TaxTMI 
TaxTMI 
2019 (10) TMI 1243
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.... ITA No. 550/Kol/2014 dated 05.12.2018, which stood adjudicated in assessee's favour as under: "3. Coming to ground No. 1. At the outset itself the Ld. Sr. Counsel for the assessee submitted that the issue raised in ground No. 1 of the revenue is no longer res Integra. According to him, this issue has already cropped up in AYs 2005-06 and 2006-07 and the Tribunal in assessee's own case for these Assessment Years in ITA Nos. 2222 & 2223/Kol/2010 was pleased to uphold similar action of the Ld. CIT(A) and against the same the revenue preferred an appeal before the Hon'ble High Court which has been dismissed by the Hon'ble High Court in GA No. 2314 of 2015 by order dated 08.01.2016 and thus Hon'ble High Court confirmed the order of the Tribunal. We note that the Tribunal in assessee's own case wherein the Ld. CIT(A) had deleted the addition made by the AO/TPO as per the transfer pricing adjustment made by them, was challenged by the revenue before this Tribunal for AYs. 2005-06 and 2006-07 wherein the Tribunal upheld the action of Ld. CIT(A) by holding as under: "13. We noted from factual aspects of the case that the TPO perceived that functional and risk pr....
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....al factor for awarding a service contract would always be technical and commercial expertise and experience of the assessee in handling such similar projects. The local presence of the AEs or it standalone financial or technical capabilities hardly influence the decision of the customer to sign the agreement with the AEs. The assessee stated that the possibility of a customer raising any claim for deficiency in administrative services are very remote, as they are rendered to the assessee as an internal arrangement and the customers are not affected by it. Only possibility of any customer raising a claim would be in respect of non-administrative services which are exclusively provided by ITA No. 2222 & 2223/Kol/10 ITC Infotech India Ltd. 16 the assessee irrespective of the business model. It was also emphasised that it is the assessee, which has adequate capital and technical expertise to bear the risks arising from deficiency in services, which neither 12A nor 12B possess. Thus even if a customer raises any claim on 12A/12B, such risk would be eventually passed on to the assessee. 14. There is contractual relationship among the assessee, its subsidiaries and third parties. The su....
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.... analysing the economic substance of a transaction, it is necessary to examine whether the conduct of the associated enterprises over time has been consistent with the purported allocation of risk and whether changes in the pattern of behavior have been matched by changes in the contractual arrangements (emphasis added) Furthermore, in relation to contractual relationship and conduct of the contracting parties, para 5.3.2.30 states that: The conduct of the contracting parties is generally a result of the terms of the contract between them. The contractual relationship thus warrants careful analysis when computing the transfer price. Other than a written contract, the terms of the transactions may be found in correspondence and communications between the parties involved. In cases where the terms of the arrangement between the two parties are not explicitly defined, the contractual terms have to be deduced from their economic relationship and conduct, (emphasis added) It is also pertinent to mention at this juncture that the concept of business risk in transfer pricing context has been discussed at length in the recent amendments to the OECD Transfer Pricing Guidelines 201....
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....h nature of such risk allocation.... "control" should be understood as the capacity to make decisions to take on the risk (decision to put the capital at 5risk)) and decisions on whether and how to manage the risk, internally or using an external provider. This would require the company to have people - employees or directors - who have the authority to, and effectively do, perform these control functions. Thus, when one party bears a risk, the fact that it hires another party to administer and monitor the risk on a day-to-day basis is not sufficient to transfer the risk to that other party." Further, the OECD Guidelines have also discussed on the issue of "risk allocation" and "financial capacity" in para 9.29, 9.30 as follows: "Another relevant, although not determinative factor that can assist in the determination of whether a risk allocation in a controlled transaction is one which would have been agreed between independent parties in comparable circumstances is whether the risk barer has, at the time when risk is allocated to it, the financial capacity to assume (i.e. to take on) the risk. Where risk is contractually assigned to a party (hereafter 'the transferee) ....
