TaxTMI 
TaxTMI 
TaxTMI 
2022 (5) TMI 1645
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....elay of 26 days in filing the appeal. The same has been explained as owning to administrative reasons. The delay not being inordinate, the same is condoned. 3. The grounds of appeal raised by the Revenue reads as follows: 1. The order of the Ld.CIT(Appeals) in so far as it pertains to the following grounds of appeal is opposed to law and facts of the case. 2. The Ld. CIT(A) erred in holding that data automation expenses are revenue in nature. 3. The Ld. CIT(A) erred in holding that Information Technology Support service expenses are revenue in nature. Grounds of Appeal in respect of TP issue 4. Whether the Hon'ble CIT(A) was right in fact and law in removing 3 companies in MSS Segment M/s Asian Business Exhibition & Conference Ltd, M/s HCCA Business Services Pvt Ltd and M/s Killick Agencies & Mktg Ltd as comparable on functional dissimilarity? 5. Whether the CIT(A) is right in not appreciating in fact that transfer pricing is not an exact science and no two entities can be exact replicas? 6. Whether the Hon'ble CIT(A) is right in trying to find out exact replica of the assessee for determining the Arm's Length price based on such replica, even when th....
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....e a final determination of costs actually incurred and will adjust the amount charged to the Assessee in the prior period by issuing a final invoice or a credit. Any cost incurred by TI not covered by per second of use if any will be allocated to the Assessee on a mutually agreed basis. Given that the payment is towards per second usage of software, the same cannot be said to be capital in nature. Further, the expenditure incurred by the Assessee did not result in bringing into existence any new asset or an advantage or benefit of an enduring nature to TI India. In this regard, reliance was placed on the Honourable Supreme Court in the case of Empire Jute Co Ltd Vs CIT (124 ITR 1). The assessee had also cited several case laws to substantiate that the software expenditure has been held to be in the nature of revenue expenditure. 6. Furthermore, in the earlier two years i.e., AY 2008-09 and AY 2009- 10, the CIT(A) has held EDA expenses as being revenue in nature. Therefore, the issue is squarely covered in favour of the Appellant. 7. The CIT(A) deleted addition made by the AO observing as follows: "Having considered the submissions, I am inclined to agree with the submissions of....
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.... revenue in treating amount paid towards automation software as revenue expenditure. The facts with regard to this ground of appeal are that the Assessee claimed deduction of a sum of Rs.135,52,51,594/- while computing income from business under the head "Data Automation software Expenses". The AO called upon the Assessee to explain the nature of the aforesaid expenditure. The Assessee vide its letter dated 28.7.2011 explained to the AO that the software in question were "Electronic Design Automation"(EDA) which are used by the Assessee's designers for product design and verification. The Assessee pointed out that EDA software license is acquired by the Texas Instruments Inc. USA under a global agreement from vendors of such software like Synopsis, Cadence, Mathwork, Magma, Rational etc., and the Assessee is allowed to use such software and billed on the basis of actual hours the Assessee uses the software. The Assessee therefore submitted that the expenditure was a payment for license to use software and the Assessee never acquired any right or interest in the software and therefore the payment made for right to use such software was purely revenue expenditure and should be allowe....
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....ation as per rules." 5.5 Reliance is also placed on the decision in the case of Amway India Enterprises Vs. DCIT (ITAT, Del-Special Bench) [111 ITD 112]. In this case the Hon'ble ITAT held that computer software was tangible asset eligible for depreciation @ 60%. In the result, the Automation software expenses of Rs. 135,52,51,594/- are held to be capital in nature. The amount as claimed in P 86 L a/c is disallowed and added back. Instead, the assessee is allowed depreciation on the amount @ 60%. [Addition Rs. 54,21,00,637/-]" 29. On appeal by the Assessee, the CIT(A) deleted the addition made by the AO holding that the Assessee acquired on purchase by the Assessee and as per the Agreement with the owner of the software the Assessee had only a right to use the software and that the software was anenabling tool in the business of the Assessee and therefore the expenditure question was revenue expenditure. Aggrieved by the order of the CIT(A), the revenue is in appeal before the Tribunal. 30. We have heard the rival submissions. A copy of the group cost allocation Agreement dated 24.3.2006 is at page -406 of Assessee's paper book. The agreement is between Tex....
