TaxTMI 
TaxTMI 
TaxTMI 
2017 (10) TMI 1376
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....AY 2005-06. 2. As far as ITA No.1026/Bang/2014 is concerned, this is an appeal by the revenue against the order dated 18.4.2014 of the CIT(Appeals), LTU, Bangalore relating to AY 2005-06. This appeal arises out of the order of assessment passed u/s. 147 r.w.s. 143(3) of the Act in relation to AY 2005-06. 3. We will first take up the appeal of the revenue in ITA No. 1838/Bang/2013 for consideration for the AY 2005-06 arising out of assessment proceedings u/s. 143(3) of the Act. 4. Ground No.1 by the revenue is general in nature and calls for no specific adjudication. 5. Ground No.2 raised by the revenue reads as follows:- "2. The Ld CIT(A) erred in directing the AO to deduct telecommunication expenses from total turnover and export turnover while computing the eligible deduction u/s l0A, as this is against the provisions of section 10A." 6. The Assessee is in the business of rendering software development services. It has STPI (software technology Parks of India) in Bangalore and Hyderabad, which are eligible for deduction u/s.10A of the Income Tax Act, 1961 (Act). Ground No.2 raised by the Revenue project the grievance of the Revenue regarding the action of the CIT(A) in exc....
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.... excluded both from the export turnover and total turnover. The Assessee also placed reliance on the decision of the Special Bench of the Chennai ITAT in the case of Sak Soft Limited v. ITO (ITA no. 691 & 1953/Mds/2007) wherein it was held that if the telecommunication, freight and insurance expenses are reduced from the export turnover then the same would also have to be reduced from the total turnover in order to compute the deduction under section 10A. The Assessee also placed reliance on the decision of the Hon'ble High Court of Karnataka in the appellant's owns case for AY 2002-03, 2003-04 & 2004-05 (ITA No. 450 of 2008, ITA no. 451 of 2008 & ITA no. l37 of 2010) wherein it was held that telecommunication charges should be excluded both from export turnover and total turnover while applying the formula for allowing deduction u/s.10A(4) of the Act. 8. The AO did not accept the plea of the Assessee and he reduced telecommunication charges only from the Export Turnover and did not reduce it from the total turnover while applying the formula for allowing deduction u/s.10A(4) of the Act. As a result, the deduction u/s.10A of the Act was allowed at a much lower sum than wha....
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....aim was made on a scientific basis with minimum margin of error. The Assessee claimed that the liability to incur the expenditure on account of warranty liability was a certain liability and that the quantification of such liability was based on sales made in each year and the quantum of claims on account of warranty liability as a percentage of sales in the past. The assessee also relied on the decision of the Hon'ble ITAT in its own case for the assessment years 2003-04 and 2004-05, wherein similar claim was held to be a liability of the Assessee and allowable as deduction while computing income from business of the Assessee. The Assessee thus claimed that the liability in question was not contingent liability and should be allowed as deduction. 14. The AO examined the aspect whether the provision by the Assessee on account of warranty liability was made on scientific basis with minimum margin of error. He was of the view that in making a provision on account of warranty liability the Assessee merely adopts a formula and by doing so claims that the liability was an ascertained liability. He was of the view that the estimation made should be more or less equal to the actual e....
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....tated before the Hon'ble High Court of Karnataka. 17. For the above reasons, the AO held that the provision made by the assessee in its books and debited in the profit and loss account, towards warranty expenditure, in excess of the actual expenditure has to be treated as a contingent liability. Accordingly, an amount of Rs. 2,49,81,000/-, being the excess provision made, was disallowed and added back to the assessee's total income. 18. On appeal by the assessee, the CIT(Appeals) accepted the submission of the assessee that similar disallowance made in assessee's own case for the AYs 2002-03 & 2003-04 was deleted by the Tribunal and the CIT(A) found that the facts and circumstances under which the disallowance was made in the present assessment year was identical to the facts as it prevailed in AYs 2002-03 & 2003-04. The CIT(Appeals) accordingly deleted the addition made by the AO. The CIT(A) was of the view that provision for warranty as made by the assessee company was in conformity with the ruling of the Hon'ble Supreme Court in the case of Rotork Controls India Pvt. Ltd. v. CIT, 223 CTR 425. Aggrieved by the order of CIT(Appeals), the revenue has raised ground No.3 be....
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....provision made was based on past history and was on scientific method of estimating liability on account of warranty claims. It is clear from the chart which has been extracted in the order of assessment that as and when the period of warranty expires, the assessee writes back the provision made in the books of account to the extent it relates to the warranty liability which the assessee does not incur and which was already provided by way of a provision and allowed as deduction in the past. It appears to us that the provision made by the assessee is scientific and is based on past history. We are also of the view that in view of the parity of basis of provision of warranty in AYs 2002-03 & 2003-04 and AY 2005-06, the ruling of the Tribunal in AYs 2002-03 & 2003-04 is squarely applicable to AY 2005-06 also. For the reasons stated above, we do not find any merit in ground No.3 raised by the revenue and accordingly the same is dismissed. 23. Ground Nos. 4 to 8 raised by the revenue in its appeal and the grounds raised by the assessee in the CO No.21/Bang/2016 are with regard to determination of ALP of the international transactions entered into by between the assessee and its AE in ....
