9911796707
TMI Blog2021 (2) TMI 777X X X X Extracts X X X X X X X X Extracts X X X X ..... 2.2009. It was brought to our notice that the necessary evidence was filed before the CIT(A) but the CIT(A) has overlooked the same. We are of the view that it would be just and appropriate to direct the AO to verify the claim of the assessee regarding tax deduction at source, in the light of the evidence produced before the CIT(A) after affording the assessee opportunity of being heard. TDS u/s 195 - Disallowance u/s 40(a)(ia) - disallowing the expenses grouped by the Appellant under Repairs and maintenance towards purchase of application software on the premise that it constitutes royalty - HELD THAT:- Prior to the decision in the case of Samsung Electronics [ 2011 (10) TMI 195 - KARNATAKA HIGH COURT ] rendered by the Hon ble Karnataka High Court on 15.10.2011, the law as interpreted by various judicial forums was that payments for purchase of software were not in the nature of royalty but were in the nature of business profits and if the recipient non-resident did not have a Permanent Establishment in India, there was no obligation to deduct tax at source. Therefore payments to non-resident for purchase of software prior to 15.10.2011 cannot be disallowed u/s.40(a)(ia) of the Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cal facts and circumstances. We therefore deem it convenient to pass a common order. 2. We shall first take up for consideration the cross appeals for AY 2010-11. The assessee is a subsidiary of VMware International Unlimited Company, Ireland (formerly known as VMware International Limited), which is an affiliate of VMware Inc., USA. It provides software development services ['SWD services' for short], Information Technology Enabled Services ['ITES' for short] and marketing support services ['MSS services' for short] to VMware group companies, as a captive service provider. For all the above services, the Assessee is compensated by the Associate Enterprise (AE) on a cost plus mark up basis. In terms of section 92B of the Income Tax Act, 1961 (Act), the above transactions were international transactions. In terms of section 92 of the Act, any income arising out of an international transaction has to be determined having regard to Arm's Length Price (ALP). The revenue from the international transactions are as follows: Details of international transactions entered into by the Assessee with its AE, as reflected in the TP order are as follows: International Transactions Amount (i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7.05 Arithmetic Mean 22.71% Computation of arm's length price by TPO and the adjustment made: Arm's Length Mean Margin 22.71% Less: WC Adjustment (restricted to 1.98%) 1.98% Adjusted margin 20.73% Operating cost ₹ 1,14,57,87,196/- Arm's Length Price (ALP): 120.73% of Operating Cost ₹ 1,38,33,08,881/- Price Received ₹ 1,22,09,69,922/- Short fall being adjustment u/s. 92CA ₹ 16,23,38,959/- 4. The adjustment suggested by the TPO was incorporated by the TPO in the draft Order of Assessment. The assessee did not file any objection to the draft Assessment Order before Dispute Resolution Panel (DRP) but filed appeal against the final Assessment Order in which the addition suggested by the TPO was incorporated by the AO. 5. The CIT(A) passed an order dated 21.11.2017 granting partial relief to the Assessee. The CIT(A) accepted the contention of the Assessee and directed exclusion of the following companies: 1. ICRA Techno Analytics Ltd.; 2. Infosys Ltd.; 3. Kals Information Systems Ltd.; 4. Persistent Systems Ltd.; 5. Sasken Communication Technologies Ltd.; and 6. Tata Elxsi However, the CIT(A) did not agree with the contentions of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ground, without appreciating that not two companies can ever be the same"? 9. "The C1T(A) erred in holding that the size and turnover of the company are deciding factors for treating a company as a comparable and accordingly erred in excluding ICRA Techno Analytics Ltd., (seg.) as comparable". 10. 'The C1T(A) has erred in not appreciating that economies of scale is not relevant in the software industry". 11. "Whether the C1T(Appeals) was right in removing the comparables on functional similarity"? 12. "Whether the C1T(A) was right in seeking exact comparability while searching comparable companies of the assessee under TNMM method whereas requirements of and international jurisprudence require seeking similar comparable companies"? 13. `Whether the C1T(A) has erred in judging the nature and vast arena of the segment Marketing and sales support services"? 14.For these and other grounds that may be urged at the time of hearing, it is prayed that the order of the C1T(A) in so far as it relates to the above grounds may be reversed and that of the Assessing Officer may be restored. 