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.... expenses. As far as the ground No.3 is concerned, it relates to expenses incurred by the assessee towards information technology support services. The agreement by which the assessee received information technology support services is dated 01.01.2006 and the information technology services were provided by Texas Instruments, USA. The agreement clearly mentions that the assessee desires to avail information technology services from the parent company to better carry on its operations of the business. The nature of services for the following services to be performed by the parent company 1.0 Services to Be Performed By TI 1.1 Purchaser employs TI to provide it with services as to certain phases of its information technology needs, including but not limited to: * Maintenance and on-going support services for various information systems including but not limited to SAP. Oracle, Peoplesoft, UNIX, etc. * System malfunction and software repair. * Manage and coordinate with worldwide third party vendors such as SAP, Oracle, Peoplesoft, Unix, Network Appliance etc for required support for various information systems 13. The mode of payment is on the basis of allocation whi....
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....acts brought on record by the Appellant, I am of the view that the ITSS cost is to be treated as revenue expense. Accordingly, the addition made by the AO in this regard by treating the said expenditure as capital, is deleted. In the result, these grounds of appeal are allowed." 16. At the time of hearing, learned Counsel for the assessee brought to our notice that in Assessment Year 2011-12, on identical expenditure in assessee's own case, the Tribunal in ITA Nos.275, 525/Bang/2019, order dated 11.03.2022, upheld similar order of the CIT(A) deleting the addition made by the AO. The relevant observations of the Tribunal in this regard are contained in paragraph 6.3. It is not disputed before us that the facts and circumstances of the case are identical. In these circumstances, following order of the Tribunal in Assessment Year 2011-12, we uphold the order of the CIT(A) and dismiss ground No.3 raised by the Revenue. 17. Ground Nos.4 to 6 raised by the Revenue are with regard to depreciation of Arm's Length Price (ALP) in respect of international transaction of providing marking support services by the assessee to its AE. The assessee provided marking support services to its AE. T....
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....g comparable companies which is as follows: These companies are regarded as comparable to TI India having regard to the following counts: * Companies engaged in the business of arranging tours and travel earn their revenue by acting as a conduit between the buyer and seller, * Companies engaged in market research, event management promotional activities, facility maintenance and administration support render low-end routine services and do not have any decision making powers, * Similar to TI India, these companies do not hold any inventory, * Such companies have a similar asset profile as they do not own machinery or transportation equipment, * Companies identified can be classified as operating in broadly the same level in a value chain, though in a different industry, and * They do not own any non-routine intangibles. Thus, there is a broad similarity in terms of functions performed, assets employed and risk assumed. 20. According to the learned DR, the 3 companies set out in the ground No.4 satisfies the criteria laid down by the assessee in its TP study. Learned Counsel for the assessee however pointed out that on identical facts, the Bengaluru Benches ....
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....g to the regular incumbent going on leave for a month at the relevant point of time resulting in the delay in finalizing the grounds of appeal. The delay is condoned accepting the reasons given for the delay. 25. The grounds of appeal raised by the Revenue reads as follows: TP adjustment on SWD segment: a) The Ld. CIT(A) has erred in law in directing that the operating margin decided in the Bilateral APA with USA for the US AE which was decided by the APA authorities after examining the FAR of the US AE, be applied to the Malaysian AE without verifying and analysing the FAR of the Malaysian AE. b) The order of the CIT(A) is erroneous, since as per the provision of section 92CC(5)(a), BAPA is binding on the person in whose case, and in respect of the transaction in relation to which, the agreement has been entered into and none other. TP adjustment on MSS segment: a) The Ld. CIT(A) has erred in fact and law in removing M/s Killick Agencies 86 Marketing Ltd and M/s Just Dial as comparable on grounds of functional dissimilarity. b) The Ld. CIT(A) has erred in not appreciating the fact that transfer pricing is not an exact science and no two entities can be exact....
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....gn services, has determined the ALP for EDS and SWD at 25.58% and 19.71% [including the transactions with TI Inc, US]. It is also noted that the Appellant has got Bilateral APA concluded in respect of transaction.; with TI Inc, US, wherein the ALP has been determined at 17.50%. The transactions with Natsem Malaysia are not covered by the Bilateral APA and the Appellant's contention is that the transactions with Natsem Malaysia are to be treated at par with transactions of TI Inc, US. To this effect, the Appellant has furnished the submissions on 15 March 2019. The Appellant also highlighted that the transactions with TI Inc, US are 98.43% of the contract SWD/ EDS contract services transaction, whereas the transactions with Natsem Malaysia is only 1.57% of the contract services transaction which is very meager in comparison with the transactions of TI Inc US, the ALP of which has been determined in the APA. The Appellant further submitted that there is no distinction in the nature of services provided by TI India to Natsem Malaysia and the services provided to TI Inc, US. Accordingly, the Appellant requests that the ALP for transactions with Natsem Malaysia should be considered ....
