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TMI Blog2019 (5) TMI 1539X X X X Extracts X X X X X X X X Extracts X X X X ..... nditure - HELD THAT:- This issue is to be decided against assessee relying on decision in the case of WIPRO LTD. [ 2010 (8) TMI 1053 - KARNATAKA HIGH COURT] Disallowance u/s. 37(1) - purchase of bearing - capital expenditure - HELD THAT:- In respect of disallowance out of purchase of ball bearing assembly of ₹ 13,28,603/- this was the submission of assessee before DRP that the expenditure was disallowed without giving assessee an opportunity of being heard. As per the direction of DRP also, it is seen that the direction of DRP is very cryptic without any reasoning. Under these facts, we feel it proper to restore this matter back to the file of DRP for fresh decision by way of a speaking and reasoned order after providing adequate opportunity of being heard to both sides. This ground is allowed for statistical purposes. Expenditure towards Repairs and Maintenance charges - revenue or capital expenditure - HELD THAT:- Repair expenditure were incurred to preserve and maintain an already existing asset, in the course of such repairs, if they have upgraded the facilities to international standards, then that would not constitute a new asset and in the present case, in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act as per the directions of the DRP. For Assessment Year 2007-08, the appeal of the assessee and revenue are directed against the order of ld. CIT(A)-IV, Bangalore dated 12.03.2012 and for Assessment Year 2008-09, the cross appeals are directed against the order of ld. CIT(A)-IV, Bangalore dated 10.01.2013. All these appeals were heard together and are being disposed of by way of this common order for the sake of convenience. 2. First we take up the appeal of the assessee for Assessment Year 2006-07. As per the revised and additional grounds of appeal filed by the assessee, there are 24 grounds of appeal including additional ground no. 24. The same read as under. (In conformity with Rule 8 of Income-tax Appellate Tribunal Rules. 1963) 1. That the learned Assessing Officer ('AO') and the learned Dispute Resolution Panel('Panel') erred in upholding the rejection of Transfer Pricing (TP) documentation bythe learned Additional Director of Income-tax (Transfer Pricing Officer - II) ('TPO')and thereby erred in not appreciating that the Appellant had prepared the TPdocumentation bona fide and in good ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the assessmentproceedings. [corresponding to ground 2.2] 5. That the learned AO and the learned Panel erred both in facts and law indisregarding application of multiple year/ prior year data as used by the Appellant inthe TP documentation and holding that current year (i.e. Financial Year 2005-06)data for comparable companies should be used despite the fact that the same wasnot necessarily available to the Appellant at the time of preparing the TPdocumentation, and in doing so have grossly erred in interpreting the requirementof 'contemporaneous' data in the Rules to necessarily imply current year/ singleyear (i.e. FY 2005-06) data and expecting the Appellant to perform act ofimpossibility in terms of being able to use data subsequently available (i.e. duringaudit proceedings). [corresponding to ground 2.3, 2.3.1 2.3.2] 6. That the learned AO and the learned Panel erred both in facts and law in upholdingthe rejection of comparability analysis of the Appellant in the TP documentation andconfirming the comparability analysis as adopted by the learned TPO in the TPOrder by applying additional filters (i.e. RPT filter of 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1. Goldstone Tech Limited Nittany OutsourcingServices Pvt. Limited ADS DiagnosticsLimited 2. Computech Intl Limited(Seg) Quantum e-ServicesLimited Agrima Consultants Intl Limited 3. ICRA TechnoAnalytics(Seg) Indus Networks Limited Central MinePlanning Design Institute Limited Companies included in the final set failing the RPTfilter of more than15% 1. Aztec Software Limited - RPT 17.79% - - 2. Geometric SoftwareLimited (Seg) - RPT 19.34% - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deduction under section 10B of the Act without any justification, while ignoring the appellant's submissions.