2021 (7) TMI 192 - AT - Income Tax

Deduction u/s 10A, 10B, 10AA - computation of export turnover for purposes of computing deduction under section 10A - HELD THAT - Both sides submit that the issue raised by revenue is no more res integra by virtue of the decision of Hon'ble Supreme Court in case of CIT vs. HCL Technologies Ltd., 2018 (5) TMI 357 - SUPREME COURT . Hon'ble Supreme Court upheld the observations of Hon'ble Karnataka High Court in case of CIT vs. Tata Elxi Ltd. 2011 (8) TMI 782 - KARNATAKA HIGH COURT wherein held that if the deductions on freight, telecommunication and insurance attributable to the delivery of computer software under Section 10A of the IT Act are allowed only in Export Turnover but not from the Total Turnover then, it would give rise to inadvertent, unlawful, meaningless and illogical result which would cause grave injustice - Decided against revenue. Addition made on account of selling commission and networking charges - reason for making adjustment in the hands of assessee towards selling commission and networking charges is that, there is no basis for such cost allocation - disallowance of networking charges is on the basis that the agreement does not mention about the markup on cost - HELD THAT - We note that this issue has not been decided by the DRP though objection was raised. Under such circumstance we direct DRP to consider this issue based on various evidences/details filed by assessee having regards to various judicial pronouncements passed by Hon'ble High Courts, in accordance with law. Needless to say that proper opportunity of being heard must be granted to assessee in accordance with law. Addition made on account of outstanding receivables - AR submitted that, as TNMM is used as most appropriate method, the outstanding receivables get subsumed in the working capital adjustment and therefore separate addition is not warranted - HELD THAT - We note that, the Ld. AO has not looked into various aspects in the light of the evidences filed by assessee. The submission by Ld. AR that under TNMM the working capital adjustment subsumes the outstanding receivables, needs to be verified by the Ld. AO/TPO. Several factors need to be considered before coming to the conclusion that the receivables from AE needs to be separately benchmarked. Most importantly the impact this would have on working capital of assessee would have to be studied. In the event any receivables needs to be separately benchmarked, we direct Ld. AO/TPO to compute the interest in accordance with the ratio of Hon'ble Delhi High Court in case of CIT vs. Cotton Naturals India Pvt. Ltd. 2015 (3) TMI 1031 - DELHI HIGH COURT - With the above directions we remand this issue back to the Ld. AO/TPO to reconsider the issue in accordance with law. Not granting deduction under section 10A/10AA/10B with respect to profits attributable towards on-site software development work being sub contractor to an performed by the AEs overseas - HELD THAT - As relying on own case 2015 (10) TMI 2062 - KARNATAKA HIGH COURT we direct the Ld. AO to verify the MSA having regard to the contract entered into by assessee with the foreign clients. In the event the services rendered by AE's under the total supervision of assessee and that the entire risk in respect of these contracts are owned by assessee then the expenditure deserves to be included for the purposes of computing deduction under section 10A/10AA/10B of the Act as they are attributable to rendering of services to foreign clients.

Issues Involved:

1. Re-computation of deduction under Section 10A.
2. Reference to Transfer Pricing Officer (TPO) for determining arm's length price.
3. Transfer pricing adjustments for selling commission and network charges.
4. Charging interest on extended payment terms given to AE.
5. Variation of deduction under Section 10A/10AA/10B.
6. Depreciation on computer peripherals.
7. Additional claims made by the assessee during assessment proceedings.
8. Levy of interest under Sections 234A and 234B.

Detailed Analysis:

1. Re-computation of Deduction under Section 10A:

The Dispute Resolution Panel (DRP) directed the Assessing Officer (AO) to recompute the deduction allowable under Section 10A of the Income Tax Act. The DRP's decision was based on the judgment of the Karnataka High Court in the case of CIT vs. Tata Elxi Ltd., which was upheld by the Supreme Court in CIT vs. HCL Technologies Ltd. The appeal by the revenue on this issue was dismissed.

2. Reference to Transfer Pricing Officer (TPO):

The AO made a reference to the TPO for determining the arm's length price of international transactions exceeding ?15 crores. The TPO conducted an independent search and found the margins computed by the assessee to be at arm's length. However, the TPO made adjustments for selling commission and network charges, concluding that the arm's length price for these should be 'nil' due to lack of direct and tangible benefit to the assessee.

3. Transfer Pricing Adjustments for Selling Commission and Network Charges:

The TPO's adjustments for selling commission and network charges were contested by the assessee. The assessee argued that these transactions were closely linked to providing software development services and should be analyzed using a combined transaction approach. The DRP did not decide on this issue, and the Tribunal directed the DRP to reconsider the issue based on the evidence and judicial pronouncements, granting the assessee an opportunity to be heard.

4. Charging Interest on Extended Payment Terms Given to AE:

The TPO computed notional interest on outstanding receivables exceeding 180 days at 14.74%. The assessee argued that under the Transactional Net Margin Method (TNMM), the working capital adjustment subsumes the outstanding receivables, and separate addition is not warranted. The Tribunal remanded this issue back to the AO/TPO for reconsideration, directing them to compute the interest in accordance with the Delhi High Court's decision in CIT vs. Cotton Naturals India Pvt. Ltd.

5. Variation of Deduction under Section 10A/10AA/10B:

The AO excluded on-site development charges and communication charges from export turnover while computing deductions under Sections 10A/10AA/10B. The Tribunal directed the AO to verify the Master Services Agreement (MSA) and the contracts with foreign clients. If the services rendered by the AE were under the supervision of the assessee and the entire risk was borne by the assessee, the expenditure should be included for computing the deduction.

6. Depreciation on Computer Peripherals:

The AO restricted the depreciation on computer peripherals to 15% instead of 60% claimed by the assessee. The Tribunal directed the AO to grant depreciation at 60%, following the Special Bench decision in DCIT vs. Datacraft India Ltd.

7. Additional Claims Made by the Assessee During Assessment Proceedings:

The DRP did not consider the additional claims made by the assessee as they were not part of the original return of income. The Tribunal noted that these issues were raised in a revised return and remanded the issue to the DRP for consideration based on the evidence provided by the assessee.

8. Levy of Interest under Sections 234A and 234B:

The assessee contested the levy of interest under Sections 234A and 234B. The Tribunal noted that these grounds were consequential in nature and did not require adjudication.

Conclusion:

The Tribunal dismissed the revenue's appeal and allowed the assessee's appeal, directing the DRP and AO/TPO to reconsider and verify several issues based on the evidence and judicial pronouncements. The Tribunal emphasized the need for proper opportunity to be heard and adherence to legal precedents.

← Previous Next →