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2019 (10) TMI 1371 - AT - Income TaxTP Adjustment - characterization of services rendered to its AE - assessee claims that services rendered to its AE are in the nature of engineering design services - TPO has accepted the fact that the assessee is into mainly engineering design services; however, he has characterized the services rendered by the assessee to AE as ITES/BPO services - HELD THAT - When the assessee is having different stream of services including engineering design services and ITES services, it has to furnish complete segmental details while carrying out its TP study. But, the assessee has aggregated its services while carrying out TP study to determine ALP of international transactions with AE - TPO has recharacterized services rendered to the AE into ITES services without assigning any reasons as to how services rendered by the assessee are coming within the ambit of ITES services. Therefore, we are of the considered view that there are some lapses from both sides while determining ALP of international services with AE. Co-ordinate Bench of ITAT, in the case of Continental Automotive Components (India) Pvt. Ltd. 2019 (4) TMI 1929 - ITAT BANGALORE has considered identical issue and restored the issue back to the file of the TPO/AO for characterization of services rendered by the assessee to its AE. Therefore, considering the facts and circumstances of this case and also consistent with view taken by the Co-ordinate Bench, we restore the issue to the file of the TPO for denovo consideration and to decide the issue of characterization of services rendered by the assessee to its AE. TDS Liability - Disallowance of expenditure on computer software under section 40(a)(ia) - HELD THAT - We find that an identical question has been considered by the Co-ordinate Bench of ITAT, in the case of Teekays Interiors Solutions 2019 (4) TMI 193 - ITAT BANGALORE where the Tribunal, after considering relevant facts and also the decision in the case of CIT Vs. Samsung Electronics Co. Ltd 2011 (10) TMI 195 - KARNATAKA HIGH COURT held that the assessee cannot be fastened with the liability to deduct tax at source retrospectively on the basis of subsequent judgment of jurisdictional High Court, when the law stood at that point of time was very clear that there is no requirement of TDS on such payments. We direct the AO to delete the additions made towards disallowance of expenditure under section 40(a)(ia). Levy of interest under section 234B and 244A - HELD THAT - Levy of interest mandatory in nature and which also depends upon total income computed for the year under consideration and hence the AO is directed to re-compute interest under section 234B and 244A of the of the Income Tax Act, 1961 on total income computed as per the provisions of the Act.
Issues Involved:
1. Transfer Pricing 2. Disallowance of Expenditure on Computer Software under Section 40(a)(ia) 3. Non-Allowance of Depreciation on Software Expenditure 4. Brought Forward Losses Not Set Off Against Assessed Income 5. Interest under Section 234B of the Act 6. Interest under Section 244A of the Act Issue-Wise Detailed Analysis: Transfer Pricing: The primary issue revolves around the characterization of services rendered by the assessee to its Associated Enterprises (AE). The assessee claimed these services were engineering design services, while the Transfer Pricing Officer (TPO) recharacterized them as Knowledge Process Outsourcing (KPO) services. The TPO rejected the assessee's Transfer Pricing (TP) study, which applied the Transactional Net Margin Method (TNMM) with a Profit Level Indicator (PLI) of 8.07%, and instead conducted a fresh comparability analysis, selecting 6 comparables with an average margin of 49.88%, leading to a TP adjustment of ?13,67,99,658. The Dispute Resolution Panel (DRP) upheld the TPO's findings. The Tribunal found lapses on both sides and restored the issue to the TPO for a fresh characterization of services and directed the assessee to segregate its services into engineering design services and ITES services. Disallowance of Expenditure on Computer Software under Section 40(a)(ia): The AO disallowed ?2,42,386 for failure to deduct tax at source on payments for computer software, following the Karnataka High Court's decision in the case of Samsung Electronics. The Tribunal, referencing the ITAT decision in M/s. Teekays Interiors Solutions, held that the assessee cannot be retrospectively held liable for TDS based on subsequent judicial decisions. Therefore, the Tribunal directed the AO to delete the disallowance. Non-Allowance of Depreciation on Software Expenditure: The assessee did not press this ground during the hearing, and hence, the Tribunal dismissed it as not pressed. Brought Forward Losses Not Set Off Against Assessed Income: The assessee did not press this ground during the hearing, and hence, the Tribunal dismissed it as not pressed. Interest under Section 234B of the Act: Levy of interest under Section 234B is mandatory and consequential. The Tribunal directed the AO to recompute the interest based on the total income computed as per the provisions of the Act. Interest under Section 244A of the Act: Similar to Section 234B, the Tribunal directed the AO to recompute the interest under Section 244A based on the total income computed as per the provisions of the Act. Additional Issues in IT(TP)A No. 259/Bang/2014: The issues in this appeal were similar to those in IT(TP)A No. 1557/Bang/2012. The Tribunal applied the same reasoning and directions, setting aside the TP adjustment to the AO/TPO for fresh consideration and directing the AO to delete the disallowance of software expenditure under Section 40(a)(ia). Additionally, the Tribunal addressed the issue of short credit for TDS, directing the AO to verify and give full credit after due verification of records. Conclusion: Both appeals filed by the assessee were partly allowed for statistical purposes, with directions for fresh consideration and verification by the AO/TPO. The Tribunal emphasized the need for proper characterization of services and adherence to legal precedents regarding TDS liabilities.
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