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2021 (2) TMI 777 - AT - Income TaxTP Adjustment - comparable selection - HELD THAT - Assessee provides software development services SWD services for short , Information Technology Enabled Services ITES for short and marketing support services MSS services for short to VMware group companies, as a captive service provider. For all the above services, the Assessee is compensated by the Associate Enterprise (AE) on a cost plus mark up basis - Companies functionally dissimilar with that of services provided by the Assessee need to be deselected from final list. Addition u/s 40(a)(ia) - non deduction of tds - CIT(A) confirmed the action of the AO by holding that the necessary evidence of having deducted tax at source had not been produced by the assessee - HELD THAT - Assessee brought to our notice Form No.27A which is a statement of deduction of tax at source for the period 01.10.2009 to 31.12.2009. It was brought to our notice that the necessary evidence was filed before the CIT(A) but the CIT(A) has overlooked the same. We are of the view that it would be just and appropriate to direct the AO to verify the claim of the assessee regarding tax deduction at source, in the light of the evidence produced before the CIT(A) after affording the assessee opportunity of being heard. TDS u/s 195 - Disallowance u/s 40(a)(ia) - disallowing the expenses grouped by the Appellant under Repairs and maintenance towards purchase of application software on the premise that it constitutes royalty - HELD THAT - Prior to the decision in the case of Samsung Electronics 2011 (10) TMI 195 - KARNATAKA HIGH COURT rendered by the Hon ble Karnataka High Court on 15.10.2011, the law as interpreted by various judicial forums was that payments for purchase of software were not in the nature of royalty but were in the nature of business profits and if the recipient non-resident did not have a Permanent Establishment in India, there was no obligation to deduct tax at source. Therefore payments to non-resident for purchase of software prior to 15.10.2011 cannot be disallowed u/s.40(a)(ia) of the Act for non deduction of tax at source as on the date of payment to non-resident, there was no such obligation. In view of the above said decisions, we hold that the disallowance under section 40(a)(ia) of the Act has to be deleted. We hold and direct accordingly. Suppressed income - audit adjustments made in the Appellant s financial statements and adding back the same to the taxable income - HELD THAT -The issue has to be remanded to the AO for fresh consideration. The assessee works on a cost mark-up as its margin. The revenue that the assessee shows in the financial statements is dependent on cost and if due to an incorrect estimation of cost or other reasons as submitted by the learned counsel for the Assessee before us, there is change in the revenue shown by the assessee then the corresponding cost which was wrongly estimated also needs to be identified. It is only when there is reconciliation of the incorrect estimate of the cost can it be said that the audit adjustment suggested would be correct. In other words, the restatement of revenue has to be matched by corresponding reduction in the estimated cost only then can it be said that the audit adjustment suggested will not have any effect on the income of the assessee. The submissions made before us as well as the revenue authorities are general and do not give one to one tally or reconciliation of the differences and the reasons for such differences. The assessee is, therefore, directed to give a complete breakup of the difference between the revenue recorded in financial statements and as per the invoices and correlate the same with the cost estimates and as to how both are reflected in the financial statements.
Issues Involved:
1. Computation of Arm’s Length Price (ALP) for Software Development Services (SWD) Segment. 2. Computation of ALP for Information Technology Enabled Services (ITES) Segment. 3. Computation of ALP for Marketing Support Services (MSS) Segment. 4. Exclusion of telecommunication and foreign currency expenses from export turnover and total turnover for deduction under section 10A. 5. Disallowance of expenses for non-deduction of tax at source under section 40(a)(ia). 6. Rejection of audit adjustments leading to alleged suppression of income. 7. Allowance of depreciation on expenses treated as capital expenditure in previous years. Detailed Analysis: 1. Computation of Arm’s Length Price (ALP) for Software Development Services (SWD) Segment: The Assessee and TPO both adopted the Transaction Net Margin Method (TNMM) as the Most Appropriate Method (MAM) for determining the ALP. The TPO selected 11 comparables with an arithmetic mean of 22.71%. After adjustments, the TPO computed an ALP leading to a TP adjustment of ?16,23,38,959/-. The CIT(A) excluded six companies (ICRA Techno Analytics Ltd., Infosys Ltd., Kals Information Systems Ltd., Persistent Systems Ltd., Sasken Communication Technologies Ltd., and Tata Elxsi) for functional dissimilarity. The Tribunal upheld the CIT(A)'s exclusion of these companies citing consistent precedents and functional dissimilarity. 2. Computation of ALP for Information Technology Enabled Services (ITES) Segment: The Revenue's grounds of appeal were found vague as no specific comparables were challenged. Therefore, the Tribunal held that the Revenue did not effectively challenge the CIT(A)'s order in this segment, making the Assessee's grounds academic. 3. Computation of ALP for Marketing Support Services (MSS) Segment: The TPO selected seven comparables with an arithmetic mean of 24.80% leading to a TP adjustment of ?2,55,86,449/-. The CIT(A) excluded three companies (Asian Business Exhibition & Conferences Ltd., HCCA Business Services Pvt. Ltd., and Killick Agencies & Mktg. Ltd.) for functional dissimilarity. The Tribunal upheld the CIT(A)'s exclusion of these companies citing functional dissimilarity and consistent precedents. 4. Exclusion of Telecommunication and Foreign Currency Expenses from Export Turnover and Total Turnover for Deduction under Section 10A: The Tribunal upheld the CIT(A)'s order to exclude telecommunication and foreign currency expenses from both export turnover and total turnover, following the jurisdictional High Court's decision in CIT v. Tata Elxsi Ltd. and the Supreme Court's decision in CIT v. HCL Technologies Ltd. 5. Disallowance of Expenses for Non-Deduction of Tax at Source under Section 40(a)(ia): For AY 2010-11, the Tribunal directed the AO to verify the Assessee's claim of tax deduction at source and allow the expenses if evidence is found satisfactory. For AY 2011-12, the Tribunal deleted the disallowance under section 40(a)(ia) for payments made for application software, following precedents that payments for software licenses were not considered royalty before the Karnataka High Court's decision in Samsung Electronics Ltd. in 2011. 6. Rejection of Audit Adjustments Leading to Alleged Suppression of Income: For AY 2010-11, the Tribunal remanded the issue to the AO to verify the Assessee's claim regarding audit adjustments and their impact on revenue and cost. For AY 2011-12, the Tribunal directed the AO to consider the Assessee's reconciliation of revenue and cost adjustments and decide afresh. 7. Allowance of Depreciation on Expenses Treated as Capital Expenditure in Previous Years: The Tribunal held that depreciation on expenses treated as capital expenditure in AYs 2009-10 and 2010-11 should be allowed in AY 2011-12 as it is consequential in nature. Conclusion: The Tribunal dismissed the Revenue's appeals and partly allowed the Assessee's appeals, directing the AO to re-compute the ALP and other adjustments as per the Tribunal's directions and precedents. The Tribunal also upheld the CIT(A)'s decisions on various exclusions and adjustments, ensuring compliance with judicial precedents and functional similarity criteria.
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