TaxTMI 
TaxTMI 
2021 (7) TMI 192
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....nover also. The appellant craves leave to add, alter, amend and/or delete any of the grounds mentioned above. ITA No. 578/B/2015 GROUNDS RELATING TO LEGAL ISSUES 1. The Orders passed by learned Additional Commissioner of Income Tax Circle- 4(1), Bangalore (hereinafter referred to as "AO" for brevity), learned Joint Commissioner of Income Tax TP-II, Bangalore (hereinafter referred to as "TPO" for brevity) and Honorable Dispute Resolution Panel (hereinafter referred to as Honorable DRP) ("AO "TPO" and "DRP" collectively referred as "lower income tax authorities" for brevity) are bad in law and liable to be quashed. 2. The learned Assessing Officer has erred in making a reference to Transfer Pricing Officer for determining arm's length price without demonstrating as to why it was necessary and exdient to do so. The Honorable DRP has erred in confirming the action of the Assessing officer. 3. The lower income tax authorities have erred in a. Making transfer pricing adjustment of Rs. 117,20,60,655/-. b. Passing the order without demonstrating that appellant had motive of tax evasion. c. Not appreciating....
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....s and circumstance of the case; and f. Not appreciating that the Appellant had received tangible and direct benefit from services rendered by the AE. ALP OF NETWORK CHARGES 6. With respect to network charges, the lower income tax authorities have erred in: a. Concluding that the network charges were only reimbursement of expenses without appreciating that the AE rendered various value added services on which mark up was levied in addition to certain cost to cost reimbursement; b. Concluding that no mark up should have been paid by the Appellant ignoring the business and commercial realities; c. Concluding that the arm's length mark up on network charges is NIL adopting internal CUP without appreciating that the transactions being compared were themselves international transactions and therefore cannot be considered for comparison; d. Considering and erroneously clubbing incorrect expense heads of "Communication costs and Other expenses paid to HP Singapore" together with Network Charges and deeming the differential amount of Rs. 12,80,73,476 as adjustment without appreciating the nature of transaction and on ground ....
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....B 8. The lower income tax authorities have erred in: a. Not granting deduction u/s. 10A/10AA/10B with respect to profits attributable towards onsite software development work being sub-contracted to and performed by the AE's overseas without appreciating the fact that i) the entire risk & rewards and functions & responsibilities of executing the work lies with the Appellant; and ii) the entire on-site software development work was performed under the control and supervision of the Appellant. b. Excluding communication charges from export turnover in process of computing deduction u/s. 10A/10AA/10B without reducing the same from total turnover c. Not appreciating that, under similar facts and circumstances of the case, the Honorable High Court of Karnataka and the Bangalore bench of the ITAT as well as other Tribunals have held that if some expenses, for any reason are excluded in arriving at the 'export turnover' the same should also be reduced from 'total turnover'. d. Not appreciating that, under similar facts and circumstances of the case, the Honorable Bangalore bench of the ITAT in case of Mphasis Software Servic....
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.... 2009-10 and for which TDS was duly deducted and deposited to the credit of Government during the year under consideration. The learned AO has further erred in reducing Rs. 10,40,253 from the profits of the business and thereby reducing deduction u/s. 10A/10B/10AA. GENERAL GROUNDS 11. The lower income tax authorities have erred in levying a sum of Rs. 77,43,733 towards interest under section 234A even though the return of income was filed within the due date prescribed under the Act. The Appellant denies its liability to pay interest. 12. The lower income tax authorities have erred in levying a sum of Rs. 42,36,34,219/- towards interest under section 234B. On the facts and in the circumstances of the case, interest under section 234B is not leviable. The Appellant denies its liability to pay interest. The Appellant submits that each of the above grounds/sub-grounds are independent and without prejudice to one another. The Appellant craves leave to add, alter, vary, omit, substitute or amend the above grounds of appeal, at any time before or at, the time of hearing, of the appeal, so as to enable the Income-tax Appellate Tribunal to decid....
