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TMI Blog2022 (5) TMI 1645X X X X Extracts X X X X X X X X Extracts X X X X ..... es on software licences and software from the parent company - As decided in own case [ 2022 (3) TMI 714 - ITAT BANGALORE] , ITSS[Information Technology Support Service] cost is to be treated as revenue expense. Accordingly, the addition made by the AO in this regard by treating the said expenditure as capital, is deleted. In the result, these grounds of appeal are allowed - dismiss ground No.3 raised by the Revenue. TP Adjustment - depreciation of Arm s Length Price (ALP) in respect of international transaction of providing marking support services by the assessee to its AE - comparable selection - HELD THAT:- Companies were rightly regarded as functionally not comparable with assessee rendering MSS by the CIT(A). TP Adjustment in the Software Development Services segment (SWD Segment) - international transaction with TI US, the assessee entered into a Bilateral Advance Price Agreement (BAPA) accepting profit margin of 17.50% - as asked rate agreed under BAPA in respect of international transaction with TI US should also be applied to the transaction with Natsem Malaysia - HELD THAT:- As neither the assessee or TPO have not made any distinction between US and Non-US AE transaction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he amount in question cannot be regarded as a capital expenditure because the capital asset never reached the assessee and got damaged in transit. The loss cannot be regarded as a capital loss just because it was a sum paid for purchase of a capital asset. The loss in question in our view is allowable under section 28 r.w.s 29 of the Act as a loss incidental to the business of the assessee. We are therefore of the view that the Revenue authorities were not justified in not accepting the claim of the assessee for deduction. Case of Graphite India Ltd. [ 1996 (6) TMI 73 - CALCUTTA HIGH COURT] was squarely applicable as held that the expenditure was allowable as incurred wholly and exclusively for the purpose of the assessee s business. X X X X Extracts X X X X X X X X Extracts X X X X ..... software. The assessee while computing its business income, claimed deduction of a sum of Rs.1,62,24,40,373/- under the head "Data Automation Software Expenses" (EDA). The AO noticed that identical claim was made by the assessee in the Assessment Year 2008-09 and 2009-10 and in those Assessment Years similar expenditure was treated as capital expenditure and depreciation at 60% was allowed. Following the reasoning given in the aforesaid orders, the AO treated the EDA as capital expenditure and allowed 60% depreciation. Consequently, a sum of Rs.97,34,64,223/- was disallowed by the AO. The assessee pointed out computational errors and the AO accepted the same and the ultimate disallowance on account of EDA expense was a sum of Rs.15,58,13,566/-. 5. The assessee filed appeal against the order of the AO. Before the CIT(A), the assessee pointed out EDA is a category of software tools for designing the electronic systems such as printed circuit boards and integrated circuits. The EDA is provided by the ground entity outside India (TI Inc.) and the cost for providing such services are allocated on the basis of actual usage. The tools work together in a design flow that the chip designer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . There is no acquisition of any asset, thus, the cost can be described as revenue expenditure. It is also pertinent to mention here that in the immediate preceding two years, the CIT(A) has agreed with the submissions of the Appellant that the said expenditure is revenue in nature. As the facts and circumstances of the current year being identical to that of the preceding years adjudicated by my predecessor, I do not find any reason to deviate from the findings. Accordingly, I allow this ground of the Appellant by treating the expenditure of Rs 1,622,440,373 incurred towards Data Automation Software ("EDA") as revenue." 8. Aggrieved by the order of the CIT(A), Revenue has raised ground No.2 before the Tribunal. 9. Learned DR pointed out that the agreement for rendering EDA services was used for manufacturing certain semiconductor components and products and the EDA expenditure in question helps the assessee to bring into existence the capital asset and therefore the expenditure ought to have been treated as a capital expenditure. It was submitted that the expenditure was part of the profit making operative and therefore ought to be considered as capital expenditure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ired to be capitalized by the assessee. Assessee's relies on the Hon'ble Supreme court decision in the case of Empire Jute Co Ltd Vs CIT [124 ITR 1] is misplaced since thedecision was given by the Hon'ble Court in a different set of facts