2017 (10) TMI 1376 - AT - Income Tax

Deduction u/s 10A computation - deduct telecommunication expenses from total turnover and export turnover while computing the eligible deduction u/s l0A - 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 the CIT(A) s order directing the Assessing Officer to exclude telecommunication charges both from export turnover and total turnover, as was prayed for by the assessee in the alternate was rightly accepted by the CIT(A). The relevant ground of appeal of the Revenue is accordingly dismissed. Excess provision towards warranty expenses created by the assessee - provision created in unscientific way - Held that - The basis on which the provision for warranty was made was identical in AYs 2002-03 & 2003-04 as well as in AY 2005-06. The Tribunal has in the appeal for the AYs 2002-03 & 2003- 04 after considering the method of providing for warranty liability by way of a provision, specified that the provision made was based on past history and was on scientific method of estimating liability on account of warranty claims. It is clear from the chart which has been extracted in the order of assessment that as and when the period of warranty expires, the assessee writes back the provision made in the books of account to the extent it relates to the warranty liability which the assessee does not incur and which was already provided by way of a provision and allowed as deduction in the past. It appears to us that the provision made by the assessee is scientific and is based on past history. - Decided against assessee TPA - determination of ALP of the international transactions entered - Held that - The assessee is in the business of rendering software development services, thus companies functionally dissimilar need to be deselected from the final list. Action of the CIT(A) excluding companies with turnover of above ₹ 200 crores from the list of comparable companies is held to correct and such action does not call for any interference. Nature of software expenditure incurred - revenue v/s capital expenditure - Held that - At the time of hearing, the Bench expressed the view that there was merit in the contention of the learned DR because in paragraph 10.2 the CIT(A) has not dislodged the factual finding of the AO and has merely proceeded to rely on judicial pronouncements. Though there is a finding that software in question was operating software, there is no reference to the basis on which such a finding was given. Therefore, it would be just and proper to set aside the order of CIT(A) on this issue and remand for fresh consideration of the issue, as to whether the software expenditure which was claimed as deduction was capital or revenue in nature. The Assessee is directed to place all the relevant evidence before the AO to show the expenditure was revenue expenditure. Decision of IBM India Ltd. 2006 (3) TMI 196 - ITAT BANGALORE-B to be followed - Decided in favour of revenue for statistical purposes.

Issues Involved:
1. Deduction of telecommunication expenses from total turnover and export turnover for computing eligible deduction under section 10A.
2. Allowance of excess provision towards warranty expenses.
3. Determination of Arm’s Length Price (ALP) of international transactions.
4. Nature of software expenditure as capital or revenue.

Issue-wise Detailed Analysis:

1. Deduction of telecommunication expenses from total turnover and export turnover for computing eligible deduction under section 10A:
The revenue contested the CIT(A)'s direction to deduct telecommunication expenses from both total turnover and export turnover while computing the eligible deduction under section 10A. The Assessee argued that telecommunication charges should not be excluded from export turnover as they were not specifically attributable to the delivery of articles or software outside India. Alternatively, if excluded from export turnover, they should also be excluded from total turnover. The CIT(A) accepted this alternative plea, relying on the Karnataka High Court's decision in CIT v. Tata Elxsi Ltd, which was upheld by the Tribunal. Consequently, the revenue's appeal on this ground was dismissed.

2. Allowance of excess provision towards warranty expenses:
The AO disallowed the provision for warranty expenses, considering it unscientific and contingent. The Assessee argued that the provision was based on a scientific method, considering past sales and warranty claims. The CIT(A) accepted the Assessee's contention, noting that similar provisions were allowed in previous years and were in line with the Supreme Court's ruling in Rotork Controls India Pvt. Ltd. v. CIT. The Tribunal upheld the CIT(A)'s decision, confirming that the provision was scientific and based on past history, and dismissed the revenue's appeal on this ground.

3. Determination of Arm’s Length Price (ALP) of international transactions:
The TPO determined the ALP using the Transactional Net Margin Method (TNMM) and selected comparable companies, resulting in an addition to the Assessee's income. The CIT(A) applied a 0% Related Party Transaction (RPT) filter and excluded companies with high turnover, reducing the list of comparables. The Tribunal directed the TPO/AO to adopt a 15% RPT filter and reconsider the comparability of certain companies, including Thirdware Solutions Ltd., Tata Elxsi Ltd., Sasken Communication Technologies Ltd., and Geometric Software Solutions Ltd., based on functional and other factors. The Tribunal also directed the CIT(A) to reconsider the comparability of Bodhtree Consulting Ltd. The revenue's appeal was partly allowed for statistical purposes, and the Assessee's cross-objection was partly allowed for statistical purposes.

4. Nature of software expenditure as capital or revenue:
The AO treated the software expenditure as capital in nature due to a lack of evidence from the Assessee. The CIT(A) allowed the expenditure as revenue without dislodging the AO's findings. The Tribunal set aside the CIT(A)'s order and remanded the issue to the AO for fresh consideration, directing the Assessee to provide relevant evidence. The revenue's appeal was allowed for statistical purposes.

Conclusion:
The Tribunal dismissed the revenue's appeal regarding telecommunication expenses and warranty provisions. It partly allowed the revenue's appeal and the Assessee's cross-objection on the ALP determination, remanding certain comparability issues to the CIT(A). The Tribunal also remanded the issue of software expenditure's nature to the AO for fresh consideration. The Assessee's appeal was dismissed due to a delay in filing.

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