9911796707
TMI Blog2015 (1) TMI 1363X X X X Extracts X X X X X X X X Extracts X X X X ..... n charges, consultancy charges, repairs and maintenance and certain other expenses incurred by the Assessee (including expenses incurred in foreign currency), both from export turnover and total turnover, as has been prayed for by the assessee TDS u/s 195 - Disallowance of interest expenses invoking the provisions of Sec.40(a)(i) - non deduction of tds - DTAA between India and Singapore - Held that:- As rendered in the context of taxation of interest income in the hands of the non-resident and are not in the context of point of time at which obligation to deduct tax at source lies on the person making payment to a non-resident. We agree with the submission of the learned DR that the said decisions are therefore not relevant to the facts of the present case. We therefore hold that disallowance u/s.40(a)(i)of the Act, in the facts and circumstances of the case, is justified. The quantum of sum to be disallowed as we have already stated is to be decided by the AO afresh in view of the discussion on the issue raised in ground no.9 in the earlier part of this order. Provisions of section 40(a)(ia) - assessee failed to deduct at source and pay tax in respect of payments made to contracto ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se was a housing project. The Tribunal further held that while giving effect to the computation provisions contained in ss. 30 43D one should not be bogged down by the theory that the disallowed expenditure cannot be considered as profits ‘derived” from the housing project or as “operational profits. The above ruling of the Tribunal, in our view, would squarely apply to the present case also. Similar is the ruling rendered by the Hon’ble Gujarat High Court in the case of Keval Construction (2013 (7) TMI 291 - GUJARAT HIGH COURT). X X X X Extracts X X X X X X X X Extracts X X X X ..... s Ltd 12.56% 62.72 20 R S Software (India) Ltd 13.47% 101.04 21 R Systems International Ltd (Seg.) 15.07% 112.01 22 S I P Technologies & Exports Ltd 13.90% 3.80 23 Sasken Communication Technologies Ltd (Seg.) 22.16% 343.57 24 Tata Elxsi Ltd (Seg.) 26.51% 262.58 25 Thirdware Solutions Ltd 25.12% 36.08 26 Wipro Ltd (Seg.) 33.65% 961.09 Arithmetic Mean 25.14% Assessee's OP / TC for FY 2006-07 11.88% 6. The TPO finally passed an order u/s. 92CA of the Act and on the basis of the comparables set out above, arrived at arithmetic mean of 25.14%. After factoring the working capital adjustment of 1.96%, the adjusted arithmetic mean was determined at 23.18%. The computation of the ALP by the TPO in this regard was as follows:- "Computation of Arms Length Price: The arithmetic mean of the Profit Level indicators is taken as the arms length margin. (Please see Annexure B for details of computation of PLI of the comparables). Based on this, the arms length price of the software development services rendered by you is computed as under: Arithmetic mean PLI 25.14% Less: Working capital Adjustment(Annexure-C) 1.96% Adj.Arithmetic mean PLI 23.18% Arm's L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... applied by him for choosing comparable companies. Even before DRP the Assessee did not object to choosing these two companies as comparable companies. The learned counsel for the Assessee in support of the admission of additional ground placed reliance on the decision of the Hon'ble Special Bench in the case of the ITAT Chandigarh Bench in the case of DCIT v. Quark Systems Pvt. Ltd. 38 SOT 207 wherein it was held that a taxpayer is not estopped from pointing out a mistake in the assessment though such mistake is the result of evidence adduced by the taxpayer. The learned counsel further submitted that the aforesaid two companies were held to be software product companies and therefore not comparable with software development service provider such as the Assessee in several decisions rendered by the Tribunal. The decisions rendered by the Tribunal are later in point of time to the Transfer Pricing Study undertaken by the Assessee. The Assessee is entitled to take note of the subsequent judicial pronouncement and seek to exclude a company which is functionally not comparable with that of the Assessee. The learned DR opposed the prayer for admission of additional ground. He pointed ou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exactly on identical facts before us but they emphatically show that taxpayer is not estopped from pointing out a mistake in the assessment though such mistake is the result of evidence adduced by the taxpayer. 37. When substantial justice and technical considerations are pitted against each other, the cause of substantial justice deserves to be preferred. For the other side cannot claim to have a vested right in injustice being done due to some mistakes on its part. 38. Accordingly, on facts and circumstances of the case, we hold that taxpayer is not estopped from pointing out that Datamatics has wrongly been taken as comparable. While admitting additional ground of appeal raised by the assessee to require us to consider whether or not Datamatics should be included in the comparable, we make no comments on merit except observing that assessee from record has shown its prima facie case. Further claim may be examined by the Assessing Officer. This course we adopt as objection to the inclusion of Datamatics as comparable has been raised now and not before revenue authorities. Therefore, we deem it fit and proper to remit the matter to the file of the Assessing Officer for consider ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase of Trilogy E-Business Software India Pvt.Ltd. Vs. DCIT ITA No.1064/Bang/2011 for AY 07-08 order dated 23.11.2012. The following were the relevant observations in the case of First Advantage Offshore Services Pvt. Ltd.