and circumstances. The assessee has not stated or clarified in its submission dated 28.07.2011 as to how it has applied the judgment in the case of Empire Jute Co Ltd in its case. 5.4 The computer software expenses have been held to be capital in nature by the Hon'ble Rajasthan High Court in the case of CIT Vs Arawali Construction Co. (P) Ltd. (259 ITR 30). The Hon'ble Court held as under: "The fact on record is that the payment of Rs 1,38,360/- was not made as consultancy fee to Hindustan Computers Ltd_ in fact, the payment was made for outright sale of 'computer software' which is used as technique in mining operations. The finding of the Commissioner (Appeals) was that the acquisition of software cannot be treated to be an asset of endurable nature. If the programme is used in one mining to another mining operation, why it should not be treated as capital asset and expenditure on that, capital expenditure. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fact that what was paid by the assessee was of the expenses incurred by TI Incorporated, USA, for use of computer software which it allowed its group companies to use. He pointed out that US parent company charged the assessee on the basis of the actual use of software. He therefore submitted that the expenditure was nothing but the right to use the computer software on the basis of actual usage which did not give any benefit of enduring nature to the assessee nor did it result in any asset coming into existence. 11. We have carefully considered the rival submissions and are of the view that the nature of expenses is identical to the expenses that was considered by the Tribunal in Assessment Year 2008-09. The Tribunal, after analyzing the terms of the agreement, has come to the conclusion that assessee acquired no right or interest of whatsoever in the EDA tools and had only the right to use software. The use of the software was no doubt connected to the business but did not result in any asset coming into existence. The Tribunal held that the expenditure was revenue in nature. We are of the view that in the light of the similarity of facts with regard to these expenses, the decis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll be charged by the Purchaser to TI or credited to the Purchaser as provided in 2.4. 2.2 IT costs will be allocated to Purchaser on the basis of a fixed activity based per person charge. Any cost incurred by TI not covered by the per person charge will be allocated to Purchaser on a mutually agreed basis. TI will periodically notify Purchaser of the amounts of the per person charge used to determine the allocable charge. 14. The AO took the view that the expenditure was capital in nature and the assessee has purchased software licences and software from the parent company which is factually incorrect. The AO however allowed depreciation at 60%. 15. On appeal by the assessee, the CIT(A) held that the expenditure was Revenue in nature, as follows: "Having considered the submissions, it is evidently clear that the Appellant being charged for the licenses used by its employees from the software licenses purchased and owned by the parent company, i.e., TI Inc. The License Cost Allocation Agreement makes it amply clear. The AO, on the other hand, has relied only on the invoices on stand-alone basis. The cost allocation method provided in the License Cost Allocation Agreement mak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nies whose average profit margin was 24.80%. The TPO ultimately computed the ALP as follows: "Computation of Arm's Length Price: The arithmetic mean of the Profit Level indicators is taken as the Arm's length margin. Based on this, the Arm's length price of the Marketing support services rendered by you is computed adopting the ALP as under: Arm's length mean margin 24.80% Operating Cost Rs. 37,24,46,533 Arm's Length Margin of the Operating Cost 24.80% A rm 's Length Price (ALP) 124.80% of operating cost Rs. 46,48,13,184 Price received Rs. 39,10,68,860 Shortfall being adjustment u/s 92CA Rs. 7,37,44,413 Thus a sum of Rs.7,37,44,413 was added to the total income of the Assessee on account of determination of ALP. 18. Aggrieved by the order of the TPO which was incorporated in the draft Order of Assessment and the final Order of Assessment, assessee preferred appeal before the CIT(A). The CIT(A) accepted submission of the assessee and excluded 4 comparable companies out of the 7 comparable companies chosen by the TPO. The Revenue is aggrieved by the order of the CIT(A) for excluding 3 out of the 4 comparable companies excluded by the CIT(A). ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ervices Pvt. Ltd., cannot be regarded as a comparable company because it was engaged in the business of rendering pay roll processing services. Vide paras 41 to 42 of the said decision, Killick Agencies and Marketing Ltd., was held to be not comparable because it was acting as agent for various foreign principles for sale of equipment, dredgers, dredging equipment, steerable rudder propellers, maritime and aviation lighting, acoustic communication equipment etc. The Tribunal also held that this company does not satisfy the 75% export revenue filter. This company was also rendering export of micro switches, engineering items, acoustic items and head sets and no segmental details of revenue are available. In our view, the ratio laid down in the aforesaid decisions will be squarely applicable to the present case also. The 3 companies were rightly regarded as functionally not comparable by the CIT(A). We find no grounds to interfere in the order of the CIT(A) and accordingly dismiss ground Nos.4 to 6 raised by the Revenue. 22. In the result, appeal of the revenue is dismissed. 23. IT(TP)A No.1446/Bang/2019 and ITA No.1075/Bang/2019 : ITA No.1075/Bang/2019 is an appeal by the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rned, the facts are that the assessee rendered SWD services to its AE Texas Instrument Inc. (TI US) and Natsem Malaysia. The volume of international transaction with the aforesaid two AE was as follows: Sl. No. Name of the AE Value of the transaction in INR Value of the transaction in % terms Remarks 1 TI US 10,23,83,42,951 98.43% Covered by BAPA, wherein the ALP has been determined at 17.50% 2 Natsem Malaysia 16,37,75,973 1.57% Total 10,40,21,18,924 100.00% 27. With regard to the international transaction with TI US, the assessee entered into a Bilateral Advance Price Agreement (BAPA) accepting profit margin of 17.50%. The assessee made a prayer before CIT(A) that the same percentage of profit margin as agreed in the BAPA should be applied to transaction with Natsem Malaysia also. In this regard the assessee highlighted before the CIT(A) the nature of services rendered by the assessee to both TI US and Natsem Malaysia was one and the same. The arguments in this regard are set out in the order of the CIT(A) at pages-36 to 43 of his order. The CIT(A) agreed with the submissions and held that the rate agreed under BAPA in respect of international transaction with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ounds of appeal before the Tribunal and the argument of the learned DR was that the Functions performed, Assets employed and risks assumed in the transactions between the assessee and TI Us and that with Natsem Malaysia were different. The other submission was that the BAPA is binding only on the parties to the agreement but on Natsem Malaysia which is not a party to the BAPA. The learned counsel for the assessee reiterated submissions made before CIT(A) and highlighted as to how the TPO did not distinguish the services rendered by TI US and Natsem Malaysia as different and adopted results of both the companies for the purpose of comparison. 29. We have carefully considered the rival submissions. Identical submissions on identical facts was considered by this Tribunal in the case of Dell International Services India Pvt. Ltd. Vs. JCIT (LTU) in IT (TP) A No.637 & 639/Bang/2016 for AY 2010-11 and the Tribunal in its order dated 3.8.2021 held as follows: "40. As far as the additional ground is concerned, it is seen that subsequent to filing of the present appeal, the Assessee's AE located in the United States of America ("US") opted for the Mutual Agreement Procedure ("MAP") procee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... missions on the additional ground of appeal made by the learned Counsel for assessee. 43. We have considered the rival submissions and find merit in the same. As pointed out by the learned Counsel for assessee, the assessee or TPO have not made any distinction between US and Non-US AE transactions. In such circumstances, the margin accepted in MAP in respect of US AE transaction has to be regarded as Arm's Length mark-up cost for the Non-US AE transaction in the ITES segment. We hold and direct accordingly. In view of the above conclusion, the other grounds raised by the Revenue and assessee in their appeals on determination of ALP in the ITES segment become infructuous and calls for no adjudication and are dismissed." 30. We find that in the present case also neither the assessee or TPO have not made any distinction between US and Non-US AE transactions. In such circumstances, the margin accepted in MAP in respect of US AE transaction has to be regarded as Arm's Length mark-up cost for the Non-US AE transaction also. Respectfully following the aforesaid decision, we uphold the order of CIT(A) and find no merits in the grounds raised by the revenue in its appeal. 