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TMI Blog2024 (12) TMI 1561X X X X Extracts X X X X X X X X Extracts X X X X ..... ect the AO to grant relief by way of restricting the levy of the dividend distribution tax, on the dividend distributed/paid to Robert Bosch GmbH, Germany, to 10% in terms of Article 10 of the DTAA between India and Germany, instead of 16.2225% charged in terms of section 115-0 of the Act. 2. The Appellant pleads the Hon'ble ITAT to direct the AO to refund the excess Dividend Distribution Tax paid by the Appellant as per section 237 of the Act. 3. Whether on the facts and in the circumstances of the case and in law, the Education Cess and Higher and Secondary Education Cess, being cess on tax payable on Total Income under the provisions of the Act other than section 115JB of the Act is allowable as a deduction? 4. The Appellant craves leave to add to, amend or alter the ground herein. 5. For these and other grounds that may be urged at the time of hearing, the appellant prays for appropriate relief." 4. In the application filed for the admission of the additional ground, the assessee pleaded that the issues raised in the additional grounds of appeal are legal in nature and go to the root of the matter. Accordingly, the learned Authorised Representative (AR) for the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... use (i) of the Explanation to Section 80JJAA(2) of the Act, "additional wages" refers to wages paid to new regular workmen employed during the previous year, provided the number of such workmen is not less than 10% of the existing employees as on the last day of the preceding year. Furthermore, clause (ii)(c) of the Explanation specifies that "regular workmen" are those who have completed at least 300 days of employment in the previous year. Based on this legal framework, the AO found that the number of new regular workmen employed by the assessee during the year who completed 300 days stood at 320 only, whereas the total number of existing workmen on 1st April 2011 was 3,582 only. Therefore, the condition of a 10% increase in the number of employees was not fulfilled. Similarly, in the immediate previous assessment year (A.Y. 2011-12), the assessee employed 160 new workmen who completed 300 days, which was also less than 10% of the existing workmen as on 1st April 2010. Consequently, the AO concluded that the conditions for claiming a deduction under Section 80JJAA were not met. Hence, the AO disallowed the deduction claim of Rs. 21,16,54,868/- and made a corresponding addition to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) opined that no further deduction under Section 80JJAA could be allowed for units whose profits were already claimed as exempt under Sections 10A or 10AA of the Act. Consequently, the ld. CIT(A) disallowed the claim for these units. 8.5 The ld. CIT(A) further disallowed the deduction under Section 80JJAA of the Act on the grounds that the provision applies only to assessee deriving profits from industrial undertakings engaged in the manufacture or production of articles or things. The ld. CIT(A) held that the appellant assessee, engaged in software development and IT enabled services, did not meet this requirement. 9. Being aggrieved by the order of the learned CIT(A), the assessee is in appeal before us. 10. The learned AR before us filed a paper book running from pages 1 to 750, written submission having 13 pages, a chart explaining the transfer pricing issues having 11 pages, various case laws along with its compilation and contended that the number of employees employed in the year in dispute is far exceeding 10% of the employees as on the last day of the previous year. The ld. AR in support of his contention filed the auditors certificate place on pages 524 - 525 of the pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reads as under: Explanation 1.-For the purposes of this sub-clause, the expression "industrial undertaking" means any undertaking which is engaged in- (a) the manufacture or processing of goods; or (aa) the manufacture of computer software or recording of programme on any disc, tape, perforated media or other information device; or (b) the business of generation or distribution of electricity or any other form of power; or (ba) the business of providing telecommunication services; or (c) mining; or (d) the construction of ships; or (da) the business of ship-breaking; or (e) the operation of ships or aircrafts or construction or operation of rail systems. 12.2 The above definition includes the manufacture of computer software as an industrial undertaking. Since the term "industrial undertaking" is not specifically defined for the purposes of Section 80JJAA of the Act or any other relevant provisions of the Act, we are inclined to rely on the definition provided under Section 10(15) of the Act. The appellant assessee is engaged in the development of computer software, IT-enabled services, and the development of embedded software for automobile components and access ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vant observations of the Hon'ble Supreme Court are as follows: The word 'production' or 'produce' when used in juxtaposition with the word 'manufacture' takes in bringing into existence new goods by a process which may or may not amount to manufacture. It also takes in all the byproducts, intermediate products and residual products which emerge in the course of manufacture of goods. 