2023 (11) TMI 1364 - AT - Income Tax

Deduction u/s 10A - telecommunication expenses excluded from export turnover and total turnover - HELD THAT - CIT (A) in first appellate proceedings has directed the AO to reduce telecommunication charges from export turnover and total turnover while computing deduction u/s 10A. The contention of the assessee is that export turnover does not include telecommunication charges. It is no more res-integra that freight telecommunication charges or insurance charges attributable to the delivery of the Computer Software outside India are to be excluded from export turnover as well as total turnover. As in the case of CIT vs. HCL Computer Technologies Ltd 2018 (5) TMI 357 - SUPREME COURT has in an explicit manner held that if freight telecommunication charges and insurance charges are excluded only from export turnover and not the total turnover it would give absurd result as Total Turnover Export Turnover as defined in Explanation 2(iv) of section 10A of the Act Domestic Sale Profits. Allowing a revised computation of long-term capital gains which was based on a revised sale consideration of land - HELD THAT - It is a well settled principle that only the real income of assessee can be taxed. Department cannot tax the income that has never accrued to or received by the assessee. The Hon ble Apex Court in the case of CIT vs. Shoorji Vallabhdas Company 1962 (3) TMI 6 - SUPREME COURT held Income-tax is a levy on income. No doubt the Income-tax Act takes into account two points of time at which liability to tax is attracted viz. the accrual of its income or its receipt; but the substance of the matter is income if income does not result there cannot be a tax even though in book-keeping an entry is made about a hypothetical income which does not materialize. The aforesaid principal laid down as been reiterated in the case of Hemal Raje Shete 2016 (4) TMI 1082 - BOMBAY HIGH COURT and Dinesh Vazirani 2022 (4) TMI 746 - BOMBAY HIGH COURT . Thus in an undisputed facts of the case we find no merit in ground. Allowing interest u/s. 244A on the refund arising out of excess self- assessment tax paid by the assessee - HELD THAT - For refund arising out of self-assessment tax paid there is no dispute. As in the case of Stockholding Corporation of India 2014 (11) TMI 899 - BOMBAY HIGH COURT has held that tax paid on self-assessment would fall u/s. 244A(1)(b) of the Act that is a residual clause. The said section clearly mandates that the Revenue would pay interest on the amounts refunded for the period commencing from the date payment of tax is made to the Government exchequer upto the date when refund is granted. Hence the assessee is eligible for interest on refund on excess amount paid on self assessment tax. We find no error in the findings of CIT (A) on this issue hence ground No. 4 of appeal is dismissed. TP adjustment - software development services - Comparable selection - Sasken Network Systems Ltd - HELD THAT - TPO selected the said company as comparable. One of the filters applied by the TPO for rejection of comparable was Related Party Transaction 4%. Assessee referring to the P L Account of Sasken Network Systems Ltd. has pointed that the RPT of the said company is more than 8%. Hence the said company was excluded by the CIT (A) from the list of comparable. Four Soft Ltd. - The said company was excluded by the CIT (A) for the reason that the RPT of the said company was 5%. The submissions made by the assessee before the CIT (A) shows that the RPT of the company is 22.69%. Thirdware Solutions Limited - CIT (A) rejected the company from the list of comparables on the ground that no segmental data is available. In support of the findings the assessee has drawn our attention to the extracts of the financials of the company. A perusal of the same reveals that the company has revenue from sale of licenses services export and subscription. However no segmental profits were reflected by the company. Tata Elxsi Limited - CIT (A) has excluded the company from the list of comparable as RPT is 4%. Assessee has drawn our attention to the extracts of P L Accounts for the year ended 31/03/2005 of Tata Elxsi Limited at page 668 of the paper book to contend that RPT of the said company is 5.74%. Flextronics Software Systems Ltd.- The said company has also been rejected by the CIT (A) on the ground of RPT filter 4%. As per the findings of the CIT (A) the RPT of the said company for the relevant Assessment Year is 5.23% Infosys Technology Limited - The said company has also been rejected by the CIT (A) on the ground that RPT is 4%. The ld.Counsel for the assessee has drawn our attention to the extract of the Annual Report of the company to contend that RPT to cost is 5.26%. Exensys Software Solutions Ltd. - CIT (A) has excluded the said company from the list of comparables as an exceptional event had happened during the relevant period. During the relevant period another company Holool India Ltd. was amalgamated with Exensys Software Solutions Ltd. w.e.f. 01/04/2004 which had purportedly significant impact on the financial results of company for the year ended 31/03/2005. Larsen Toubro Infotech Ltd. - The said company was excluded from the list of comparable by the CIT (A) as it had RPT of 4%. The ld. Counsel for the assessee pointed that the RPT of the said company is 4.35%. The reasons given for rejecting the aforesaid companies by the CIT (A) could not be controverted by the Department. In the absence of any contrary material we find no reason to interfere with the findings of CIT (A) in excluding the said companies from the list of comparable. Inclusion of ASM Technologies Ltd. and Subex Systems Ltd. Blue Star Infotech Ltd., Goldstone Technologies Ltd., Megasoft Ltd. Mphasis BFL Ltd.as functionally similar. Allowing depreciation and working capital adjustment - Depreciation adjustment is not an alien concept. The Tribunal in the case of Egan Communication Pvt. Ltd. 2008 (6) TMI 299 - ITAT PUNE-A allowed adjustment for depreciation where the rates of depreciation adopted by the tested party and the comparable companies were different. As regards working capital adjustment the assessee had carried out the adjustment to eliminate interest component in working capital. No contrary material is placed before us by the Revenue to support the argument against allowing of working capital adjustment. Disallowance with respect to secondment of employees to AEs - We find that the Co-ordinate Bench in assessee s own case in preceding year i.e. AY 2004-05 in ITA No. 5653/Mum/2009 2023 (4) TMI 889 - ITAT MUMBAI approved the approach of the CIT (A) in considering Indian salary of employees. We see no reason to interfere with the findings of CIT (A) on this issue hence ground No. 6 in the appeal by the Revenue is dismissed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The Tribunal considered the following core legal issues:

