TaxTMI 
TaxTMI 
2017 (7) TMI 363
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....ssing 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 has erred in confirming the action of the Assessing officer. 3. The learned Assessing Officer, learned Transfer Pricing Officer and Commissioner of lncome Tax (Appeals) - IV have erred in, a. passing the order without demonstrating that appellant had 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 analysis undertaken by the appellant without specifying the relevant clause under section 92C(3) which necessitated such rejection;....
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....e 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 reason; d. not appreciating that appellant has onsite revenue of more than 75% of total revenue and ought to be compared with other Indian companies having more than 75% on site revenues. On such a comparison, the appellant's international transaction relating to receipt of services from AE are at arm's length; and, e. 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, learned Transfer Pricing Officer and Commissioner of Income Tax (Appeals) - IV have erred in not making prop....
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....s erred in: i. computing the disallowance in respect of on-site software development work based on the ratio of software development charges paid to AEs to the total software development expenses; ii. not considering the submissions of the Appellant with respect to the ratio to be adopted for computing the disallowance, i.e. the ratio of software development charges paid to AEs to the total expenses incurred by the unit for developing the software; iii. not appreciating the fact that the aforesaid ratio has been accepted by the assessing officer during the assessment proceedings for AY 2008-09; and, iv. The CIT(A) has erred in reducing the deduction under section l0B of the Act by an amount of Rs. 69,853,035. DISALLOWANCE UNDER SECTION 40(A)(l) IN RESPECT OF COMMISSION PAYMENTS 16. Without prejudice to ground no. I, the learned CIT(A) erred in holding that the services rendered by Mphasis Corporation outside India are in the nature of managerial services and commission paid to MphasiS Corporation in consideration of such services is chargeable to tax in India under section 9(i)(vii) of the Act and under Article 12 of the India-US trea....
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....the brief financials of the tax payer as under:- Operating Revenue 247,76,81,000/- Operating Expenses 208,34,13,468/-* Operating Profit (PBIT) 39,42,67,532/- Operating Profit to Revenue 15.91% (*Excluding diminution in the value of investments) 2.4 International Transactions (as mentioned in the 92 CE report) The following are the international transactions entered into by the tax payer with its associated enterprises (as per the 3CEB Report and as per the reference received by the TPO from the Assessing Officer U/S92CA). ♦ Rendering of software development and IT consultancy services - Rs. 18,23,60,998/- ♦ Receipt of software development, professional and IT consultancy services - Rs. 121,97,06,243/- ♦ Reimbursement of Expenses to AEs - Rs. 1,97,60,359/- ♦ Reimbursement of Expenses by AEs - Rs. 132,78,279/- ♦ Payment of selling commission - Rs. 15,50,58,541/- ♦ Investment in subsidiaries - Rs. 306,73,25,866/- The ALP has to be determined with reference to the above transactions. The taxpayer describes the nature of reimbursement expenses paid and receive....
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..... Since, the reimbursement of expenses to AEs of Rs. 1,97,60,359/- is incurred for the purpose of rendering services, it should form part of operating expenses of the taxpayer. Similarly, it should also form part of the revenue. Just because the taxpayer chooses to give a different name as 'reimbursement of expenses', the nature of expense would not change. So, the reimbursement of expenses to AEs is added to the cost as well as the revenue. There are two types of international transactions in this case. The taxpayer takes the services of its subsidiaries and also renders software development services to its AEs. The taxpayer was asked to submit the profit realized from these two types of international transactions separately. The taxpayer in its letter filed on 04.07.08 submitted the bifurcation as under. Description Rendering Services to AEs Receiving Services from AEs (Rs.) Total (Rs.) Operating Revenue 18,23,60,998/- 229,53,20,002/- 247,76,1,000/- Operating Expenses 14,48,86,732/- 193,85,26,736/-* 208,34,13,468/-** Operating Profit (PBIT) 3,74,74,266/- 35,67,93,266/- 39,42,67,532/- Operating Profit to Cost / Revenue ....
