2023 (11) TMI 185 - AT - Income Tax

TP Adjustment - TPO rejected the entity-level benchmarking done by assessee, instead made unit-level comparison i.e. PLI of each unit was compared with the PLI of external comparables - ' principle of res judicata' OR principle of consistency' - HELD THAT - Admittedly, the transactions done by assessee are not closely-related but they are identical. As decided in CIT Vs. Birlasoft India Limited 2011 (6) TMI 1035 - ITAT DELHI rejected unit-level comparison done by department and accepted assessee s claim of entity-level comparison on the grounds that the assessee had provided identical services from all units; there were no significant functional difference in the services; the services were rendered by various units to the same AEs; and the terms and conditions for rendering such services by all units were governed by one single agreement entered into between assessee and AEs. Same view was again taken in the case of same assessee for AY 2005-06 Birla Soft India Ltd. 2014 (8) TMI 867 - ITAT DELHI The management and finance functions of assessee were common and centralized; the individual units were only concerned with providing services. Therefore, in such a situation, the uniform rate agreed by assessee with AEs is certainly a rate at entity-level which has no connection or linkage with individual units. There is also merit in the submission of assessee that the assessee had to maintain separate books and computed separate profits of all 5 units just to claim exemption qua some of the eligible units but had there been no exemption, there would not have been any necessity to maintain separate books or even compute separate figures of each unit. Therefore, in the present case, when the authorities have accepted entity-level approach of assessee in other years, there is a gross fallacy in not accepting the same approach in current year in absence of any changed circumstance. Therefore, we are inclined to accept that the entity-level approach applied by assessee deserves to be accepted. We, therefore, reverse the decision of lower-authorities and direct the AO to apply entity-level approach as claimed by assessee. Internal benchmarking with Mumbai Unit denied - AR submitted that under TNMM, there can be internal benchmarking as well as external benchmarking and it is judicially settled that the former should be preferred over later - HELD THAT - From analysis of Rule 10B as interpreted in the judicial rulings cited above, it is clear that internal comparison is allowed by law and the same is preferrable also. But, as contended by Ld. DR for revenue, the DRP has given a clear-cut basis for rejecting the claim of internal comparison . Needless to mention that the claim of internal comparison cannot be allowed merely because the law permits or merely on the basis of mathematical analysis; the assessee has to prove the functional and economic comparability. The DRP has clearly noted that the assessee has failed to do so. We do not find anything wrong in the findings of DRP which are re-produced in foregoing paragraph. Therefore, we are not inclined to make any interference with the order of DRP. The claim of internal benchmarking is therefore devoid of merit and dismissed. Certain external comparables have been wrongly used; they are liable to be excluded - HELD THAT - Avani Cincom Technologies - As there is a substantial difference in the business of assessee and this company. While the assessee is engaged in providing software/outsourcing services, this company is a product company and catering to specific segments of customers like travel, insurance, etc. Therefore, the assessee is not comparable to this company. We, therefore, direct the TPO/AO to exclude this company from comparable list. Celestial Bio-Labs Ltd. is a product company and secondly, it is developing software for a specific segment, namely bio-technology, pharma, healthcare and clinical research. The name of company Celestial Labs Limited also gives some indication that the company is engaged in laboratory or bio-tech related activity. Therefore, its business is completely different from assessee s business, thus be excluded from list of comparables. Flextronics Software Systems Ltd. company is firstly a product-cum-service company whereas the assessee is a service company only. Secondly, the revenue model of this company is also unique in as much as the company also earns by way royalty from products. Therefore, the assessee s case cannot be compared with this company. We direct the TPO/AO to exclude this company from list of comparables. Infosys Technolgies Ltd. is a giant in software industry and it cannot be compared with small players like assessee. It is also noteworthy that this company has been excluded from list of comparable in assessee s own case by ITAT. Therefore, without mentioning anymore analysis, we are inclined to exclude this company from list of comparables and direct the TPO/AO to do so. Ishir Infotech Ltd. - payments made to outside professional cannot be included in employee cost for the reason that the test of employee cost filter is applied to judge the nature of business. If a company is paying lesser amount of salary to its own staff but paying higher amount to outside professionals, it goes out of service company and does not remain comparable with assessee. Kals Information company is also a product company. It has developed various software products as pointed out by Ld. AR and earning revenue therefrom. Further, it is also claimed by assessee that the company is earning from composite contracts. These business activities of assessee are not controverted by Ld. DR. Therefore, we feel appropriate to exclude this company from comparable and directly accordingly to TPO/AO. Lucid Software Ltd. be excluded as sufficient difference in this company and assessee noticed. Tata Elxi is functional dis-similar in the business with assessee. Even the TPO has also accepted this by mentioning in his report TNMM does not call for strict product comparability and it also allows some diversity in functional comparability. Being a functionally dis-similar, this company cannot be considered as comparable to assessee. Wipro Ltd. company is one of big market players in software sector. The turnover of company is manifold of assessee s turnover, thus we are inclined to exclude this company from comparable. Re-working of exemption u/s 10A/10B - exclusion in numerator (i.e. Export Turnover) but not in denominator - HELD THAT - As relying on HCL Technologies case 2018 (5) TMI 357 - SUPREME COURT 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 to the Respondent which could have never been the intention of the legislature. Also Circular No. 4/2018 dated 14.08.2018 stating freight, telecommunication charges and insurance expenses and expenses incurred in foreign exchange for providing the technical services outside India to be excluded from both export turnover- and total turnover-while computing deduction admissible under section 10A - Decided in favour of assessee. Nature of expenses - civil and tiling expenditure - revenue or capital expenditure - HELD THAT - As noteworthy here that the assessee has himself capitalized expenses in books of account which itself shows that the expenditure cannot be in the nature of repair or maintenance. We find that the AO has carefully invoked the provision of Explanation 1 to section 32(1) by making a sufficient note in assessment-order. Consequently, we uphold AO s action. The assessee fails in this ground. Nature of expenses - licensed software - revenue or capital expenditure - HELD THAT - As assessee agreed that this issue stands covered against assessee by the decision of 2014 (3) TMI 1186 - ITAT CHENNAI for AY 2008-09 - As AR has not been able to bring on record any change in the nature of expenditure so as to not follow the decision of ITAT, Chennai in assessee s own case for AY 2008-09 re-produced earlier. Therefore, we have no reason to deviate from the view taken therein. Respectfully following the same, we uphold AO s action. Disallowance u/s 14A on account of expenditure incurred for earning exempt income - reasonable computation u/s 14A - assessee has earned exempted dividend from mutual funds - HELD THAT - We agree with the proposition canvassed by Ld. AR that the Rule 8D was not applicable to AY 2007-08 involved in present appeal as held by Hon ble Supreme Court 2018 (2) TMI 115 - SUPREME COURT Therefore, the disallowance computed by AO in terms of part (iii) of Rule 8D cannot stand. But, however, we find that a reasonable disallowance is attracted u/s 14A de hors Rule 8D. It is to be noted that the assessee has earned a very high amount of exempted income and the AO has mentioned, in his words, that the assessee has incurred expenses which are embodied in various indirect expenses debited to P L A/c. We also find that this issue has also cropped in other years in assessee s case. As mentioned earlier, in the consolidated order for AY 2011- 12 to 2013-14 2023 (4) TMI 1263 - ITAT INDORE the ITAT Indore has remanded this issue back to AO. We find that the assessee has filed a copy of order 2014 (3) TMI 1186 - ITAT CHENNAI for AY 2008-09 in assessee s own case wherein the ITAT has upheld disallowance of Rs. 35 lakhs on reasonable computation u/s 14A de hors Rule 8D. We find it most appropriate to remit this issue back to the file of AO for a fresh consideration. Ground allowed for statistical purpose.

Summary

Issues Involved:

1. Transfer Pricing Adjustment
2. Re-working of Exemption u/s 10A/10B
3. Capitalization of Civil and Tiling Expenditure
4. Capitalization of Software License Fees
5. Disallowance u/s 14A
6. Levy of Interest u/s 234B

Summary:

Transfer Pricing Adjustment:

The assessee challenged the transfer pricing adjustment of Rs. 37,69,02,830/- made by the AO. The TPO rejected the entity-level benchmarking done by the assessee and instead made unit-level comparisons, resulting in an upward adjustment for the Bangalore units. The Tribunal accepted the assessee's claim for entity-level benchmarking, citing legal provisions and judicial rulings, and directed the AO to apply the entity-level approach. However, the Tribunal rejected the assessee's claim for internal benchmarking with the Mumbai unit due to a lack of functional and economic comparability. Additionally, the Tribunal directed the exclusion of nine external comparables from the list used by the TPO.

Re-working of Exemption u/s 10A/10B:

The AO excluded certain expenses from the export turnover but not from the total turnover, which reduced the deduction under sections 10A/10B. The Tribunal directed the AO to re-compute the deduction by excluding the expenses from both the export turnover and the total turnover, in line with the Supreme Court's decision in CIT Vs. HCL Technologies and the CBDT Circular No. 4/2018.

Capitalization of Civil and Tiling Expenditure:

The AO treated the expenditure of Rs. 2,88,28,306/- on civil and tiling work as capital expenditure. The Tribunal upheld the AO's decision, referencing Explanation 1 to section 32(1), which treats such expenditures in leasehold premises as capital expenditures eligible for depreciation.

Capitalization of Software License Fees:

The AO treated the cost of Rs. 73,10,920/- incurred towards licensed software as capital expenditure. The Tribunal upheld the AO's decision, following the ITAT Chennai's decision in the assessee's own case for AY 2008-09 and the Special Bench decision in Amway India Enterprises.

Disallowance u/s 14A:

The AO made a disallowance of Rs. 41,34,428/- under section 14A, computed using Rule 8D. The Tribunal noted that Rule 8D was not applicable for AY 2007-08 as per the Supreme Court's decision in CIT Vs. Essar Teleholdings Ltd. However, the Tribunal remanded the issue back to the AO for a fresh consideration, directing a reasonable disallowance de hors Rule 8D.

Levy of Interest u/s 234B:

This ground was not pressed by the assessee during the hearing and was dismissed by the Tribunal.

Conclusion:

The appeal was partly allowed, with directions for the AO to modify the assessment order based on the Tribunal's findings and provide necessary opportunities to the assessee for further submissions.