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....al dissimilarity * Presence of Intangibles * High Turnover 6. The Ld. CIT(A) while rejecting Flextronics Software Ltd., on turnover filter has grossly erred in not adjudicating on the following grounds: * Functional dissimilarity 7. The Ld. CIT(A) while rejecting Satyam Computer Services Ltd., on turnover filter has grossly erred in not adjudicating on the following grounds: * Unreliable financial statements * Presence of Brand 8. The Ld. CIT(A) while rejecting Infosys Technologies Ltd., on turnover filter has grossly erred in not adjudicating on the following grounds: * Presence of Brand * Economies of scale * Functionally Dissimilar 9. The Ld. CIT(A) while rejecting Sankhya Infotech Ltd., on the ground of functional dissimilarity has erred in not adjudicating on the following ground: * Fails employee cost filter The respondent craves leave to add, alter, amend and/or delete any of the ground mentioned above." 24. As we have already seen, the assessee is in the business of rendering software development services. The assessee renders software development services to its Associate Enterprise (AE), M/s. Dell International Inc. and received consider....
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....ransactions. The assessee in its TP report filed to justify the price received from the AE was at Arm's Length, selected the comparable companies and the average PLI of those comparable companies was compared with OP to TC of the assessee and it was claimed that the price received by the assessee was at arms' length. The TPO after rejecting the methodology applied by the assessee came to the conclusion that the companies as per list enclosed as Annexure-I to this order alone were comparable and arrived at the average arithmetic mean of profits of the those comparable companies at 26.59%. 26. The TPO thereafter computed the ALP as follows:- "13.6 Computation of Arms Length Price: The arithmetic mean of the Profit Level indicators is taken as the arms length margin. (Please see Annexure B for details of computation of PLI of the comparables). Based on this, the arms length price of the software development services rendered by you is computed as: Arithmetic mean PLI : 26.59% Less Working capital adj. as per Ann.-C : 2.90% Adj.Arithmetic mean PLI : 23.69% Arm's Length Price: Operating Cost Rs. 99,98,80,000/-* Arms Length Margin 22.69% of the Operating cost Arms ....
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....efore it cannot be compared. By this process, 5 companies were excluded from the list of comparable companies. These 5 companies, as we have already mentioned, also got excluded by application of RPT filter. These companies are:- (1) iGate Solutions Ltd. (2) Infosys Technologies Ltd. (3) Satyam Computer Services Ltd. (4) L&T Infotech Ltd. and (5) Flextronics Software Systems Ltd. 30. Companies which got excluded by application of RPT filter alone are:- (1) Sasken Network Systems Ltd. (2) Four Soft Ltd. (3) Thirdware Solutions Ltd. (4) R S Software (India) Ltd. (5) Geometric Software Solutions Ltd. (6) Tata Elxsi Ltd. (7) Sasken Communication Technologies Ltd. 31. Another question that came up for consideration before the CIT(Appeals) was with regard to accepting Sankhya Infotech Ltd. which was a comparable chosen by the TPO, which was rejected as not comparable by the CIT(Appeals) on the basis that the said company was not only a software development service provider, but also developing software products, therefore it cannot be regarded as a comparable company with the assessee which was a pure software development service provider. On the decision of the....
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....laced on the decision of Hon'ble Gauhati High Court in the case of Assam Company (India) Ltd. Vs. CIT 256 ITR 453 (Gau) wherein it was held that it is permissible on part of Tribunal to entertain a ground beyond those incorporated in memorandum of appeal though party urging said ground had neither appealed before it nor had filed a cross-objection in appeal filed by other party provided relevant facts on which such ground are to be founded are available on record. 36. We have heard the rival submissions. As far as ground No.4 raised by the revenue is concerned, the submission of the learned DR was that only where the related party transaction (RPT) is more than 15% to 25%, can a company be excluded from the list of comparable companies. Our attention was drawn to the decision of the Hon'ble ITAT Bangalore "B" Bench in the case of Robert Bosch Engineering and Business Solutions Ltd. Vs. DCIT IT (TP) A.No.1519/Bang/2013 and 1687/Bang/2013 order dated 13.9.2017 wherein the Tribunal in paragraph 8 has observed 25% to 15% RPT filter has to be applied depending on availability of comparables. His submission was therefore that companies with RPT of 25% or more alone should be excluded fr....
