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TMI Blog2014 (10) TMI 737X X X X Extracts X X X X X X X X Extracts X X X X ..... ned by the CIT(A) as the rental income is to be deleted. Payment made to 'bandwidth' charges u/s 40(a)(ia) – Held that:- Following the decision in M/s. Market tools Research Pvt. Ltd. vs. DCIT [2014 (2) TMI 312 - ITAT HYDERABAD] - the offer of a standard facility to a number of customers such as telephone/cell phone users does not amount to rendering any ‘technical service’ within the meaning of the definition of technical service - Technical or consultancy service rendered should be of such a nature that it ‘makes available’ the technical knowledge, skills etc. must remain with the person receiving the services even after the particular contract comes to an end - It is enough that the services offered are the product of intense technological effort and a lot of technical knowledge and experience of the service provider have gone into it - The technical knowledge or skills of the provider should be imparted to and absorbed by the receiver so that the receiver can deploy similar technology or techniques in the future without depending upon the provider - the CIT(A) erred in upholding the disallowance made by the AO in respect of payment made to towards bandwidth charges u/s. 40(a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ose T. Kottaram ORDER PER ASHA VIJAYARAGHAVAN, J.M.: This appeal by the assessee is directed against the order of the CIT(A)-III, Hyderabad dated 28.3.2011 for assessment year 2005-06. 2. The assessee is engaged in the business of software development and filed its return of income for A.Y. 2005- 06 on 30.12.2005 showing income of ₹ 1,83,670 after claiming deduction of ₹ 96,04,588 u/s. 10A of Income-tax Act, 1961. During the assessment proceedings, the Assessing Officer noticed that during the FY 2004-05 it had made international transactions with its Associated Enterprises (AEs). For computation of arm's length price (ALP) of such transactions, during the assessment proceedings, the Assessing Officer made reference to the Transfer Pricing Officer (TPO) u/s. 92CA(1) of the Act. In response to this, the TPO after making necessary enquiries and verification vide his order dated 30.5.2008 passed u/s. 92CA(3) of the Act determined the ALP of such transactions at ₹ 7,97,32,152 as against ₹ 7,26,98,036 shown by the assessee thereby suggesting adjustment of ₹ 70,34,116 to the income of the assessee u/s. 92CA of the Act. 3. Later, in c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st the actual expenditure incurred under Schedule-11 and 12 of the financial statements of the Assessee. It was pointed out that during the financial year 2004-2005 Skyworks has availed the premises/facilities of the Assessee Company for a period of 3 months i.e. April, May and June 2004 and the recoveries of ₹ 9,73,317 for the period of 3 months from Skyworks as disclosed in schedule 12 of the financial statements consists of the following: Particulars Amount Communication 7,535 Printing Stationary 300 Repairs Maintenance 1,70,714 Security services 20,127 Telephone 54,401 Rent 7,20,240 Total Additions 9,73,317 5. It was stated that the above represents 50% of the relevant expenditure incurred by the Assessee over the corresponding period and the actual amount recovered from Skyworks. The Assessee submitted that it has furnished all relevant details with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the head 'income from other sources', then the relevant expenditure namely, rent paid to Landlord needs to be allowed as expenditure against such income. 9. The CIT(A) at para 17.2 of his order held as under: 17.2. ... I find that the appellant has not commented with reference to the observation of the AO made in para 2 at page 6 of the assessment order, relating to recovery of ₹ 29,00,000/- for the F.Y 2004-05 from the said M/s. Skyworks Solutions P. Limited. This amount has been considered by the AO as income from other sources. However, as out of such recoveries made from that company, a sum of ₹ 9,73,317/- has been adjusted against rent claimed by the assessee in the P L account, In my view, the balance amount of ₹ 19,26,683/- (29,00,000 - 9,73,317), has to be considered for the purpose of taxation under the head 'Income from Other Sources', in the hands of the assessee for this assessment year i.e., A.Y. 2005-06. The AO is directed accordingly. 10. Aggrieved, the assessee is in appeal before us with the following ground: 2. That on the facts and circumstances of the case, the Learned CIT Appeals has erred in confirming the additio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... held in the case of Intertek Testing Services India P Ltd. (307 ITR 418)( AAR) that the offer of a standard facility to a number of customers such as telephone/cell phone users does not amount to rendering any technical service within the meaning of the definition of technical service. Technical or consultancy service rendered should be of such a nature that it makes available the technical knowledge, skills etc. must remain with the person receiving the services even after the particular contract comes to an end. It is enough that the services offered are the product of intense technological effort and a lot of technical knowledge and experience of the service provider have gone into it. The technical knowledge or skills of the provider should be imparted to and absorbed by the receiver so that the receiver can deploy similar technology or techniques in the future without depending upon the provider. Hence, we confirm the order of the CIT(A) that tax is not deductible on payment Data circuit rentals and dismiss the departmental appeal on this issue. 