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TaxTMI 
TaxTMI 
TaxTMI 
2022 (5) TMI 1645
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.....06.2018, but was filed on 04.07.2018 resulting in a delay 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....
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....ftware packages provided by TI Inc. to the Assessee. Following the end of each yearly accounting period, TI will make 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 m....
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....3.2020. The Tribunal in the aforesaid order held as follows: "28. Gr.No.3 raised by the revenue is with regard to the grievance of the 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 righ....
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....refore, the assessing officer has rightly treated the expenditure on acquiring the computer software as expenditure of capital nature and rightly allowed depreciation 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. ....
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....uphold the order of the CIT(A) and dismiss ground No.2 raised by the Revenue. 12. As far as ground No.3 raised by the Revenue is concerned, the facts are almost identical to the EDA 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. • Man....
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....rent and there is no separate and exclusive purchase of any software from the parent company. The ownership rights in respect of these software vests with the parent company, i.e, TI Inc. Considering the above, and also considering the other supporting facts 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....
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....f the 3 comparable companies excluded by the CIT(A) which is challenged in this appeal have been set out. 19. The submissions of the learned DR before us was that in the TP study of the assessee at page 159, the assessee has set out the broad comparability criteria that have been adopted by it in selecting 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 a....
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....9 : ITA No.1075/Bang/2019 is an appeal by the assessee while IT(TP) A No.1446/Bang/2019 is an appeal by the Revenue. Both these appeals are directed against the order dated 15.3.2019 of CIT(A)-Bengaluru-2, relating to AY 2012-13. First we shall take up for consideration the Revenue's appeal: 24. There is a nominal delay of 31 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. 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 re....
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....rd are set out in the order of the CIT(A) at pages-36 to 43 of his order. The CIT(A) agreed with the submissions and held that the rate agreed under BAPA in respect of international transaction with TI US should also be applied to the transaction with Natsem Malaysia for the following reasons: "The submissions made by the Appellant have been carefully considered and it is noted that the TPO after re-characterizing certain portion of the software development activities as engineering design 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 trans....
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....the additional ground is concerned, it is seen that subsequent to filing of the present appeal, the Assessee's AE located in the United States of America ("US") opted for the Mutual Agreement Procedure ("MAP") proceedings pursuant to Article 25 of the IndiaUS Double Taxation Avoidance Agreement ("DTAA") with respect to the transfer pricing adjustment made to the ITES revenue earned by the Assessee from its AE located in the US. Thereafter, the Assessee has accepted the terms of the MAP resolution under Article 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 int....
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....regarded as Arm's Length mark-up cost for the Non-US AE transaction also. Respectfully following the aforesaid decision, we uphold the order of CIT(A) and find no merits in the grounds raised by the revenue in its appeal. 31. We shall now take up for consideration the Transfer Pricing adjustment in the MSS segment for AY 2012-13. As far as the provision of MSS by the assessee to its AE is concerned, the assessee filed a Transfer Pricing Study (TP Study) to justify the price paid in the international Transaction as at ALP by 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 Trans....
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.... ITAT, Delhi Bench in the case of Nokia India Ltd., in ITA No.6502/Del/2017 in its order dated 26.12.2021 excluded this company on the ground that it is functionally not comparable to the company providing marketing support services. The Tribunal held that Just Dial Ltd., operates local search engine which assists general public in finding information pertaining to nearby areas. In the light of the above discussion, we are of the view that the order of the CIT(A) excluding Just Dial Ltd., was just and proper and calls for no interference. We also find that the Revenue 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 ....
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.... are the grounds of appeal raised by the Revenue in this regard: 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 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 ba....
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....s: 23.2 The taxpayer's PLI is 6.00% whereas that of comparables is 9.73%. The adjustment in this segment is calculated as under: Arm's Length Mean Margin on cost 9.73% Operating Cost 68,33,33,551 Arm's Length Price(ALP) 74,98,21,905 109.73% of Operating Cost) Price Received 72,43,33,562 Shortfall being adjustment u/s 92CA: 2,54,88,343 3% of price received 2,17,30,006 Since the shortfall is exceeding 5% of the International Transaction, adjustment is made Thus a sum of Rs.2,17,30,006/- was added to the total income of the assessee on account of determination of ALP. 44. 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 Asse....
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....ssee and it is allowable deduction u/s 37 of the Act. The assessee further stated that it can assume the nature of trading loss and should be allowed as deduction while computing the income from business and profession. The assessee has also quoted some of the judicial pronouncements in support of its claim that the said loss is not capital in nature. 48. The AO however did not accept the plea of the Assessee. He found that the Assessee received one EMC storage Primary Hardware in damaged condition on 21/06/2011. The assessee lodged the insurance claim towards the damaged equipment with M/s New India Assurance Co Ltd. The assessee considered the insurance receivable as loans 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 fi....
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....r of the AO. The assessee has preferred the appeal before the Tribunal. We have heard the rival submissions. From the facts of the case, it is clear that the assessee purchased EMC storage primary hardware. It is not disputed that this asset was for the purpose of business of the assessee. The asset was received in a damaged condition and the assessee lodged insurance claim towards the damaged equipment. The insurance claim was settled at a lesser value to the extent of Rs.71,28,124/- which was claimed as a loss incidental to the business and deductible expenditure in computing income from business. The claim was examined by the Revenue authorities in the light of the provisions 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 i....
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....ns. We, accordingly, answer question No. 4 in the affirmative and in favour of the assessee and against the Revenue." 50. Following the aforesaid decision, we direct that the claim made by the assessee should be allowed. 51. In the result, ground of appeal of the assessee is allowed and the appeal of the assessee is also allowed. 52. ITA No.365/Bang/2019 and IT(TP)A No.606/Bang/2019 IT(TP)A No.606/Bang/2019 is an appeal by the Revenue and ITA No.365/Bang/2019 is an appeal by the assessee. Both these appeals are directed against the order dated 21.12.2018 of CIT(A), Bengaluru-2, Bengaluru, relating to Assessment Year 2014-15. 53. First, we shall take up the appeal of the Revenue 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, ....
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.... adjustment in the MSS segment for AY 2012-13. As far as the provision of MSS by the assessee to its AE is concerned, the assessee filed a Transfer Pricing Study (TP Study) to justify the price paid in the international Transaction as at ALP by 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 6.78%. 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. 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 compan....