TaxTMI 
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2021 (7) TMI 192
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....mend 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 that there is no amendment to the definition of "income" and charging or computation provision relating to income under....
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.... 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 that details of such payments are not made available; e. Adopting CUP method as the most appropriate method without justifying how the same was the most appropriate method in the facts and circumstance of the case; f. Concluding that arm's length mark up for ....
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....llant; 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 Services India Pvt. Ltd. (MSSIP[L) in AY 08 (A group company of Mphasis Group), have held that where entire on-site software development work was performed under the control and supervision of the Appellant, profits attributable to onsite development of software is eligible for deduction u/s. 10A/10B/10AA as the case may be, and the ratio this decision applies to the impugned assessment of the Appellant. GROUND REL....
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....iability 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 decide the appeal according to law. The Appellant prays accordingly. Brief facts of the case are as under: 2. The assessee is a company and engaged in the business of software development, providing information technology enabled services, BPO including call centre services. It filed its return of income on 06/10/2010 declaring total income of Rs. 288,31,65,798/-. The return was processed under section 143(1) of the Act. 3. The Assessee had claimed deduction under section 10A, 10B, 10AA of the Act as under: Particulars Deduction Amount Mphasi....
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..../ 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 outsourcing service segment had average margin of 11.26% on sales 18.52% and 14.08% on cost for ITES and IT outsourcing services rendered. 10. The Ld. TPO dissatisfied with the study, conducted independent search for all the 3 segments, and found that, the margin computed by the Ld. TPO was less than the margin computed by assessee. Ld. TPO thus concluded SWD, ITES segment and IT outsourcing segment to be at arms length. 11. The Ld. TPO further observed that, during the year under consideration assessee paid certain amounts as selling commission and networking charges to its AE. A notice was issued to assessee asking for the details in respect of these payments. Assessee filed various submissions in respect of its contentions which were rejected by ....
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....td., 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 original return of income. 19. In respect of the other issues the DRP upheld the observations of the Ld. AO/TPO. 20. Upon receipt of the DRP directions, the Ld. AO passed the final impugned assessment order, against which both assessee as well as revenue are in appeal. 21. At the outset, both sides submit that the issue raised by revenue is no more res integra by virtue of the decision of Hon'ble Supreme Court in case of CIT vs. HCL Technologies Ltd., reported in (2018) 404 ITR 719. Hon'ble Supreme Court upheld the observations of Hon'ble Karnataka High Court in case of CIT vs. Tata Elxi Ltd. (supra). Accordingly the appeal filed by revenue stands dismissed. Assessee's appeal: 22. Ground No. 4-6 relates to the addition made on account of selling commission and networking charges: 23. It has b....
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....see 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 receivables that are payable by the AE to assessee. She also submitted that the agreement does not discuss on what shall be the cost base and how that will be allocated and what shall be the mark up. She thus supported the addition made in this by authority below. 26. We have perused submissions advanced by both sides in light of records placed before us. 27. We note that, the reason for making adjustment in the hands of assessee towards selling commission and networking charges is that, there is no basis for such cost allocation. Further the disallowance of networking charges is on the basis that the agreement does not mention about the markup on cost. 28. We note that this issue has not been decided by the DRP though objection was raised. Under such circumstance we direct DRP to consider this issue based on various evidences/details filed by assessee having regards to ....
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....t, 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 with the foreign client in respect of the work that was sub contracted to the AE. Ld. AR submitted that, Ld. AO/TPO wrongly held that assessee is not eligible for deduction under section 10A/10AA/10B in respect of profits attributable to sub contracting of software development work. 39. The Ld. AR submitted that, coordinate bench of this Tribunal in assessee's own case for assessment year 2007-08 in ITA No. 1209/B/2012 and ITA No. 1168/B/2012 by order dated 20/12/2013 has held that assessee is not involved in rendering of technical services and therefore no expenditure incurred in foreign currency is to be excluded from export turnover in computing deduction under section 10A of the Act. This view has been upheld by Hon'ble High Court in 263-264/2014 by order dated 29/07/2015 reported in (2015) 62 Taxmann.com 165. On the contrary, Ld. CIT. DR relied on orders passed by authorities. 40. ....
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....ision 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 assessee, say for an amount of Rs. 10 crores, for carrying on the work of the end customer, out of which 'off shore' work was to be carried out by the assessee to the extent of, say Rs. 8 crores and the remaining 'on-site' work of Rs. 2 crores was sub-contracted to the AE, then, the question for consideration would be with regard to the profits earned from 'on-site' development work of Rs. 2 crores which had been sub-contracted to the AE. There is, admittedly, no dispute with regard to profits earned from 'off-shore' work carried out by the assessee, amounting to Rs. 8 crores. For such 'on-site' development work, the assessee has an option of sending its own personnel for which it will have to have an establishment at the place of the end customer situate outside India, for which it may have to incur travelling and other expenses for its personnel to go 'on-site' outside India for per....
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....te' 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 beneficial piece of legislation, as is the present one. 21. With regard to denial of benefit of Section 10A because of the personnel of the assessee having not performed the 'on-site' work, emphasis has been laid by the learned counsel for Revenue on the Circular No. 694 dated 23.11.1994 issued by the Central Board of Direct Taxes (CBDT). The relevant paragraph 7 of the said Circular is reproduced below: "Similarly, for the purpose of s. 10A or 10B, as long as a unit in the EPZ/EOU/STP itself produces computer programmes and exports them, it should not matter whether the programme is actually written within the premises of the unit. It is, accordingly, clarified that, where a unit in the EPZ/EOU/STP develops software sur place, that is, at the client's site abroad, such unit should not be denied the tax holiday under s. 10A or 10B on the ground that it was prepared on site, as long as the software is a product of the unit, i.....
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....n 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 the site of the assessee's unit in the free trade zone would alone be eligible for the benefit under section 10A and not such production or manufacture which has been carried outside or by a third party. A mere reading of sub-section (2) would not be sufficient. The entire section has to be read in conjunction with Explanation 3, which clarifies that profits and gains derived from 'on-site' development of software outside India shall also be deemed to be profits and gains derived from the export of software outside India, and same would also be entitled to such benefit. If the interpretation, as contended by the Revenue is accepted, the very purpose of inserting Explanation 3 to Section 10A of the Act would be lost or frustrated. 25. Lastly, learned counsel for the Revenue has contended that there is no nexus between 'off-shore' production by the assessee in India and 'on-site' production by the AE outside India. He relies on the finding....
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....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 on the specification of the products to the AE and also to reserve right to reject the product if the AE does not produce the product in conformity with the product as given in the task order. Therefore, it can be safely concluded that the development of the software by the AE is under the supervision and control of the assessee". 27. From the record it is not borne out that the entire 'on-site' work has been sub-contracted to the AE. The MSA provides for the AE to work under total supervision and control of the assessee. The software to be produced by the assessee during its 'on-site' development has to be as per the specifications given by the assessee. The AE has no concern or direct dealing with the end customer. The assessee provides all relevant information and inputs to the AE on behalf of the end customer. The AE is admittedly answerable to the assessee and not the end customer. In such nature of the work which is carried on by the AE on behalf of the assessee, it cannot be ....