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2016 (6) TMI 1333 - AT - Income TaxTPA - Comparable selection - Held that - Assessee providing software development service to its group companies. Assessee is a captive service provider assisting SAP AG Germany in research design and development of new software products software enhancement and modifying existing software modules. It operates from various units registered with Software Technology Parks (STP) of India. Assessee had international transactions in the nature of software development services rendered to its AE abroad thus companies functionally dissimilar with that of assessee need to be deselected from final list. We direct exclusion of Accel Transmatics Ltd (seg) Avani Cimcon Technologies Ltd Celestial Labs Ltd E-Zest Solutions Ltd Flextronics Software Systems Ltd (seg) Helios & Matheson Information Technology Ltd Infosys Technologies Ltd Ishir Infotech Ltd Kals Information Systems Ltd(seg) Lucid Software Ltd Persistent Systems Ltd Tata Elxsi Ltd (seg) Thirdware Solutions Ltd and Wipro Ltd (seg) from the list of cmparables considered by the TPO. We also direct that Megasoft Ltd shall be considered as a comparable only after effecting proper segmentation of its results as mentioned at para 15 above. TPO/AO is directed to rework the ALP of international transactions of the assessee accordingly. Needless to say that working capital adjustment has to be given to the assessee based on the work- out of such working capital relating to the final set of comparables left in the list. Claim for deduction u/s.80JJAA - additional wages paid during the year consisted of a sum paid to 383 new regular workman employed in Unit-1 - engineers who were newly employed by the assessee were not considered as workers by the lower authorities - Held that - The deduction is given on profits and gains derived from industrial undertaking engaged in manufacture of production of article or thing. It is only for quantification of the amount that 30% is applied. In our opinion the deduction is very much linked to the profits of the undertaking. We are therefore unable to accept this line of argument taken by the counsel. In the result we hold that assessee is not eligible for deduction u/s.80JJAA of the Act in respect of its units 2 3 and 4. However denial of such claim in respect of unit-1 where it was not claiming any deduction in our opinion is incorrect. We therefore set aside the orders of authorities below for the limited purpose of quantifying the eligible deduction u/s.80JJA in respect of Unit-1. In the result ground treated as partly allowed for statistical purpose. Allocation of interest related to its non 10A to other software units - depressing its claim of exempt income from 10A units and prorata increasing the income of the non-10A unit - Held that - Just because the loan was taken for rolling over an earlier loan would not mean that interest incurred in relation to such loan cannot be allocated to unit-2 which was also functioning from the very same area and utilising the services given by the head office which was functioning from the building constructed utilising the loan. In our opinion AO was justified in making reallocation of the interest in between unit-1 and unit-2. Evidence produced by the assessee which is in the nature of resolution passed by its board of directors and letter to the concerned bank does not in any way show that the loans were utilised only for construction of campus and the campus never catered to unit-2. In any case assessee itself had mentioned that a part of the loan was unsed for financing the working capital and business needs. In such a situation we do not find any reason to interfere with the orders of lower authorities in this regard. Deduction u/s 10A - deduction of travelling expenditure support expenses telecommunication expenditure and other expenditure from export turnover while computing the deduction available to it u/s.10A - Held that - The definition of the term export turnover in Explanation (iv) to Section 10A of the Act does not give room for such an interpretation as sought by the assessee. However in so far as its alternate ground that items which are deducted from export turnover have to be reduced from total turnover also while computing deduction u/s.10A of the Act we are inclined to accept in view of the judgment in the case of Tata Elxsi Ltd v. CIT 2011 (8) TMI 782 - KARNATAKA HIGH COURT . Accordingly we direct the AO to rework the deduction u/s.10A of the Act after reducing the amounts which are deducted from export turnover from total turnover also. Disallowance of deduction u/s.10A in respect of its business undertaking located in Chandigarh registered with STP authorities - slump sale - Held that - It is not disputed that the Chandigarh unit came to the assessee through a slump sale. M/s. Virsa had given this undertaking to the assessee as a going concern. That such transaction was a slump sale has not been disputed by any of the lower authorities. It is also not disputed that the said M/s. Virsa was eligible for deduction u/s.10A of the Act and was claiming such deduction in the earlier years for such unit. As decided in M/S. SONATA SOFTWARE LTD. 2012 (4) TMI 99 - BOMBAY HIGH COURT Slump sale could not be considered as a reconstruction of business. Similar view was also taken by the coordinate bench in the case of LG Soft India P. Ltd 2010 (5) TMI 825 - ITAT BANGALORE . We are therefore of the opinion that assessee was eligible for claiming deduction u/s.10A for its Chandigarh unit for the balance sheet for the period of availability of deduction u/s.10A. We therefore set aside the orders of lower authorities in this regard and remit the issue back to the AO for consideration afresh in accordance with law for verifying whether the claim for deduction u/s.10A Foreign tax credit as not granted to it though it was claimed in the return of income - Held that - Facts before us does not show whether assessee was eligible for the claim of foreign tax credit of Rs. 2, 42, 205/-. It might be true that it had claimed such credit in the return of income. In all fairness we feel that this matter requires a fresh look by the AO. If the assessee is eligible for foreign tax credit and if the amount claimed by the assessee is correct AO shall give such credit. Ground. is allowed for statistical purpose.
