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TMI Blog2015 (5) TMI 70X X X X Extracts X X X X X X X X Extracts X X X X ..... elopment service is the aggregate price and cannot be bifurcated on the basis of the man hour rate of each member of the team. As we have already observed that the assessee is providing the software development services and not the man hour to its clients, thereore, in view of the facts and circumstances of the case as well as the above discussion, we set aside the orders of authorities below and direct the Assessing Officer/TPO to recomputed and determine the ALP in respect of software development services by taking into consideration the aggregated price charged by the assessee from AE as well as non AE and not by selecting the independent man hour rate based on which, the assessee charged price from AE and non AE. Disallowance of bad debts written off on account of non receipt of TDS Certificate from debtors - The non realization of the sum represented by the TDS receivable is clearly a loss suffered in the course of business and, therefore, is an allowable claim of the assessee. An identical issue has been considered by the Delhi Benches of this Tribunal in the case of Kelly Services India Pvt. Ltd.[2013 (1) TMI 83 - ITAT DELHI]. Disallowance of staff advances written off ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unt in question was advanced to the subsidiary of the assessee for meeting the working capital requirement and the subsidiary was also engaged in the same business and then decide the matter in the light of various decisions as relied upon by the assessee. Transfer pricing adjustment on account of notional interest on free advance granted to the AE - We note that this issue has been considered by the Tribunal in the number of decisions where the arm’s length rate of interest is considered as LIBOR +2%. In the case of Aurionpro Solutions Ltd.[2013 (11) TMI 806 - ITAT MUMBAI], the Tribunal has held that the loan given to the AE is an international transaction. however, by following the various Judgments of the Tribunal on the issue of rate of interest being arm’s length interest. Exclusion of certain expenses incurred in foreign currency from the total turnover for the purpose of computation of deduction u/s 10A of the Act - The view which we have taken is consistent with the view which was taken, though in the context of section 80HHC, by a Division Bench of this Court in Sudarshan Chemicals Industries Ltd. [2000 (8) TMI 73 - BOMBAY High Court].This decision has been cited wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act. Ground No :-11 Learned Commissioner of Income Tax (Appeals) erred in not passing a speaking order to alternative claim filed by the Appellant which is reproduced herein below :- Without prejudice to the above it is submitted that in case Bad Debts are held to be not allowable than the said items which relates to lOA units. should be disallowed/added back while computing deduction u/s lOA of the Act. Accordingly amount of deduction u/s lOA of the Act shall increase to that extent. Appellant submits that in above facts and circumstances of the case as well as in law, the disallowance if at all sustained pertaining to lOA unit ought to be made out of profits of 10A Unit. Ground No :-12 Learned Commissioner of Income Tax (Appeals) erred in confirming the order passed by Learned Assessing Officer in disallowing a sum of ₹ 7,20,886/- out of advance given to its Australia Branch by US Branch. Appellant submits that in view of the facts and circumstances of the case as well as in law the said amount ought to have been allowed as business expenditure. 2. Ground nos. 1 to 8 are regarding addition of ₹ 65,35,709/- on account of transfer pricing adju ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the case of Cummins India Ltd. Vs. ACIT 31 CCH 171)(Pune) as well as in the case of Demag Cranes Components (India) Pvt. Ltd. Vs DCIT 34 CCH 378. The Ld. Authorized Representative has submitted that the adjustment has to be made on aggregated basis and not on individual line by line item of income as the entire revenue is from software development services which is a composite work and no part of work is independent of other part. All the activities performed by different skills of persons are inextricably interconnected and hence income from software development services is earned from composite activity. 2.2 On the other hand, the Ld. DR has submitted that each and every transaction has to be considered as separate international transaction and, therefore, the arm s length price of each transaction has to be determined separately and independently as per Chapter X of the Income Tax Act. 2.3 We have considered the rival submissions as well as relevant material on record. For the purpose of providing software development services, the assessee has charged its AE as well as non AE based on hourly rates. The details of the rates are given by the TPO at page 3 of the order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d under Rule 10A(b) as well as it is also supported by OECD transfer pricing guidelines. Therefore, in order to examine whether all transactions are closely linked or continuous, it is to be considered that one transaction is follow on of the earlier transaction and each subsequent transaction is carried out is dependent wholly or substantially on the earlier transaction. In such a case, the transactions are considered tobe closely linked or continuous and, therefore, for the purpose of valuation these has to be aggregated. Accordingly, when the overall price charged for a particular service is the final price of a service and the same has to be compared with over all price charged for the same services provided to un related party has to be compared. The various rates of man hours applied by the assessee for the purpose of price charged for the services rendered to the AE and non AE cannot remain uninfluenced by each other in determining the price and margin involved in the transaction because the final product being the software development service is possible only by integrated contribution of the entire team. Therefore, such transactions can be said to be closely linked transac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. Vs. CIT (323 ITR 397). 3.2 On the other hand, the Ld. DR has submitted that this is not an amount receivable from the debtors and there is not question of the debts gone bad or become irrecoverable. Therefore, in the absence of the amount represents debt or unrecoverable , the same cannot be allowed as bad debts as per section 36(1)(vii) of the Income Tax Act. He has relied upon the orders of authorities below. 