TaxTMI 
TaxTMI 
2020 (2) TMI 1222
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....rrated in, revenue's appeal in ITA No. 2075/Kol/2017 for A.Y. 2010-11 and revenue's appeal in ITA No. 220/Kol/2018 for A.Y. 2011-12, have been taken into consideration for deciding the above appeals en masse. 3. The Revenue's appeal in ITA No. 2075/Kol/2017, for A.Y. 2010-11 is barred by limitation by 4 days. The Revenue filed a petition for condonation of delay requesting the Bench to condone the delay. We have heard both the parties on this preliminaryissue and having regard to the reasons given in the petition for condonation of delay, we condone the delay and admit the appeal of revenue for hearing on merits. 4. The assessee's appeal in ITA No. 552/Kol/2019 for A.Y. 2010-11, ITA Nos. 486 to 488/Kol/2019 for A.Y. 2011-12 & 2012-13 are barred by limitation by 553 days, 395 days respectively. The assessee filed a petition for condonation of delay requesting the Bench to condone the delay. The ld. Counsel for the assessee filed before us affidavit stating reasons of delay, which are reproduced below: 2. The petitioner had offered the above mentioned amount of education cess for tax under the normal provisions of the Act considering the same as an expense disallowable....
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....assess correctly the tax liability of an assessee in accordance with law. If, for example, as a result of a judicial decision given while the appeal is pending before the Tribunal, it is found that a non-taxable item is taxed or a permissible deduction is denied, we do not see any reason why the assessee should be prevented from raising that question before the Tribunal for the first time, so long as the relevant facts are on record in respect of that item. We do not see any reason to restrict the power of the Tribunal under section 254 only to decide the grounds which arise from the order of the Commissioner of Income-tax (Appeals). Both the assessee as well as the Department have a right to file an appeal/cross-objections before the Tribunal. We fail to see why the Tribunal should be prevented from considering questions of law arising in assessment proceedings although not raised earlier." 7. The petitioner states that the Hon'ble Tribunal is vested with plenary powers to admit and adjudicate on questions of law arising in assessment proceedings although not raised earlier. 8. Your petitioner states that in not claiming deduction in respect of cess earlier, it h....
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....sed by the revenue for AY 2010-11. 3.Whether on the facts and in the circumstances of the case and in law the ld. CIT(A) was justified in accepting the segmented accounts for AE for establishing arm's length price. This ground covers ground no. 3 raised by the revenue in A.Y. 2010-11. Grounds relating to Corporate issue 4.Whether on the facts and in the circumstances of the case and in law, the ld. CIT(A) was justified in treating the software expenses of Rs. 39,58,659/- [55,16,940 - 15,58,281] as revenue expenditure ignoring that the said expenses are of enduring measure. This ground covers ground no. 5 raised by the revenue for A.Y. 2010-11, ground no. 2 raised by the revenue for A.Y. 2011-12, ground no. 2 raised by the revenue in A.Y. 2012-13 and ground no. 2 raised by the revenue in A.Y. 2013-14. 5.Whether on the facts and in the circumstances of the case and in law the order of the ld. CIT(A) was erroneous because in absence of breakup of expenses incurred by the assessee and also without ascertaining the nature / utility of the software, it is simply not possible for the Assessing Officer to ascertain whether software were useful for day to....
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....9;FAR') and economic analysis for each transaction.Based on the FAR and the facts and circumstances of the respective transaction, the assessee had benchmarked the profitability of the respective transaction. Thus, the economic analysis including the selection of tested party is based on the FAR profile of the transacting entities.The determination of margin for the tested party for the purpose of benchmarking analysis, is based on data derived from audited financial statements of the assessee and respective AE. ITC Limited is a part of the British American Tobacco (BAT) group and has a diversified presence in product segments ranging from Cigarettes, Hotels, Paperboards & Specialty Papers, Packaging, Agri- business, Packaged Foods & Confectionery, Information Technology, Branded Apparel, Personal care, Stationery, Safety Matches and other FMCG products. In order to capture the opportunities offered by the global information technology (IT) business, ITC Limited restructured its IT division into a wholly owned subsidiary named I3L in October, 2000. ITC Infotech India Limited (I3L) I3L is a wholly owned subsidiary of ITC Limited, which is a part of the BAT group. For th....