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....icle 27 of the India-US DTAA on 13.07.2020 with respect to its ITES rendered to the AEs based in the US at a margin of 15.69%. Accordingly, the Assessee has withdrawn the grounds in the appeal insofar as it related to the ITES provided by the Assessee to its AE based in the US. 41. It is the plea of the assessee in the additional ground of appeal filed along with application dated 24.02.2021 for admitting additional ground that the profit margin of the assessee adopted in MAP ought to be adopted as ALP mark-up for non-US based AE transactions also. It is submitted that the transactions entered by the Assessee with its US based AE is similar to the transactions entered into with the non-US based AEs and that no distinction has been made by the Assessee between the two in its TP study and while preparing its audited financial statements. It has further been submitted that no distinction has been made by the TPO also in the comparability analysis carried out by him. Therefore, the assessee prays that the Tribunal may adopt the same arm's length mark-up cost for the international transactions entered into with the Non-US AEs as well and, accordingly, dispose of the TP grounds with r....
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.... adopting the Transaction Net Margin Method (TNMM) as the Most Appropriate Method (MAM) of determining ALP. The assessee selected Operating Profit/Operating Cost (OP/OC) as the Profit Level Indicator (PLI) for the purpose of comparison. The OP/OC of the assessee was arrived at 5.89%. The assessee chose companies who are engaged in providing similar services such as the assessee. The assessee identified companies whose average arithmetic mean of profit margin was comparable with the Operating margin of the assessee. The assessee therefore claimed that the price it charged in the international transaction should be considered as at Arm's Length. 32. The Transfer Pricing Officer (TPO) to whom the determination of ALP was referred to by the AO, accepted TNMM as the MAM and also used the same PLI for comparison i.e., OP/TC. He also selected comparable companies from database. The TPO identified 5 companies as comparable with the assessee company and worked out the average arithmetic mean of their profit margins at 12.06%. 33. The TPO computed the Addition to total income on account of adjustment to ALP as follows: 14.6 The taxpayer's PLI is 5.89% whereas that of comparables is 1....
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....evenue in its ground of appeal has raised issues with regard to the comparability criteria to be adopted in TP cases and has contended that it is not possible to have exact comparable companies as was sought to be demanded by the CIT(A). In this regard, we may observe that under Rule 10B(1)( e)(iii) profit margin realized by an unrelated enterprise from a comparable uncontrolled transaction has to be compared with the profit margin realized by the assessee carrying out the international transaction. Rule 10B(2) gives the comparability criteria which essentially talks about functions performed, characteristic of the property at service, contractual terms, conditions prevalent in the market, etc. In our view, the Revenue has raised a general ground without pointing out as to how the comparability criteria as laid down in the Rules have been violated. With these observations, we find no merits in the grounds raised by the Revenue in so far as it relates to TP adjustments in the MSS segment. The appeal of the Revenue is accordingly dismissed. 35. As far as the appeal of the assessee in ITA No.1075/Bang/2019 is concerned, the only ground raised by the assessee is with regard to disallo....
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....on to which, the agreement has been entered into and none other. TP adjustment on MSS segment: a) The Ld. CIT(A) has erred in fact and law in removing M/s Asian Business Exhibition 86 Conference ltd and M/s Killick Agencies & Marketing Ltd in MSS segment on grounds of functional dissimilarity. b) The Ld. CIT(A) has erred in not appreciating the fact that transfer pricing is not an exact science and no two entities can be exact replicas. c) The Ld. CIT(A) has erred in trying to find out exact replica of the assessee for determining the Arm's length price based on such replica, even when the law and the international jurisprudence itself recognize that there cannot be an exact comparable to a given situation, especially with TNMM as the most appropriate method. d) The Ld. CIT(A) has erred in law in demanding comparability standards that may itself defeat the purpose of law relating to determination of ALP under the Income Tax Act. e) The Ld. CIT(A) has erred in imposing conditions is beyond the scope of law and business reality by rejecting such a close comparable, without appreciating that not two companies can ever be same. 40. As far as grounds raised by th....