[corresponding to ground 8] 12. Without prejudice to the above, the Learned Assessing Officer erred in consideringincorrect figures relating to telecommunication charges and freight charges whilecomputing claim of deduction under section 10B of the Act. [corresponding toground 9] 13. Without prejudice to the above, the Learned Assessing Officer erred in consideringtelecommunication expenses to the extent of INR 5,098,102 twice while excludingthe same from export turnover while computing deduction under section 10B of theAct. [corresponding to ground 10] 14. Without prejudice to the above, the Learned Assessing Officer erred in reducing thealleged telecommunication expenses of INR 12,866,261; freight charges of INR824,428; insurance charges of INR 2,470,891; and expenditure incurred in foreigncurrency viz., travel and conveyance of INR 10,424,981; salaries of INR 9,135,780;telephone telex, fax charges of INR 5,098,102 only from 'export turnover' and notfrom 'total turnover' while computing the deduction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 234B of the Actof INR 9,678,215 and under section 234C of the Act of INR 64,731. [corresponding to ground 19] 23. That the Appellant craves leave to add to and/or to alter, amend, rescind, modify thegrounds herein above or produce further documents before or at the time of hearing ofthis Appeal. [corresponding to ground20] ADDITIONAL GROUNDS OF APPEAL Transfer Pricing Related: 24. The learned AO / TPO erred in considering certain companies as mentioned below ascomparable that fail the test of comparability or certain filter applied by the TPO, ascomparable to the Appellant. S.No. IT Services segment IT Enabled Servicessegment R D Servicessegment 1. Persistent Systems Limited Maple eSolutions Limited Alphageo (India) Limited 2. R Systems InternationalLimited (Seg) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of ₹ 24,70,891/- as being expenditure attributable to delivery of computer software outside India while computing deduction u/s. 10B of IT Act. However, the main grievance of the assessee as per ground no. 14 is this that the AO has reduced these expenses from export turnover only and not reduced the same from total turnover while computing deduction allowable to assessee u/s. 10B of IT Act. In course of hearing and in the chart, there is no argument on any other aspect. By now, this is settled position of law as per these two judgments cited before us being the judgment of Hon'ble Karnataka High Court rendered in the case of CIT Vs. Tata Elxsi Ltd. (supra) and the judgment of Hon ble Apex Court rendered in the case of CIT vs. HCL Technologies Ltd. (supra) that total turnover is sum total of export turnover and domestic turnover and therefore, if an amount is reduced from export turnover then the total turnover also goes down by the same amount automatically. Respectfully following these two judgments, we direct the AO to decide the issue afresh regarding allowability of deduction to assessee u/s. 10B of IT Act by reducing the same expenses from total turnover also whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of testing in the laboratory and the same does not provide any enduring benefit and hence, the same is revenue in nature. Reliance has been placed on the following judicial pronouncements. a) PCIT vs. Banco Aluminium Ltd (ITA No. 943 of 2017)(Guj) b) CIT vs. Aditya Ferro Alloys (P) Ltd (36 ITR 490 (Mad) c) CIT vs. ADI Artech Transducers (P) Ltd. (ITA Nos. 505 to 507 of 2013)(Guj) 10. In course of hearing, the bench wanted to know about the decision of DRP on this issue. The ld. AR of assessee submitted that the decision of DRP is contained on page no. 26 of the DRP directions. He submitted that the order of DRP is very cryptic without any reasoning. The ld. DR of revenue supported the orders of authorities below. 11. We have considered the rival submissions. First of all, we reproduce the relevant finding of DRP from page nos. 25 and 26 of the DRP directions. The same are as under. Objection No. 3 - Capital Expenditure - ₹ 13,78,603/- 1. The AO is not justified in proposing to treat the payment to the architect forobtaining stability certificate for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... disallowance out of purchase of ball bearing assembly of ₹ 13,28,603/- this was the submission of assessee before DRP that the expenditure was disallowed without giving assessee an opportunity of being heard. As per the direction of DRP also, it is seen that the direction of DRP is very cryptic without any reasoning. Under these facts, we feel it proper to restore this matter back to the file of DRP for fresh decision by way of a speaking and reasoned order after providing adequate opportunity of being heard to both sides. This ground is allowed for statistical purposes. 