(supra): "18. As regards the group 2 companies which are to be excluded as functionally different based on the Tribunal's order in the case of Trilogy E-Business Software India Pvt.Ltd., we find that these companies are- 1) Accel Transmatic 2) Avani Cimcon Technologies Ltd. 3) Celestial Labs Ltd. 4) KALS Information Systems Ltd. 19. The Tribunal in the case of Trilogy E-Business Software India Pvt.Ltd., while considering the issue of improper selection of comparables has held as under: (b) Avani Cimcon Technologies Ltd. 39. As far as this company is concerned, the plea of the Assessee has been that this company is functionally different from the assessee. Based on the information available in the company's website, which reveals that this company has developed a software product by name "DXchange", it was submitted that this company would have revenue from software product sales apart from rendering of software services and therefore is functionally differe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of ITAT (Mumbai) in the case of Telcordia Technologies Pvt. Ltd. v. ACIT (supra) also supports the plea of the assessee. We therefore accept the plea of the Assessee to reject this company as a comparable. (c) Celestial Labs Ltd. 42. As far as this company is concerned, the stand of the assessee is that it is absolutely a research & development company. In this regard, the following submissions were made:- i. In the Director's Report (page 20 of PB-Il), it is stated that "the company has applied for Income Tax concession for in-house R&D centre expenditure at Hyderabad under section 35(2AB) of the Income Tax Act." ii. As per the Notes to Accounts - Schedule 15, under "Deferred Revenue Expenditure" (page 31 of PB-II), it is mentioned that, "Expenditure incurred on research and development of new products has been treated as deferred revenue expenditure and the same has been written off in 10 years equally yearly installments from the year in which it is incurred." An amount of ₹ 11,692,020/- has been debited to the Profit and Loss Account as "Deferred Revenue Expenditure" (page 30 of PB-II). This amounts to nearly 8.28 percent of the sales of this company. It was there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reference to development of a molecule to treat cancer using bio-informatics tools for which patenting process was also being pursued. As explained earlier it is a diversified company and therefore cannot be considered as comparable functionally with that of the Assessee. There has been no attempt made to identify and eliminate and make adjustment of the profit margins so that the difference in functional comparability can be eliminated. By not resorting to such a process of making adjustment, the TPO has rendered this company as not qualifying for comparability. We therefore accept the plea of the Assessee in this regard.' " 44. It was submitted that the learned DR in the above case vehemently argued that this company is into research in pharmaceutical products. The ITAT concluded that this company is owner of IPR, it has software for discovery of new drugs and has developed molecule to treat cancer. In the ultimate analysis, the ITAT did not consider this company as a comparable in clinical trial segment, for the reason that this company has diverse business. It was submitted that, however, from the above extracts it is clear that this company is not into software development a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Initial Public Offer (IPO) and thus in no way connected with business operations of the company during FY 06-07. We are of the view that in the light of the submissions made by the Assessee and the fact that this company was basically/admittedly in clinical research and manufacture of bio products and other products, there is no clear basis on which the TPO concluded that this company was mainly in the business of providing software development services. We therefore accept the plea of the Assessee that this company ought not to have been considered as comparable. (d) KALS Information Systems Ltd. 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 Q 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 IT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld be rejected as comparable. The relevant observations of DRP as extracted by the ITAT in its order are as follows: "In regard to Accel Transmatics Ltd. the assessee submitted the company profile and its annual report for financial year 2005-06 from which the DRP noted that the business activities of the company were as under. (i) Transmatic system - design, development and manufacture of multi function kiosks Queue management system, ticket vending system (ii) Ushus Technologies - offshore development centre for embedded software, net work system, imaging technologies, outsourced product development (iii) Accel IT Academy (the net stop for engineers)- training services in hardware and networking, enterprise system management, embedded system, VLSI designs, CAD/CAM/BPO (iv) Accel Animation Studies software services for 2D/3D animation, special effect, erection, game asset development. 