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TMI Blog2015 (3) TMI 1226X X X X Extracts X X X X X X X X Extracts X X X X ..... n the comparable cannot be excluded solely on the ground that the comparables have different financial year endings. - ITA 217/2014 - - - Dated:- 27-3-2015 - MR. JUSTICE S. RAVINDRA BHAT AND MR. JUSTICE R.K. GAUBA For the Appellant : Sh. Kamal Sawhney, Sr. Standing Counsel. For the Respondent : Sh. Porus Kaka, Sr. Advocate with Sh. Divesh Chawla and Sh. N. Ganapathy, Advocates. JUDGEMENT MR. JUSTICE S. RAVINDRA BHAT (OPEN COURT) 1. This appeal under Section 260A of the Income Tax Act, 1961 by the Revenue, challenges an order dated 13.09.2013 of the Income Tax Appellate Tribunal ( ITAT ) in ITA No.2195/Del/2011 for the assessment year (AY) 2006-07. The ITAT by the impugned order confirmed the order of the Commissioner of Income Tax (Appeals) ( CIT(A) ) and allowed the assessee‟s claim for certain deductions under Section 10A of the Income Tax Act, 1961 (hereafter referred to as the the Act ). 2. Briefly, the facts of the case are that, the Assessee Company was incorporated on 15.02.1999 under the Companies Act, 1956. The Assessee is a wholly owned subsidiary of McKinsey Holdings Inc. which is in turn held by McKinsey Co., Inc. The Assessee was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at all of them were functionally similar and only varied in terms of certain common parameters considered for the assessment. It is against this order that the Revenue is in appeal before this Court. 4. The Revenue challenges both the deletions made to the assessment made by the AO. It argues that the ITAT erred in deleting the addition of ₹ 26,32,11,737/-, thereby allowing the deduction under Section 10A of the Act ignoring the fact that the Assessee is not fundamentally engaged in IT enabled services and therefore not entitled to the deduction and further questioned the deletion of an additional ₹ 59,09,890/- made by the Transfer Pricing Officer ( TPO ) u/s 92CA on account of Transfer Pricing Adjustment and the acceptance of the comparables that were initially rejected in the AO‟s assessment. 5. The question of law that arises before this Court for consideration is whether the deduction should be allowed to the Assessee under Section 10A, on the ground that it is indeed entitled to the benefit under the particular provision. The Revenue argues that for the Assessee to be eligible for such deduction, the services so rendered must be IT enabled and the role ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee XXXXXX XXXXXX XXXXXX Explanation 2 - For the purposes of this section, - (i) computer software means,-- (a) Any computer programme recorded on any disc, tape, perforated media or other information storage device; or (b) Any customized electronic data or any product or service of similar nature, as may be notified by the Board, which is transmitted or exported from India to any place outside India by any means. 8. A perusal of the above provision and the explanation implies that the two conditions so mentioned must be cumulatively satisfied in order to be eligible for the deduction. While the Assessee claims itself to be covered under the broader definition of Computer Software‟ and more particularly under clause (b) of Explanation 2 under services of similar nature‟, the Assessment Order was based on the decisions in S. Gopal Reddy v. State of Andhra Pradesh [1996] 6 JT 268 , K. P. Varghese v. ITO [1981] 13 I ITR 597 and Indian Hotels Co. Ltd. v. ITO [2000] 245 ITR 538 (SC) and relying upon the purposive approach to interpret the Act reflects that the services are being performed in India and the end product, which is not software wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture would qualify and should be treated as falling under clause (b), in addition to customised data processing. The intention of the Legislature was not to constrain or restrict but to enable the Board to include several services or products of similar nature in the ambit of the provision. This is what precisely the Board has done when it used the expression, information technology enabled products or services‟ in the notification. 11. The court relied on the circular issued by the CBDT explaining the provisions of the Finance Act, 2000, and held that the interpretation of the term 'manufacture or produce of an article or thing or computer software' by the tax authorities should be guided by the intention of the legislature (including the pronouncements of the Central Government while notifying the STP scheme) and the directions/notifications of the CBDT. Furthermore, the deductions on the same grounds were disallowed by the AO and later permitted by the CIT (A) and upheld by the ITAT for the AY 2002-2003 and subsequently examined and allowed in the preceding AYs 2003-04, 2004-05 and 2005-06 by the AO himself and since there has been no change either in the fact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lows: S.O.890(E) In exercise of the powers conferred by clause (b) of item (l) of Explanation 2 of section 10A. Clause (b) of item (l) of Explanation 2 to section 10B and clause (b) to Explanation to section 80HHC of the Income-tax Act, 1961 (43 of 1961), the Central Board of Direct Taxes hereby specifies the following Information Technology enabled products or services as the case may be for the purpose of said clauses namely :- (l) Back-Office Operations (ii) Call Centres (iii) Content Development or animation (iv) Data Processing (v) Engineering and Design (vi) Geographic Information System Services (vii) Human Resources Services (viii) Insurance claim processing (ix) Legal Databases (x) Medical Transcription (Xl) Payroll (xii) Remote Maintenance (xiil) Revenue Accounting (xiv) Support Centres and (xv) Web-site Services. There is no dispute with respect to the findings arrived at by the lower authorities. The assessee is involved in providing back office support and thereby entitled to the benefit under the definition of the term computer software‟. Its activities are in the nature of data processing, customizatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he ground that the comparables have different financial year endings. 15. As far as KCSL and MOML are concerned, (again, rejected by the TPO) typically a filter of companies with less than a turnover of `1 crore is applied for selecting the comparables. According to the available data, the turnover of these two companies was less than Rupees one crore. However, if this filter is applied then, as submitted by Counsel for the Assessee, the companies with a higher turnover also should have been rejected which was not the case in the said TP adjustments. Rule 10B (2) to (4) of the Income Tax Rules are relevant for this purpose. They are extracted below: 10-B(2) For the purposes of sub-rule (1), the comparability of an international transaction with an uncontrolled transaction shall be judged with reference to the following, namely :-- (a) the specific characteristics of the property transferred or services provided in either transaction; (b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions ; (c) the contractual terms (whether or not such terms are formal or in writing) of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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