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....he respondent who would be impacted for any deficiency in the services provided by the subsidiaries. The only area of any probable dispute and consequential claims is with regard to non-administrative services which are being provided by the respondent under both the business models. -Claim for any deficiency in non-administrative services- The Ld. TPO, vide his order, has acknowledged the fact that the MSA very clearly envisage that the subsidiaries would sub-contract to the respondent the non-administrative services and the provider of these non-administrative services, i.e., the respondent would be fully liable to the user, i.e., customer for the same. He further submitted that it has the adequate capital and the technical expertise to bear the risk that may arise for any deficiency in the services provided to the customers. The subsidiaries do not have adequate capital or technical expertise to bear such a risk. Thus, in our view, under the Business Model 2, as per terms of the MSA, in case a Customer raises any claim for non-performance of the non-administrative services, the subsidiaries would eventually pass on such risk to the assessee and the assessee has to bear suc....
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....isks. However, the subject of risk evaluation and quantification has continued to be an area of extensive study and research. The assessee vide submission dated 11th October, 2009 briefly discussed one such concept in the area of risk management i.e., towards risk evaluation and quantification. In case of the assessee, there is an inherent transfer of risk by 12A/12B to the assessee vide the MSA in relation to cases where the customer contacts directly with these. AEs and there are financial claims relating to the quality of deliverables. Such a transfer of risk through contractual arrangement is a common risk management practice in commercial world and should be duly recognized. The TPO made adjustment by determining a different revenue split [15% or 13% as the case may be] from the one followed by the respondent and 12A/12B. Such an adjustment made by the TPO was without any basis or analysis. In relation to difference in clauses in the MSA between the assessee and 12A as referred to by the TPO for making an ad-hoc adjustment, the assessee further drew our attention towards Clauses 4A(iii) and clause 4B(ii) of the MSA which provides for the same effect in relation to exclusion ....
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....ied by the documents so submitted before the authorities below. Further, the genuineness of the documents which were relied on by the authorities have not been doubted by the Department. Thus, in view of the above, we do not find any illegality and infirmity in the orders and further we are of the opinion that a concurrent finding of fact on the basis of the documents on records was recorded by the First Appellate Authority as well as the Second Appellate Authority. Accordingly, no question of law arises out of the judgment rendered by the authorities below. The appeals are devoid of merits and the same are dismissed accordingly along with the applications being GA No. 2314 of 2015 and GA No. 2318 of 2015 respectively." 5. Therefore, respectfully following the order of the Hon'ble High Court in AYs 2005-06 and 2006-07 and taking note of the Hon'ble jurisdictional High Court decision in assessee's own case, supra, we confirm the order of the Ld. CIT(A) and dismiss this ground of appeal of the revenue." 3. The Revenue is fair enough in not pinpointing any distinction on facts or law the two corresponding assessment years. The CIT(A)'s detailed discussions has a....
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....s making companies. No justification has been given for the same. It appears that he might have excluded loss making companies because their profitability was not considered as normal. However, no case has been made out to show that such companies were affected by any abnormal factors and loss making comparables have been summarily eliminated. It has been held in several decisions, including that by Special bench of tribunal in the case of Quark Systems P. Ltd. vs. DCIT 38 SOT 307 that a comparable cannot be rejected merely because of showing loss. Some other such decisions are in the cases of Exxon Mobil Company India P. Ltd. vs. DCIT, 15 ITR (Trib) 353 (Mum), Willis Processing Services (I) P. Ltd. vs. DCIT 30 ITR (Trib) 39 (Mum.) and Yum Restaurants (India) P. Ltd. vs. ACIT 14 ITR (Trib.) 420 (Del). It has been also informed, that the TPO himself has accepted loss-making comparables in the appellant's case in A.Y. 2007-08 and A.Y. 2009-10. If one considers contemporaneous data of all the comparables without excluding loss making companies from the set of comparables, mean PLI works out to be lower than PLI of the appellant. It is also informed by the appellant that in the ord....
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.... relevant to AY 2008-09 has incurred the following software related expenses: Sl. Particulars Amount (in Rs.) Remarks 1 Purchase of System Software's enduring in nature Capitalised as Fixed Assets by the appellant company 3,63,49,672/- Capitalised by the Appellant Company under "Capitalised Software" of Schedule 4 of the Audited Annual Accounts - Refer Exhibit A Page 45 of the Paper Book-II Total amount of Systems Software's capitalised by The Appellant Company 3,63,49,672/- 2 Software related expenditure towards consumables, maintenance, yearly renewal charges, Annual Maintenance contracts etc. 3,54,03,415/- Revenue expenditure incurred on maintenance of softwares and other related expenditure incurred in the normal course of business - duly allowed by the Assessing Officer 3 Expenditure towards purchase of Application Software - not extending and enduring benefit and having limited useful life 1,63,71,912/- Application Sofware's facilitating appellants conduct of business and having limited useful life Total "Software Related Expenditure" debited in the Profit and loss Account by the Appellant Company under Schedule....