4.3 On careful perusal of the business activities of Accel Transmatic Ltd. DRP agreed with the assessee that the company was functionally different from the assessee company as it was engaged in the services in the form of ACCEL IT and ACCEL animation services for 2D and 3D animation and there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ese two companies are also to be excluded from the list of comparables on the basis of the finding of this Tribunal in the case of Mercedes Benz Research & Development India Pvt. Ltd. dt 22.2.2013, wherein at pages 17 and 22 of its order the distinctions as to why these companies should be excluded are brought out. He submitted that the facts of the case before us are similar and, therefore, the said decision is applicable to the assessee's case also. 23. The learned DR however objected to the exclusion of these two companies from the list of comparables. On a careful perusal of the material on record, we find that the Tribunal in the case of Mercedes Benz Research & Development India Pvt. Ltd. (cited supra) has taken a note of dissimilarities between the assessee therein and Lucid Software Ltd. As observed therein Lucid Software Ltd. company is also involved in the development of software as compared to the assessee, which is only into software services. Similarly, as regards Ishir Infotech Ltd., the Tribunal has considered the decision of the Tribunal in the case of 24/7 Co. Pvt. Ltd to hold that Ishir Infotech is also out-sourcing its work and, therefore, has not satisfied ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... break up of revenue between software products and software services business on a standalone basis of this comparable. The TPO relied on information which was given by this company in which this company had explained that it has two divisions viz., BLUEALLY DIVISION and XIUS-BCGI DIVISION. Xius-BCGI Division does the business of product software. This company develops packaged products for the wireless and convergent telecom industry. These products are sold as packaged products to customers. While implementing these standardized products, customers may request the company to customize products or reconfigure products to fit into their business environment. Thereupon the company takes up the job of customizing the packaged software. The company also explained that 30 to 40% of the product software would constitute packaged product and around 50% to 60% would constitute customized capabilities and expenses related to travelling, boarding and lodging expense. Based on the above reply, the TPO proceeded to hold that the comparable company was mainly into customization of software products developed (which was akin to product software) internally and that the portion of the revenue fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for Mega Soft Ltd. Is therefore remitted to the file of the TPO to compute the correct margin by following the direction of the Tribunal in the case of Trilogy E-Business Software India Pvt. Ltd." 17. Respectfully following the decision of the Tribunal referred to above, we direct the AO/TPO to compute the correct margin of Mega Soft Ltd., as directed by the Tribunal in the case of First Advantage Offshore Services Pvt.Ltd. (supra). 18. As far as comparable companies listed at Sl.No.10, 24 & 26 of the final list of comparable companies chosen by the TPO viz., M/S.Infosys Technologies Limited, Tata Elxsi Ltd. (Seg.) & Wipro Limited are concerned, this Tribunal in the case of M/S. Curam Software International Pvt.Ltd. Vs. ITO ITA No.1280/Bang/2012 for AY 08-09 order dated 31.7.2013 has held that the aforesaid companies are not comparable companies in the case of software development services provider. The following were the relevant observations in the case of M/S.Curam Software International Pvt. Ltd.(supra): "12. (4) Infosys Technologies Ltd. 12.1 This was a comparable selected by the TPO. Before the TPO, the assessee objected to the inclusion of the company in the set of comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able to this year also. The argument put forth by assessee's is that Infosys Technologies Ltd is not functionally comparable since it owns significant intangible and has huge revenues from software products. It is also seen that the break up of revenue from software services and software products is not available. In this view of the matter, we hold that this company ought to be omitted from the set of comparable companies. It is ordered accordingly. 13.0 (5) Wipro Limited 13.1 This company was selected as a comparable by the TPO. Before the TPO, the assessee had objected to the inclusion of this company in the list of comparables or several grounds like functional dis-similarity, brand value, size, etc. The TPO, however, brushed aside the objections of the assessee and included this company in the set of comparables. 13.2 Before us, the assessee contended that this company is functionally not comparable to the assessee for several reasons, which are as under : (i) This company owns significant intangibles in the nature of customer related intangibles and technology related intangibles and quoted extracts from the Annual Report of this company in the submissions made. (ii) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... however, rejected the contention put forth by the assessee and included this company in the set of comparables. 