2013 (12) TMI 1539 - AT - Income Tax

Claim of the assessee for relief u/s. 10A/10AA - Held that - Set aside the order of the AO in this regard and remand the issue to the AO for fresh consideration in the light of the evidence filed by the assessee and in the light of the ultimate outcome of the assessee s claim for deduction u/s. 10A/10AA of the Act. The assessee will be at liberty to file additional evidence to substantiate its case Credit for tax deduction at source - Held that - The issue should be examined afresh by the AG in the light of the subsequent instruction of CBDT on the issue relied upon by the learned counsel for the assessee. The assessee is directed to make the necessary application before the AO in this regard with supporting evidence, which according to the assessee has already been furnished to the AO. The AO is directed to examine the claim of the assessee in the light of the instruction referred to above. The assessee is also at liberty to furnish such further evidence as may be necessary or called for by the AO. As hold by the Hon ble Bombay High Court in the case of Yashpal Sahini (2007 (7) TMI 7 - HIGH COURT , BOMBAY), the revenue will be precluded from recovering taxes/amounts as evidenced by the TDS certificates filed by the assessee before the AO, till completion of due verification by the AO. TPA - selection of comparables - Held that - Assessee predominantly functions as a provider of information technology (IT) products and services, inter alia undertaking export of software services and trading activities. The Assessee s primary business segments consist of export services, trading and leasing of company s products. The export services comprise of Global Business Services are) Application Management Services The trading segment offers a broad range of products from entry level, mid-range to high-end servers and main frames, presenting the best technology and practices to support e-business infrastructure requirements. The IBM Global Financing (IGF) segment providers flexible and attractive financing and leasing programmes to fund the IT requirement of India customers, thus companies functionally dissimilar with that of assessee need to be excluded from the final list of comparable.

Issues Involved:
1. General challenge to the impugned order.
2. Jurisdiction of the DRP.
3. Denial of relief under sections 10A/10AA of the Income-tax Act.
4. Disallowance of provision for warranty.
5. Disallowance of expenses on club membership/subscription.
6. Disallowance under sections 40(a)(i) and 40(a)(ia).
7. Non-grant of full foreign tax credit.
8. Restriction of credit for tax deduction at source (TDS).
9. Transfer Pricing adjustments.

Detailed Analysis:

1. General Challenge to the Impugned Order:
The assessee raised a general ground challenging the impugned order as not in accordance with law, contrary to facts, and in violation of principles of equity and natural justice. This ground did not require specific adjudication.

2. Jurisdiction of the DRP:
The assessee contended that the DRP exceeded its jurisdiction while giving directions to the AO. This issue was linked with the grounds related to sections 10A/10AA and was addressed in conjunction with those grounds.

3. Denial of Relief under Sections 10A/10AA:
The assessee, a wholly-owned subsidiary of IBM World Trade Corporation, engaged in various IT-related businesses, claimed deductions under sections 10A and 10AA for its STP and SEZ units. The AO denied these deductions on two main grounds:
- The sale proceeds of export of computer software were not credited to a separate bank account outside India approved by the RBI.
- The assessee did not maintain separate books of account for each unit.

The Tribunal found that:
- There is no legal requirement to maintain separate books of account for each unit under section 10A.
- The assessee had provided sufficient evidence to demonstrate the maintenance of records enabling the computation of profits for each unit.
- The issue regarding the RBI-approved bank account was remanded to the DRP for fresh consideration, allowing the assessee to provide additional evidence to prove that the sale proceeds were brought into India in convertible foreign exchange.

4. Disallowance of Provision for Warranty:
The AO disallowed the provision for warranty on the grounds that the assessee did not write back unutilized provisions. The DRP remanded the issue back to the AO. The Tribunal held that the DRP exceeded its jurisdiction by remanding the issue and directed the DRP to reconsider the matter, emphasizing that the provision for warranty was created on a scientific basis.

5. Disallowance of Expenses on Club Membership/Subscription:
The AO treated the payment for corporate membership fees as capital expenditure. The Tribunal, following the jurisdictional High Court's decision, held that such expenses are revenue in nature and allowed the deduction.

6. Disallowance under Sections 40(a)(i) and 40(a)(ia):
The AO disallowed expenses due to non-deduction of tax at source. The DRP remanded the issue to the AO. The Tribunal held that the DRP exceeded its jurisdiction by remanding the issue and directed the DRP to reconsider the matter.

7. Non-Grant of Full Foreign Tax Credit:
The AO did not grant full foreign tax credit due to the denial of deductions under sections 10A/10AA. The Tribunal remanded the issue to the AO for fresh consideration in light of the evidence provided by the assessee and the outcome of the deductions under sections 10A/10AA.

8. Restriction of Credit for TDS:
The AO restricted the credit for TDS based on discrepancies in the NSDL/AST records. The Tribunal directed the AO to verify the TDS claims in light of the CBDT's instructions and the evidence provided by the assessee, ensuring that the assessee is not penalized for discrepancies caused by the deductor.

9. Transfer Pricing Adjustments:
The AO made adjustments to the arm's length price (ALP) of software development services provided to associated enterprises. The Tribunal directed the exclusion of certain companies from the list of comparables and remanded the issue to the TPO for fresh consideration, including the treatment of reimbursement of expenses and adjustments for risks and research and development expenditures.

Conclusion:
The Tribunal allowed the appeal partly, remanding several issues to the DRP and AO for fresh consideration and directing the exclusion of certain comparables in the transfer pricing adjustments. The AO was also directed to provide consequential relief for the demand of taxes and interest based on the final outcome of the proceedings.

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