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....ing expenses allocation 14,00,25,260 9. General administration expense allocation 17,18,67,704 10. Reimbursement of various expenses 19,02,96,505 11. Recovery of various expenses 2,37,26,352 7. The segmental results of the revenue generated under SWD and ITES segment and IT Outsourcing Support Services are as under: Segmental Results Description Application Services (SWD) (Rs.) ITES (Rs.) IT Outsourcing (Support Services) (Rs.) Operating Revenue 2662,46,27,000 291,99,93,000 836,73,53,000 Operating Expenses 1981,56,45,000 234,36,57,000 551,70,41,000 Operating Profit 680,89,82,000 57,63,36,000 285,03,12,000 OP/ Expenses 34.36% 24.59% 51.66% 8. The Ld. TPO observed that, assessee used TNMM as most appropriate method for determining the arm's length price of the services rendered. Assessee used OP/OC as the PLI and computed the net profit margin of assessee at 34.36% for SWD services segment, 24.59% under ITES segment and IT outsourcing (support services) at 51.66%. 9. The comparables selected by assessee SWD and ITES segment and IT outsou....
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....will arising due to merger of Mphasis Finesolutions into assessee and assessee claimed deduction disallowed for assessment year 2009-10 under section 40(a)(ia) of the Act, as the TDS was remitted during the year under consideration. All these claims were incorporated in the revised return which work rejected by the Ld. AO. 15. The Ld. AO thus computed proposed adjustment at Rs. 6,46,47,17,384/- as income in the hands of assessee, after giving credit to taxes paid and raised a demand of Rs. 106,26,14,503/-. 16. On receipt of the draft assessment order, assessee raised objections before the DRP. 17. DRP directed the Ld. AO to recompute export turnover for purposes of computing deduction under section 10A in accordance with the decision of Hon'ble Karnataka High Court in case of CIT vs. Tata Elxi Ltd., reported in 349 ITR 98. However, exclusion of the on-site development charges and communication charges from export turnover for computing deductions under section 10 A/10 AA/10 B was not decided by the DRP. 18. In terms of the depreciation claimed and the additional claim raised by assessee, the DRP did not consider the objections as these did not form part of the origi....
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....itted that, the margin earned by assessee are comparable to margins earned by other service providers operating in India and therefore these services are to be treated to be at arms length. In regards to networking charges Ld. AR submitted that assessee paid such charges for using some tools/software developed by EDS International Singapore PTE. Assessee paid markup on such cost, as these are developed by EDS Singapore, while for other cost, such as BT circuit and GSM, no markup is added since these costs are resulted due to the contracts EDS Singapore has with 3rd parties customer. It was submitted that, all these details and breakups of the markup were provided to the authorities below, however the same were not appreciated. 25.1. On the contrary the Ld. CIT. DR submitted that as per agreement for selling and marketing services dated 01/04/2008 between assessee and its US AE it is mutually agreed that fee for services rendered by the US AE will be at cost, allocated to the company to which profit markup will be added which is mutually agreed. The Ld. CIT. DR further submitted that, the service fee charged to the taxpayer on the gross bill is without netting of the receivabl....
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....e conclusion that the receivables from AE needs to be separately benchmarked. Most importantly the impact this would have on working capital of assessee would have to be studied. In the event any receivables needs to be separately benchmarked, we direct Ld. AO/TPO to compute the interest in accordance with the ratio of Hon'ble Delhi High Court in case of CIT vs. Cotton Naturals India Pvt. Ltd. reported in: (2015) 276 CTR 445. 36. With the above directions we remand this issue back to the Ld. AO/TPO to reconsider the issue in accordance with law. Accordingly this ground raised by assessee stands allowed for statistical purposes. 37. Ground No. 8 is raised by assessee against not granting deduction under section 10A/10AA/10B with respect to profits attributable towards on-site software development work being sub contractor to an performed by the AEs overseas. 38. Ld. AR submitted that, assessee subcontracted part of on-site software development activity to its associated enterprise and that the risk, rewards and responsibilities of the outcome of the sub contractor work continue to rest with assessee. It was submitted that, assessee has entered into the main contract ....