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....comes difficult to find comparable companies for TP analysis. In case of foreign AEs, the revenue recognition method, expenses recognition method, and inventory valuation and recognition method are different therefore comparison of financial data is not possible, hence the foreign AEs should not be selected as a tested party. 10.On the other hand, ld Counsel for the assessee defended the order passed by the ld CIT(A). 11. We heard both the parties and carefully gone through the submission put forth on behalf of the assessee along with the documents furnished and the case laws relied upon, and perused the fact of the case including the findings of the ld CIT(A) and other materials brought on record. We note that the selection of the tested party depends on the comparative evaluation of the functions performed, assets employed and risks assumed ("FAR profile") by the parties involved in an international transaction. The entity which is the least complex based on the evaluation is adopted as the 'tested party'. We note thatbased on a detailed FAR profile conducted by the Assessee, the foreign AEs were selected as the tested party for the purpose of a transfer pricing ana....
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.... tested party. I have discussed on the case relied upon by the Assessee a bit later in this order. I have gone through the literatures produced by the Assessee on selection of the 'tested party'. After going through the documents, there seems to be no doubt that the entity with the least complex functions should be adopted as the tested party if reliable data for transfer pricing comparison is available. In the instant case,it is clear that the Assessee is performing the more complex functions when compared with the AEs (the functional profile has been confirmed by the Hon'ble High Court of Calcutta and the Jurisdictional ITATs- as mentioned above) and also the reliable information has been produced by the Assessee which has been used to undertake the transfer pricing analysis. Also out of the literature produced before me, I would like to put a special mention on the United Nations Practical Manual on Transfer Pricing for Developing Countries, 2017 (Part D- Country Practices- India) (Para D.3.2.3) which goes to prove that even the Indian tax authorities acknowledge that the tested party should be the least complex entity. Further, even the TPO in the ....
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.... Tribunal held that the Ld. TPO's action of "selecting Assessee as the tested party would result in an abnormal outcome in the TP adjustment" and concluded that 5.2.12 ...with regard to correct application of CPM or TNMM, the Associated Enterprises of the Assessee should be selected as the tested party to the transaction, as being the least complex entity. Subsequently an analysis of gross margin by applying either CPM or TNMM retained by AEs should be undertaken for benchmarking the transactions...". Therefore this ruling overrules the findings made in the ruling of onward Technologies (supra) which was relied upon by the TPO in the assessee's case and incidentally was also relied upon by the D.R. in the above case of Landis + Gyrbut did not find any favour with the Hon'ble Kolkata Tribunal. Therefore, for the reasons stated above, I am in agreement with the analysis of the assessee and conclude that the overseas associated enterprise be accepted as the 'tested party' being the least complex of the transacting entity for the year for comparability analysis of international transactions of the assessee." Having gone through the order of ld CIT(A), we find that ....
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.... Off site: Under this category. the company enters into a contract with the client for the development of certain specific software. The software is developed at the software development facility of the company and then integrated into the system of the client. The business profile of 13L can be represented through the following diagram: 4.31 Contractual Relationship between 13L and its subsidiaries The business between 13L and its subsidiaries is regulated by the contracts between 13L and the subsidiaries. Since the terms of the contract between each of the subsidiaries are similar, the following paragraphs outline the significant contractual terms. Resourcing: Under the contract 13L and its subsidiaries would exchange information on IT qualified professionals database with each other. upon a request being made by one party to the other. seeking deployment (either Offshore or Onsite) of its respective personnel for the work received from its client, the other party shall place suitably qualified personnel offshore or on-site at places required for the client/s of the other party. Such personnel deployed shall work under the direction and supervision ....
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....equired to enable such resources to settle down at site - Liaising between the resource teams deployed by 13L (in India or at Customer locations abroad) and the Customer to ensure effective communication between the teams. - Monitoring the progress in the execution of each Scope of Work and liaising between the Customer and 13L to facilitate execution of the same. - Obtaining feedback on client satisfaction for each Scope of Work and on the performance of Resources deployed by 13L. - Performing other administrative functions including lodging and collection of bills on the respective due dates, filing time sheets and obtaining approval of the Customers for the same etc. - Carrying out specific Customer assessment(s) including potential risk analysis, credit analysis etc. - 13L will provide 12A/12B with relevant information and documents necessary to enable it to perform the Administrative Services requested. Remuneration: If 13L subcontracts its obligations in accordance with this clause 4(A), the Parties agree that a fee equal to 25% of the revenue derived from the Customer Contract Shall be paid by 13L to 12A/12B. The....
