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2015 (6) TMI 602 - AT - Income TaxDisallowance of payment towards consultancy charges by determining Arm s Length Price (ALP) at Nil - Held that - In the instant case, the UK and USA subsidiaries did only contractual work parcelled out to it whose results were given to clients directly and no technical knowledge was made available to assessee. Hence, even under the respective DTAA, the payments made to UK and US subsidiaries/companies would not fall under the ambit of FTS. The payments made by assessee to its foreign subsidiaries were towards software development services rendered by them on the portion of work sub-contracted by assessee to them. Thus, if the so called consultancy charges of ₹ 14,98,07,749 paid in the impugned AY are of identical nature, then, it cannot be treated as consultancy charges simpliciter Further, it is relevant to note that though similar payments were made even in the subsequent AY 2009-10, TPO has not determined the ALP of such payments at nil. In view of the aforesaid factual position, since the issue raised by assessee goes to the root of the matter as it is inextricably linked with the ultimate determination of TP adjustment made by TPO and since the primary/basic facts relating to such issue are already available on record, in our view, the additional grounds raised by assessee required to be admitted in consonance with the principle decided in case of NTPC Ltd. v. CIT 1996 (12) TMI 7 - SUPREME Court . However, since this issue was not raised by assessee before ld. DRP and was raised for the first time before us, in the interest of fair play and justice, we remit the issue back to the file of TPO to decide afresh after examining the agreements between assessee and M/s Pratt & Whitney as well as assessee and its subsidiaries and other evidences brought on record by assessee. - Decided in favour of assessee for statistical purposes. Selection of two comparables, i.e., M/s Infosys Technologies Ltd. and Wipro Ltd. - Held that - It is accepted fact that these two companies are leading software companies and have carved out a separate place for themselves. They are in their own league and cannot be compared to any other software development company. The Hon ble Delhi High Court in case of Agnity India Ltd. (2013 (7) TMI 696 - DELHI HIGH COURT ) has also observed that big companies like Infosys cannot be considered as comparable to other software development companies. Different benches of ITAT have also expressed similar view while examining the comparability of Infosys Technologies Ltd and Wipro Ltd. In view of the aforesaid, we direct TPO to exclude these two companies from the list of comparables. - Decided in favour of assessee. Disallowance u/s 40(a)(i) - amount of ₹ 2,29,78,128 was paid to M/s G.E. Network Solutions, Netherlands towards purchase of a software called small world software - Held that - The amount in question is not taxable u/s 9(1)(i) because even assuming for a moment there is a business connection between the assessee and the foreign software supplier there are no operations in India of the foreign company to which income may be reasonably attributed to as required under Explanation 1(a) to section 9(1)(i). Hence we find there is no applicability of S.9(1)(i) in the instant case. Similar issue relating to disallowance of amounts paid to M/s G.E. Network Solutions, Netherlands towards purchase of small world software came up for consideration before the ITAT in assessee s own case for AYs 2006-07 and 2007-08, the Tribunal after considering the nature of payment and going through the Indo-Netherlands DTAA in the context of provisions contained u/s 195 read with section 9(1)(vi) of the Act, held that the payments made by assessee to M/s G.E. Network Solutions, Netherlands is not in the nature of royalty. Further, the Tribunal held that when the payment made to non residents is not assessable to tax under the Indian Income-tax Act, there cannot be any withholding of tax u/s 195 and consequentially no disallowance can be made u/s 40(a)(i). - Decided in favour of assessee. Exclusion of communication expenses from the export turnover while granting deduction u/s 10A - Held that - This issue is squarely covered by the decision of CIT v. Gemplus Jewellery 2010 (6) TMI 65 - BOMBAY HIGH COURT and ITO v. Saksoft Ltd. 2009 (3) TMI 243 - ITAT MADRAS-D . Following the ratio laid down in the aforesaid judgments, we direct the AO to exclude the communication expenses from export turnover as well as total turnover while computing deduction u/s 10A of the Act. - Decided in favour of assessee. Disallowance of guest house maintenance expenditure and picnic expenditure - Held that - Undisputedly, though, assessee has claimed these expenditure, but, he has failed to