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2014 (10) TMI 737 - AT - Income TaxAddition of rental income Held that - The lease deed dated June 2, 2003 between the assessee- company and Vanenburg IT Park was amended by an addendum with effect from September, 22,2004 to include lease of additional premises (building D 4th floor) which inter-alia included revised monthly rental and the AO has wrongly considered the amended lease agreement entered into by the assessee and the landlord which was operational with effect from September 22, 2004, without appreciating the fact that Skyworks had occupied the said premises and availed of the facilities up to June, 2004 only - the figure of monthly rentals arrived at by the AO is based on the amended lease agreement and consequently the view of the AO with regard to recovery of the amount from Skyworks computed by the AO was wrong the AO has wrongly stated that Skyworks has availed the said premises/facilities only 6 months from April 4, 2004 to September, 2004 whereas the Skyworks has availed the premises for a period of 3 months only i.e., during April, May and June, 2004 - the addition determined by the CIT(A) as the rental income is to be deleted. Payment made to bandwidth charges u/s 40(a)(ia) Held that - Following the decision in M/s. Market tools Research Pvt. Ltd. vs. DCIT 2014 (2) TMI 312 - ITAT HYDERABAD - the offer of a standard facility to a number of customers such as telephone/cell phone users does not amount to rendering any technical service within the meaning of the definition of technical service - Technical or consultancy service rendered should be of such a nature that it makes available the technical knowledge, skills etc. must remain with the person receiving the services even after the particular contract comes to an end - It is enough that the services offered are the product of intense technological effort and a lot of technical knowledge and experience of the service provider have gone into it - The technical knowledge or skills of the provider should be imparted to and absorbed by the receiver so that the receiver can deploy similar technology or techniques in the future without depending upon the provider - the CIT(A) erred in upholding the disallowance made by the AO in respect of payment made to towards bandwidth charges u/s. 40(a)(ia) Decided in favour of assessee. Determination of arm s length mark-up for provision of software development services Held that - As decided in Intoto Software Services Pvt. Ltd. vs. ACIT 2013 (10) TMI 599 - ITAT HYDERABAD - the assessee has accepted the Exensys Software Solutions Limited as one of the comparable companies when proposed by the TPO - the fact that there is an amalgamation of two companies i.e., Exensys Software Limited and Holool India Limited, the results of which, has resulted in high operating margin cannot be lost sight for - to compare a company with another company, both the companies have to be brought on par with each other after making the necessary adjustments wherever necessary and possible - As the material relied upon by the learned Counsel for the assessee clearly denotes that there is an extraordinary event which has resulted in the high operating margin of the company, the matter is to be remitted back to the AO for re-consideration. The TPO has brought out the differences between a product company and a software development services provider - he is aware of the functional dissimilarity between a product company and a software development service provider - the AO ought not to have taken the companies which are into both the product development as well as software development service provider as comparables unless the segmental details are available - Even if he has adopted the filter of more than 75% of the revenue from the software services for selecting a comparable company, he ought to have taken the segmental results of the software services only - The percentage of expenditure towards the development of software products may differ from company to company and also it may not be proportionate to the sales from the sale of software products - Under section 133(6) of the I.T. Act, the TPO has the power to call for the necessary details from the comparable companies - the AO/TPO has exercised this power to call for details with regard to the various companies - the AO is directed to rework out the ALP on the remaining comparables in the list and make adjustment, if any Decided partly in favour of assessee.
Issues Involved:
1. Addition of rental income. 2. Disallowance of bandwidth charges under Section 40(a)(ia). 3. Determination of arm's length mark-up for software development services. Issue-wise Detailed Analysis: 1. Addition of Rental Income: The assessee, engaged in software development, filed returns for AY 2005-06, claiming a deduction under Section 10A of the Income-tax Act, 1961. The Assessing Officer (AO) added Rs. 70,34,116 to the income, based on the Transfer Pricing Officer's (TPO) determination of the arm's length price (ALP). The AO also added Rs. 29,00,000 as rental income from Skyworks Solutions India Private Limited, treating it as "Income from other sources." The CIT(A) adjusted this amount to Rs. 19,26,683. The tribunal found that the AO incorrectly considered the amended lease agreement effective from September 22, 2004, while Skyworks occupied the premises only until June 2004. Hence, the addition of Rs. 19,26,683 was deleted. 2. Disallowance of Bandwidth Charges under Section 40(a)(ia): The AO disallowed Rs. 52,664 paid towards bandwidth charges, considering it liable for TDS under Section 194J. The tribunal referred to the decision in the case of M/s. Market Tools Research Pvt. Ltd. vs. DCIT, where it was held that payments for bandwidth do not constitute technical services and are not liable for TDS under Section 194J. Therefore, the tribunal allowed the assessee's ground, reversing the disallowance. 3. Determination of Arm's Length Mark-up for Software Development Services: The TPO rejected the comparables identified by the assessee and selected 17 comparables. The CIT(A) upheld 16 of these, excluding Satyam Computer Services Ltd., and determined an average profit margin of 26.41%. The assessee objected to five comparables: Thirdware Solutions Ltd., Exensys Software Solutions Ltd., Infosys Technologies Ltd., Flextronics Software Systems Ltd., and Four Soft Ltd., based on functional dissimilarity and extraordinary events affecting their margins. The tribunal, following decisions in similar cases, directed the exclusion of these comparables and instructed the AO to rework the ALP based on the remaining comparables. The issue of risk adjustment was deemed academic as the ALP would fall within the range of the assessee's profit margin. Conclusion: The tribunal deleted the addition of Rs. 19,26,683 as rental income, allowed the disallowance of bandwidth charges, and directed the reworking of the ALP for software development services, excluding certain comparables. The appeal was partly allowed for statistical purposes.
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