2014 (11) TMI 849 - AT - Income Tax

Allocation of common expenses incurred on various units Held that - As decided in assessee s own case for the earlier assessment year, it has been held that assessee is following head-count of personnel as the basis for allocation of the common and indirect expenses while the AO seeks to allocate the common expenses on the basis of the turnover of each segment - the assessee is into various activities and the assessee is eligible for deduction u/s 10A of the Act only with regard to software development activity which is set up in STPI - merely because there can be more than one method of apportioning common expenses between STPI and domestic unit, it cannot be said that the method of head-count followed by the assessee should be discarded that too midway even though it was not questioned at any time in the past - The assessee has given detailed explanation as to how it is allocating the expenditure between various units on the basis of head-count but both the AO as well as the DRP have failed to consider the factual aspects of the said submission thus, the matter is remitted back to the AO for verification Decided in favour of assessee. Software expenses disallowed Expenses in the nature or reimbursements or not Held that - The AO noticed that the assessee had not deducted tax at source on payments made on software expenses which were claimed as revenue expenses - the software expenses were payments made by it to CSI and were reimbursements hence tax at source was not to be deducted - the absence of profit element in cross-charges as claimed by the Assessee was neither explained by assessee nor could it be independently verified and ascertained - as TDS has not been deducted on the revenue expenses claimed and therefore the amount is liable for disallowance u/s.40(a)(ia) - assessee could not point out any evidence filed before the lower authorities in this regard - Even before the Tribunal, no evidence has been filed to establish the claim of the assessee Decided against assessee. Transfer pricing adjustment Determination of ALP International transaction of rendering software development services to AE Held that - The total foreign exchange gain on account of realization of proceeds from debtors, taken to creditors, inter-company statements etc. was a sum of ₹ 179,01,08,756 - a sum which was sought to be added as part of the operating income on rendering software development services is only on account of transactions of rendering software development services by the assessee to its AE and the foreign exchange fluctuation at the time of realization of the payment for rendering software development services - the foreign exchange fluctuation has to be treated as part of the operating income of software development services segment of the assessee and the operating profit to operating cost has to be determined accordingly - the foreign exchange gain from software development services has to be considered as part of the income from software development services while computing the margin of the assessee and accordingly the margin of 12.67% computed by the assessee is directed to be adopted. Selection of comparables Bodhtree Consulting Ltd. Held that - As decided in Wills Processing Services (India) P. Ltd. Versus Deputy Commissioner of Income-tax 2013 (6) TMI 532 - ITAT MUMBAI - Bodhtree Consulting Ltd. is in the business of software products and was engaged in providing open & end to end web solutions software consultancy and design & development of software using latest technology - Bodhtree Consulting Ltd. cannot be regarded as a comparable - the fact that the assessee had itself proposed this company as comparable should not be the basis on which the company should be retained as a comparable, when factually it is shown that the company is a software product company and not a software development services company. Infosys Ltd. Held that - The assessee has brought on record sufficient evidence to establish that this company is functionally dis-similar and different from the assessee and hence is not comparable - Infosys Technologies Ltd is not functionally comparable since it owns significant intangible and has huge revenues from software products - the break up of revenue from software services and software products is not available - Infosys Ltd. is to be excluded from the list of comparable companies. KALS Information Systems Ltd. Held that - In Trilogy E-Business Software India (P.) Ltd. Versus Deputy Commissioner of Income-tax. Circle 12(4). Bangalore 2013 (1) TMI 672 - ITAT BANGALORE - the TPO has drawn conclusions on the basis of information obtained by issue of notice u/s 133(6) of the Act - This information which was not available in public domain could not have been used by the TPO, when the same is contrary to the annual report of this company as highlighted by the Assessee in its letter dated 21.6.2010 to the TPO - this company was developing software products and not purely or mainly software development service provider - KALS Information Systems Ltd. should not be regarded as a comparable. Inclusion of companies as comparables Held that - In case of Evoke Technologies Pvt. Ltd. and Maverick Systems Ltd., the export revenues during the previous year relevant to AY 2009-10 were less than 75% - However, these companies in the past had export revenues above 75% and therefore the TPO ought not to have been rejected as comparable and should have seen the average export revenues to the total operating revenues for the past three years - the relevant data to be considered is the data for the previous year relevant to AY 2009-10 - export sales was less than 75% of the total sales during the previous year relevant to A.Y. 2009-10 and only this data would be relevant the rejection of those two companies as comparable is upheld. The assessee has adopted the figures of this company for the calendar year ending 31.12.2008 - Since the assessee is closing its accounts as on 31.3.2009, naturally, the data of R. Systems does not pass the test laid down in sub-rule (4) of Rule 10B - R. Systems International Ltd. has been excluded by the TPO solely for the reason that its financial year is different without considering that the data for the financial year adopted by the assessee can be easily compiled from the audited statements of such company the order is set aside and the matter is remitted back to the TPO/AO for including the case of R. Systems International Ltd. in the list of comparables by working out the figures relevant to the financial year. Determination of ALP Spares replacement services transaction with AE Held that - As decided in assessee s own case for the earlier assessment year, it has been held that the assessee is only a custodian of the goods imported till they are delivered to the client or customer of its parent company on its directions - therefore, the assessee cannot be held to be a trader or distributor of the goods - when the assessee cannot be held to be a trader or distributor of the spare parts, it is clear that the resale price method is not applicable for arriving at the ALP of the international transactions - the TNMM method is the most appropriate method for computing the ALP relating to the international transactions of the assessee with its associated enterprises thus, the issue of determining the ALP should be remanded to the TPO/AO for fresh consideration Decided in favour of assessee. Administration and other support services transaction to its AE Held that - The payments made to the assessee for administration support services and marketing support services by its AE is at arm s length - the approach adopted by the TPO of combining the Administrative Support services and management/marketing services and making a comparison of the combined results has to be upheld as both the segments were inter connected - the plea of the assessee to include foreign exchange gain to be considered as operating revenue deserves to be accepted, thus, the TPO is directed to compute the arm s length price after allowing the benefit of proviso to section 92C of the Act, after affording opportunity of being heard to the assessee Decided in favour of assessee.