15. The next issue raised by the Department is Payment of band width charges: The Assessing Officer held that payments made to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that the TPO is not justified in rejecting the comparable companies identified by it. The assessee had referred to 15 companies viz., Prithvi Information Solution Ltd., Goldstone Technologies Ltd., IT People (India) Ltd., Maars Software International Ltd., Orient Information Technology Ltd., Softpro Systems Ltd.,(seg), Vishu International Ltd., Federal Technologies Ltd., Quintegra Solutions Ltd., R Systems International Ltd.,(seg), FCS Software Solutions Ltd., PSI Data Systems (seg), Melstar Information Technologies Ltd., Akshay Software Technologies Ltd., and VJIL Consulting Ltd. 17. The TPO discussed the factual position in detail in respect of each such company and since he was of the opinion that these companies had not satisfied all the filters adopted by him rejected those companies. For determining the ALP the TPO selected 17 comparables which are referred at page 224 of his order. Out of those 17 comparables, the assessee had objected to 9 comparables before the CIT(A) on appeal against the order of the TPO. Out of the 17 companies selected by the TPO excluding only Satyam Computer Services Ltd., the remaining 16 were selected as comparables for determining the ALP of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6. Geometric Software Ltd. 18.57 18.57 7. RS Software (I) Ltd. 7.50 7.50 8. Sasken Networks Ltd. 14.81 14.81 9. L T Infotech Ltd. 9.29 9.29 10. IGate Global Services Ltd. 2.55 2.55 11. Thirdware Solutions Ltd. 65.29 - 12. Exensys Software Solutions Ltd. 64.14 - 13. Infosys Technologies Ltd. 42.03 - 14. Flextronics Software Systems Ltd. 30.38 - 15. Tata Elxsi Ltd. 23.66 - 16. Four Soft Ltd. 22.22 - Arithmetic Mean Margin of comparables ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entity i.e., Exensys Software Solutions Limited. It is also mentioned in the said communication that by virtue of the merger, there is a gap in expenditure expected to incur and actual expenditure incurred, which may have resulted in high operating margin on cost. Thus, according to him, this company is to be excluded from the list of comparables. The learned DR, on the other hand, has supported the Orders of the authorities below and submitted that the assessee had not objected to the adoption of this company viz., Exensys Software Solutions Limited before the TPO nor has raised any ground of appeal before the CIT(A) on the adoption of this company. He submitted that the assessee should therefore, be precluded from raising such objection at this stage before us. Having heard both parties and having considered the material available on record, we find that there is no dispute that the assessee has accepted the Exensys Software Solutions Limited as one of the comparable companies when proposed by the TPO. However, the fact that there is an amalgamation of two companies i.e., Exensys Software Limited and Holool India Limited, the results of which, has resulted in high operatin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e development, cannot be considered as a comparable to any other companies which are also involved in similar activities. It is not only a giant company but is also engaged in development of various niche products. It cannot be compared to the assessee in any manner. Similar directions have been given by the Tribunal at Delhi and Hyderabad Benches in the cases cited (supra). The other companies which are objected to by the assessee are Flextronics Software Limited, Foursoft Limited and Thirdware Software Solution Limited. As far as these three companies are concerned, the learned Counsel appearing on behalf of the assessee submitted that they are into both software as well as product development. He submitted that the TPO has taken note of the fact these companies are also into product development but has selected these companies as comparables by applying the filter of more than 70% of its revenue being from software development services. The learned Counsel submitted that the functions of these companies are different from the assessee who was into sole activity of software development for its associated enterprise. He submitted that the TPO has allocated the expenditure in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at page 7 of the TPO s Order, the said company has derived income from software licence also and AMCs. 23. The co-ordinate Bench in assessee s own case in ITA No. 1429/Hyd/2010 Anr. dated 22.3.2013 held as follows: 22. Tata Elxsi Limited. Objecting to the aforesaid company as comparables, the learned AR submitted that as per the information obtained under section 133(6) of the Act from the aforesaid company, the software development services rendered by Tata Elxsi can be broadly categorised as under: a) Product development services b) Innovation design Engineering c) Visual computing Labs It was submitted that this company being functionally different, it cannot be treated as comparables. The learned AR referring to the decision of ITAT Mumbai Bench in the case of Telcordia Technologies India P. Ltd. Vs. ACIT (ITA No. 7821/Mum/11 dated 11-5-2012 submitted that the Mumbai Bench in the aforesaid decision has also held that Tata Elxsi is engaged in software product development. 23. The learned OR countering the submissions of the learned AR submitted that the TPO has taken the software development and services segment of the company as a comparable. It was f ..... X X X X Extracts X X X X X X X X Extracts X X X X
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