31. We shall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lready upheld exclusion of this company on the ground of functional comparability. The functions performed in Assessment Year 2012-13 are also identical and therefore this company was to be rightly excluded from the list of comparable companies by the CIT(A). As far as exclusion of Just Dial Ltd., is concerned, it is clear that this company is engaged in local search related services in India through multiple platforms. The nature of services rendered by this company is providing a list of available service providers and this cannot be equated to specific marketing support services which the assessee performs to its AE. Apart from that, in Assessment Year 2015-16, in assessee's own case, the TPO has himself excluded this company from the list of comparable companies. This company owns intangibles in the nature of goodwill, computer software, website and unique telephone numbers. Besides the above, the ITAT, Delhi Bench in the case of Nokia India Ltd., in ITA No.6502/Del/2017 in its order dated 26.12.2021 excluded this company on the ground that it is functionally not comparable to the company providing marketing support services. The Tribunal held that Just Dial Ltd., operates loca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appeal of the assessee and hold that the expenditure in question is revenue expenditure. 36. In the result, appeal filed by the assessee for Assessment Year 2012- 13 is allowed. 37. IT(TP)A No.1447/Bang/2019 and ITA No.1076/Bang/2019 : IT(TP)A No.1447/Bang/2019 is an appeal by the Revenue while ITA No.1076/Bang/2019 is an appeal by the assessee. Both these appeals are directed against the order dated 18.03.2019 of CIT(A), Bengaluru-2, Bengaluru, relating to Assessment Year 2013-14. 38. First, we shall take up appeal of the Revenue for consideration. There is a delay of 29 days in filing this appeal by the Revenue which is explained as owing to the regular incumbent going on leave and consequently delay in filing the appeal. We find the reasons assigned for delay in filing the appeal as proper and sufficient reason and hence the delay in filing the appeal is condoned. 39. The following are the grounds of appeal raised by the Revenue in this regard: TP adjustment on SWD segment: a) The Ld. CIT(A) has erred in law in directing that the operating margin decided in the Bilateral APA with USA for the US AE which was decided by the APA authorities after examining the FAR of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The assessee chose companies who are engaged in providing similar services such as the assessee. The assessee identified companies whose average arithmetic mean of profit margin was comparable with the Operating margin of the assessee. The assessee therefore claimed that the price it charged in the international transaction should be considered as at Arm's Length. 42. The Transfer Pricing Officer (TPO) to whom the determination of ALP was referred to by the AO, accepted TNMM as the MAM and also used the same PLI for comparison i.e., OP/TC. He also selected comparable companies from database. The TPO identified 6 companies as comparable with the assessee company and worked out the average arithmetic mean of their profit margins at 12.06%. 43. The TPO computed the Addition to total income on account of adjustment to ALP as follows: 23.2 The taxpayer's PLI is 6.00% whereas that of comparables is 9.73%. The adjustment in this segment is calculated as under: Arm's Length Mean Margin on cost 9.73% Operating Cost 68,33,33,551 Arm's Length Price(ALP) 74,98,21,905 109.73% of Operating Cost) Price Received 72,43,33,562 Shortfall being adjustment u/s 92CA: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f a sum of Rs.71,28,124/- by the Revenue authorities. The facts with regard to this addition are that the assessee claimed an expenditure of Rs. 71,28,124 towards loans and advances written off in the profit and loss account. The assessee was asked to furnish the details of expenditure and the substantiation for the claim.The assessee submitted that the advances written off represents the under recovery of insurance claim on damaged shipments. The same was reflected as loans and advances in the earlier year; and on settlement of the insurance claim, the under recovery has been written off. The assessee made further submission stating that, the same is revenue in nature and not capital. According to the assessee, the item of loss is incidental to the business of the assessee and it is allowable deduction u/s 37 of the Act. The assessee further stated that it can assume the nature of trading loss and should be allowed as deduction while computing the income from business and profession. The assessee has also quoted some of the judicial pronouncements in support of its claim that the said loss is not capital in nature. 