furnish any documentary evidence towards claim of such expenditure. Therefore, assessee s claim of expenditure cannot be allowed in full. However, considering the fact that assessee maintains guest house and some expenditure must have been incurred towards maintenance of the same. It will be reasonable to allow 50% of the expenditure claimed. Accordingly, we direct AO to sustain the addition to the extent of 50% of the expenditure claimed by assessee. - Decided partly in favour of assessee. Disallowance of deduction towards stores and spares written off - Held that - There is no dispute with regard to the fact that the expenditure claimed by assessee relates to replacement of certain spares to the computer which was claimed as revenue expenditure. As evident from record, similar expenditure claimed by assessee in AY 2008-09 was allowed by ld. DRP following its own order passed in AY 2006-07 and 2007-08. However, in the impugned AY, AO has again treated the expenditure as capital in nature. Considering the aforesaid factual aspect, we remit the matter back to the file of AO to verify the nature of expenditure vis- -vis- the expenditure claimed in AY 2006-07, 2007-08 and 2008-09. If, on verification, the nature of expenditure is found to be same, then, the expenditure claimed has to be allowed - Decided in favour of assessee for statistical purposes.
Issues Involved:
1. Disallowance of consultancy charges by determining Arm's Length Price (ALP) at Nil. 2. Selection of comparables for Transfer Pricing. 3. Disallowance under Section 40(a)(i) of the Income Tax Act. 4. Exclusion of communication expenses from export turnover for deduction under Section 10A. 5. Disallowance of guest house maintenance and picnic expenditure. Issue-wise Detailed Analysis: 1. Disallowance of Consultancy Charges by Determining ALP at Nil: The primary issue was the disallowance of Rs. 14,98,07,749 towards consultancy charges by determining the ALP at Nil. The assessee argued that these payments were for software development services rendered by its foreign subsidiaries, not consultancy charges. The Tribunal noted that similar payments in previous years were accepted without adjustments. It referred to the agreements and invoices, which supported the assessee's claim. The Tribunal remitted the issue back to the TPO for fresh examination, considering the findings in the assessee's own case for previous years. 2. Selection of Comparables for Transfer Pricing: The assessee objected to the selection of Infosys Technologies Ltd. and Wipro Ltd. as comparables due to their significantly higher turnover and different business scale. The Tribunal agreed that these companies are in a different league due to their brand name, economy of scale, and diversified activities. It directed the TPO to exclude these companies from the list of comparables, noting that other factors like brand and scale make them incomparable to the assessee. 3. Disallowance under Section 40(a)(i) of the Income Tax Act: The assessee faced disallowances under Section 40(a)(i) for payments made towards software licenses and consultancy fees to foreign subsidiaries without deducting tax at source. The Tribunal referred to its earlier decisions, where similar payments were not considered royalty and hence not subject to withholding tax under Section 195. It held that the payments were for software development services, not consultancy, and thus outside the purview of Section 195. The Tribunal deleted the disallowances for both assessment years. 4. Exclusion of Communication Expenses from Export Turnover for Deduction under Section 10A: The Tribunal addressed the issue of excluding communication expenses from export turnover while computing the deduction under Section 10A. It followed the decisions of the Hon'ble Bombay High Court and ITAT Special Bench, directing the AO to exclude communication expenses from both export turnover and total turnover for computing the deduction. 5. Disallowance of Guest House Maintenance and Picnic Expenditure: The Tribunal dealt with the disallowance of guest house maintenance and picnic expenditure due to the lack of documentary evidence. It acknowledged that some expenditure must have been incurred and directed the AO to allow 50% of the claimed expenditure for both guest house maintenance and picnic expenses, considering the practical aspects of maintaining a guest house and organizing employee activities. Conclusion: The Tribunal provided a detailed analysis of each issue, remitting some issues back to the TPO for fresh examination and providing clear directions for others based on past decisions and relevant legal principles. The appeals were partly allowed for statistical purposes, ensuring a fair and just resolution of the disputes.
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