2015 (6) TMI 1122 - AT - Income Tax

Adjustment in the arm s length price(ALP) of international transaction - Held that - The Assessee is a wholly owned subsidiary of Beceem Communications Inc. USA. The Assessee rendered software development services to its holding company thus companies functionally dissimilar with that of assessee need to be deselected from final list of comparable. Deduction u/s.10A computation - Held that - Taking into consideration the decision rendered by the Hon ble High Court of Karnataka in the case of CIT v. Tata Elxsi Ltd 2011 (8) TMI 782 - KARNATAKA HIGH COURT we are of the view that it would be just and appropriate to direct the Assessing Officer to exclude telecommunication charges internet charges etc. both from export turnover and total turnover as has been prayed for by the assessee Disallowing expenditure for acquiring the rights to use application software - Held that - It is not disputed by the revenue that the expenditure was in respect of application software. Thus we hold that expenditure incurred on purchase of software should be allowed as revenue expenditure.

Issues Involved:
1. Adjustment in the arm's length price (ALP) of international transactions.
2. Exclusion of certain comparable companies.
3. Application of turnover filter.
4. Computation of deduction under section 10A.
5. Treatment of expenditure on software as capital or revenue.

Detailed Analysis:

1. Adjustment in the Arm's Length Price (ALP) of International Transactions:
The Assessee contested the addition of Rs. 3,43,55,770/- made by the AO due to an adjustment in the ALP of international transactions with its Associated Enterprise (AE). The Assessee sought the exclusion of Helios and Matheson Information Technology Ltd. from the list of comparable companies, arguing it did not meet the comparability criteria. The Tribunal admitted the additional ground for adjudication, referencing the Special Bench Chandigarh's decision in Quark Systems Pvt. Ltd., which supports the taxpayer's right to reject a company as not comparable even if raised for the first time before the Tribunal.

2. Exclusion of Certain Comparable Companies:
The Tribunal examined the comparability of companies selected by the TPO, including Accel Transmatic Ltd., Avani Cimcon Technologies Ltd., Celestial Labs Ltd., KALS Information Systems Ltd., Ishir Infotech Ltd., Lucid Software Ltd., Megasoft Ltd., Infosys Technologies Ltd., Tata Elxsi Ltd., Wipro Ltd., E-Zest Solutions Ltd., Persistent Systems Ltd., Quintegra Solutions Ltd., Thirdware Solutions Ltd., and Helios & Matheson Information Technology Ltd. The Tribunal excluded these companies from the final list of comparables due to functional dissimilarities, differences in business models, and the presence of extraordinary circumstances such as acquisitions or significant intangible assets.

3. Application of Turnover Filter:
The Tribunal applied the turnover filter, excluding companies with turnovers exceeding Rs. 200 crores from the list of comparables. This decision was based on the principle that significant differences in company size impact comparability. The Tribunal referenced the decision in Trilogy E-Business Software India Pvt. Ltd., which held that companies with turnovers between Rs. 1 crore and Rs. 200 crores should be considered comparable.

4. Computation of Deduction Under Section 10A:
The Assessee argued that telecommunication charges, internet expenses, and other expenses should not be excluded from export turnover when computing the deduction under section 10A. Alternatively, if excluded from export turnover, these expenses should also be excluded from total turnover. The Tribunal, referencing the Karnataka High Court's decision in CIT v. Tata Elxsi Ltd., directed the AO to exclude these expenses from both export turnover and total turnover.

5. Treatment of Expenditure on Software as Capital or Revenue:
The Tribunal addressed the issue of whether expenditure on software should be treated as capital or revenue. The DRP had classified the expenditure as capital, but the Tribunal, referencing the Karnataka High Court's decision in IBM India Ltd., held that expenditure on application software, which enhances operational efficiency without resulting in the acquisition of a capital asset, should be treated as revenue expenditure. The Tribunal directed the AO to allow the expenditure as revenue.

Conclusion:
The Tribunal partly allowed the Assessee's appeal, directing the AO/TPO to re-compute the ALP after excluding the non-comparable companies and applying the turnover filter. The Tribunal also directed the AO to exclude certain expenses from both export turnover and total turnover for section 10A computation and to treat the expenditure on software as revenue expenditure.

← Previous Next →