15.The appellant craves leave to add, alter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sales and thus acts as an entrepreneur as against the Assessee which is a captive unit. It also focuses heavily on R & D, having its own applied research division, and thus the company is thus not comparable to the Assessee. The turnover of this company for the year ended 31st March 2010 was ₹ 21,140 crores which is far higher than the turnover of the Assessee. Infosys is a giant in the software development space while the Assessee is a captive unit. This company is being consistently excluded from the list of comparables in similar cases. Since the circumstances leading to it being excluded as being functionally dissimilar in the previous assessment continue to remain same, the company ought to remain excluded in the current assessment year. Further this Tribunal in DCIT v. Electronics for Imaging India P. Ltd [(2016) 70 taxmann.com 299 (Bang - Trib.)], ACIT v. Broadcom India Research (P.) Ltd [2016] 72 taxmann.com 77 (Bangalore - Trib.) and ITO v. Interwoven Software Services (India) (P.) Ltd. [2016] 74 taxmann.com 103 (Bangalore - Trib.) directed that this company should be excluded. We thus find no infirmity in the order of the CIT(A) in excluding this company. 9. Kals I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar.The company is being consistently excluded from the list of comparables in similar cases, and also in the case of the Assessee for the assessment year 2009-10. Since the circumstances leading to it being excluded as being functionally dissimilar in the previous assessment continue to remain same, the company ought to remain excluded in the current assessment year. This Tribunal in DCIT v. Electronics for Imaging India P. Ltd [(2016) 70 taxmann.com 299 (Bang - Trib.)] ACIT v. Broadcom India Research (P.) Ltd [2016] 72 taxmann.com 77 (Bangalore - Trib.) and ITO v. Interwoven Software Services (India) (P.) Ltd.[2016] 74 taxmann.com 103 (Bangalore - Trib.), where the said company was directed to be excluded/exclusion upheld in the case of assessees similar to the Assessee herein. We, therefore, uphold the order of CIT(A). 11. Sasken Communication Technologies Ltd.: This company was excluded suo moto by the CIT(A) for the reason that it was excluded by this Hon'ble Tribunal in assessee's own case for the assessment year 2009-10. The company is engaged in high-end software products and services that are not similar to the services rendered by the Assessee. It develops and owns severa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he company is being consistently excluded from the list of comparables in similar cases, and also in the case of the Assessee for the assessment year 2009-10. Since the circumstances leading to it being excluded as being functionally dissimilar in the previous assessment continue to remain same, the company ought to remain excluded in the current assessment year. Further, this Tribunal in DCIT v. Electronics for Imaging India P. Ltd [(2016) 70 taxmann.com 299 (Bang - Trib.)] and ITO v. Interwoven Software Services (India) (P.) Ltd. [2016] 74 taxmann.com 103 (Bangalore - Trib.) excluded this company in the case of an Assessee similar to the Assessee herein. Following the same, we uphold exclusion of this company. 13. As far as ground No.9 raised by the Revenue is concerned, vide this ground, the Revenue is challenging the action of the CIT(A) in excluding ICRA Techno Analytics Ltd. upon taking its turnover into consideration. In this regard, it is seen that while the Assessee had sought for its exclusion inter alia on the ground that the turnover of this company was not comparable with that of the Assessee, the CIT(A) had directed its exclusion by placing reliance on the decisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ₹ 15,31,18,416/- Operating Profit (Op. Income - Op. Expenses) ₹ 1,23,86,918/- OP/OC 8% Comparison of TP study done by the Assessee and the TPO: Assessee TPO Methodology adopted TNMM TNMM Profit Level Indicator (PLI) OP/TC OP/OC Database used PROWESS & CAPITALINE PROWESS Comparables selected 6 7 Comparables selected by TPO and their arithmetic mean as per TPO order: Sl. No. Name of the Company Mark up WC Unadj. (%) 1. Asian Business Exhibition & Conference Ltd. 60.13 2. Cyber Media Research Ltd. 13.68 3. HCCA Business Services Pvt. Ltd. 19.09 4. Hindustan Housing Co. Ltd. 38.12 5. ICC International Agencies Ltd. 13.72 6. Killick Agencies & Mktg. Ltd. 17.36 7. Priya International Ltd. 11.47 ARITHMETIC MEAN 24.80 Computation of arm's length price by TPO and the adjustment made: Arm's Length Mean Margin 24.80% Operating cost ₹ 15,31,18,416/- Arm's Length Price (ALP): 124.80% of Operating Cost ₹ 19,10,91,783/- Price Received ₹ 16,55,05,334/- Short fall being adjustment u/s. 92CA ₹ 2,55,86,449/- 18. The Addition suggested by the TPO was incorporated in the draft order of Assessment by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (A). 21. HCCA Business Services P. Ltd: This company was excluded by the CIT(A) for the reason that it is functionally dissimilar to the Assessee. This company is a service provider and provides services in the gamut of HR operations and administration. It provides HR operations and administration services, offering payroll processing and compensation restructuring, management of labour and legal compliances, employee reimbursement processing and accounting services. It is thus clear that the activities of HCCA are not similar to marketing support services provided by the Assessee. This Tribunal in DCIT v. Electronics for Imaging India P. Ltd [(2016) 70 taxmann.com 299 (Bang - Trib.)] and ITO v. Interwoven Software Services (India) (P.) [2016] 74 taxmann.com 103 (Bangalore - Trib.) directed this company to be excluded as a comparable in the case of assessees similar to the Assessee herein. Therefore, this company ought to remain excluded from the final list of comparables for the MSS segment. 