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2022 (5) TMI 1645 - AT - Income TaxNature of expenditure - deduction under the head Data Automation Software Expenses (EDA) - HELD THAT - As nature of expenses is identical to the expenses that was considered by the Tribunal in Assessment Year 2008-09 2020 (3) TMI 1195 - ITAT BANGALORE . The Tribunal after analyzing the terms of the agreement has come to the conclusion that assessee acquired no right or interest of whatsoever in the EDA tools and had only the right to use software. The use of the software was no doubt connected to the business but did not result in any asset coming into existence. Tribunal held that the expenditure was revenue in nature.. Following the aforesaid decision of the Tribunal we uphold the order of the CIT(A) and dismiss ground No.2 raised by the Revenue. Expenses on software licences and software from the parent company - As decided in own case 2022 (3) TMI 714 - ITAT BANGALORE ITSS Information Technology Support Service cost is to be treated as revenue expense. Accordingly the addition made by the AO in this regard by treating the said expenditure as capital is deleted. In the result these grounds of appeal are allowed - dismiss ground No.3 raised by the Revenue. TP Adjustment - depreciation of Arm s Length Price (ALP) in respect of international transaction of providing marking support services by the assessee to its AE - comparable selection - HELD THAT - Companies were rightly regarded as functionally not comparable with assessee rendering MSS by the CIT(A). TP Adjustment in the Software Development Services segment (SWD Segment) - international transaction with TI US the assessee entered into a Bilateral Advance Price Agreement (BAPA) accepting profit margin of 17.50% - as asked rate agreed under BAPA in respect of international transaction with TI US should also be applied to the transaction with Natsem Malaysia - HELD THAT - As neither the assessee or TPO have not made any distinction between US and Non-US AE transactions. In such circumstances the margin accepted in MAP in respect of US AE transaction has to be regarded as Arm s Length mark-up cost for the Non-US AE transaction also. TP adjustment in the MSS segment - CIT(A) excluded 2 companies Just Dial Ltd. and Killick Agencies and Marketing Ltd - HELD THAT - Killick Agencies and Marketing Ltd. is concerned we have already upheld exclusion of this company on the ground of functional comparability. Order of the CIT(A) excluding Just Dial Ltd. was just and proper and calls for no interference as thus company is engaged in local search related services in India through multiple platforms. The nature of services rendered by this company is providing a list of available service providers and this cannot be equated to specific marketing support services which the assessee performs to its AE. Comparability criteria to be adopted in TP cases - Revenue contended that it is not possible to have exact comparable companies as was sought to be demanded by the CIT(A) - As under Rule 10B(1)( e)(iii) profit margin realized by an unrelated enterprise from a comparable uncontrolled transaction has to be compared with the profit margin realized by the assessee carrying out the international transaction. Rule 10B(2) gives the comparability criteria which essentially talks about functions performed characteristic of the property at service contractual terms conditions prevalent in the market etc. In our view the Revenue has raised a general ground without pointing out as to how the comparability criteria as laid down in the Rules have been violated. With these observations we find no merits in the grounds raised by the Revenue in so far as it relates to TP adjustments in the MSS segment. The appeal of the Revenue is accordingly dismissed. Nature of expenses - disallowance of information technology support services - HELD THAT - We allow ground of the appeal of the assessee and hold that the expenditure in question is revenue expenditure. Expenditure towards loans and advances written off in the profit and loss account - HELD THAT - The claim was examined by the Revenue authorities in the light of the provisions of section 36(1)(vii) of the Act as bad debts written of which was rightly rejected by the Revenue authorities. The deduction was also examined under section 37(1) of the Act and was rejected by the Revenue authorities. The amount in question cannot be regarded as a capital expenditure because the capital asset never reached the assessee and got damaged in transit. The loss cannot be regarded as a capital loss just because it was a sum paid for purchase of a capital asset. The loss in question in our view is allowable under section 28 r.w.s 29 of the Act as a loss incidental to the business of the assessee. We are therefore of the view that the Revenue authorities were not justified in not accepting the claim of the assessee for deduction. Case of Graphite India Ltd. 1996 (6) TMI 73 - CALCUTTA HIGH COURT was squarely applicable as held that the expenditure was allowable as incurred wholly and exclusively for the purpose of the assessee s business.
Issues Involved:
1. Condonation of delay in filing the appeal. 2. Nature of data automation expenses and information technology support service expenses. 3. Transfer Pricing (TP) issues related to the selection of comparable companies and determination of Arm's Length Price (ALP). Detailed Analysis: Condonation of Delay: The Revenue's appeal was filed with a delay of 26 days, explained due to administrative reasons. The tribunal found the delay not inordinate and condoned it. Nature of Data Automation Expenses: The assessee, involved in the design and manufacture of computer software, claimed a deduction for "Data Automation Software Expenses" (EDA). The Assessing Officer (AO) treated these expenses as capital expenditure, allowing 60% depreciation. The CIT(A) reversed this decision, treating the expenses as revenue in nature, citing that the payment was for the usage of software tools provided by the parent company, Texas Instruments Inc. (TI Inc.), and did not result in the acquisition of any new asset. The tribunal upheld the CIT(A)’s decision, noting that the nature of the expenses was identical to those considered in previous years where they were treated as revenue expenditure. Nature of Information Technology Support Service Expenses: Similar to the EDA expenses, the Information Technology Support Service (ITSS) expenses were initially treated as capital expenditure by the AO. However, the CIT(A) treated these expenses as revenue in nature, noting that the assessee was charged for using licenses owned by the parent company, without acquiring any ownership rights. The tribunal upheld this decision, referencing a similar conclusion in the assessee’s case for a different assessment year. Transfer Pricing (TP) Issues: The Revenue challenged the CIT(A)’s decision to exclude certain companies as comparables for determining the ALP for Marketing Support Services (MSS). The CIT(A) excluded companies like M/s Asian Business Exhibition & Conference Ltd., M/s HCCA Business Services Pvt Ltd., and M/s Killick Agencies & Marketing Ltd., citing functional dissimilarity. The tribunal upheld the CIT(A)’s decision, referencing previous tribunal decisions where these companies were excluded for similar reasons. Determination of ALP in Software Development Services (SWD) Segment: The assessee argued that the profit margin agreed in a Bilateral Advance Price Agreement (BAPA) with the US should apply to transactions with Natsem Malaysia, given the similarity in services provided. The CIT(A) accepted this argument, and the tribunal upheld this decision, noting that neither the assessee nor the TPO had distinguished between US and non-US transactions in their comparability analysis. Disallowance of Loans and Advances Written Off: The assessee claimed a deduction for under-recovery of insurance claims on damaged shipments, which was treated as a capital loss by the AO. The tribunal held that the loss was incidental to the business and allowable under section 28 r.w.s 29 of the Act, directing the Revenue to allow the claim. Conclusion: The appeals by the Revenue were dismissed, and the appeals by the assessee were allowed, with the tribunal upholding the CIT(A)’s decisions on the nature of expenses and TP adjustments, and directing the Revenue to allow the deduction for loans and advances written off. The tribunal also directed the AO to verify and consider the assessee’s claim for short grant of TDS.
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