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..... On appeal by the assessee, the CIT(A) excluded Asian Business Exhibition and Conferences Ltd., and Killick Agencies and Marketing Ltd., as functionally not comparables. The Revenue is aggrieved by the order of the CIT(A) and has therefore filed appeal before the Tribunal. The functional profile of both the aforesaid 2 comparable companies excluded by the CIT(A) is identical in Assessment Year 2013-14 also. The reason given for exclusion of these companies in Assessment Year 2012-13 will therefore equally apply to Assessment Year 2013-14 also for the reasons given in Assessment Year 2012-13 and 2008-09 for excluding these 2 companies from the list of comparable companies. We uphold the order of the CIT(A) and find no merits in the grounds raised by the Revenue. 45. In the result, appeal by the Revenue is dismissed. 46. ITA No.1076/Bang/2019 : This is an appeal by the assessee for Assessment Year 2013-14. The first issue raised by the assessee in its appeal is with regard to disallowance of information technology support services. The ground raised by the assessee is with regard to disallowance of information technology support services. In Assessment Year 2010-11, the CIT(A) all....
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....ans and Advances in its Balance sheet. Subsequently, the insurance claim of the assessee was settled for a lesser value resulting in under recovery of Rs. 71,28,124. The assessee wrote off this amount reflected under loans and advances and charged to profit and loss account. The assessee claimed the same as revenue expenditure for Income Tax purposes. According to the AO had the damaged item received by the Assessee it would have been a capital asset of the assessee. However, the same has not entered into the fixed asset schedule as it got damaged in the transit itself. The damaged item was not a tradable good of the assessee, but it was a capital asset. The assessee was supposed to include all the incidental cost including the purchase price as cost of acquisition of the asset and the same was not to be claimed as revenue expenditure if the asset was received in good condition. However, the asset was received in damaged condition and the assessee could not put to use the same for the purpose of business. The insurance claim was also under recovered. Under such circumstances, the nature of loss is definitely capital in nature. If it were to be a trade loss, then the same would have....
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....ns of section 36(1)(vii) of the Act as bad debts written of which was rightly rejected by the Revenue authorities. The deduction was also examined under section 37(1) of the Act and was rejected by the Revenue authorities. The amount in question cannot be regarded as a capital expenditure because the capital asset never reached the assessee and got damaged in transit. The loss cannot be regarded as a capital loss just because it was a sum paid for purchase of a capital asset. The loss in question in our view is allowable under section 28 r.w.s 29 of the Act as a loss incidental to the business of the assessee. We are therefore of the view that the Revenue authorities were not justified in not accepting the claim of the assessee for deduction. In this regard, we are of the view that the decision of the Hon'ble Kolkata High Court in the case of CIT Vs. Graphite India Ltd., 221 ITR 420 (Kolkata) was squarely applicable. The relevant question referred by the Tribunal to the High Court in that case was whether in the facts and circumstances of that case, the Tribunal was jussified in holding that the expenditure incurred for the assessee's proposed petrochemical project was revenge ....
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....evenue for consideration. There is a nominal delay of 12 days in filing this appeal which has been explained as owing to the regular incumbent going on leave for a month at the relevant point of time resulting in the delay in finalizing the grounds of appeal. The delay is condoned accepting the reasons given for the delay. 54. The grounds of appeal raised by the Revenue reads as follows: 1. The Order of the Ld. CIT (A), in so far as it is prejudicial to the interest of the Revenue, is opposed to law and the fact and circumstances of the case. 2. A) Whether the Hon'ble CIT(A) was right in fact and law in directing that the operating margin decided in the Bilateral APA with USA for the US AE which was decided by the APA authorities after examining the FAR of the US AE, be applied to the Malaysian AE without verifying and analysing the FAR of the Malaysian AE. b) Whether the CIT(A) is right in not appreciating in not appreciating that the purpose of DTAA is to prevent profit shifting and tax avoidance by MNC's and hence the transactions with the Malaysian AE should have also been subject to transfer pricing audit instead of merely applying the operating margin decided....
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....assessee. The assessee therefore claimed that the price it charged in the international transaction should be considered as at Arm's Length. 57. The Transfer Pricing Officer (TPO) to whom the determination of ALP was referred to by the AO, accepted TNMM as the MAM and also used the same PLI for comparison i.e., OP/TC. He also selected comparable companies from database. The TPO identified 4 companies as comparable with the assessee company and worked out the average arithmetic mean of their profit margins at 12.06%. 58. The TPO computed the Addition to total income on account of adjustment to ALP as follows: 17.5 Computation of Arm's Length Price: 17.5.1 The arithmetic mean of the Profit Level indicators is taken as the arm's length margin. Please see Annexure 'A' for details of computation of PLI of the comparable. Based on this, the arm's length price of the services rendered by the taxpayer to its AE(s) is computed as under: Arm's Length Mean Margin on cost 29.14% Operating Cost 86,90,06,264 Arm's Length Price(ALP) @ 129.14% 112,22,34,689 of Operating Cost) Price Received 92,79,38,210 Variation in Price 19,42,....