14.4 The development of computer software involves intellectual and technical efforts to create a product or service with economic value, thereby fulfilling the criteria for production. Inputs such as human expertise, technology, and tools (e.g., coding platforms) are combined to produce software, aligning with the general definition of production. The output, typically intangible (a software application or code), is a hallmark of production in knowledge-based or service-oriented industries. Therefore, in our considered opinion, the activity of the assessee amounts to the production of an article or thing. 14.5 Before concluding, it is important to note that in the immediately preceding assessment year, the assessee had also claimed a deduction under Section 80JJAA of the Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... preceding assessment year, i.e., A.Y. 2011-12, in IT(TP)A No. 608/Bang/2016. In its order dated 02-02-2022, the Tribunal held as under: We have perused the submissions advanced by both sides in light of records placed before us. On bare reading of section 80JJ AA of the Act, following requirements emerges to be fulfilled in order to claim deduction under the section: 1. The Assessee should be an Indian Company and the gross total income of the Assessee should include profits and gains derived from any industrial undertaking engaged in the manufacture or production of article or thing. Admittedly this condition is satisfied in the case of the Assessee. 2. There are certain prohibition laid down in Sec. 80JJAA(2) of the Act and it is not the case of the Ld.AO that these prohibitions are applicable in the case of the Assessee. 3. The new workmen employed must be a regular workmen and the number of such new workmen employed should be in excess of one hundred workmen employed during the previous year. 4. The increase in the number of regular workmen employed during the year should not be less than ten per cent of existing number of workmen employed in such undertaking as on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . With these directions, the Tribunal set aside the issue to the file of the Assessing Officer (AO). 15.5 At the time of the hearing before us in the matter of the current assessment year, the learned AR of the assessee referred to a recent judgment of the Hon'ble Karnataka High Court in the case of Aquarelle India Ltd. vs. DCIT (157 taxmann.com 244). In this judgment, the Hon'ble High Court observed that the requirement of 300 days of employment should be considered cumulatively across both the previous year and the succeeding year. As such, for availing the benefit under Section 80JJAA of the Act, it is not mandatory for the workmen to have worked for 300 days in a single previous year. The relevant observation of the Hon'ble High Court reads as under: 12. After considering the aspect of working for 300 days in the previous year, this Court in Texas Instruments has held that period of 300 days could be taken into consideration both in the previous and succeeding years for the purpose of availing the benefit under section 80JJAA of the Act and it is not required that workmen works for 300 days in the previous year relevant to assessment year. 15.6 The order of the Tribunal in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y. Consequently, the AO disallowed the claim and made an addition of Rs. 13,73,17,444 only. 18. Aggrieved, the assessee, preferred an appeal before the learned CIT(A), reiterating that it was engaged in the business of developing embedded software for automobile components and accessories. The production/development of such software requires significant effort, processes, and human involvement, and therefore, should be considered as the business of "manufacture or production of articles or things." The assessee placed reliance on the order of the Tribunal in the case of Manhattan Associates (India) Development Centre (112 taxmann.com 200) and the judgment of the Hon'ble Supreme Court in the case of Chrestien Mica Industries Ltd. vs. State of Bihar [1961] 12 STC 150. 18.1 The assessee also cited the judgment of the Hon'ble Karnataka High Court in CIT vs. Datacons Pvt. Ltd. (21 taxman 341), and the Hon'ble Delhi High Court in CIT vs. Radio Today Broadcasting Ltd. (64 taxmann.com 164). 