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....long term road-map for off-shoring therefore are increasingly trying to tie up directly with the India based delivery organisations. In such cases. the contract is entered into between the customer and 13L but the functions and risks undertaken by both 13L and 12A/12B remain the same as they are when the customers enter into the contract with 12A/12B. The functions performed by 13L and 12A/12B under the above two business scenarios has been Summarised below. Thus, from the above table, it can be seen that the functions being carried out by 13L and its AEs (12A and 12B) under both the business models are the same. Under both the business models, the basic functions of the AEs, with regard to the administrative functions i.e. Account management, are the same. Similarly, 13L's functions under both the business scenarios, with regard to non-administrative services also remain the same. Intellectual Property: Each Party (13L, 12A or 12B. as the case may be) will retain full title to its own Background Intellectual Property Rights and Proprietary Information, and shall take such steps as may be necessary in connection with the use Of Such Background Intelle....
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....the business interest of 12A and 12B. Hence it was justified to recover the associated costs from the actual benefit recipient. • Certain top level marketing effort by 13L personnel also served the business interest of 12A and 12B, hence 13L was justified in receiving a remuneration for the time spent. The assessee would like to highlight the fact that the above services are not the main line of business operation of the assessee. The services are auxiliary in nature and as such the assessee recovered the estimate cost of the effective time spent by the managerial personnel on 12A and 12B's business interest along with a mark-up of 11% to recover the administrative charges .The assessee does not assume any risk and the services are rendered out of the assessee's own resources. 4.3.3 Inside Sales Services 13L has a dedicated team that provides call centre support services to 12A & 12B. The support services provided by the sales centre within 13L involves placing calls to potential customers based overseas in order to understand their requirements and accordingly, assisting 12A and 12B in their marketing functions. In order to prov....
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.... An understanding of the assets employed and owned by 13L provides an insight into the resources deployed by 13L and their contribution to the business processes/economic activities of 13L 4.1.1. Tangibles/ intangibles owned by 13L The following types of assets owned by 13L as on March 31, 2010^18 Type of Fixed Assets Gross Block (Rs) Leasehold Improvements 111,504,365 Plant & Machinery 150,994,108 Computers etc. 218,799,604 Capitalised Software 300,851,251 Furniture and fixtures 62,702,716 Total 844,852,044 It may be also noted from the contract existing between 13L and 12A/12B, rights in Background Intellectual Property remains with 13L and any intellectual property created in course of development work on behalf of clients (Foreground Intellectual Property) is vested with the clients or to 13L in case such arrangements are made. 4.1.2 Tangibles owned by 12A & 12B Tangible assets like equipment. purchased or internally developed software, furniture and fixtures and leasehold improvements are stated at cost. Depreciation is provided under various methods based upon the estimated useful lives of ....
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....administrative services. It is the which is entrusted with the task of performing non-administrative, core & essential services. It was however noted that even the top management & marketing services were essentially sub-contracted back by 12A/2B to the ssessee for which management fees were paid to the assessee. Furthermore inside sale services to 12A/12B customers were also being rendered by the call center owned and operated by the assessee for which separate fees were paid. Meaning thereby the allegedly main task of marketing which was entrusted to the subsidiaries were being performed by the assessee only. From client interaction, identification, to sale coordination, placing cold calls and involvement of assessee's top management team were being performed by the asessee. These raised serious concerns on the nature of services being actually by the AEs. Accordingly relevant evidences/correspondences were called, for which were submitted by the assesse only on 20.01.2014. I however find certain infirmities in the submissions made by the A/R of the assessee vis-a-vis the documentary evidences placed on record. Some of these infirmities are discussed below: Email dated 16.....
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....ntre. In the circumstances I find that the functional analysis undertaken by the assessee was factually incorrect and contrary to the facts on record. 9.2 Even in the risk analysis it is evidently clear that the assessee carries very high risk whereas the AEs are with minimum risk. In terms of the MSA between and AEs the provider of actual services shall bear full responsibility for the delivery of all Non-Administrative Services provided to a customer and shall be fully liable to the other entity for the same. Any claim for any deficiency in non-Administrative services would have to be borne by the assessee. By assessee's own admission the of a customer raising any claim for any deficiency in administrative services by the 12A/12B is very remote. In the circumstances it is surprising to note that although revenues are being shared in the ratio of 75% to 25% but any claims/liabilities arising out of the contract with the customers shall have to be borne by the assessee in full. 9.3 In view of the foregoing it would not be wrong to raise serious questions the payment of 25% of gross revenues to 12A & 12B when the maximum functions re being performed by the ases....