22. Killick Agencies & Mktg. Ltd.: This company was excluded by the CIT(A) for the reason that it is functionally dissimilar to the Assessee, and therefore does not warrant any interference ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct. The order of the CIT(A) is therefore upheld. In view of the ground Nos.2 and 3 raised by the Revenue are without merit, the same are dismissed. 25. Ground Nos.1, 14 and 15 are general and require no specific adjudication. 26. What now remains for consideration in the appeal relating to AY 2010-11 is ground Nos.2.1, 2.2, 3 and 4 raised by the assessee in its appeal. We may add that the ground Nos.5 to 17 raised by the assessee in its appeal has already been dismissed as infructuous and ground No.18 raised by the assessee being levy of interest under section 234B of the Act being purely consequential in nature and a direction to the AO give consequential effect would be sufficient to dispose off the said ground. 27. Ground Nos.2.1 and 2.2 raised by the assessee reads as follows: 2.1 The learned CIT(A) erred in law and facts by upholding the action of the Deputy Commissioner of Income Tax, Circle - 12(5), Bangalore ("learned AO") in not providing an allowance for expenditure amounting to INR 1,37,875 which was disallowed during the assessment proceedings for the Assessment Year ("AY") 2009-10, despite the fact that the Tax Deducted at Source ("TDS") on such expenditure was de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee did not deduct tax at source, the AO invoked the provisions of section 40(a)(ia) of the Act and disallowed the claim of the assessee for deduction of a sum of ₹ 3,63,397/-. The CIT(A) confirmed the order of the AO. 31. The learned Counsel for the assessee made submission that even assuming that the payment in question is in the nature of royalty as laid down by the Hon'ble Karnataka High Court in the case of CIT Vs. Samsung Electronics Ltd., 16 taxmann.com 141 which was passed on 15.10.2011, the assessee in the present case had made payments to the non-resident during the period 01.04.2009 to 31.03.2010. It is the submission of the learned Counsel for the assessee that prior to the decision of Hon'ble Karnataka High Court referred to above, payments made for purchase of software were not considered as in the nature of royalty and therefore the assessee cannot be held as an assessee in default for the period prior to the pronouncement of the decision of the Hon'ble Karnataka High Court in the case of Samsung Electronics Ltd., (supra) dated 15.10.2011. In this regard, learned Counsel for the assessee placed reliance on the following decisions: 1. ITO Vs. Clear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ruling of a court (the Karnataka HC in CIT v Samsung Electronics Co. Ltd. (16 taxmann.com 141) was passed on October 15, 2011). Courts have consistently upheld this principle as seen in: • ITO v. Clear Water Technology Services (P.) Ltd. (52 taxmann.com 115) • Kerala Vision Ltd v. ACIT (46 taxmann.com 50) • Sonic Biochem Extractions (P.) Ltd v. ITO (35 taxmann.com 463) • Channel Guide India Ltd v. ACIT (25 taxmann.com 25) • DCIv. Virola International (20 14(2) TMI 653) • CIT v. Kotak Securities Ltd. (20 taxmann.com 846). 04. The relevant portion of the CIT(A) order is extracted as under : "Disallowance of expenses under 40(a)(i) / 40(a)(ia) : 5.1. As regards disallowance of expenses under 40(a)(i)/40(a)(ia), it has been submitted that the company had determined the rate of tax to be deducted and following the judgments that were prevalent at the time of tax deduction, Supreme Court in the case of Tata Consultancy Services and jurisdictional Tribunal in the case of Samsung Electronics Co. Ltd, the appellant submitted that the said judgment shall not be applicable since it was pronounced on 15/10/2011 and Velankani Mauritius Ltd., wher ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... refore, the payment was royalty and disallowable. On appeal: Held, (i) that mere purchase of software, a copyrighted article, for utilisation of computers cannot be considered as purchase of copyright and royalty. The assessee did not acquire any rights for making copies, selling or acquiring which generally could be considered within the definition of "royalty". Explanation 2 to section 9(1)(vi) cannot be applied to purchase of a copyrighted software, which does not involve any commercial exploitation thereof. The assessee simply purchased software delivered along with computer hardware for utilization in the day-to-day business." 