3.3 We have considered the rival submissions as well as relevant material on record. There is no dispute that the assessee has already offered the amount to tax being part of sales turnover. However, the TDS deducted by the debtors appears to have not been deposited in the Government account and, therefore, the debtors has not issued TDS certificate to the assessee. The assessee has already paid tax on this account without having the real income and without receiving the TDS certificate against the said deduction of the amount by the debtors. The non realization of the sum represented by the TDS receivable is clearly a loss suffered in the course of business and, therefore, is an allowable claim of the assessee. An identical issue has been considered by the Delhi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... verification and examination. Accordingly, we set aside this issue to the record of Assessing Officer to verify whether the advances in question were given to the staff who has already left the service of the assessee and further whether the claim of the assessee is allowable in view of the decisions relied upon by the assessee. Needless to say the Assessing Officer should give a proper opportunity of hearing to the assessee. Alternatively, the assessee has also submitted that even if the claim of the assessee is disallowed then the said amount is eligible for deduction u/s 10A. Since this issue has not been examined by the authorities below, therefore, the alternative plea of the assessee shall also be considered and examined by the Assessing Officer. 5 Ground no. 12 is regarding the disallowance of advances given to Australian branch by US branch. 5.1 The Assessing Officer disallowed a sum of ₹ 7,20,886/- being the amount written off out of amount advanced to Australia Subsidiary Company of the assessee. The Assessing Officer made disallowance on account of capital advance and not on account of any trade activity. 5.2 The assessee challenged the action of Assessing O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the facts of the said loan was given by the assessee to meet the requirement of working capital of the subsidiary and the subsidiary was engaged in the same business as of the assessee has not been considered and discussed by the authorities below. The issue has been considered by the various decisions as relied upon by the assessee and found to be an allowable claim when the amount was given for expenses and working capital of the subsidiary which was considered to be for commercial expediency of the assessee s business. Accordingly, we direct the Assessing Officer to verify the fact as claimed by the assessee that the amount in question was advanced to the subsidiary of the assessee for meeting the working capital requirement and the subsidiary was also engaged in the same business and then decide the matter in the light of various decisions as relied upon by the assessee. 6. For the A.Y. 2004-05, the assessee has raised following concise grounds:- CONCISE GROUNDS OF APPEAL 1. Learned Commissioner of Income Tax (Appeals) erred in confirming the addition of Rs . 87,37,753/- to the returned income made by Learned Assessing Officer, on account of transfer pricing adjustmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Uncontrolled Price Method without appreciating the facts of the case. Learned Assessing Officer / Transfer Pricing Officer has erred in rejecting TNNM method as the Most Appropriate Method adopted by the Appellant. Appellant submits that in view of the facts and circumstances of the case as well as in law, TNMM ought to be the most appropriate method as adopted by Appellant. 6.1 Ground no. 1 is general in nature and does not require any specific finding or adjudication. 6.2 Ground no. 2 is regarding transfer pricing adjustment on account of notional interest on free advance granted to the AE. 6.3 We have heard the Ld. Authorized Representative as well as Ld. DR and considered the relevant material on record. The assessee has given loan to its subsidiary company and has not charged interest on the same. The assessee has also not reported the said transaction as international transaction. The TPO has considered the CUP as the most appropriate method and determined the arm s length interest at 10% per annum on the advances given to the US based AE. 6.4 The assessee challenged the action of Assessing Officer/TPO before the CIT(A). The CIT(A) modified the arm s length in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot arise from the impugned order of CIT(A) as the issue was decided in favour of the assessee, accordingly, this ground of the assessee s appeal is dismissed as withdrawn. 8. Ground no. 4 and 5 is regarding addition on account of transfer pricing adjustmen in respect of software development services provided to AE. The issue raised in ground no. 4 and 5 is identical to the issue raised in ground no. 1 to 8 for A.Y. 2003-04. Accordingly, this issue is set aside to the record of Assessing Officer/TPO with the same directions as given for A.Y. 2003-04. 8.1 The assessee has also raised common additional grounds for both A.Y.s which reads as under:- Ld. Commissioner of Income Tax (Appeals) erred in confirming the order passed by Ld. Assessing Officer/Transfer Pricing Officer in not granting benefit of variation of 5% as provided in second proviso of section 92C of the Act. Appellant is eligible for variation upto 5% as provided in second proviso to section 92C of the Act. 8.2 Since the additional ground raised by the assessee is purely legal in nature and further the issue of transfer pricing adjustment has been set aside to the record of Assessing Officer for determinat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lery India Ltd (supra), the Hon ble High Court has held in para 6 to 8 as under:- 6. The export turnover, in the numerator must have the same meaning as the export turnover which is a constituent element of the total turnover in the denominator. The Legislature has provided a definition of the expression export turnover in Explanation (2) to section 10A by which the expression is defined to mean the consideration in respect of export by the undertaking of articles, things or computer software received in or brought into India by the assessee in convertible foreign exchange but so as not to include inter alia freight, telecommunication charges or insurance attributable to the delivery of the articles, things or software outside India. Therefore in computing the export turnover the Legislature has made a specific exclusion of freight and insurance charges. 7. The submission which has been urged on behalf of the revenue is that while freight and insurance charges are liable to be excluded in computing export turnover, a similar exclusion has not been provided in regard to total turnover. The submission of the revenue, however, misses the point that the expression total turn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... should also be excluded. In that context, the Division Bench observed that the meaning of export turnover in clause (b) of the Explanation to section 80HHC showed that export turnover did not include excise duty and sales tax. The Division Bench observed that the export turnover is the numerator in the formula whereas the total turnover is the denominator. The formula having been prescribed to arrive at profits from exports, sales tax and excise duty could not form part of the total turnover. If the denominator were to include those two items and the numerator excluded them, the formula (noted the Division Bench), would become unworkable. In the circumstances, the Division Bench held that while ascertaining the export profits, excise duty and sales tax could not be introduced to inflate the total turnover artificially in order to reduce the benefit to which the assessee is entitled. The decision of the Division Bench of this Court in Sudarshan Chemical Industries Ltd.'s case (supra) has been cited with approval by the Supreme Court in CIT Vs. Lakshmi Machine Works (2007) 290 ITR 667 1. The same view has been taken by the Supreme Court in CIT Vs. Catapharma (India) (P.) Ltd. (2 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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