18.2 Additionally, the assessee referred to the definition of "activity of article or thing or operation" under the 14th Schedule of the Act, which includes "electronics, including comput ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he contentions of the assessee with regard to production of product is rejected. The legislative intent is very clear to provide the incentive for specified industries producing article or thing in factory/business premises using plant/machinery. That is the reason why plant/machinery installed office/residential premises are not made eligible. In sections like 10A/10AA/10B etc, specific mention is made for computer services so as to allow deduction for assesses engaged in IT sector. Non-inclusion of computer services or other services clearly shows the legislative intent not to include them in the amobit of Sec. 32. The case laws mentioned by the assessee do not cover the facts of the case. In the case of CIT vs. Oracle software India (2010T1OL-04-SC-IT), The Court in the context of Sec. 801A stated that producing new compact discs with loaded content constitutes manufacture/process. It is pertinent to note that appellant is not engaged in any such manufacture/process. It is also interesting to note the observations of Hon'ble Supreme Court in the very same case which held that "Where the issue arises for determination, the department should study actual process undertaken b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allowance. Probably, in the backdrop of these decision, a definition of 'manufacture' came to be inserted in the Act in section 2(29BA) through Finance Act, 2009. These decisions cannot be applied to the appellant's case, as there are no inputs nor there was any processing of goods. In fact the appellant offered software development as a service and had shown revenue there from in the account. In so far as section 32(1)(iia) is concerned, it covers the assesses who are engaged in manufacture or production of article or thing only. Provision of services for development of software has been kept out of purview of section 32(1)(iia). Therefore, assessee providing software development services is not eligible for additional depreciation. For the detailed discussion above, it is held that software/IT services provided by the assessee do not constitute manufacture/production of article or thing and hence assessee is not eligible for additional depreciation u/s 32(1)(iia) of the Act. All the grounds raised by the assessee are accordingly rejected on this issue and disallowance of AO sustained. Hence, the Ground No. 6, 7 & 8 are dismissed. 19. Being aggrieved by the order of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the production process. 21.4 Given that the assessee is engaged in the production of an article or thing (software), the computers used in the production of such software can be treated as plant and machinery under the provisions of Section 32(1)(iia) of the Act. Therefore, the claim for additional depreciation on the computers used in the production of software is in line with the provisions of the Act. 21.5 In light of the above, we hereby reverse the findings of the learned CIT(A) and allow the assessee's claim for additional depreciation under Section 32(1)(iia) of the Act. 22. The next issue raised by the assessee vide ground No. 15 is that the learned CIT(A) erred in confirming the disallowances of maintenance charges for Rs. 27,71,000/- by treating prior period item. 23. The AO found that the "repair & maintenance charges others" includes an amount of Rs. 27.71 Lakh paid to Coimbatore Hitech Infrastructure Pvt Ltd as maintenance charges at the rate of Rs. 1 Lakh per annum per acer for the period 1st April 2010 to 31st March 2011 and debit note issue by the party in this respect as on 21st January 2011. Thus, the same relates to previous years not to the year unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion, provided they meet the following conditions: * The Expense Must Relate to the Business: It must be a legitimate business expense incurred in the prior period that is subsequently recognized in the current period. * Accrual Basis of Accounting: The expense should have been incurred in the prior period under the accrual accounting method but recognized and paid in the current period. * Adjustment in Books: The accounting treatment of prior period expenses should be appropriately reflected in the books of account for the current period. For instance, adjustments for such expenses should be made through prior period adjustments in the financial statements. * Disclosure Requirements: The prior period expenses should be separately disclosed in the financial statements of the current year, clearly stating the period to which they relate. 