13. In the remaining grounds, it is seen that ground nos. 21 and 22 are consequential grounds for which no separate adjudication is called for. Ground no. 23 is a general ground requiring no separate adjudication. 14. In the result, the appeal filed by the assessee for Assessment Year 2006-07 is partly allowed for statistical purposes in the terms indicated above. 15. Now we take up the cross appeals for Assessment Year 2007-08. For this year also, the assessee has submitted letter dated 13.12.2018 in which it is stated that because of MAP resolutio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ver as well, for computation of deduction u/s 10A of the Act whereas suchexclusion is permitted to arrive at the export turnover only as per the Act andtotal turnover has not been defined in the section. 3. The CIT(A) ought to have appreciated that the decision of Hon'ble High Courtof Karnataka on the issue of computing deduction u/s 10A by excluding theabove expenses from export turnover as well, has not reached finality in viewof the pending SLP before the Hon'ble Supreme Court. 4. On the facts and in the circumstances of the case the learned CIT(A) erred inholding that the assessee is eligible for a standard deduction of 5% from theArm's Length price under the provisio to Section 92C(2) of the Act. 5. On the facts and in the circumstances of the case the learned CIT (A) erred inrejecting the companies M/s Oil Field Instrumentation India Ltd M/s Celestial labs Ltd as com parables to R D Service Segment of taxpayer. 6. On the facts and in the circumstances of the case the learned CIT(A) erred inholding that the TPO ought to have excluded comparables having any relatedparty transactions, not only thos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of appeal of the assessee and revenue for Assessment Year 2008-09. For this year also, the assessee has submitted a letter dated 13.12.2018 in which it is stated that the assessee is withdrawing all the grounds in respect of TP issues because the TP issue has been resolved as per MAP resolution and only the remaining grounds in respect of corporate tax issue should be decided by the Tribunal. The ld. AR of assessee submitted a chart for this year also at the time of hearing and in this chart also, it is submitted that ground nos. 1 to 4 and additional ground no. 1 are withdrawn in view of MAP resolution and in the same chart, it is submitted that all the grounds in the appeal of the revenue i.e. ground nos. 1 to 12 in revenue s appeal are also regarding TP issue and because of MAP resolution, the revenue s grounds on TP issue should also be rejected and accordingly we reject ground nos. 1 to 4 and additional ground no. 1 of assessee s appeal and ground nos. 1 to 12 of revenue s appeal in view of MAP resolution. As per ground no. 5 of assessee s appeal, this is the grievance of the assessee that CIT(A) has erred in holding that expenditure towards Repairs and Maintenance charges am ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cts constitute replacing the existing asset. The existing asset is the hotel building and its rooms.When no extra flooring space or extra room capacity is added on account of such repairs, it cannot be saidthat a new asset has come into existence. All these repairs are done to preserve and maintain an alreadyexisting asset. In the course of such repairs, if they have upgraded the facilities to international standards,then that would not constitute a new asset. Therefore, the Tribunal was justified in holding that theexpenditure incurred towards repairs and replacement of old parts would be in the nature of revenueexpenditure and not capital expenditure. 24. From the above Para of this judgment of Hon'ble Karnataka High Court, it is seen that in that case, this finding was given that the repair expenditure were incurred to preserve and maintain an already existing asset, in the course of such repairs, if they have upgraded the facilities to international standards, then that would not constitute a new asset and in the present case, in the absence of bills, we cannot examine the exact nature and hence, we restore this matter back to the file of A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not called for, stating that provision of Internet service was a service which had anelement of contract implicit in the mode of terms and conditions of service. 