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..... TPO rejected the application of internal CPM based on the following: i) The CPM method presents some practical difficulties in identifying the costs incurred for the provision of services like whether an indirect costs is towards rendering services or it is an enterprise level expense. ii) There is no discernible link between the level of costs incurred and market price in software as the services are usually compensated on a man hourly basis which may not vary much across the industry for same or similar type of service. So, CPM is not the appropriate method. iii) While applying CPM, the tax payer should have to consider all direct and indirect costs incurred in respect of the services rendered by it. But, it is apparent the assessee itself did not include all the direct and indirect costs while computing gross mark up. In the case of comparable companies, the details of indirect costs incurred in rendering services were simply not available. Thus, it cannot be said that the gross profit worked out in the case of the comparable is after taking into account the same items of expenditure as in the case of the taxpayer. 16. Aggrieved by the action of A....
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....the said service is manpower cost. While determining the margin (GP/Manpower Cost) of the comparable, same data elements i.e. sales and manpower costs were considered for computing the PLI of the identified comparable companies. 18. During the appellate proceedings, the assessee submitted following written submissions, which is reproduced below: "Submission dated 26 April 2017 Selection of the Most Appropriate Method (MAM) The Assessee had adopted Cost Plus Method ("CPM") as the most appropriate method for benchmarking the international transactions with its foreign AEs, CPM evaluates the arm's length nature of a controlled transaction by reference to the gross profit mark- up that is realised in comparable uncontrolled transactions. CPM is appropriate to use as the MAM in situation wherein the international transaction involves provision of services to a related party i.e. similar to the instant situation in Assessee's case. This principle is also upheld in the OECD TP Guidelines (Section D.1.2.39). The Ld. TPO has rejected the use of CPM as the MAM by mentioning that CPM presents difficulties in identifying and segregating the cost between di....
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....ent order without taking cognizance of this calculation." 19. The ld CIT(A) after taking into account assessee`s submissions and findings of the ld TPO, held as follows: "5. The last major contention of the Assessee is on the selection of the most appropriate method (MAM) for the transfer pricing analysis. It is to be well noted that the Assessee-company has been, following the CPM method for export of software services to its AEs consistently over the years. The Ld. TPO has rejected the use of CPM as the MAM by mentioning that CPM presents difficulties in identifying and segregating the cost between direct and indirect cost, At this juncture, it would be worthwhile to evaluate the situation wherein CPM can be used as the MAM. CPM evaluates the arm's length nature of a controlled transaction by reference to the gross profit mark-up that is realized in comparable uncontrolled transactions CPM is appropriate to use as the MAM in situation wherein the international transaction involves provision of services to a related. This principle is also upheld in the OECD TP Guidelines (Section D,1.2.33). From a reading of the extract from OECD guidelines, it looks like CPM is a....
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....asoning, I hold that CPM as adopted by the assessee, be adopted as the MAM for the export of software services by the assessee." We have gone through the findings of ld CIT(A) and do not find any infirmity. That being so, we decline to interfere with the order of Id. C.I T.(A) in deleting the aforesaid additions. His order on this addition is, therefore, upheld and the grounds of appeal of the Revenue are dismissed. 20. Summarized ground No. 3 reads as follows 3.Whether on the facts and in the circumstances of the case and in law the ld. CIT(A) was justified in accepting the segmented accounts for AE for establishing arm's length price. This ground covers ground no. 3 raised by the revenue in A.Y. 2010-11. 21. The brief facts qua the issue are that during the TPO proceedings the ld TPO rejected the segmental data of ITC Infotech, (USA), Inc ("I2A) and ITC Infotech Limited, UK ("I2B"), on the following premise: ".the segmented data has admittedly been prepared by the assesse which would in all likelihood suit their needs and requirements... ." 22. Aggrieved by the action of the ld TPO, the assessee carried the matter in appeal before ld CIT(A), who has ....
