TaxTMI 
TaxTMI 
2016 (9) TMI 1483
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....ax was paid under the normal provision of Income-tax Act. The case was selected for scrutiny assessment and notice u/s 143(2) was issued on 9/9/2008. 4. During the previous asst. year 2007-08, the assessee had certain international transactions therefore reference was made to the TPO. The TPO vide order u/s 92CA dated 14/10/2010 determined the ALP adjustment in respect of software services rendered to the extent of Rs. 22,98,13,929/-. Therefore the ALP adjustment to the extent of Rs. 22,98,13,929/- was added to the total income of the assessee. 5. The assessee company filed its objection before the DRP on 12/1/2011. The DRP issued directions u/s 143(3) r.w.s 144C vide order dated 22/8/2011. 6. In confirmation with the DRP, the asst. was concluded arriving at the total tax payable by the assessee at Rs. 14,52,83,020/- 7. Aggrieved, the assessee is in appeal before us. 8. The assessee has filed the following grounds of appeal. 1. The learned Dispute Resolution Panel ('DRP') and the learned Director of Income Tax (Transfer Pricing -IV), Bangalore ('Transfer Pricing Officer' or 'TPO') grossly erred in law and facts of the case in determining the arm's length price ('ALP') of the....
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....g the actions of the learned TPO in accepting a companies like Infosys Limited and Wipro Limited as a comparable companies even though the sales of Infosys and Wipro are driven based on brand developed by them, and doing so the learned DRP have incorrectly applied the ratio of the jurisdictional Delhi Income Tax Appellate Tribunal (ITAT) ruling in Agnity India Technologies India Pvt. Ltd. (reference: ITA No.3856(Del)/2010). 2.10 In upholding the actions of the learned TPO in accepting Tata Elexi Limited as comparable company even though the company in its reply to the learned TPO under section 133(6) had mentioned that the company provides product design services, which is functionally not comparable to the assessee's business. 2.11 In upholding the actions of the learned TPO in accepting companies engaged in the provision of software product development like Megasoft Limited, Flextronics Software Systems Limited, KALS Information Systems Limited, Avani Cimcon Technologies Limited, Lucid Software Limited, Ishir Infotech Limited, E-zest Solutions Limited, Persistent Systems Limited and R Systems International Limited which are functionally not comparable to the assessee's busi....
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....ange of +5% as provided in proviso to Section 92C(2) of the Act to the appellant, while determining the arm's length price. II. Corporate Tax 7. Disallowance of Project Specific Costs amounting to Rs. 158,395,739/- under section 40(a) of the Act. 7.1 The learned AO and learned DRP erred in disallowing he expenditure of Rs. 158,395,739/- incurred by the appellant towards the usage of EDA (electronic Design Automation) software tools in software development, under section 40(a) of the Act. 7.2 The learned AO erred in disallowing the expenses by placing reliance on the judgement of Hon'ble Karnataka High Court in the assessee's own case for the assessment years 2000-01 and 2001-02 where it has been held that the taxes are required to be withheld at source on payments made to non-residents. 7.3 The learned AO erred in not appreciating that the Honorable Supreme Court in the assessee's own case for the assessment years 2000-01 and 2001-02, vide order dated 9th September, 2010, has set aside the order of the Karnataka High Court (supra) and requested the High Court to decide the case on merits. 7.4 The learned AO erred in not observing that since the Honorable Supreme C....
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....should also be reduced from the total turnover in arriving at the deduction under section 10A of the Act. 8.4 The learned AO has erred in not relying upon the decision of the jurisdictional Income Tax Appellate Tribunal in the case of KPIT Cummins Infosystems (Bangalore)(P) Ltd. V. ACIT - 26 SOT 529, wherein it has been held that should the expenses be reduced from export turnover then the expenses ought to be reduced from total turnover also. 8.5 Further, the learned AO has also erred in not relying on the decision of the Special Bench of the Chennai Tribunal in the case of Sak Soft Limited v. ITO (ITA No.691 & 1953/Mds/2007) wherein it has been 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. Further, recently the High Court of Karnataka has decided the matter in favour of the assessee in the case of Honeywell Technologies Solutions Lab Pvt.Ltd. (ITA No.820 of 2009). 8.6 The learned AO erred in computing deduction under section 10A by erroneously considering the profits of the software (STPI) unit ....