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....k to be done) was with the assessee through its Project Manager, as would be clear from the terms of the MSA. In fact, assessee had also right to reject such activities of AE, if it did not conform to specification agreed to it under the contract. 18. We have also gone through the provisions of Master Service Agreement which was entered into between the assessee and the AE, which admittedly was a group company of the assessee. The terms of the MSA relate to the 'on-site' work which was to be carried out by the AE, on behalf of the assessee. In such agreement, the task order was to be given by the assessee to the AE, for which the responsibility was of the AE, subject to the supervision and all pervasive control of the assessee. The product which was to be delivered would be that of the assessee, after payment was made to the AE. As such, it is clear that the AE was carrying on the work under the supervision and control of the assessee, as well as on behalf of the assessee. The proprietorship of the product was also to remain with the assessee. 19. We may explain the transaction with an example. If a total contract (Type II Model) was procured by the assess....
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....; work carried outside the country is not done through its own personnel. For this, we may refer to Explanation-3 to Section 10A, which is clarificatory in nature and does not limit the benefit provided by Section 10A but only enlarges its scope. In the said explanation, it is provided that the profits and gains derived from 'on-site' development of computer software outside India would be deemed to be profits and gains from the export of computer software outside India. By this explanation, it is clear that the profits and gains which are derived from 'on-site' development of computer software would also be covered under Section 10A of the Act. What we notice is that the main Section 10A nowhere provides that the 'on-site' work of software development should be carried out by the own personnel of the assessee. As such, it would be wrong to deny the benefit under the said section merely because the 'on-site' work was not done by the personnel of the assessee as we are of the firm view that authorities or Courts are not to read something into the provision of law which is not there in the Section or its Explanation; more so, in the case of a beneficia....
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....9;on-site' work through its own personnel, the same cannot be read into the provisions of Section 10A of the Act. 23. The sole ground for denying the benefit of section 10A by the Assessing Officer or the appellate Commissioner is that 'on-site' development of computer software has not been executed by the assessee itself through its own personnel. Such interpretation of the Section cannot be accepted because what is not there in the Section or the Explanation, cannot be read into by the authorities or by this Court. 24. Learned counsel for the Revenue has also submitted that the conditions laid down in sub-section (2) of Section 10A of the Act have not been fulfilled by the assessee, which have to be strictly construed and as such, the assessee would not be entitled to the benefit of Section 10A. According to the learned counsel for the Revenue, the production or manufacture should be in any free trade zone and if the same is not done in the free trade zone, the assessee would not get benefit of such manufacture or produce. The benefit is site specific and not project specific. According to him, only such production or manufacture which is carried at ....
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....tion between the AEs and its clients in getting the contract executed, the assessee shall not be eligible for deduction since the core function of software development function was executed by the AEs. Neither the plant and machinery nor the employees of the STP Unit were utilized in developing the software in On-site Locations abroad. The Sub-contract work executed by AEs did not have any Indian connection on these works executed by it. The assessee has attempted to claim exemption on the work executed by a foreign entity over which the provisions of Indian Income Tax Act, 1961 are not applicable." 26. The Tribunal has considered this aspect and has come to the conclusion that the assessee company was solely responsible for the risks and rewards arising out of the sub-contract to the AE. It has given a clear finding that "the assessee is solely responsible for the discharge of its obligations under the contract to the customer and the sub-contractor has no say in the matter. It is seen from the Master Services Agreement that it is the assessee which is under an obligation to discharge its obligation of specific requirement of the customer and in pursuance thereof, to pass....