Issues Involved:
1. Transfer Pricing Adjustments 2. Deduction under Section 80JJAA 3. Allocation of Interest Expenses 4. Deduction under Section 10A 5. Foreign Tax Credit Issue-wise Detailed Analysis: 1. Transfer Pricing Adjustments: The assessee, a subsidiary of SAP AG, Germany, engaged in software development services, had international transactions amounting to Rs. 520,17,36,977/-. For benchmarking, the assessee used the TNMM method and selected 18 comparables. The TPO, however, replaced most of these comparables with 26 others, leading to an addition of Rs. 72,87,76,037/- under Section 92CA. The assessee contested the inclusion of several comparables, arguing they were functionally different. The Tribunal directed the exclusion of Accel Transmatics Ltd (seg), Avani Cimcon Technologies Ltd, Celestial Labs Ltd, E-Zest Solutions Ltd, Flextronics Software Systems Ltd (seg), Helios & Matheson Information Technology Ltd, Infosys Technologies Ltd, Ishir Infotech Ltd, Kals Information Systems Ltd (seg), Lucid Software Ltd, Persistent Systems Ltd, Tata Elxsi Ltd (seg), Thirdware Solutions Ltd, and Wipro Ltd (seg) from the list of comparables. Megasoft Ltd (seg) was to be included only after proper segmentation of its results. The TPO/AO was directed to rework the ALP accordingly and provide a working capital adjustment based on the final set of comparables. 2. Deduction under Section 80JJAA: The assessee claimed a deduction of Rs. 9,26,66,731/- under Section 80JJAA, supported by an audit report in Form 10DA. The AO denied the claim, arguing that software engineers were not "workmen" under the Industrial Disputes Act, 1947, and that the deduction was not allowable due to Section 80A(4). The Tribunal, referencing the decision in Texas Instruments India P. Ltd, held that software engineers could be considered workmen. However, the Tribunal agreed with the AO that the deduction under Section 80JJAA was linked to profits and gains and thus, Section 80A(4) applied. The Tribunal allowed the deduction for Unit-1, where no Section 10A claim was made, and directed the AO to quantify the eligible deduction for Unit-1. 3. Allocation of Interest Expenses: The AO reallocated interest expenses of Rs. 5,97,06,982/- from Unit-1 to Unit-2, arguing that both units were situated in the same campus and shared facilities. The assessee claimed the loan was used solely for Unit-1. The Tribunal upheld the AO's reallocation, noting that the assessee could not prove Unit-2 was entirely independent and did not utilize the campus facilities. 4. Deduction under Section 10A: The assessee claimed a deduction of Rs. 8,39,905/- under Section 10A for its Chandigarh unit, acquired through a slump sale from M/s. Virsa Systems P. Ltd. The AO denied the claim, arguing that the unit was formed by the transfer of used plant and machinery. The Tribunal, referencing the judgment in Sonata Software Ltd, held that a slump sale did not constitute a reconstruction of business and directed the AO to verify the eligibility of the claim within the total period of availability of deduction under Section 10A. 5. Foreign Tax Credit: The assessee claimed a foreign tax credit of Rs. 2,42,205/-, which was not granted by the AO. The Tribunal directed the AO to verify the eligibility and correctness of the claim and grant the credit if appropriate. Conclusion: The appeal was partly allowed for statistical purposes, with directions for reworking the ALP, quantifying eligible deductions, reallocating interest expenses, verifying the eligibility of Section 10A claims, and granting foreign tax credit if eligible.
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