Summary

Issues Involved:
1. Exclusion of Communication Expenses from Export Turnover for Section 10A/10B Deduction.
2. Allocation of Common Expenses Among Business Segments.
3. Disallowance of Software Expenses Due to Non-Deduction of TDS.
4. Adjustment of Arm's Length Price (ALP) for International Transactions.
5. Determination of ALP for Spares Replacement Services.
6. Determination of ALP for Administrative and Other Support Services.

Analysis:

1. Exclusion of Communication Expenses from Export Turnover for Section 10A/10B Deduction:
The assessee contended that communication expenses should not be excluded from export turnover for computing deductions under Sections 10A and 10B. Alternatively, if excluded from export turnover, they should also be excluded from total turnover. The DRP allowed the alternative relief, making the issue academic and not requiring further adjudication.

2. Allocation of Common Expenses Among Business Segments:
The assessee allocated common expenses based on headcount, a method consistently accepted in prior assessments. The AO, from AY 2008-09, reallocated expenses based on revenue, considering it a superior method. The Tribunal upheld the headcount method as appropriate, directing the AO to verify the number of employees and expenses allocated, following the decision for AY 2008-09.

3. Disallowance of Software Expenses Due to Non-Deduction of TDS:
The AO disallowed software expenses of Rs. 77,82,476 due to non-deduction of TDS, treating them as reimbursements without profit elements. The Tribunal upheld the AO's action as the assessee failed to substantiate the claim of no profit element in payments to CSI.

4. Adjustment of Arm's Length Price (ALP) for International Transactions:
The TPO adjusted the ALP for software development services, rejecting some comparables proposed by the assessee and including others. The Tribunal directed the TPO to consider foreign exchange gains as part of operating income, following the decision in SAP Labs India Pvt. Ltd., and recompute the ALP after excluding certain companies (e.g., Bodhtree Consulting Ltd., Infosys Ltd., KALS Information Systems Ltd., Tata Elxsi Ltd.) and including others (e.g., Evoke Technologies Pvt. Ltd., Maverick Systems Ltd., Quintegra Solutions Ltd., Goldstone Technologies Ltd., R Systems International, Silverline Technologies Ltd., CG-Vak Software & Exports Ltd.).

5. Determination of ALP for Spares Replacement Services:
The TPO used the Resale Price Method (RPM) instead of TNMM, considering the assessee a trader/distributor. The Tribunal disagreed, stating the assessee was not a trader but provided product replacement services on a cost-plus basis. The issue was remanded to the TPO/AO for fresh consideration using TNMM, following directions for AY 2006-07.

6. Determination of ALP for Administrative and Other Support Services:
The TPO combined administrative and management services for comparability, rejecting the assessee's comparables and using his own. The Tribunal upheld the combination but directed the TPO to include foreign exchange gains as operating revenue and reconsider comparables, excluding those not meeting criteria (e.g., Hindustan Housing Company Ltd., IDC India Ltd., New Age Entertainment Ltd., Office Care Services Ltd., Forbes Facility Services Pvt. Ltd., Competent Automobiles Company Ltd., DLF Services Ltd., Empire Industries Ltd., Glodyne Technoserve Ltd., Khaitan (India) Ltd., PAE Ltd., Salora International Ltd., Akshay Software Technologies Ltd., Crisil Risk & Infrastructure Solutions Ltd., E2E Infotech Ltd., ICRA Management Consulting Ltd., ICRA Techno Analytics Ltd., KPMG India Pvt. Ltd., Larsen & Toubro Infotech Ltd., Mahindra Consulting Engineers Ltd., Mindtree Ltd., PSI Data Systems Ltd., SIP Technologies & Exports Ltd., Synetairos Technologies Ltd., Computech International Ltd., H S India Ltd., Apitco Ltd., Vapi Waste & Effluent Management Co. Ltd., Bengal CES Infratech Pvt. Ltd., Cybermedia India Online Ltd., Best Mulyankan Consultants Ltd., Kitco Ltd., Future Capital Investment Advisors Ltd., ICRA Online, Kshitij Investment Advisory Co. Ltd.).

Conclusion:
The Tribunal provided detailed directions for each issue, emphasizing the need for proper verification and adherence to judicial precedents, ensuring fair and accurate determination of tax liabilities and transfer pricing adjustments.