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....alysis should be audited, The segmental accounts prepared for a transfer pricing analysis may not necessarily be same as the segmental accounts prepared for any financial statements. In the absence of any mandate that the segmental for transfer pricing should be audited, I am inclined to accept the contention of the Assessee that till the time the reliability of the segmental account is demonstrated, these can be used for a transfer pricing analysis and need not necessarily be" audited. If it is also to be mentioned that the judicial rulings placed in reliance by the assessee-company support its contentions. The Ld. TPO has not brought out any specific finding to indicate that the segmental data of the Assessee-company are not reliable, and therefore liable for rejection, The Assessee before me explained in length how the segmental accounts are captured and the reliability of the same. Also the certification from the CFO of the Assessee, in my considered view contributes enormously to indicate that the segmental accounts are prepared with reliable accounting system in place. With such view of the matter, I am not inclined to agree with the Ld TPO / AO, and hold that the segmental a....
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....nue in A.Y. 2013-14. 25. Brief facts qua the issue are that the assessee, M/s ITC Infotech India Ltd, during Financial year 2009-10, relevant to A.Y. 2010-11, has incurred the following software related expenses: Sl. No. Particulars Amount (in Rs.) Remarks 1 Purchase of System Software's enduring in nature - Capitalised Fixed Assets by the appellant company 4,00,29,717/- Capitalised by the Appellant Company under "Capitalised Software" of Schedule 4 of the Audited Annual Accounts - Annexure 3 Total amount Of Systems Software's capitallsed by the Appellant Company 4,00,29,717/- 2 Software related expenditure towards consumables, maintenance, yearly renewal Charges, Annual Maintenance contracts etc. 4,42,80,601/- 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 any enduring benefit and having limited useful life 55,16,940 Application Software's facilitating appellants conduct of business and having limited us....
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....ssets and expenditure on the same, in my considered view, is to be treated as capital expenditure. Considering this, the same were, in my opinion, required to be capitalized. The disallowance is therefore, confirmed in respect of them. The Ld. AO shall however, allow depreciation on the same. However, the remaining items of software are found to be useful for day to day functioning of the assessee and they are either application softwares for office work or tools like anti-virus etc. Therefore, cost of these items is to be considered as revenue expenditure and be allowed as deduction. The Assessing Officer is directed to reduce the disallowance accordingly. Overall, Ground No 2 is partly allowed as indicated supra." 27. Expenditure incurred on the purchase of the application softwares used exclusively for the purpose of the business of the assessee company amounting to Rs. 55,16,940/- has been charged as revenue expenditure and debited to the Profit and loss account. These application softwares have not resulted in any enduring benefit to the company. Hence the expenditure is not classified as capital expenditure. These were approximately treated as revenue expenditures and were....
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....that education cess is part of income tax and therefore should not be allowed as expenditure. 31. We have heard both the parties and perused the material available on record. We note that issue raised by the assessee is no longer res integra.We note that Coordinate Benches of this Tribunal in the following cases held that education cess should be allowed as an expense. The relevant judgments are given below: (i) M/s ITC Limited -vs.-ACIT (ITA No. 685/Kol/2014) - "The assessee's additional last/ substantive ground avers that it is entitled for the educations secondary higher education cess as overhead deduction amounting to Rs. 423618317 u/s 37 of the Act. We note that hon'ble Rajasthan high court's decision in DB Income Tax Appeal No. 52/Kol/2018 M/s Chambal Fertilizers Ltd. vs. DCIT decided on 31.07.2018 takes into account CBDT circular dated 18.05.1967 for holding such cess(es) to be allowable as deduction. Their lordships hold that section 40a(ii) applies only on taxes such than earn cess(es). We therefore reject the Revenue's contentions supporting the impugned disallowance. The assessee's instant substantive ground is accepted. The Assessing Officer is dir....
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....al Tribunal and thus we allow the claim of the education cess. The AO is directed to allow the claim of education cess in computing total income of the assessee company. These grounds raised by the assessees are allowed for A.Y. 2010-11 to 2013-14. 33. In the result, appeals filed by the Revenue in ITA No.2075/Kol/2017 and appeals in ITA nos.220 to 222/Kol/2018 filed by the Revenue are dismissed. Whereas, appeals filed by the assessee in ITA No.552/Kol/2019 and in ITA Nos. 486 to 488/Kol/2019 are allowed. Order pronounced in the Court on 31.01.2020 ============= Document 1 ITC Infotech Services • Advanced Technologies ⚫ Business Consulting Customer Relationship Management . Custom Applications Engineering Services Enterprise Resource Planning Infrastructure services • Product Lifecycle . management Quality Assurance & Testing Quality Consulting Solution Areas .Asset management . Document Tracking • Loyalty Analytics Solutions Trade Promotion Management • Data Warehousing & business Intelligence • Performance Engineering Functional Testing • S....