14.2 Before us, it was reiterated that this company is not functionally comparable to the assessee as it performs a variety of functions under the software development and services segment namely (a) Product design services (b) Innovation design engineering and ( c ) visual computing labs. In the submissions made the assessee had quoted relevant portions from the Annual Report of the company to this effect. In view of this, the learned Authorised Representative pleaded that this company be excluded from the list of comparables. 14.3 Per contra, the learned Departmental Representative supported the stand o the TPO in including this company in the list of comparables. 14.4.1 We have heard both parties and carefully perused and considered the material on record. From the details on record, we find that this company is predominantly engaged in product designing services and not purely software development services. The details in the Annual Report show that the segment "software development services" relates to design services and are not similar to software developmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PO, the assessee had objected to the inclusion of this company as a comparable on the ground that it was functionally different from the assessee. The TPO had rejected the objections raised by the assessee on the ground that as per the information received in response to notice under section 133(6) of the Act, this company is engaged in software development services and satisfies all the filters. 14.2 Before us, the learned Authorised Representative contended that this company ought to be excluded from the list of comparables on the ground that it is functionally different to the assessee. It is submitted by the learned Authorised Representative that this company is engaged in 'e-Business Consulting Services', consisting of Web Strategy Services, I T design services and in Technology Consulting Services including product development consulting services. These services, the learned Authorised Representative contends, are high end ITES normally categorised as knowledge process Outsourcing ('KPO') services. It is further submitted that this company has not provided segmental data in its Annual Report. The learned Authorised Representative submits that since the Annual Report of the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e objected to the inclusion of this company in the list of comparables on the ground that its turnover was in excess of ₹ 500 Crores. Before us, the assessee has objected to the inclusion of this company as a comparable for the reason that apart from software development services, it is in the business of product development and trading in software and giving licenses for use of software. In this regard, the learned Authorised Representative submitted that :- (i) This company is engaged in product development and earns revenue from sale of licences and subscription. It has been pointed out from the Annual Report that the company has not provided any separate segmental profit and loss account for software development services and product development services. (ii) In the case of E-Gain communications Pvt. Ltd. (2008-TII-04- ITAT-PUNE-TP), the Tribunal has directed that this company be omitted as a comparable for software service providers, as its income includes income from sale of licences which has increased the margins of the company. The learned A.R. prayed that in the light of the above facts and in view of the afore cited decision of the Tribunal (supra), this company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are designing services and analytic services and therefore it is not purely a software development service provider as is the assessee in the case on hand. (ii) Page 60 of the Annual Report of the company for F.Y. 2007- 08 indicates that this company, is predominantly engaged in 'Outsourced Software Product Development Services' for independent software vendors and enterprises. (iii) Website extracts indicate that this company is in the business of product design services. (iv) The ITAT, Mumbai Bench in the case of Telecordia Technologies India Pvt. Ltd.(supra) while discussing the comparability of another company, namely Lucid Software Ltd. had rendered a finding that in the absence of segmental information, a company be taken into account for comparability analysis. This principle is squarely applicable to the company presently under consideration, which is into product development and product design services and for which the segmental data is not available. The learned Authorised Representative prays that in view of the above, this company i.e. Persistent Systems Ltd. be omitted from the list of comparables. 