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....he appellant company has incurred these application software expenses to fine tune its business operations thereby, enabling the running of its business more effectively, efficiently and profitably. Legal position in respect of allowability of expenses on purchase of application softwares: Appellant refer to the decision of the Hon'ble Special Bench of the Delhi Tribunal in Amway India Enterprises vs. DCIT (2008-TIOL-97-ITAT-DEL-SB) (Refer Exhibit B Pages from 90 to 124 of the Paper Book-II), laying down the tests/principles with regard to the treatment of expenditure incurred for acquisition of software either as revenue or as capital. Extract of the said decision is given below:- "Since computer software becomes obsolete with technological innovation and advancement within a short span of time, if can be said that that where the life of the computer software is shorter (say less than 2 years), it may be treated as revenue expenditure; any software having utility to assessee for a period beyond two years can be considered as accrual of benefit of enduring nature, however, that by itself will not make expenditure incurred on software as capital in nature and functional te....
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....n on carrying on a trade at all. The Hon'ble Supreme Court in the case of Alembic Chemical co. [1989] 177 ITR 377 held that the concept of payment made 'once and for all' and of 'enduring benefit' must respond the changing economic realities of the business. It is also observed that 'once for all' payment test is also inconclusive. In a given case the test of 'enduring benefit' might break down. In the light of above principle, let us examine the facts of the present case." The ITAT further observed in the above mentioned judgment of IBM that "the assessee in the course of its business acquired certain application software. It is made clear that the amount is paid for application software and not system software. The application software enables the assessee to carry out its business operation efficiently and smoothly. However, such software itself does not work on stand-alone basis. The same has to befitted to the computer system to work. Such software enhances the efficiency of the operation. It is an aid in manufacturing process rather than the toll itself." Therefore, the expense for purchase of software packages were incurred for acquisi....
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....hased were called for from the appellant and were examined. It is seen that the software purchases included following items:- Sl. No. Vendor Particular Amount (Rs.) 1 Microgenesis Cardsoft P. Ltd. Autodesk Inventor Professional 2008 for engineering design 11,13,840/- 2 Credence Innovations (lndia) P. Ltd. Power designer data architect for data modelling 2,96,400/- 3 Dell lndia P. Ltd. Project 2007 for project management 5,14,734/- 4 Sonata information Technology Ltd. IBM Rational Software Architect Floating for application design data modelling 3,10,268/- The aforesaid software tools are useful for carrying out projects on a continuous basis. They function as tool for creation of application, data modelling, software designing, project management and engineering design. Considering nature of business of the appellant, these software items are tools of trade for the appellant to be utilized for executing contracts for clients over a long term. They enhance technical capability of the appellant to enable it to undertake work which it could not have effectively carried out otherwise. They are meant to be used for executing a number of customer contrac....
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....The taxpayer's case on the other hand is that hon'ble Rajasthan high court's judgment in Chambal Fertilizers and Chemicals Ltd. case ITA No. 52/2018 dated 31.07.2018 considered in the tribunal's order in M/s. ITC Limited vs. ACIT ITA No. 685-1267/Kol/2014 decided on 27.11.2018 held that the impugned disallowance of educational cess u/s. 40(a)(ii) is not sustainable. Hon'ble apex court's landmark decision in Collector, Land Acquisition vs. Mst. Katiji & Others (1987) 167 ITR 471,472-473 (SC) settled the law long back that the cause of substantial justice prevails over all technical aspects. Their lordships' latter decision in National Thermal Power Co. Ltd. vs. CIT (1998) 229 ITR 383 (SC) also held that the tribunal can very well entertain an additional ground/issue in order to determine correct tax liability of an assessee provided all the relevant facts are already on record. We hold in view of the foregoing pleadings and settled legal proposition that the impugned delay of 1535 days in filing deserves to be condoned. We order accordingly. The assessee's cross-appeal ITA No. 485/Kol/2019 is taken for adjudication. 9. Adverting to the assessee's....