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2016 (11) TMI 1482 - AT - Income TaxTDS u/s 195 - withholding of tax - Disallowance u/s 40(a)(i) - expenditure incurred by the assessee as Management services fees on the ground that the assessee failed to deduct tax at source in terms of section 195 - Held that - Hon ble Delhi High Court in assessee own case 2016 (8) TMI 166 - DELHI HIGH COURT has held on the last page that (i) the payment made by the assessee to Steria France for the management services provided by the latter cannot be taxed as Fees for technical services; and (ii) the said payments are not liable to withholding of tax u/s 195 of the Act. By rendering this judgment, a copy of which has been placed on record, the Hon ble High court has vacated the Ruling of the AAR on this issue. In the given circumstances, we are of the considered opinion that the ends of justice would meet adequately if the impugned order on this issue is set aside and the matter is restored to the file of AO. We order accordingly and direct him to decide this issue afresh in consonance with the judgment of the Hon ble Delhi High Court passed in the assessee s own case. Deduction u/s 10A computation - AO excluding the three items of expenses claimed by the assessee from Export turnover alone - Held that - AO computed deduction u/s 10A by reducing the three expenses from the figure of Export turnover without correspondingly reducing such amounts from the figure of total turnover in the formula given for computing the amount of deduction. This approach, in our considered opinion, is not right. When a particular amount is excluded from the numerator of Export turnover , it has, naturally, to be excluded from the denominator of Total turnover as well in the computation of deduction u/s 10A. It is so for the reason that Total turnover always includes export turnover and if a particular item is not a part of export turnover, that cannot partake the character of total turnover as well. Excluding proportionate amount of interest income from the total profits in the re-computation of deduction u/s 10A - Held that - In computing the Income under the head Profit and gains of business or profession (before/ after apportionment of interest income to the Noida Unit-IV), the assessee started with Profit before tax as per P& L account at ₹ 15,66,85,756 / ₹ 19,39,06,979 including interest income of ₹ 62,481 / ₹ 3,72,83,704. Thereafter, such Interest income of ₹ 62,481 / ₹ 3,72,83,704 has been reduced to arrive at income under the head Profits and gains of business or profession at ₹ 26,37,50,768 / ₹ 26,37,50,768. It is this figure of ₹ 26,37,50,768, which has been taken by the AO before reducing, inter alia, the amount of interest income of ₹ 3,72,83,704. Once the interest income of ₹ 3,72,83,704 does not form part of the business profits eligible for deduction u/s 10A, there can be no question of once again reducing such interest income from the amount of eligible business profits. We, therefore, overturn the impugned order to this extent and direct that the interest income apportioned to the eligible unit be not separately reduced since the Business profits eligible for deduction u/s 10A were already exclusive of the same. This ground is allowed. Transfer pricing adjustment in the Software development services - selection of comparable - Held that - The assessee provides both software and BPO services to its customers. It reported, inter alia, an international transaction of Provision of software services with the transacted value of ₹ 3,31,67,83,807/-, thus companies functionally dissimilar with that of assessee need to be deselected from final list of comparable.
Issues Involved:
1. Transfer pricing adjustment in the IT-enabled service segment. 2. Disallowance under Section 40(a)(i) of the Income-tax Act. 3. Reduction of deduction under Section 10A. 4. Exclusion of interest income in the recomputation of deduction under Section 10A. 5. Transfer pricing adjustment in the software development services segment. Issue-wise Detailed Analysis: 1. Transfer Pricing Adjustment in the IT-enabled Service Segment: - The appeal about the addition on account of transfer pricing adjustment amounting to ?22,35,90,000 in the IT-enabled service segment was not pressed by the assessee's representative and thus stands dismissed. 2. Disallowance Under Section 40(a)(i) of the Income-tax Act: - The assessee incurred an expenditure of ?26.63 crore as remuneration for Management services to Groupe Steria SCA (Steria France) without deducting tax at source. - The AO disallowed this expenditure under Section 40(a)(i) read with Section 195, citing an AAR ruling that categorized the payment as 'Fee for technical services.' - The Delhi High Court later vacated the AAR ruling, stating that the payment cannot be taxed as 'Fees for technical services' and is not liable for tax withholding under Section 195. - The Tribunal set aside the AO's order and directed a fresh decision in line with the High Court's judgment. 3. Reduction of Deduction Under Section 10A: - The AO reduced the deduction under Section 10A from ?26,37,50,768 to ?15,41,43,089 by excluding telecommunication charges, subsistence for onsite employees, and standby and callout charges from 'Export turnover' alone. - The Tribunal held that such exclusions should also be made from 'Total turnover' as per the formula for computing the deduction. - Following precedents, the Tribunal directed the AO to exclude the specified expenses from 'Total turnover' as well. 4. Exclusion of Interest Income in the Recomputation of Deduction Under Section 10A: - The AO apportioned interest income of ?15.77 crore among different units and reduced the business profits of Noida Unit-IV by ?3.72 crore in the recomputation of deduction under Section 10A. - The Tribunal noted that the interest income was already excluded from the business profits in the assessee's computation. - The Tribunal directed that the interest income apportioned to the eligible unit should not be separately reduced since the business profits were already exclusive of the same. 5. Transfer Pricing Adjustment in the Software Development Services Segment: - The AO made a transfer pricing adjustment of ?75,47,44,000 in the software development services segment. - The Tribunal examined the comparability of certain companies included by the TPO: - E-Infochips Bangalore Ltd.: Excluded due to combined revenues from software development and IT-enabled services without segmental information. - Thirdware Solutions: Included as comparable based on the 'Overseas' segment related to software services. - Tata Elxsi Ltd.: Excluded due to involvement in sales of software products apart from rendering software development services. - Sasken Communications: Directed for fresh examination by the TPO to verify the assessee's claim of non-comparability. - The Tribunal also upheld the exclusion of certain companies by the TPO: - CG Vak Software & Exports Ltd.: Excluded due to involvement in IT-enabled services without segmental information. - Goldstone Technologies Ltd.: Excluded due to engagement in IT-enabled services and media division without separate segmental information. - Quintegra Solutions Ltd.: Excluded due to persistent losses and declining sales indicating abnormal financial circumstances. - The Tribunal remitted the matter to the AO/TPO for fresh determination of the ALP of the international transaction in line with the directions provided. Conclusion: - The appeal was partly allowed for statistical purposes, with specific directions for fresh examination and recomputation on certain issues.
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