17.2 Per contra, the learned Departmental Representative support ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uct engineering and infrastructure management services), proprietary software products and consultancy services in IT on various platforms and technologies." (iii) This company is also engaged in research and development activities which resulted in the creation of Intellectual Proprietary Rights (IPRs) as can be evidenced from the statements made in the Annual Report of the company for the period under consideration, which is as under : " Quintegra has taken various measures to preserve its intellectual property. Accordingly, some of the products developed by the company …………… have been covered by the patent rights. The company has also applied for trade mark registration for one of its products, viz. Investor Protection Index Fund (IPIF). These measures will help the company enhance its products value and also mitigate risks." (iv) The TPO has applied the filter of excluding companies having peculiar economic circumstances. Quintegra fails the TPO's own filter since there have been acquisitions in this case, as is evidenced from the company's Annual Report for F.Y. 2007-08, the period under consideration. The learned Authorised Representativ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... O to exclude the aforesaid companies from the final list of comparable companies for the purpose of determining ALP. 22. As far as comparable chosen by the TPO at Sl.No.8 of the final list of comparable viz., M/S.Helios & Matheson Information Technology Ltd., we find that the said company has been held to be not comparable with a software service provider like the Assessee by the ITAT Pune Bench in the case of PTC Software (India)Pvt.Ltd. ITA.No.1605/PN/2011 (Asstt. Year : 2007-08) order dated 30.4.2013. The following were the relevant observations of the Tribunal: "16. The next point made out by the assessee is with regard to the inclusion of items at (9) and (11) namely Helios & Matheson Information Technology Ltd., and KALS Information Solutions Ltd. (Seg). The primary plea raised by the assessee to assail the inclusion of the aforesaid two companies from the list of comparables is to be effect that they are functionally incomparable and therefore, are liable to be excluded. In sum and substance, the plea set up by the assessee is that both the aforesaid concerns are engaged in development and sale of software products which is functionally different from the services undertak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... invited to page 454 where the accept reject matrix undertaken by the assessee reflected KALS Information Solutions Ltd. (Seg) as functionally incomparable. The Ld. Counsel pointed out that the aforesaid position has been accepted by the TPO in the earlier A.Y. 2006-07 and therefore, there was no justification for the TPO to consider the said concern as functionally comparable in the instant assessment year. 19. In our considered opinion, the point raised by the assessee is potent in as much as it is quite evident that the said concern has not been found to be functionally comparable with the assessee in the immediately preceding assessment year and in the present year also, on the basis of the Annual Report, referred to in the written submissions addressed to the lower authorities, the assessee has correctly asserted out that the said concern was inter alia engaged in sale of software products, which was quite distinct from the activity undertaken by the assessee in the IT Services segment. At the time of hearing, neither is there any argument put forth by the Revenue and nor is there any discussion emerging from the orders of the lower authorities as to in what manner the functi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of turnover filter and it was submitted that the aforesaid comparable companies have to be excluded from the final list of comparables selected by the TPO. 26. We have considered the submission of the learned counsel for the Assessee and the learned DR. In the case of Trilogy E-Business Software India (P) Ltd. (supra), this Tribunal on application of the turnover filter while selecting comparable companies for comparability analysis held as follows: "(1) Turnover Filter 11. The ld. counsel for the assessee submitted that the TPO has applied a lower turnover filter of ₹ 1 crore, but has not chosen to apply any upper turnover limit. In this regard, it was submitted by him that under rule 10B(3) to the Income-tax Rules, it was necessary for comparing an uncontrolled transaction with an international transaction that there should not be any difference between the transactions compared or the enterprises entering into such transaction, which are likely to materially affect the price or cost charged or paid or profit arising from such transaction in the open market. Further it is also necessary to see that wherever there are some differences such differences should be capab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as compared to ₹ 47.47 crores of Assessee). It was submitted that an appropriate turnover range should be applied in selecting comparable uncontrolled companies. 14. Reference was made to the decision of the ITAT Bangalore Bench in the case of Genesis Integrating Systems (India) Pvt. Ltd. v. DCIT, ITA No.1231/Bang/2010, wherein relying on Dun and Bradstreet's analysis, the turnover of ₹ 1 crore to ₹ 200 crores was held to be proper. The following relevant observations were brought to our notice:- "9. Having heard both the parties and having considered the rival contentions and also the judicial precedents on the issue, we find that the TPO himself has rejected the companies which .ire (sic) making losses as comparables. This shows that there is a limit for the lower end for identifying the comparables. In such a situation, we are unable to understand as to why there should not be an upper limit also. What should be upper limit is another factor to be considered. We agree with the contention of the learned counsel for the assessee that the size matters in business. A big company would be in a position to bargain the price and also attract more customers. It