TaxTMI 
TaxTMI 
TaxTMI 
2019 (8) TMI 1839
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....tc. For Assessment Year 2010-11, the assessee filed its return of income on 07.10.2010 declaring a loss of (-)Rs. 1,83,75,992/-. The return was processed under section 143(1) of the Act and the case was subsequently taken up for scrutiny for this Assessment Year. A reference under section 92CA of the Act was made by the Assessing Officer (AO) to the Transfer Pricing Officer (TPO) for determination of the arms length price (ALP) of the international transactions entered into by the assessee in the year under consideration. The TPO passed an order under section 92CA of the Act dated 30.01.2014 proposing an adjustment of Rs. 7,26,12,896/- to the international transactions in the manufacturing segment of the assessee company. After receipt of the TPO's order under section 92CA of the Act, the AO passed the draft order of assessment under section 144C of the Act dated 10.03.2014 wherein the assessee's income was determined at Rs. 5,87,24,278/- by making various additions/disallowances, including the TP adjustment of Rs. 7,26,12,896/-. 2.2 Aggrieved by the draft order of assessment dated 10.03.2014 for Assessment Year 2010-11, the assessee filed its objections thereto before th....
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....li) Limited as a comparable company on the ground that the comparable company is a government undertaking. 8. The Appellant retains the right to have the benefit of applying the range of +/- 5% in determination of arm's length price. II. Corporate Tax Disallowance of Software Expenses - Rs. (sic)00(sic)791/- 9. The Honorable DRP and the learned Assessing Officer erred in disallowing expenses incurred on availing licenses for operating the ERP software and other software which are in the nature of application software or on availing software maintenance services, by treating it as capital expenditure. 10. The Honorable DRP and the learned Assessing Officer erred in not considering the same as revenue expenditure. 11. The Honorable DRP and the learned Assessing Officer ought to have appreciated the fact that by incurring the said expenditure, the Appellant had acquired merely the license to use the application software/availed software maintenance services and there was no outright purchase of software giving ownership to the Appellant of the said software so as to treat the same as a capital expenditure. 12. The Honorable DRP and the learned Assessing Officer ought....
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....lity in the years prior to and succeeding AY 2010-11: It is submitted that this point was taken up before the Hon'ble DRP as can be seen from the DRP directions itself. However, no specific ground in this regard has been raised in Form 36 and therefore this additional ground is being raised to provide more clarity to the ground already raised. 3. Prayer Under the above circumstances, Your Petitioner humbly prays to Your Honors to permit it to file this additional grounds of appeal by exercising the power vested in Your Honors under Rule 11 of the Income-Tax Appellate Tribunal Rules, 1963 (-Rules") and allow the Petitioner to argue the aforesaid additional grounds of appeal, 4.2.3. Per contra, the learned DR for Revenue opposed the admission of additional ground No. 6A. 4.2.4. We have considered the rival contentions/submissions in respect of the assessee's plea for admission of additional ground No. 6A on the issue of adjustment towards capacity utilization and the erroneous manner of computation thereof in addition to ground No. 6 on the issue of adjustment towards capacity utilization. Taking into account the facts and circumstances of the case on the issue of adm....
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....upra), not being pressed by the assessee in its appeal, are rendered infructuous and are accordingly dismissed as not pressed. 7. Ground No. 6 Additional Ground No. 6A/Under utilization of capacity 7.1.1. In these grounds/additional ground (supra), the assessee contends that the TPO erred in not appreciating the fact that the losses incurred by the assessee in the manufacturing segment was mainly due to under utilization of capacity and that both the TPO and DRP had erred in computing the capacity utilized by the assessee. 7.1.2. According to the learned AR, the TPO had denied the assessee capacity utilization adjustment, not because it was not applicable, but because the TPO found that the capacity utilization of the assessee, as given in Appendix - 9 of the TP Study was 72.40% as against 76.43% of the comparable companies and since there was not much difference between the two, capacity utilization adjustment was not warranted. In this regard, the learned AR submitted that the TPO has misunderstood the chart at Appendix - 9 of the TP Study and misinterpreted the same. It was submitted that the chart at Appendix - 9, contained the details of three products, out of which motors....
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.... numbers mentioned therein, as he has quoted from the above Charts/Appendix (supra). Since the TPO has himself accepted the figures/numbers stated in the Appendix - 9 and 10, the figures stated therein cannot be doubted at this stage. 7.3.2. In our view, the only difference between the contentions of the assessee and the TPO was on whether the mean average of capacity utilization should be adopted or whether the capacity utilization of only Motors should be adopted. In the factual matrix of the case, as discussed above, we find merit in the contentions put forth by the learned AR of the assessee that the capacity utilization of only the main product, i.e., the Motors, should be considered. The other two components, namely, coils and parts, in our considered opinion, are only incidental components and cannot by any stretch of imagination be equated and treated on par with the main product, i.e., Motors. The installed capacity of Motors, Coils and Parts are 38,000, 80,000 and 3,82,000 respectively, whereas the price of these are Rs. 18,426/- per motor, Rs. 312/0 per coil and Rs. 172/- per part. In these factual circumstances, as narrated above, assigning of equal weight age to motor....