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....on was drawn to the decision of the Hon'ble ITAT in the case of Net Devices India Pvt.Ltd., wherein at paragraph 7.3 the Tribunal has referred to the RPT of M/s. Geometric Software solutions Ltd., as computed by the TPO himself as 19.34% for the very same AY 05-06. Hence according to him this company has to be regarded as not comparable by applying RPT filter. Besides the above, the learned counsel for the Assessee also pointed out that this company is not functionally comparable as stated by the Assessee in the various submissions filed before the CIT(A) and since the CIT(A) excluded this company by applying 0% RPT filter, the functional comparability of this company was not considered by the CIT(A) and the issue should be examined by the CIT(A) on the functional comparability of this company. 37. We have considered the submissions. It is no doubt true that in the case of Robert Bosch (supra) this Tribunal has held that RPT filter can be in the range of 25% to 15% of the total receipts from software development services, depending on availability of comparable companies. It is no body's case that there is dearth of comparable companies in software development services industry. T....
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....fect of such high turnover on the margin should be seen. According to him, therefore, the order of CIT(A) excluding companies with huge turnover was not proper. 40. The learned counsel for the Assessee however placed reliance on the decision of the ITAT Bangalore Bench in the case of Sysarris Software Pvt.Ltd. Vs. DCIT (2016) 67 Taxmann.com 243 (Banglore-Trib) wherein the Tribunal after noticing the decision of the Hon'ble Delhi High Court in the case of Chryscapital (supra) and the decision to the contrary in the case of CIT Vs. Pentair Water India Pvt.Ltd., Tax Appeal No.18 of 2015 dated 16.9.2015 wherein it was held that high turnover is a ground to exclude a company from the list of comparable companies in determining ALP, held that there were contrary views on the issue and hence the view favourable to the Assessee laid down in the case of Pentair Water (supra) should be adopted. 41. We have given a very careful consideration to the rival submissions. ITAT Bangalore Bench in the case of Genesis Integrating Systems (India) Pvt. Ltd. v. DCIT, ITA No.1231/Bang/2010, relying on Dun and Bradstreet's analysis, held grouping of companies having turnover of Rs. 1 crore to Rs. 200 cr....
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.... Assessee and therefore following the said view, the action of the CIT(A) excluding companies with turnover of above Rs. 200 crores from the list of comparable companies is held to correct and such action does not call for any interference. 43. In view of the above conclusion, the grounds raised in CO for excluding Flextronics Software Ltd., Satyam Computer Services Ltd. and Infosys Technologies Ltd., from the list of comparable companies on the ground of functional and other dissimilarities has become academic and hence is not being adjudicated and left open. 44. As far as Ground Nos .7 & 8 raised regarding exclusion by CIT(A) of M/s. Sankhya Infotech Ltd. as comparable company is concerned, the learned DR reiterated the stand as taken by the revenue in the grounds of appeal. The learned counsel for the Assessee placed reliance on the decision rendered in the case of Electronics for Imaging India Pvt. Ltd. (supra) and M/S. Net Devices India Pvt.Ltd. (supra) wherein M/s. Sankhya Infotech Ltd. was regarded as a company in software products also and not pure software development service provider such as the Assessee and hence cannot be regarded as comparable in cases of companies r....
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....that the above company is to be excluded as functionally not comparable with a software development service provider such as the Assessee as held by this Tribunal in the case of Electronics for Imaging India Pvt. Ltd. IT (TP) A.No. 464/Bang/2013 and M/S. Net Devices India Pvt. Ltd. IT(TP) No. 1099/Bang/2011 and M.P.100/Bang/2016. 49. On the aspect whether comparability of this company can be considered in the present proceedings, we find that the Hon'ble Gauhati High Court in the case of Assam Company (India) Ltd., (supra) taken the view that it is permissible on part of Tribunal to entertain a ground beyond those incorporated in memorandum of appeal though party urging said ground had neither appealed before it nor had filed a cross-objection in appeal filed by other party provided relevant facts on which such ground are to be founded are available on record. We are of the view that there is no application of the principle of estoppel in the matter determination of ALP. The comparability or otherwise of a company for the purpose of determination of ALP under the Transfer Pricing provisions of the Act cannot be on the basis of admission of a party that a particular company is comp....
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....ssessee against the very same order of the CIT(A) against which the present appeal has been filed. We therefore refuse to condone the delay in filing the appeal as there is no reasonable or sufficient cause made out for filing the appeal belatedly. 53. In the result, appeal by the Assesse is dismissed. ITA No. 1026/Bang/2014 54. This is an appeal by the Revenue against the order dated 18.4.2014 of the CIT(A), LTU, Bangalore. This appeal arises out of assessment of the total income of the Assessee for AY 2005-06 under Sec.147 of the Act. 55. The only ground raised by the Revenue in its appeal is with regard to the order of the CIT(A) in holding that software expenditure incurred by the Assessee was revenue in nature and therefore should be allowed as deduction in computing income from business of the Assessee. The contention of the learned DR before us was that the AO has come to the conclusion that the expenditure in question was capital in nature for the reason that the Assessee did not produce the relevant evidence to show that the software in question was non exclusive non transferable licensed software. Without dislodging this finding of the AO, the CIT(A) has come to a co....