2020 (1) TMI 1623 - AT - Income Tax

Addition on account of Sales Tax exemptions - assessee claimed exemption on account of Sales Tax and Purchase Tax subsidy and treated the same as capital receipt - AO held the same as revenue in nature - HELD THAT - We find the order of this Tribunal in assessee s own case for A.Y. 2009-10 2017 (5) TMI 1513 - ITAT PUNE held that the receipt on account of Sales Tax and Purchase Tax is capital in nature - As discussed above the CIT(A) while adjudicating the issue placed reliance on the order of this Tribunal in assessee s own case for A.Ys. 2006-07 2007-08 and 2008-09 held that the assessee is entitled to claim exemption on account of Sales Tax and Purchase Tax therefore we find no infirmity in the order of CIT(A) and it is justified. Thus ground Nos. 1 to 6 raised by the Revenue are dismissed. TP Adjustment - action of CIT(A) in excluding functionally companies in the field of software services - HELD THAT - Companies functionally dissimilar with that of assessee need to be deselected from final list. As accepted filter to take RPT is only 25% companies companies exceeding it need to be rejected. Allocate unallocable expenses to each segment in proportion to segmental turnover to total turnover - HELD THAT - As for A.Y. 2010-11 2019 (5) TMI 97 - ITAT PUNE TPO included certain companies on segmental basis in the list of comparables in the software development services segment as well as the other segments of the assessee. While calculating the operating profits of the relevant segments of these companies the TPO did not take into their unallocated expenses. The Tribunal held all common expenses cannot be apportioned in the universal ratio of sales or gross revenue from different segments each having its own separate features and characteristics and the allocation depending upon the nature of expenses and appropriate allocation key and directed the AO/TPO to allocate common unallocated expenses on the basis of relevant keys as the case may be after allowing an opportunity of hearing to the assessee. Disallowance made u/s. 40(a)(i) - HELD THAT - As relying on assessee own case for A.Y. 2010-11 2019 (5) TMI 97 - ITAT PUNE Tribunal remanded the similar issue to the file of AO for deciding the same afresh in the light of filing of additional evidences by the assessee and prayed to remand the same to the file of AO.

Summary

Issues Involved:
1. Deletion of addition on account of Sales Tax exemptions.
2. Exclusion of functionally comparable companies.
3. Allocation of unallocable expenses to each segment.
4. Disallowance under Section 40(a)(i) of the Income Tax Act.
5. Inclusion of specific companies in determining the Arm's Length Price (ALP) of Software Development segments.

Issue-wise Detailed Analysis:

1. Deletion of Addition on Account of Sales Tax Exemptions:
The Revenue challenged the CIT(A)'s action in deleting the addition made by the AO on account of Sales Tax exemptions, claiming it as a revenue receipt. The assessee treated the exemption as a capital receipt. The CIT(A) relied on previous Tribunal orders for the assessee's own cases for AYs 2006-07, 2007-08, and 2008-09, which held such receipts as capital in nature. The Tribunal found no infirmity in the CIT(A)'s order and dismissed the Revenue's grounds.

2. Exclusion of Functionally Comparable Companies:
- Infosys Technology Ltd.: The CIT(A) excluded Infosys Technology Ltd. based on its significantly higher turnover compared to the assessee. The Tribunal upheld this exclusion, citing previous decisions that giant companies like Infosys cannot be compared with smaller companies.

- 8K Miles Software: The CIT(A) excluded 8K Miles Software due to its failure to meet the basic filter of foreign exchange earnings and abnormal profitability in its first year of operations. The Tribunal found no infirmity in this decision.

- E-Infoship Ltd.: The CIT(A) excluded E-Infoship Ltd. due to its engagement in multiple activities beyond software development, including ITES and product sales. The Tribunal agreed, noting functional differences and the lack of segmental data.

- Outsourced Back Office Support Services: The CIT(A) excluded Fortune Infotech Ltd. due to high related party transactions (98.68%) and Eclerx Services Ltd. as it was a KPO, not comparable to the assessee's BPO services. The Tribunal upheld these exclusions.

- Asian Business Exhibition & Conferences Limited: The CIT(A) excluded this company due to its functional differences from the assessee. The Tribunal found no infirmity in this decision.

3. Allocation of Unallocable Expenses to Each Segment:
The Revenue challenged the CIT(A)'s direction to allocate unallocable expenses proportionately to segmental turnover. The Tribunal referred to its previous decision in the assessee's case for AY 2010-11, emphasizing the need for appropriate allocation keys based on the nature of expenses. The Tribunal dismissed the Revenue's ground, upholding the CIT(A)'s order.

4. Disallowance under Section 40(a)(i) of the Income Tax Act:
The assessee challenged the CIT(A)'s confirmation of disallowance under Section 40(a)(i). The Tribunal, referencing its order for AY 2010-11, remanded the issue to the AO for fresh consideration, allowing the assessee to present additional evidence.

5. Inclusion of Specific Companies in Determining the ALP of Software Development Segments:
The assessee contested the inclusion of M/s. Thirdware Solutions Ltd. and M/s. Acropetal Technologies Ltd. as comparables. The Tribunal, referencing its order for AY 2010-11, excluded these companies due to functional differences and their engagement in on-site services and software products. The Tribunal directed the AO to exclude these companies from the list of comparables.

Conclusion:
The Tribunal dismissed the Revenue's appeal and partly allowed the assessee's appeal for statistical purposes, remanding certain issues for fresh consideration by the AO. The Tribunal's decisions were based on previous orders and detailed analysis of functional comparability and appropriate allocation of expenses.