woul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises, and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises. Sec.92- A defines what is an Associated Enterprise. In the present case there is no dispute that the transaction between the Assessee and its AE was an international transaction attracting the provisions of Sec.92 of the Act. Sec.92C provides the manner of computation of Arm's length price in an international transaction and it provides:- (1) that the arm's length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, having regard to the nature of transaction or class of transaction or class of associated persons or functions performed by such persons or such other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (a)……. to (d)…….. (e) transactional net margin method, by which,- (i) the net profit margin realised by the enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base; (ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base; (iii) the net profit margin referred to in subclause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market; (iv) the net profit margin realised by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii); (v) the net profit margin thus establi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d for determining the ALP of the international transaction. The disputes are with regard to the comparability of the comparable relied upon by the TPO. 20. In this regard we find that the provisions of law pointed out by the ld. counsel for the assessee as well as the decisions referred to by the ld. counsel for the assessee clearly lay down the principle that the turnover filter is an important criteria in choosing the comparables. The assessee's turnover is ₹ 47,46,66,638. It would therefore fall within the category of companies in the range of turnover between 1 crore and 200 crores (as laid down in the case of Genesis Integrating Systems (India) Pvt. Ltd. v. DCIT, ITA No.1231/Bang/2010) . Thus, companies having turnover of more than 200 crores have to be eliminated from the list of comparables as laid down in several decisions referred to by the ld. counsel for the assessee. Applying those tests, the following companies will have to be excluded from the list of 26 comparables drawn by the TPO viz., Turnover Rs. (1) Flextronics Software Systems Ltd. 848.66 crores (2) iGate Global Solutions Ltd. 747.27 crores (3) Mindtree Ltd. 590.39 crores (4) Persistent Systems Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT v. Tata Elxsi Ltd [2012] 349 ITR 98 (Karn). 31. We have heard the ld. counsel for the assessee and the ld. DR on the issues raised in concise ground Nos.7 & 8. Taking into consideration the decision rendered by the Hon'ble High Court of Karnataka in the case of CIT v. Tata Elxsi Ltd [2012] 349 ITR 98 (Karn), we are of the view that it would be just and appropriate to direct the Assessing Officer to exclude telecommunication charges, consultancy charges, repairs and maintenance and certain other expenses incurred by the Assessee (including expenses incurred in foreign currency), both from export turnover and total turnover, as has been prayed for by the assessee in concise ground No.8. In view of the acceptance of the alternative prayer in concise ground No.8, we are of the view that no adjudication is required on concise ground No.7. 32. Gr.No.9 raised by the Assessee in the concise grounds of appeal relate to disallowance of interest expenses debited to the Profit & Loss A/C by invoking the provisions of Sec.40(a)(i) of the Act i.e., on the ground that tax at source has not been deducted at source. The material facts relevant for adjudication of the aforesaid grounds are as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d under sub-section (1) of section 200, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid." 34. The AO accordingly disallowed the claim of the Assessee for deduction of the aforesaid sum and added the same to the total income of the Assessee. 35. Before the DRP the Assessee submitted that the payee Broadcom Singapore Pte.Ltd. is a tax resident of Singapore. The Assessee submitted that the interest income that accrues or arises to the non-resident viz., Broadcom Singapore Pte.Ltd. will be taxable in India as per the provisions of DTAA between India and Singapore. The Assessee pointed out that taxability of the interest income in India is as per Article 11 of the Double Taxation Avoidance Agreement (DTAA) between India and Singapore which reads thus:- "ARTICLE 11 Interest 1. Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. 2. However, such interest may also be taxed in the Contracting State in which it arises, and according to the laws of that State, but if the beneficial owner of the interest is a resident of the other Contracting S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pectively, there can be no disallowance u/s.40(a)(i) of the Act in view of the proviso to Sec.40(a)(i) which lays down that "where in respect of any such sum, tax has been deducted in any subsequent year or, has been deducted in the previous year but paid in any subsequent year after the expiry of the time prescribed under sub-section (1) of section 200, such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid" 39. The learned DR on the above submission of the learned counsel for the Assessee, submitted that the claim of the Assessee may be directed to be verified by the AO and if found correct, to the extent tax deducted and paid to the credit of the Government, the disallowance may be deleted. 