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....bnormally high growth rates 3.Fluctuating margins from 5.68% in 2004 to a loss of (18.13%) in 2005 to a profit of 40.75% in 2006 and 21.11% in 2007; 4.Revenue from the software services is 27.60% of the total operating revenue ch which is much less than the 75% threshold. 2. Avani Cimcon Techno-logies Ltd Functionally dissimilar 3. Celestial Labs Ltd Functionally dissimilar 4. E Zest Solutions Ltd., Functionally dissimilar 5. Flextronics Software Systems Ltd (Segment) Functionally dissimilar 6 Helios & Matheson Information Technology Ltd., 1.Functionally dissimilar 2. Abnormal Margin fluctuations 7. Infosys Limited 1. Functionally dissimilar 2. Presence of Brand 3. High Margin and 4. Industry leader - large economies of scale 8. Ishir Infotech Ltd Functionally dissimilar 9. KALS Information Systems Limited Functionally dissimilar 10. Lucid Software Ltd., Functionally dissimilar 11. Megasoft Ltd 1.Functionally dissimilar 2.Margin to be computed at segmental level and not entity level 3.Abnormally high margins 12. Persistent Systems Limited Functionally dissimilar 13 RS Software (India) Ltd., Different financial year end 14. Tata Elexi Lim....
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..... Ground No. 7 to 7.6 are with respect to corporate tax disallowance of project specific costs amounting to Rs. 158,395,739 u/s 40(a)(ia) of the Act. 22. This issue is covered by the decision of the tribunal in the assessee's own case in ITA No.1670/Bang/2012, wherein it has been held as under:- 10.1 This Ground is in respect of the disallowance of project specific costs amounting Rs. 11,25,95,270 u/s 40(a)(i) of the Act. In the course of assessment proceedings, the Assessing Officer observed that the assessee had claimed these amounts as project specific costs. It was found that these charges consist of GLM and software charges paid by the company. The Assessing Officer held that this issue of disallowance of software usage charges (shrink wrapped software) for non-deduction of taxes is to be disallowed under Section 40(a)(i) of the Act as has been held by the Hon'ble High Court of Karnataka in the case of Samsung Electronics Co. Ltd. & Others (Kar) in ITA No.2808 of 2005 dt.15.10.2011 and to which case the assessee was also a party (ITA No.1264 & 1265/06). In this view of the matter, the Assessing Officer made the disallowance of Rs. 11,25,95,270 under Section 40(a)(i) ....
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....panies who operate in the capacity of entrepreneurial entities. * The Hon'ble DRP members and the learned AO erred in concluding that the market risk adjustment will be nullified against the existence of single customer and political risks. Ground No.6.1 - Depreciation Adjustment The appellant submits that it should be granted Depreciation adjustment. * The depreciation cost as a percentage of the cost of the appellant during the financial year 2006-07 is significantly different from that of the comparable companies. * The difference in the depreciation cost arises due to differences in the accounting treatment across the comparable companies and the appellant. * Considering the above fact, to achieve reliable comparability, the margins of the comparable companies should be adjusted for difference in depreciation cost of comparable companies and tested party. 29. With respect to market risk adjustment, the learned counsel for the assessee relied on the decision of Intellinet Technologies Pvt. Ltd., in ITA No.1237/Bang/2010 which has been followed in the case of Infineon Technologies India Pvt. Ltd., in IT(TP) No.1670/Bang/2012. The assessee contends that it is....
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....ifference needs to be adjusted for comparability. During the proceedings, on being specifically asked, the learned counsel for the assessee stated that this ground was not raised before the TPO and CIT (Appeals) but prayed that the same be admitted for adjudication as it was a legal issue. 19.3 The learned Departmental Representative submitted that he has, prima facie, no objection to admission of this additional ground. He, however, pointed out that the additional ground raised was very general, put in a bland manner, was not clear or specific and appeared to be an afterthought after the CIT (Appeals) has confirmed the adjustments made by the TPO. The learned Departmental Representative submitted that the assessee has not explained as to why this claim of depreciation is being submitted now; why it is necessary to accept the same; why this claim was not raised earlier; computation of quantum, etc. In the absence of these details, such an additional ground would have no meaning and not being maintainable ought to be dismissed summarily. 9.4 We have heard both parties and considered the rival submissions. We find force in the submissions of the learned Departmental Representat....