final list of comparables and relied upon the judgment cited as (i) Kedarnath Jute Mfg. Co. Ltd. vs. CIT - 82 ITR 363; (ii) CWT vs. Meattles (P_ Ltd. - 156 ITR 569; (iii) CIT vs. Mrs. V. Chandra - 245 ITR 610; (iv) Director of Inspection of Income-tax (Inv.) vs. Pooran Mall & Sons - 96 ITR 390; (v) PV Doshi vs. CIT - 113 ITR 22 (Guj.). 13. However, on the other hand, ld. DR opposed the application on the grounds inter alia that the assessee cannot be allowed to para-drop favourable comparables and exclude unfavourable ones at this stage as it has been granted full opportunity to choose the correct comparables before TPO; that except Bothtree Consulting Limited, none of the comparables now sought to be introduced by the assessee has been taken before the TPO; that taking new comparables at this stage would cause prejudice to the revenue as complete search of the new comparables is not possible at this stage. 14. Keeping in view the ratio of the judgments (supra) referred to in the preceding paras relied upon by the assessee that even if a particular plea factual or lega....
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....a long period. 17. Ld. AR for the assessee contended that recruitment and training expenses incurred by the assessee are revenue expenditure, hence allowable and relied upon judgment cited as Hindustan Aluminium Corporation Ltd. vs. CIT - (1986) 159 ITR 673 and CIT vs. Munjal Showa Ltd. - (2010) 329 ITR 449. 18. Hon'ble Supreme Court in judgment cited as Hindustan Aluminium Corporation Ltd. (supra) while deciding the identical issued held as under :- "CAPITAL OR REVENUE EXPENDITURE - ASSESSEE ESTABLISHING FACTOYR FOR MANUFACTURE OF ALUMINIUM - EXPENDITURE INCURRED IN SENDING SOME EMPLOYEES TO U.S.A. FOR PRACTICAL TRAINING AND EXPERIENCE IN RUNNING FACTORY - TRAINING GIVEN TO ACHIEVE EFFICIENT RUNNING OF FACTORY FOR GAINING OPTIMUM PRODUCTION - DIRECTLY LINKED TO PROFIT EARNING PROCESS - IS REVENUE EXPENDITURE - EXPENDITURE INCURRED FOR PRSPECTIVE AND SEARCHING BAUXITE MINES - BAUXITE RAW MATERIAL FOR PRODUCTION OF ALUMINIUM - EXPENDITURE WAS FOR EARNING PROFITS - IS REVENUE EXPENDITURE AND AN ALLOWABLE DEDUCTION - INCOME TAX ACT, 1961, S. 37." 19. Similarly, Hon'ble jurisdictional High Court in judgment cited as CIT vs. Munjal Showa Ltd. (supra) while deciding the ident....
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....ions and conduct of business in a more profitable manner; that the expenditure would be of revenue nature even though the advantage may endure for an indefinite future and relied upon the judgment of the Hon'ble Supreme Court cited as Empire Jute Co. Ltd. vs. CIT - 124 ITR 1 (SC). Hon'ble Apex Court while examining the nature of revenue expenditure held as under :- "(ii) There may be cases where expenditure, even if incurred for obtaining an advantage of enduring benefit, may, none the less, be on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be ....
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....2008) held that the consideration for acquiring such software was royalty which was taxable in India u/s 9(1)(vi) and Article 12 of DTAA, amended by Finance Act, 2012 with retrospective effect and it is provided therein that royalty includes payment for transfer of any right to use computer software and tax was required to be deducted at source and ratified the order passed by the AO in disallowing the deduction for such payment u/s 40(1)(i) on ground of the non-deduction of tax at source. 27. However, Hon'ble jurisdictional High Court in judgment cited as Director of Income Tax vs. Infrasoft Ltd. - (2013) 39 Taxman.com 88 made a distinction between royalty paid and consideration for transfer of copyrighted articles to decide the issue if royalty is to be paid in case of purchase of computer software by making following observations :- "89. There is a clear distinction between royalty paid on transfer of copyright rights and consideration for transfer of copyrighted articles. Right to use a copyrighted article or product with the owner retaining his copyright, is not the same thing as transferring or assigning rights in relation to the copyright. The enjoyment of some or all ....
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....ence has been issued by the AEs in favour of the assessee for transfer of copyrights but assessee has merely paid the consideration for transfer of copyrighted article in the form of PTC software and as such, exclusive right has not been transferred in favour of the assessee qua the software purchased by it rather assessee's right was restricted to use the copyrighted product for internal business purpose. 29. Identical issue has been dealt with by the Tribunal in case cited as SMS Demag (P.) Ltd. vs. DCIT, 9 (1), New Delhi - (2010) 38 SOT 496 (Delhi), the operative part of the findings are as under:- "Section 40(a)(i) of the Income-tax Act, 1961, read with article 24 of the DTAA between India and Germany - Business disallowance - Interest, etc., payable outside India - Assessment year 2000-01 - Assessee paid certain amount to 'AG', its parent company in Germany for purchase of software 'SAP' - It claimed deduction on said payment - Assessing Officer disallowed assessee's claim on ground that said amount paid by assessee to its parent company was in nature of royalty/fees for technical services and was chargeable to tax in India - Whether payment made for ....