40. We are of the view that it would be just and appropriate to direct the AO to verify the claim of the Assessee as aforesaid and if found correct, to the extent tax deducted and paid to the credit of the Government, the disallowance should be deleted. 41. The learned counsel for the Assessee further submitted that in view of Article 11(2) of the DTAA between India and Singapore interest income is taxable in India only when th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act in respect of Home salary/special allowances paid by foreign company/head office to expatriate employees outside India. The Hon'ble Supreme Court observed that TDS provisions which are in the nature of machinery provisions to enable collection and recovery of tax are not independent of the charging provisions which determine the assessability in the hands of the employee. The learned counsel for the Assessee relying on the aforesaid observations submitted that unless the income is chargeable to tax in the hands of the non-resident for the relevant previous year, there is no obligation to deduct tax at source. According to him interest income as per Article 11 of the DTAA between India and Singapore of which the payee non-resident is a tax resident, taxability of the interest income in the hands of the non-resident in India is only at the point of time of receipt and not earlier. Since the machinery provisions for collection and recovery of tax and the charging provisions form an integral code and cannot be looked at independently, the obligation to deduct tax at source should also be at the point of time when the income is taxable in India in the hands of the non-resident. 44 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... refore only on receipt of interest income by the non-resident, tax at source should be deducted by the person making payment. 46. As rightly contended by the learned DR, the decisions relied upon by the learned counsel for the Assessee are rendered in the context of taxation of interest income in the hands of the non-resident and are not in the context of point of time at which obligation to deduct tax at source lies on the person making payment to a non-resident. We agree with the submission of the learned DR that the said decisions are therefore not relevant to the facts of the present case. We therefore hold that disallowance u/s.40(a)(i)of the Act, in the facts and circumstances of the case, is justified. The quantum of sum to be disallowed as we have already stated is to be decided by the AO afresh in view of the discussion on the issue raised in ground no.9 in the earlier part of this order. We however hasten to add that the decision on ground No.9 would be subject to the decision on Gr.No.11 which we will deal with in the later part of this order. Thus ground No.9 is treated as partly allowed. 47. In Concise ground No.10, the assessee has challenged the action of the AO/DR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax for TDS on Fees for FTS is 10%. The AO grossed up tax deductible of ₹ 53,579 at 10 times and arrived at a figure of ₹ 5,35,790. After deducting this sum of ₹ 5,35,790 from ₹ 9,55,062, the AO arrived at a further disallowance of ₹ 4,22,867. This is shown in the chart given in the earlier part of this order in the last two columns. The AO thus proceeded on a wrong assumption that amount disallowed by the assessee in the return of income u/s. 40(a)(ia) was incorrect, whereas the amount disallowed by the Assessee was correct. It is this addition that is subject matter of dispute between the assessee and Revenue raised in concise ground No.10. According to the assessee, it is a double addition and the figure of ₹ 4,22,867 has been arrived at in the manner set out in the table given in the earlier paragraph of this order. 50. We have seen the computation of total income in the return filed by the assessee as also in the order of assessment and are of the view that the further disallowance of ₹ 4,22,867 u/s. 40(a)(ia) is uncalled for, as the assessee has already in its computation of total income, disallowed the correct figure of ₹ 9,5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) of the Act. Such disallowance, will naturally go to increase the profits derived from the eligible business. It is on such increased profits that the assessee has claimed deduction under section 80IB of the Act. We fail to see as to how because of the disallowances made, the amount ceased to be profits derived from the eligible business. 54. A similar issue was considered by the ITAT Mumbai in the case of S.B. Builders and Developers vs. ITO, 136 TTJ (Mum) 420. The Assessee in that case claimed deduction under s. 80-IB of the Act on the Profits and gains from housing project. The AO made addition on account of disallowance under s. 40(a)(ia) and disallowed certain payments relating to the cost of construction, RCC consultancy, architect's fees, commission and professional charges aggregating to ₹ 4,50,12,485/- as the assessee had not deducted tax at source as stipulated in s.40(a)(ia) of the Act. As a result, the gross total income stood enhanced at ₹ 8,26,90,888. The AO however restricted deduction under s. 80-IB(10) based on original profit of ₹ 3,76,78,403 declared. The Tribunal held that the action of the AO was not justified. The Tribunal held that under s ..... X X X X Extracts X X X X X X X X Extracts X X X X
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