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.... the judicial pronouncements cited. We find that the TPO has rejected this company, 'NGEF', on the ground that it is a government company; which proposition has been negated by the decision of this Tribunal in the case of IKA India (P) Ltd., Vs. ACIT (supra); wherein the Co-ordinate Bench at para 17 of its order; following the decision of the Hon'ble Madras High Court in the case of Same Deutz Fahr India (P) Ltd., (2018) 405 ITR 345 (Mad), held that there is no reason why a government company cannot be treated as a comparable if it passes the filters adopted. 8.3.2. In the case on hand, however, it is not ascertainable as to whether this company, 'NGEF' has satisfied all the filters applied by the TPO. In this factual matrix of the case, we concur with the plea of the learned DR for Revenue that the comparability of this company, 'NGEF', needs to be tested on the touchstone of satisfying all the filters that have been applied for ascertaining the comparability of all other companies. In this view of the matter, we remand the issue of comparability of 'NGEF' back to the file of the TPO for fresh consideration. Needless to add, the TPO shall accor....
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....as considered the issue and held that these software expenses are revenue in nature; at paras 30 to 44 of its order which is extracted hereunder:- 30. The next ground of appeal is with respect to disallowance of software expenses. The facts with regard to this issue are that the assessee has incurred expenses towards purchase of application software (i.e. obtaining or renewing the licenses for use of certain application software) and has deducted tax at source in respect of such payment towards application software. According to the assessee, the incurrence of such expenditure is necessary to carry on the business activities more effectively and efficiently leaving the capital base untouched. The said expenditure being revenue in nature has been charged off in the year in which it was incurred i.e. FY 2008-09. The breakup of software expenses is as under;- 31. License fees: The assessee company has paid an amount of Rs. 1,766,184 to Moog IFSC [Moog Ireland International Financial Service Centre] towards license usage charges. Moog IFSC had purchased MFGpro software licenses from QAD Inc. MFGpro is an application software designed to perform and manage business processes such as....
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.... enduring benefit is more prone to failure in the case of computer software where the pace of advancement is so rapid that whatever technology is installed today becomes obsolete within a short time. c. No portion of the application software was custom made software and all of them had been purchased "off the shelf. Further, the assessee was merely a licensee and the right to use the software was subject to the conditions mentioned in the license agreement. d. Software acquired under a license on terms and conditions whereby ownership is retained by the licensor and where such software only adds to the efficient running of day to day operation of business, cannot be held to be expenditure of capital nature as they were only copyrighted articles. All rights, title and interest in or to the programs or documentation, modifications, enhancements and derivatives shall at all times remain the property of or vest on the licensor. Thus the "ownership test" of the software is not satisfied which is an essential condition to capitalize and claim depreciation under the Act. e. Further, every advantage of enduring nature acquired by an assessee may not bring a capital asset into existen....
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.... thus the application software expenditure including maintenance expenses is revenue in nature and is eligible for deduction under section 37(1) of the Act. Attention was invited to the fact that the assessee has only acquired the requisite licenses to use the application software and hence the ownership and the intellectual properties of the software continue to remain with the licensor. 41. Reliance was placed on the decision of the Special Bench Delhi in the case of Amway India Enterprises v. DCIT, 301 ITR 1 (AT)(Det)(SB), wherein certain tests had been laid down for ascertaining whether the expenditure on purchase of software is to be treated as revenue or capital. The below tests are cumulative and not mutually exclusive. In case the transaction of purchase of software satisfies all the tests mentioned below, it will be considered as a capital expenditure. 42. The ld. counsel for the assessee submitted that in the instant case, the assessee is not satisfying all the tests set out by the Special Bench in the case cited supra and therefore the software expense should be treated as revenue in nature Reliance was also placed on the following decisions:- - Lubrizol Media Ltd.....
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.... (supra), the Hon'ble High Court, while dismissing Revenue's ground raised on this issue, citing its own earlier decision in the case of CIT Vs. IBM India Ltd., (2013) 357 ITR 88 (Kar), rejected Revenue's stand; holding as under:- "6. In view of the aforesaid decision rendered by this Court treating the computer or software expenses as revenue expenditure, no substantial question of law arises for our consideration. " 9.3.5. Respectfully following the decision of the Hon'ble Karnataka High Court in ITA No. 510/2016 dated 31.07.2018 in the assessee's own case for Assessment Year 2009-10, we also hold that these software expenses of Rs. 16,91,755/- incurred towards payments towards licence fees for usage of leased licences and application are revenue in nature and are to be allowed as deduction. While giving effect to this order, the AO is also directed to withdraw the depreciation allowed by him to the assessee on this issue in impugned order of assessment. We and direct the AO accordingly Consequently, grounds 9 to 12 of assessee's appeal are allowed. 10. In the result, the assessee's appeal for Assessment Year 2010-11 is partly allowed. Revenue'....