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....s to whether transfer of business of one of the branch of SAIC Group of USA to the assessee company on November 30, 2007 amounts to amalgamation or sale of the branch of US branch?" 36. Bare perusal of the assessment order as well as order passed by the DRP and material brought on record by the parties go to prove that the business of the SAIC Group, USA branch has been transferred to the assessee and in consideration thereof, the assessee issued shares to SAIC Group, USA. Assessee company stated to have paid the bonus to the erstwhile employees of transferring company to ensure the smooth functioning of the business. So, there is no material on file to arrive at the conclusion that it was a case of amalgamation rather a case of sale on transfer of the shares by the assessee company to SAIC Group, USA. So, the findings of the AO/DRP that the retention bonus expenditure are amalgamation expenses are based upon surmises only. 37. DRP in order to ascertain whether the payment of retention bonus actually entail any extra expenditure by the assessee as compared to the earlier years and succeeding years called upon the assessee to provide the details of the employee cost and total ....
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.... increased from 67.14% in the previous financial year to 68.12% in the financial year under assessment which is insignificant amount to have any substantial effect on the profit margin of the company. 39. Ld. DRP also noticed that retention bonus was payable over next three years and now in the year under assessment alone. Ld. DRP returned self contradictory findings that on the one hand, it is observed that the payment of retention bonus and allotment of ESOPs is very common feature in software industry and therefore such cost would be embedded in the employee cost of comparable also and on the other hand, ld. DRP observed that retention bonus paid to the employee in order to retain them for future is not in the nature of normal business expenditure but an expenditure resulting into enduring benefit to the company. 40. Ld. AR for the assessee also contended that the retention bonus paid to the employees of the erstwhile company falls under the definition of salaries u/s 15 of the Act. 41. For facility of reference, section 15 of the Act is reproduced as under :- "15. The following income shall be chargeable to income-tax under the head "Salaries"- (a) any salary due....
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.... Method Value of transaction 1. Provision of Software Development services TNMM 404,411,559 2. Cost Reimbursement paid TNMM 4,972,708 3. Reimbursement received CUP 10,349,580 44. Assessee company by applying Transactional Net Margin Method (TNMM) in order to benchmarking its international transaction computed its margin at 12.08% as against mean operating margin of the comparable selected by it at 13.74%. 45. However, TPO by making fresh search on the basis of current year data only i.e. financial year 2007-08 and by applying different sets of filters chosen 10 comparables arrived at arithmetic mean OP/OC margin of comparables at 26.79% and computed ALP of software development services provided by the assessee company to its AE as under :- 1. Operating Cost 435,559,139/- 2. Arms length margin 26.79% of the OC 3. Arms length price (ALP) 552,245,432/- 4. Price received by the assessee 461,624,534 5. Adjustment proposed by TPO {(3) - (4)} 90,620898 46. Undisputedly, TNMM is the most appropriate method applied by both the assessee company as well as TPO in this case for benchmarking the intern....
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....e considered view that this issue is again required to be reconsidered by the TPO by taking into account the cost of services while applying the filter of employees cost of more than 25% of total cost. So, we hereby restore the issue to the TPO to decide afresh by providing opportunity of being heard in the light of the observation made herein before. KALS INFORMATION SYSTEM LTD. 51. This company has been accepted as a comparable by the TPO but the assessee has opposed its inclusion on the ground that its segmental margin having inconsistency in segmental information and P&L account for financial year 2007-08 has been used without providing an opportunity of being heard to the assessee. Ld. DRP by accepting the contention of the assessee recomputed the margin of this company at 13.92% after allocating in allocated operational expenses in proportion of revenues. But, undisputedly, the directions issued by the DRP have not been complied with. So, the mater is required to be determined afresh by the TPO in the light of the unchallenged observations made by the DRP by providing an opportunity of being heard to the assessee company. WORKING CAPITAL ADJUSTMENT 52. The ld. AR ....
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....identical issue has been decided by the Tribunal in case cited as Qualcom India Pvt. Ltd. vs. ACIT (ITA No.5239/De l/2010). 54. Coordinate Bench in the judgment cited as Qualcom India Pvt. Ltd. (supra) determined the issue of working capital adjustment to account for difference in working capital employed by assessee vis-à-vis comparable companies in favour of the assessee by making following observations :- "41. Considering the above submissions we concur with the submission of the Ld. DR that the issue raised in ground No. 6 & 7 on account of working capital adjustment and risk adjustment depend upon the fact and circumstances of each case. But at the same time we are of the view that these factors are equally important to consider while selecting comparable companies. In the present case the assessee is engaged in the business of software development and providing marketing services, hence there is no dispute that appropriate adjustment to account for difference in working capital employed by the assessee vis. a vis. the comparable companies for software development services is required to be considered. Similarly making of suitable adjustments to account for differ....
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....der appeal as well. 5.2 Ld. counsel of the assessee has further submitted that Rules 10B(1)(e) of the Rules prescribe that at the time of application of Transactional Net Margin Method, the net profit margin needs to be adjusted to account for the difference if any between the international transaction and comparable uncontrolled transactions. The relevant text of the provisions is reproduced below for reference: "10B Determination of arm's length price under section 92C-(1) For the purposes of sub-section (2) of section 92C, the arm's length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely :- (a) to (d)- (e) transactional net margin method, by which,- "(iii) the net profit margin referred to in subclause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin ....