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TMI Blog2013 (6) TMI 500X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT [2012 (6) TMI 388 - ITAT MUMBAI]. As KALS Information System (P) Ltd activities are different hence need to be excluded as relying on Bind View India P. Ltd. vs DCIT [2013 (6) TMI 113 - ITAT PUNE]. Apropos the assessee's contentions about the arithmetical mistakes same have not been controverted and it is find that in the first round the TPO himself agreed to correct the mistake and in second round without pointing out any reason, the same has not been corrected. Since the assessee has been able to demonstrate that though DRP agreed with the assessee's contentions about the software testing services, however, while computing the same has been reduced. Consequently the mistake in this behalf is apparent from the order of the lower authorities. Thus merit in the argument of the assessee in this behalf and these mistakes are directed to be rectified as requested by the assessee. Loss of expenditure incurred on software holding - capital v/s revenue - Held that:- Disallowing of technical consulting fee - Held that:- AO in the preceding years accepted the allowability of deferred revenue expenditure in three years. First instalment of 1/3rd has already been allowed to the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 39;ble DRP and the ld.AO erred in not applying the proviso to s.92(c ) of the Act and has failed to allow the appellant benefit of downward variation of % in determining the arm's length prices. 6. On the facts and circumstances of the case, the Hon'ble DRP and the ld.AO erred both on facts and in law in disallowing an amount of ₹ 11,60,000/- on account of technical consulting fee. 7. On the facts and circumstances of the case, the Hon'ble DRP and the ld.AO erred both on facts and in law in charging interest u/s 234B and 234D of the Act. 2. As apparent from the above grounds, the major issue pertains to the transfer pricing adjustment of ₹ 2,34,68,530/- and corporate disallowance of ₹ 11,60,000/- being expenditure incurred on software. 3. Facts of the case are that the assessee is engaged in the business of development and support on competitor's software for its parent company. This is 2nd round of proceedings before ITAT challenging T.P. and corporate additions as the earlier order of DRP was set aside by the ITAT. Ld.Counsel for the assessee Shri Ved Jain contends that in respect of software development services assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n on the ground that this does not fall within the ambit of a rectifiable mistake. It is pleaded that it is purely an arithmetical error as is evident from the DRP order and the correct calculation was submitted in the application for rectification by the assessee. This error was admitted and corrected by TPO in the first round vide his order dt 4.3.2010 which is referred to by the Ld. Counsel. 6. The second arithmetical error which is agitated by above ground no.3 of the appellant, is glaring that the total revenue of the appellant for the year is to the extent of ₹ 13,59,91,471/- as against the total cost being ₹ 11,54,91,263/- 7. The TPO and the DRP have considered revenue of ₹ 12,13,93,695/- as against total revenue of ₹ 13,59,91,471/-. With the correction of above error of ₹ 39,47,830, the correct revenue to be considered for TP shall be ₹ 12,53,41,525. However, the total cost still has been taken at ₹ 11,54,91,263/- which is the cost incurred for total revenue of ₹ 13,59,91,471. While doing this the TPO and the DRP have ignored the fact that the operating cost has to be proportionately reduced in case operating revenue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) Ltd. v. Assistant Commissioner of Income-tax, Cir 3(3), Mumbai [2012] 22 taxmann.com 96 (Mum.) iii) Insilica Semiconductors India (P.) Ltd. v. Income-tax Officer, Ward 11(2), Bangalore [2012] 21 taxmann.com 139 (Bang.) iv) ACIT v. Sonata Software Ltd. [2013] 29 taxmann.com 144 (Mumbai - Trib.) v) Customer.Com (P.) Ltd. v. Deputy Commissioner of Income-tax, Circle 11(2), Bangalore [2012] 28 taxmann.com 258 (Bang.) vi) Triniti Advanced Software Labs (P.) Ltd. v. Asstt. CIT [2011] 9. Ld.Counsel further contends that the DRP has also rejected the appellant's contention of excluding comparable of KALS Information System (P) Ltd. The TPO has applied wages/ sales filter range of 35% to 65%. TPO adopted wages/sales of KALS at 35.35% and has considered it to be a valid comparable falling within the range of 35-65%. It is emphasized that this calculation of wages to sales at 35.35 is factually wrong. As per the published accounts of KALS the wages are only ₹ 25,12,394 on total software revenue of ₹ 1,96,90,390 which means wages to sales is just 13% and hence as per TPO own filter it needs to be excluded. 9.1. A review of the annual rep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the case of Trilogy E- Business Software India (P.) Ltd. vs DCIT [2013] 29 taxmann.com 310 , ITA No 1054/2011; the Bangalore Bench of ITAT has held: 46. As far as this company is concerned, the contention of the assessee is that the aforesaid company has revenues from both software development and software products. Besides the above, it was also pointed out that this company is engaged in providing training. It was also submitted that as per the annual repot, the salary cost debited under the software development expenditure was ₹ 45,93,351. The same was less than 25% of the software services revenue and therefore the salary cost filter test fails in this case. Reference was made to the Pune Bench Tribunal's decision of the ITAT in the case of Bindview India (P.) Ltd. v. Dy. CIT [ITA No 1386/PN/10, dated 30-11-2011] wherein KALS as comparable was rejected for AY 2006-07 on account of it being functionally different from software companies. The relevant extract are as follows:- 16. Another issue relating to selection of comparables by the TPO is regarding inclusion of Kals Information System Ltd. The assessee has objected to its inclusion on the basis tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... can be considered. It is important to note that in this case it was the department's contention that segmented results should not be considered when direct comparable are available. As in assessee's the direct comparable are available, hence KALS Information Systems Ltd should not be taken as comparable. 10.2. By applying above proposition, the arithmetic mean of the TNMM will come down to 13.39 %, and shall be within ( ) 5% range in terms of Section 92C of the Act and hence no adjustment is called for. 11. Apropos corporate issue Ld.Counsel contends that disallowance of ₹ 11,60,000/- out of ₹ 29 lac being 1/3rd of the expenditure incurred on software is made by TPO. Assessee, in the preceding assessment year, incurred an expenditure of ₹ 87 lac and claimed 1/3rd of the same at ₹ 29 lac in the preceding assessment year and 1/3rd was claimed in this year. The Assessing Officer and DRP however considered this 2nd instalment of expenditure of ₹ 29 lac as capital and has allowed depreciation at the rate of 60% of ₹ 17,40,000/- and balance ₹ 11,60,000/- has been disallowed ignoring that in earlier years department has accepted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... M/2010 in which the Tribunal did not accept the plea of exclusion on the ground of difference in turnover. The Tribunal observed that in a competitive market, high turnover was associated with low margin and low turnover did not necessarily mean high margin. The Ld.CIT, D.R. placed on record graph plotted between margin and turnover in respect of comprables selected by the assessee in this case which was placed on record which showed that there was no linear relationship between margin and turnover. For instance, in case of Persistent Systems P.Ltd. margin was 24.1% on turnover of ₹ 294.56 crores whereas in case of Mind tree Consulting Ltd. Margin was 17.69% on turnover of ₹ 446.41 crores. Referring to the argument of the Ld.Sr.Counsel that Infosys and Wipro had substantial on-site work in foreign jurisdiction which involved substantial dead cost as the employees sometimes could not be utilized fully as can be done in the home country, the Ld.CIT, DR pointed out that the dead cost in case of on-site work would only reduce the margin and therefore, Infosys and Wipro could not be excluded on this ground. It was therefore urged that the turnover should not be adopted as ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n may be deleted. 16. We heard rival contentions and perused the material available on record. Apropos the assessee's contentions about the arithmetical mistakes same have not been controverted and we find that in the first round the TPO himself agreed to correct the mistake and in second round without pointing out any reason, the same has not been corrected. Since the assessee has been able to demonstrate that though DRP agreed with the assessee's contentions about the software testing services, however, while computing the same has been reduced. Consequently the mistake in this behalf is apparent from the order of the lower authorities. Thus we find merit in the argument of the Ld.Counsel for the assessee in this behalf and these mistakes are directed to be rectified as requested by the assessee. 17. Now coming to the issue about inclusion of high turnover comparables like Wipro, Infosys and KALS, the assessee has cited a catena of judgements so also the department, in support of their respective views. In our considered opinion the applicability of the comparables depends on facts of each and every case. In the assessee's case Satyam comparable was applied ..... X X X X Extracts X X X X X X X X Extracts X X X X
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