5.3. Relying on the above deci sion, the I T A T ' C ' B e nc h , Bangalore upheld the order of the CIT(A) who had observed that the Assessee did not have the benefit of the clarification brought about by the retrospective amendment that the payments tantamount to payment for royalty and consequently tax was to be de ducted u/ s 194J. T he law as it existed on the date when the payment for obtaining the software was made, has not categorically laid down that tax is required to be deducted. It is impossible to fasten liability f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cting the audit adjustments made in the Appellant's financial statements amounting to INR 8,34,62,981 and adding back the same to the taxable income by alleging that the same is suppressed income of the Appellant. 35. As far as ground No.4 is concerned, the facts are that during the assessment proceedings, the AO issued a notice seeking details of the Foreign Inward Remittances Certificate (FIRC) statement regarding receipt of export of services. In response to the notice, the Assessee filed the FIRCs and reconciliation of FIRCs with sales invoices for the FY 2009-10. There was a difference in the total revenue as recorded in the financial statements and the total of the FIRCs. The AO sought reasons for difference between the revenue recorded in the financial statements amounting to INR 1,68,51,47,369 vis-à-vis revenue as per the invoices raised amounting to INR 1,76,86,10,350. 36. In response to the same, it was submitted by the Assessee that it works on cost plus model, wherein the invoices are raised based on an estimated cost after adding the agreed percentage of mark-up on the same on a monthly basis. However, at the year-end, the actual costs were lesser than the est ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Standard ('AS') - 9. According to AS - 9, revenue is recognized based on the percentage completion method which is on the basis of associated costs incurred towards rendering the services. In this regard, the revenue recognition policy of the Assessee as mentioned in Note L (iv) of the financials which is reproduced below was brought to our notice : "(vi) Revenue recognition- Revenue from Research and development is recognised as services are rendered, on cost plus basis, and billed as per the terms of the Master Services Agreement dated November 01, 2007 between the Company and VMware Bermuda Limited, Bermuda. Revenue from Marketing support services is recognised as services are rendered, on a cost plus basis, based on services rendered and billed as per the terms of the Master Services Agreement dated November 01, 2007 between the Company and VMware International Ltd, Ireland. Revenue from IT Enabled services is recognised as services are rendered, on a cost plus basis, based on services rendered and billed as per the terms of the Master Services Agreement dated November 01, 2007 between the Company and VMware International Ltd, Ireland." 39. The learned counsel submitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee Note F of the financial statements). To the extent the service tax was recorded as an asset, the corresponding cost was reduced. Given that the Assessee follows cost plus model wherein the revenue is a function of cost, the corresponding revenue would also be reduced. The excess amount as invoiced to the customer due to the above was recorded under 'current liability' in the balance sheet of the Assessee as advance received from VMware Bermuda Limited (note G to the financial statements). The above facts are explained by way of the following illustration: Particulars Revenue as per invoice Revenue post trueup/ down of costs Salary cost 100 100 Rental expenses 150 150 Service tax/ VAT refund 30 - Total cost (A) 280 250 Margin on cost at 15% (B) 42 37.5 Total value of revenue (A+B) 322 287.5 Excess revenue recorded subsequently adjusted at the time of audit 34.5 It was submitted that the AO and CIT(A) failed to appreciate the fact that the Assessee follows cost plus model and the revenue is a function of cost. The revenue as per financials has been arrived by applying the agreed mark-up on the revised cost. The learned AO failed to appreciate that due ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the Revenue's appeal before this Hon'ble Tribunal, since the above amount would form part of the said adjustment, no further adjustment can be made by the AO in this regard. It was submitted that when any transaction is a subject matter of the transfer pricing provisions, then the other general provisions of the Act cannot be applied simultaneously. In this regard, the learned counsel brought to our notice a decision of ITAT Bangalore rendered in the case of M/s. Herbalife International India Pvt. Ltd [IT(TP)A Nos.1679/Bang/2012 & 184/Bang/2013] wherein the Tribunal held as follows: "We have considered the rival submissions as well as the relevant material on record. This transaction of payment of administrative service fee has been declared by the assessee as international transaction and is also subjected to TP provisions of sec.92CA, however, the AO made an alternative addition by invoking the provisions of sec.40A(2) of the Act. The AO allowed only 2% of the turnover amounting to ₹ 1,02,62,530/- and the balance of ₹ 4,81,97,802/- has been disallowed under section 40A(2) of the Act. There is no dispute that the transaction has been reported by the assessee as i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es. The assessee is, therefore, directed to give a complete breakup of the difference between the revenue recorded in financial statements and as per the invoices and correlate the same with the cost estimates and as to how both are reflected in the financial statements. The AO will afford opportunity of being heard to the assessee before deciding the issue. 