48. The AO however did not accept the plea of the Assessee. He fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore, the advances write off claim of the assessee cannot be allowed. The AO further went on to hold that the loss is in the nature of capital loss as the advance was for acquiring the capital assets and purchase and sale of machineries/equipments is not the business of the assessee. Therefore the claim of the assessee in respect of under recovery of loss towards damaged machinery can not be allowed even u/s 37(1) of the Income Tax Act, 1961. Reliance was placed by the AO on the decision of Hon'ble Supreme Court in the case of Hasimara Industries Ltd. vs. CIT [1998] 231 ITR 842. The AO thus held that the assessee is not eligible to claim Advances written off amount of Rs. 71,28,124 and disallowed and added back to the total income. 49. The CIT(A) upheld the order of the AO. The assessee has preferred the appeal before the Tribunal. We have heard the rival submissions. From the facts of the case, it is clear that the assessee purchased EMC storage primary hardware. It is not disputed that this asset was for the purpose of business of the assessee. The asset was received in a damaged condition and the assessee lodged insurance claim towards the damaged equipment. The insurance cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sset of enduring in nature. The Tribunal further found that the decision of the Calcutta High Court in the case of Hindustan Aluminium Corporation Ltd. v. CIT (1986) 55 CTR (Cal.) 237: (1986) 159 ITR 673 (Cal) was applicable and following that decision held that the expenditure was allowable as incurred wholly and exclusively for the purpose of the assessee's business. Therefore, the Tribunal deleted the disallowance. The case relied upon by the Tribunal was subsequently followed in the case of Asiatic Oxygen Ltd v. CIT (1991) 190 ITR 328 (Cal). This Court in the said case reiterated the view taken in Hindustan Aluminium Corporation Ltd's case (supra). According to us, question No 4 in this reference stands concluded by the aforementioned two decisions. We, accordingly, answer question No. 4 in the affirmative and in favour of the assessee and against the Revenue." 50. Following the aforesaid decision, we direct that the claim made by the assessee should be allowed. 51. In the result, ground of appeal of the assessee is allowed and the appeal of the assessee is also allowed. 52. ITA No.365/Bang/2019 and IT(TP)A No.606/Bang/2019 IT(TP)A No.606/Bang/2019 is an appeal by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mination of ALP under the income tax Act. 5. Whether the order of the CIT(A) in imposing conditions is beyond the scope of law and business reality by rejecting all close comparable on one or the other ground, without appreciating that not two companies can ever be same. 55. As far as grounds raised by the Revenue with regard to TP adjustments on software development services (SWD) segment is concerned, the facts are identical to the facts on similar grounds in Assessment Year 2012-13. For the reasons stated in deciding the identical grounds in Assessment Year 2012-13, we find no merits in these grounds raised by the Revenue. 56. As far as ground No.3 is concerned, the Transfer Pricing adjustment in the MSS segment for AY 2012-13. As far as the provision of MSS by the assessee to its AE is concerned, the assessee filed a Transfer Pricing Study (TP Study) to justify the price paid in the international Transaction as at ALP by adopting the Transaction Net Margin Method (TNMM) as the Most Appropriate Method (MAM) of determining ALP. The assessee selected Operating Profit/Operating Cost (OP/OC) as the Profit Level Indicator (PLI) for the purpose of comparison. The OP/OC of the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Media Corp Ltd., is concerned, this company is engaged in event management services and earns revenue from sale of advertisement and event management. Besides the above, extraordinary events occurred in the previous year relevant to Assessment year 2014-15. Considering all these aspects, this Tribunal in the case of Sales Force.Com Vs. DCIT in ITA No.3286/Bang/2018 order dated 22.03.2021 excluded this company from the list of companies in the market support services segment. Following the said order, we uphold exclusion of I Media Corp Limited. As far as exclusion of Irunway India Private Limited is concerned, this company is basically engaged in IPR related services and has related party transaction exceeding the threshold of 25%. This company was considered as not comparable with a company rendering MSS by this Tribunal in the case of Sales Force.Com (supra). We, therefore, uphold the order of the CIT(A) in excluding the 3 companies from the list of comparable companies. 61. In the result, appeal by the Revenue is dismissed. 62. As far as the appeal by the assessee in ITA No.365/Bang/2019 is concerned, the only issue in this appeal is with regard to disallowance of information ..... X X X X Extracts X X X X X X X X Extracts X X X X
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