TaxTMI 
TaxTMI 
2016 (9) TMI 1483
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....,500/- after claiming deduction u/s 10A and tax 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....
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.... learned TPO erred in rejecting Akshay Software Technologies Limited and VJIL Consulting Limited. 2.9 in upholding 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 Solution....
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.... is exposed to single customer risk without evaluating the business arrangement of the assessee. 6. That the learned TPO and the learned DRP 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. 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 9....
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.... and audio conference charges. 8.3 Notwithstanding and without prejudice to the above, the learned AO erred in not observing that should a portion of the telecommunication expenses (bandwidth charges) be reduced from the export turnover, the expenses 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 Karnat....
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....exi Limited (Segment) 25. Thirdware Solutions Ltd 26. Wipro Ltd (seg) 11. The learned counsel for the assessee Shri KR Vasudean submitted that out of 26 companies selected by the TPO, the following 16 companies may be rejected for the reasons mentioned in the table below. The assessee relied on the decision of Hewlett-Packard (India) Globalsoft Pvt. Ltd., IT(TP)A No.1031/Bang/2011. S N SN Comparables Rejection Reasons 1 Accel Transmatics Ltd (Segment) 1.Functionally dissimilar 2.Abnormally 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. Infosy....
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....ed 6. Mindtree Consulting Limited 7. Quintegra Solutions Ltd 8. RS Software (India) Ltd 9. Sasken Communications Limited (Segment) 10. SIP Technologies & Exports Limited 16. Thus, we direct the TPO to reject the 15 companies as stated above in para 11, accept the 10 companies as stated in para 15 and reject 1 company (Thirdware Solution Ltd.,) as stated in para 14 and rework the ALP of the assessee. 17. With respect to the remaining grounds of appeal filed, the following observations are to be taken into account. 18. Ground No. 1, 2 are general. 19. Ground No.2.1 to 2.4 conceptual. 20. Ground No.2.2 to 2.8 and 2.15 to 2.16, 3, 4, 5 and 6 are not pressed. 21. 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 assessme....
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....ct the error which has crept in while computing deduction u/s 10A and take the profit of software unit at Rs. 181,072,777/- 28. Additional ground Nos.5.1 and 6.1 are as under: Ground 5.1 Market risk adjustment The appellant submits that the Hon'ble DRP members and learned AO ought to have granted market risk adjustment to the appellant: * The Hon'ble DRP members and the learned AO have grossly erred in accepting the learned TPO's rejection of market risk adjustment submitted by the appellant. * The Hon'ble DRP and the learned AO have erred in not appreciating the difference in the functional profile that exists between the appellant who functions in the role of a captive service provider vis-avis the independent unrelated comparable companies 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 a....
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....he same along with all the relevant material before deciding on the percentage of risk adjustment to be allowed, if any, in accordance with law. It is ordered accordingly. Consequently, Ground Nos.3 & 4 are treated as allowed for statistical purposes. 30. We direct the Assessing Officer to follow the above order in assessee's own case (Supra) and rework the Market risk adjustment. 31. With respect to depreciation adjustment allowance of depreciation adjustment, the learned counsel for the assessee relied on the decision of tribunal in the assessee's own case (supra) for the asst. year 2008-09. 19.2 The assessee in the grounds raised sought adjustment towards depreciation on the ground that the depreciation cost as a percentage of the gross block of the assessee was 25% as against 10% for the comparable and hence this difference 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 ....
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....9.7 No case has been made out by the assessee that the difference in depreciation is due to any reason like capacity utilization, etc. The difference in depreciation could be due to many reasons as different companies have their own accounting problems in the matter of fixed assets and depreciation on the basis of technical estimates made of useful life of the assets. Depreciation provided under the Income Tax Rules or the minimum depreciation provided under the Companies Act may not be really exhibiting the actual position. Over a period of time, the difference of depreciation provided under different methods would almost be the same except for marginal difference. In the written down value (WDV) method, the depreciation for the initial year would be more, whereas in straight line method, depreciation in the initial years would be less. However, at the end of the day, the depreciation off sets each by itself. 19.8 In the interest of equity and natural justice, we feel constrained to admit the additional ground raised by the assessee on the issue of depreciation. However, mere claim for an adjustment will serve no purpose unless it is backed by proper details. The addition....