2017 (7) TMI 363 - AT - Income Tax

TPA - price/cost of international transactions compared with the uncontrolled independent price - CIT (Appeals) proceeded to consider the AE of the assessee as tested party to compare the margin with the comparable price - Held that - TP Analysis of the assessee as well as the CIT (Appeals) are not in accordance with the provisions of Transfer Pricing and therefore, the impugned order of the CIT (Appeals) is set aside and the TP issue is remitted to the record of the TPO for deciding the matter afresh by comparing the margins of the international transactions with the uncontrolled comparable price. Needless to say the assessee be given an appropriate opportunity of hearing. Reduction of deduction under Section 10B in respect of expenditure incurred in foreign currency - Held that - Identical issue has been decided by the Hon ble jurisdictional High Court in assessee s own case for the Assessment Year 2003-04 decided issue in favour of assessee wherein held that the software Engineers deputed abroad who among other things have to do testing, installation and monitoring of software supplied to the client. Though the said services are technical in nature it does not fall within clause (ii) of subsection (1) of section 80HHE of the Act of providing technical services outside India in connection with the development or production of computer software. It falls under sub-clause (1) of sub-section (1) of Section 80 HHE of the Act. Therefore, the said expenditure cannot be excluded in computing export turn over. In that view of the matter we do not see any merit in this appeal. Disallowance of deduction under Section 10B in respect of on site development work subcontracted to and income derived by the AE - Held that - This issue is covered in favour of the assessee however, to verify certain facts regarding quantum of work subcontracted to the AE and whether the assessee was having total supervision and control over the work executed by the AE this issue is remitted to the record of TPO / A.O. The Assessing Officer is directed to examine the relevant fact and then decide this issue. Deduction under Section 10B in respect of interest income and profit on sale of assets - Held that - We find that the interest income from the deposits in the bank has no direct first degree nexus with the business activity of the undertaking therefore the same is not eligible for deduction under Section 10B of the Act. Similarly the profit on sale of asset is not an income derived from the business activity of the assessee-undertaking. Hence we do not find any error or illegality in the order of the Assessing Officer in denying the claim of deduction under Section 10B in respect of interest income and profit o sale of asset. Disallowance u/s 40(a)(i) - non deduction of tds on Fees for Technical Services - Held that - We are of the view that the disallowance of expenditure under Section 40(a)(i) would result enhancement of the income of the assessee. Since the income of the assessee is eligible for deduction under Section 10B therefore, the said disallowance made under Section 40(a)(i) is also eligible for deduction under Section 10B of the Act. Accordingly, the alternate plea of the assessee is allowed. Reduction of the expenditure incurred in foreign currency from export turnover as well as total turnover while computing the deduction under Section 10B - Held that - The issue of expenditure incurred towards telecommunication charges in foreign currency attributable to the delivery of computer software abroad is reduced from export turnover an equal amount should also be reduced from total turnover while computing the deduction under section 10B of the Act, is covered in favour of the assessee by the decision of the Hon ble Karnataka High Court in the case of CIT Vs. Tata Elxsi Ltd. (2011 (8) TMI 782 - KARNATAKA HIGH COURT). - Decided in favour of assessee.

Issues Involved:
1. Validity of reference to Transfer Pricing Officer (TPO)
2. Most Appropriate Method (MAM) for determining Arm's Length Price (ALP) and Transfer Pricing (TP) adjustments
3. Reduction of deduction under Section 10B for expenditure incurred in foreign currency
4. Disallowance of deduction under Section 10B for on-site development work subcontracted to Associated Enterprises (AEs)
5. Disallowance of deduction under Section 10B for interest income and profit on sale of assets
6. Disallowance under Section 40(a)(i) for commission payments
7. Levy of interest under Sections 234B and 234C
8. Reduction of expenditure incurred in foreign currency from total turnover for Section 10B deduction (Revenue's appeal)

Detailed Analysis:

1. Validity of Reference to TPO:
The assessee did not press this ground, and it was dismissed as not pressed.

2. Most Appropriate Method (MAM) for Determining ALP and TP Adjustments:
The assessee, engaged in software development, used the Transactional Net Margin Method (TNMM) as the MAM. The TPO accepted the international transactions at arm’s length, but the CIT (Appeals) adopted the Cost Plus Method (CPM) and took the AE as the tested party. The Tribunal found this approach contrary to Transfer Pricing provisions, stating the entity level margin cannot be used for benchmarking international transactions. The Tribunal remitted the issue to the TPO for fresh determination, emphasizing the need to compare segment-wise data with comparable companies and apply a 15% threshold for Related Party Transactions (RPT).

3. Reduction of Deduction under Section 10B for Expenditure Incurred in Foreign Currency:
The AO reduced foreign currency expenses from export turnover. The assessee argued these expenses were not for providing technical services. The Tribunal referred to the jurisdictional High Court’s decision in the assessee’s favor, stating such expenses should not be excluded from export turnover if they pertain to software development.

4. Disallowance of Deduction under Section 10B for On-Site Development Work Subcontracted to AEs:
The CIT (Appeals) disallowed the deduction, but the Tribunal referred to the High Court’s decision, which held that income from on-site development by AEs under the assessee's supervision is eligible for Section 10A deduction. The Tribunal remitted the issue to the AO/TPO to verify the facts and decide in light of the High Court’s ruling.

5. Disallowance of Deduction under Section 10B for Interest Income and Profit on Sale of Assets:
The Tribunal upheld the AO’s decision, stating that interest income from bank deposits and profit on asset sales do not have a direct nexus with the business activity of the undertaking and are not eligible for Section 10B deduction.

6. Disallowance under Section 40(a)(i) for Commission Payments:
The AO disallowed commission payments as Fees for Technical Services due to non-deduction of tax at source. The CIT (Appeals) upheld this but also noted no service was rendered by the AE. The Tribunal allowed the assessee’s alternate plea, stating that disallowed expenditure enhances the income eligible for Section 10B deduction.

7. Levy of Interest under Sections 234B and 234C:
The Tribunal noted that these interests are mandatory and consequential.

8. Reduction of Expenditure Incurred in Foreign Currency from Total Turnover for Section 10B Deduction (Revenue's Appeal):
The revenue contested the CIT (Appeals) decision to exclude foreign currency expenses from total turnover. The Tribunal, following the Karnataka High Court’s decision in Tata Elxsi Ltd., held that such expenses should be excluded from both export turnover and total turnover, thereby deciding against the revenue.

Conclusion:
The assessee’s appeal was partly allowed, and the revenue’s appeal was dismissed. The Tribunal remitted several issues to the TPO/AO for fresh determination, emphasizing adherence to Transfer Pricing provisions and relevant High Court decisions.

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