293. The AO has not cited the specific provision under which the appellantwas required to make TDS, but his reference to the term contract indicates thathe has invoked the provisions of section 194C(1) dealing with payment tocontractors. The section mandates TDS in respect of contracts for carrying outof any' work, including supply of labour. Clause (iv) of Explanation to section194C defines work to include advertising, broadcasting and telecasting including production of programmes, carriage of goods or passengers by any mode of transport other than by railways, catering, and manufacturing or supplying custom-made products using customers' materials. Thus the scope of section194C is limited to the items of work specifically defined therein and, to suchworks tarried out in pursuance of a contract, which includes a sub-contract interms of clause (iii) of the Explanation. 294. The appellant's refrain for not making TDS under section 194C is thatthere was no contract and that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nding has been given by the Tribunal in this case that for the payment for internet connection charges, neither section 194C is applicable nor section 194-I nor 194-J. Learned DR of the revenue could not point out any difference in facts in the present case and in the case of Destimony Enterprises Limited vs. ITO (TDS) (Supra). Hence, respectfully following this Tribunal order, we hold that the disallowance made by the AO in the present case u/s. 40(a)(ia) is not justified. We delete the same. Ground nos. 6a and 6b are allowed. 28. Ground no. 7 is regarding charging of interest u/s. 234B and 234C of IT Act. These grounds are consequential and hence, no separate adjudication is called for. 29. Ground no. 8 of assessee s appeal is not pressed as per the chart submitted by assessee and accordingly this ground is rejected as not pressed. 30. In the result, the appeal of the assessee is partly allowed in the terms indicated above. 31. Now we take up the revenue s appeal for Assessment Year 2008-09. The grounds raised by revenue in this year are as under. 1. The order of the learned CIT(A) is oppo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (A) erred in holding that M/sAccentia Technologies Ltd had extraordinary circumstance and, therefore, cannot be taken asa comparable. 11.In the facts and circumstances of the case, the learned CIT(A) erred in holding that M/s Genesys International Corporation Ltd being functionally different, cannot be taken as acomparable. 12. In the facts and circumstances of the case, the learned CIT(A) erred in holding that M/s Clinigene International Ltd and Research Support International Pvt Ltd being functionallydifferent cannot be taken as a comparable company. 13. The learned CIT(A) has erred in directing the AO to treat the expenses incurred on purchaseof Software as revenue expenditure rather than treating it as capital expenditure in view ofthe specific provisions in the I.T.Act and Rules with regard to treatment of computersoftware as forming part of computer for the purpose of allowing depreciation. 14. The learned CIT(A) has erred in directing the AO to allow deduction towards purchase ofsoftware as revenue expenditure without appreciating the fact that computer software formspart of computers for the purpose of allo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and 16 of revenue s appeal, the ld. DR of revenue supported the assessment order whereas the ld. AR of assessee supported the order of CIT(A). He also pointed out that in these grounds, the grievance of the revenue is regarding the direction of CIT(A) as per para no. 319 on page no. 100 of its order that for the purpose of computing deduction allowable to assessee u/s. 10B of IT Act, various expenses reduced by AO from export turnover should also be reduced from total turnover. The CIT(A) has followed the judgment of Hon'ble Karnataka High Court rendered in the case of CIT Vs. Tata Elxsi Ltd. (supra). Now this issue is covered in favour of the assessee by the judgment of Hon ble Apex Court rendered in the case of CIT vs. HCL Technologies Ltd. (supra) also. Respectfully following these two judgments, we decline to interfere in the order of CIT(A) on this issue. Accordingly these grounds of revenue s appeal are rejected. 36. In the result, the appeal of the revenue is partly allowed in the terms indicated above. 37. In the combined result, the appeal of the assessee for Assessment Year 2006-07 is partly allowed in the terms indicated ..... X X X X Extracts X X X X X X X X Extracts X X X X
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