• Whether the CIT(A) was correct in excluding telecommunication expenses from both export turnover and total turnover for the purpose of deduction under Section 10A of the Income Tax Act.
• Whether the CIT(A) erred in allowing a revised computation of long-term capital gains, which was based on a revised sale consideration of land.
• Whether the CIT(A) was justified in granting interest under Section 244A on the refund arising from self-assessment tax paid by the assessee.
• Whether the CIT(A) correctly deleted the transfer pricing adjustment made by the TPO concerning software development services provided to associated enterprises (AEs).
• Whether the CIT(A) appropriately restricted the disallowance related to the secondment of employees to AEs.

2. ISSUE-WISE DETAILED ANALYSIS

Telecommunication Expenses and Section 10A Deduction:

• Legal Framework and Precedents: The primary legal framework involves Section 10A of the Income Tax Act, which provides deductions for profits derived from export activities. The definition of "export turnover" under Explanation 2(iv) of Section 10A excludes telecommunication charges.
• Court's Interpretation and Reasoning: The Tribunal upheld the CIT(A)'s view that telecommunication expenses should be excluded from both export turnover and total turnover, aligning with the Supreme Court's decision in CIT v. HCL Technologies Ltd., which emphasizes consistency in the treatment of such expenses to avoid absurd results.
• Application of Law to Facts: The Tribunal found no error in the CIT(A)'s decision, as excluding telecommunication expenses from only export turnover would distort the calculation of profits eligible for deduction.

Revised Computation of Long-Term Capital Gains:

• Legal Framework and Precedents: The issue revolves around the principle that only real income, which has accrued or been received, is taxable. The Goetze (India) Ltd. case was referenced regarding the procedural aspects of making claims during assessment proceedings.
• Court's Interpretation and Reasoning: The Tribunal agreed with the CIT(A) that the assessee's revised computation was a correction of the original claim, supported by documentary evidence of the actual land area sold and the corresponding adjustment in sale consideration.
• Application of Law to Facts: The Tribunal emphasized that tax should only be levied on actual income, not hypothetical or contingent amounts, thus supporting the CIT(A)'s acceptance of the revised computation.

Interest on Refund of Self-Assessment Tax (Section 244A):

• Legal Framework and Precedents: Section 244A provides for interest on refunds, including those arising from self-assessment tax, as clarified by the Bombay High Court in Stockholding Corporation of India Ltd. v. NC Tiwari.
• Court's Interpretation and Reasoning: The Tribunal upheld the CIT(A)'s decision, affirming that interest is payable on refunds of self-assessment tax, consistent with the jurisdictional High Court's ruling.
• Application of Law to Facts: The Tribunal found no error in the CIT(A)'s directive to grant interest on the refund, as it aligns with established legal principles.

Transfer Pricing Adjustment on Software Development Services:

• Legal Framework and Precedents: The Transactional Net Margin Method (TNMM) was accepted as the most appropriate method for determining the arm's length price. The dispute centered on the selection of comparable companies.
• Court's Interpretation and Reasoning: The Tribunal supported the CIT(A)'s exclusion of certain companies from the TPO's list of comparables due to issues like high related party transactions, lack of segmental data, and exceptional events affecting financial results.
• Application of Law to Facts: The Tribunal found the CIT(A)'s approach consistent with transfer pricing principles, ensuring comparability and reliability of selected companies.

Secondment of Employees:

• Legal Framework and Precedents: The issue involved determining the arm's length price for secondment of employees, with reference to the Tribunal's earlier decision in the assessee's case for a previous assessment year.
• Court's Interpretation and Reasoning: The Tribunal upheld the CIT(A)'s decision to compute the arm's length price based on Indian salary, not US salary, considering the nature of employment and remuneration.
• Application of Law to Facts: The Tribunal found the CIT(A)'s restriction of the disallowance to be consistent with the established approach in the assessee's prior case.

3. SIGNIFICANT HOLDINGS

• The Tribunal confirmed that telecommunication expenses should be excluded from both export turnover and total turnover for Section 10A deductions, in line with the Supreme Court's decision in CIT v. HCL Technologies Ltd.
• It upheld the CIT(A)'s acceptance of the revised computation of long-term capital gains, emphasizing that only real income should be taxed.
• The Tribunal supported the CIT(A)'s decision to grant interest on refunds of self-assessment tax under Section 244A, consistent with the Bombay High Court's ruling.
• It affirmed the CIT(A)'s adjustments to the list of comparable companies for transfer pricing purposes, ensuring adherence to comparability criteria and reliable financial data.
• The Tribunal agreed with the CIT(A)'s approach to computing the arm's length price for seconded employees based on Indian salaries, maintaining consistency with previous decisions.