44. In the result, the appeal by the Revenue is dismissed while appeal by the assessee is partly allowed. 45. Now we will take up cross appeals of assessee and Revenue for Assessment Year 2011-12 against the order of CIT(A)-7, Bangalore, dated 21.11.2017. The facts of the case for Assessment Year 2011-12 are identical to the facts as it prevailed in Assessment Year 2010-11. The grounds of appeal of the Revenue are identical rather verbatim the same as in Assessment Year 2010-11. We construe the grounds of appeal of Revenue as one relating to determination of ALP in SWD services and MSS segment only and not in relation to ITES segment. 46. SOFTWARE DEVELOPMENT SERVICES SEGMENT : The details of financials and profit margins in SWD services segment and the computation of ALP as done by the AO/TPO are as follows: Net mark-up o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... count of foreign exchange fluctuation while computing the margin of the Assesseeand the comparable companies as the same is operating in nature. In view of the reliefs granted by the CIT(A), the TP adjustment made to the SWD services segment would stand deleted. 48. The learned Counsel for Assessee submitted that if Revenue's appeal in SWD services segment are decided against the Revenue then he would not press for adjudication the grounds raised by the assessee on SWD services segment in its appeal. As far as Revenue's appeal is concerned, the first aspect which we notice is that the grounds of appeal are general and vague with no reference to any particular company that was excluded by the CIT(A) as not comparable with assessee. In ground No.4, there is a reference to 2 companies in SWD service segment but there is no name of any company specified therein. In ground No.9, there is a reference to ICRA Technoanalytics Ltd., have been excluded by applying turnover filter which is factually incorrect. This company was excluded on the ground that income from SWD service segment was less than 75% of the total revenue. Since the grounds of appeal of the Revenue with reference to SWD se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The Revenue has specifically challenged the exclusion of ICRA Techno Analytics Ltd. vide ground No. 9 and exclusion of 2 companies as being functionally dissimilar vide ground No. 4. However, the specific 2 comparables whose exclusion is challenged by the Revenue is not specified. Ground No.13 with regard to this segment is also vague. Hence, the appeal of the Revenue with regard to this segment is dismissed. Since the Revenue's appeal is dismissed by upholding the order of the CIT(A) directing exclusion of the companies the learned Counsel for Assessee submitted that the Assessee's appeal to the extent it challenges the order of the CIT(A) upholding the action of the TPO would not have to be adjudicated as no adjustment would survive and consequently the same would become academic in nature. Hence, the assessee's appeal challenging CIT(A)'s order in this segment are dismissed as infructuous. 51. The other grounds in Revenue's appeal that require adjudication is ground Nos.2 to 3 relating to computation of deduction under section 10A of the Act. As far as Grd.No.2 raised by the Revenue is concerned, the same is with regard to exclusion of telecommunication expenses and expenses in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in holding that no details and documentary evidence were filed establishing its claim. In the assessment order passed for AY 2009-10 and AY 2010-11, certain expenses were disallowed by holding the same to be capital in nature. The details of the same are mentioned below: Particulars AY 2009-10 Amount (in INR ) AY 2010-11 Amount (in INR) Computers and software 96,16,777 1,77,97,245 Office Equipment 9,90,797 71,45,092 Total 1,06,07,574 2,49,42,337 The AO granted depreciation as per the applicable rates in the AYs 2009-10 and 2010-11. The AO did not allow depreciation on such expenses treated as capital in nature in AY 2009-10 & 2010-11 during the year under consideration i.e., AY 2011- 12. In our view, allowance of depreciation on expenses considered as capital expenditure in AYs 2009-10 and 2010-11 is consequential in nature and accordingly, should be allowed in Assessment Year 2011-12. The written down value of the earlier year cannot be tampered with by the AO in subsequent year. We therefore hold that the disallowance of depreciation should be deleted. We hold and direct accordingly and allow ground No.4. 54. In ground No.5, the assessee has challenged the ord ..... X X X X Extracts X X X X X X X X Extracts X X X X
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