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....submitted that when the assessee is engaged in the diversified activity of international transactions then TNMM would be the MAM for the purpose of determining the ALP. He has further contended that the CIT (Appeals) not only adopted cost plus method but also took the Associated Enterprise (AE) of the assessee as a tested party. Thus the learned Authorised Representative has submitted that a foreign company was taken by the CIT (Appeals) as tested party instead of the assessee's price. Therefore it was submitted that the impugned order of the CIT (Appeals) is not sustainable and liable to be set aside. In support of his contention, he has relied upon the decision dt.22.4.2016 of this Tribunal in the case of M/s. Kshema Technologies Ltd. Vs. ACIT in IT(TP)A No.1105/Bang/2012. 8. On the other hand, the learned Departmental Representative has relied upon the orders of the authorities below. 9. Having considered the rival submissions as well as the relevant material on record, we find that in order to determine whether the international transactions carried out by the assessee are at arm's length, the price/cost of international transactions is compared with the uncontrolled ....
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....by the TPO. Once the CIT (Appeals) has rejected the entity level profit margin of the assessee for the purpose of bench marking the international transactions with ALP, the CIT (Appeals) was required to redo exercise of determination of ALP as per the provisions of transfer pricing. Instead of following the proper procedure stipulated under Chapter X of the I.T. Act as well as Rule 10 of I.T. Rules, the CIT (Appeals) has proceeded to take the AEs of the assessee as tested party and further recomputed their profit margin by excluding 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 a....
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....ide order dt.1.8.2014 in ITA No.1075 of 2008 and 196 of 2009 the Hon'ble High Court has decided this issue in favour of the assessee. 12. On the other hand, the learned Departmental Representative has relied upon the orders of the authorities below. 13. Having considered the rival submissions as well as the relevant material on record, at the outset we note that an identical issue has been decided by the Hon'ble jurisdictional High Court in assessee's own case for the Assessment Year 2003-04 (supra) in paras 2 & 3 as under : In view of the decision of Hon'ble jurisdictional High Court in assessee's own case, we decide this issue in favour of the assessee. 2. The first substantial question of law arose for consideration before this Court in ITA No.776/2007 disposed of on 13.06.2014, wherein this Court has held at paras 18 and 19 as under:- 18. From the aforesaid provision it is clear that the consideration in respect of computer software received in or brought into India by the assessee in convertible foreign exchange is deducted from the profits of the said business. In other words the assessee is not liable to pay any income tax on such ....
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....mputing the export turnover and total turnover for arriving at deduction under Section 80HHE of the Act The assesee is engaged in the business of export out of India of computer software and its transmission to places from India outside India. Before a computer software is exported, the Software Engineers of the assessee would have initial discussion with regard to the requirements, specifications etc. Thereafter computer software is manufactured and then it is transmitted from India to a place outside India. The software Engineers deputed abroad who among other things have to do testing, installation and monitoring of software supplied to the client. Though the said services are technical in nature it does not fall within clause (ii) of subsection (1) of section 80HHE of the Act of providing technical services outside India in connection with the development or production of computer software. It falls under sub-clause (1) of sub-section (1) of Section 80 HHE of the Act. Therefore, the said expenditure cannot be excluded in computing export turn over. In that view of the matter we do not see any merit in this appeal. Accordingly, the said question of law is answered in favour of t....
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..... 16. Ground No.14 is regarding disallowance of deduction under Section 10B in respect of interest income and profit on sale of assets. 17. We have heard the learned Authorised Representative as well as learned Departmental Representative and considered the relevant material on record. We find that the interest income from the deposits in the bank has no direct first degree nexus with the business activity of the undertaking therefore the same is not eligible for deduction under Section 10B of the Act. Similarly the profit on sale of asset is not an income derived from the business activity of the assessee-undertaking. Hence we do not find any error or illegality in the order of the Assessing Officer in denying the claim of deduction under Section 10B in respect of interest income and profit o sale of asset. 18. Ground Nos.16 & 17 are regarding disallowance made under Section 40(a)(i) of the Act. 19. The Assessing Officer has disallowed commission payment under Section 40(a)(i) of the Act by holding that the same is Fees for Technical Services and therefore in the absence of deduction of tax at source it is not allowable. 20. On appeal, the CIT (Appeals) though uphel....