28.1 When a prior period expense is allowed as a deduction under Section 37(1), it directly reduces the taxable income for the current period. The expense is typically deducted in the year in which it is crystalized, even though it pertains to a previous period. In holding so we draw support and guidance from the judgment of hon'ble Calcutta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here was any distinguishing feature in the assessment year under consideration to make a departure from the earlier view. [Para 4] 28.2 Now turning to the facts of the present case, we note that the debit note was raised by the party dated 12 September 2011 for the impugned expenses pertaining to the period from 1st April 2010 to 31 March 2011 which is placed on page 587 of the paper book. Thus, it is transpired that the liability to expenses in dispute were crystalised in the year under consideration and therefore the same was claimed as deduction in the current year. 28.3 The 2nd controversy arises whether such expenses were incurred for the purpose of the business and the same were not capital in nature. In this regard, we note that the maintenance charges were paid for the maintenance of the property. There is no information available on record whether such property was purchased by the assessee as investment or for the purpose of the business. In the absence of such information, we are inclined to remit the issue to the file of the AO for fresh adjudication as per the provisions of law after considering the discussion stated above. Hence the ground of appeal of the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts but is carrying on software development businesses. The Ld.Counsel submitted that assessee has computed disallowance at Rs. 36,01,783/- as under: *********** 12. The Ld.Counsel submitted that the entire investments cannot be taken into consideration for disallowance under Rule 8D(2)(iii) at 0.5%. The Ld.DR on the contrary relied on the orders passed by the authorities below. We note that on identical issue, the Coordinate Bench of this Tribunal in assessee's own case observed for Assessment Year 2008-09(supra) as under: "9.1 We heard the parties on this issue. The Ld A.R invited our attention to page 521 of the paper book, wherein the details of investments are given. He submitted that the assessee has made investments only in units of various mutual funds. The aggregate amount of investments made during this year was Rs.90.59 crores. He further submitted the assessee has also invested a sum of Rs.15.00 crores in growth scheme and a sum of Rs.20.26 crores in dividend reinvestment scheme. The assessee has made investments in six schemes only during the year under consideration and it has encashed investments made in the earlier years in four schemes. He submitted that the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he ALP of the international transaction carried out by the assessee with its associated enterprise. 37. The necessary facts are that the assessee company, during the year, is engaged in various types of international transactions with associated enterprises. For transfer pricing purposes, the assessee categorized these transactions into two distinct segments: the Software Development Segment and the ITES Segment. 37.1 Under the Software Development Segment, the assessee reported operating revenue of Rs. 1,600,47,03,775/- and operating costs of Rs. 1,374,06,84,618/-, resulting in an Operating Profit to Operating Cost (OP/OC) ratio of 16.48% only. 37.2 Similarly, under the ITES Segment, the assessee reported operating revenue of Rs. 132,28,05,755/- and operating costs of Rs. 117,12,02,386/-, leading to an OP/OC ratio of 12.94% only. 38.3 In the Transfer Pricing (TP) study, the assessee adopted the Transactional Net Margin Method (TNMM) as the most appropriate method and used the Operating Profit to Operating Cost (OP/OC) ratio as the Profit Level Indicator (PLI). The assessee selected a different set of comparables for both segments and determined the PLI of comparable companies ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1% 38.7 The TPO further made an adjustment on account of working capital and recalculated the arm's length margin for OP/OC at 28.48%, as compared to the margin declared by the assessee at 12.94%. Consequently, the TPO determined an upward adjustment of Rs. 18,19,55,070/- only. 39. The aggrieved assessee filed an appeal before the CIT(A), and among other contentions, objected to the comparability of the new set of comparable companies selected by the TPO. 40. The learned CIT(A), after considering the facts in totality, held that out of the 10 comparable companies selected by the TPO, 2 companies viz, Universal Print Systems Ltd and BNR Udhyod Limited failed the service revenue filter. Consequently, these two companies were excluded by the learned CIT(A) from the set of comparables. Accordingly, the CIT(A) confirmed the comparability of the remaining 8 companies selected by the TPO. 41. Pursuant to the order of the learned CIT(A), the ALP margin was recalculated at 22.90%, as against 28.48% computed by the TPO. Subsequently, the assessee filed a rectification request before the learned CIT(A), highlighting an error in the computation of the margin of one comparable company, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... when calculating the ALP for the assessee, given the fact that the assessee's turnover under the ITES Segment is only Rs. 132.28 crores. In this context, it is relevant to refer to the order of the Tribunal in the case of Autodesk India Private Limited, reported in 96 taxmann.com 263, wherein it was held as follows: 17.7 We have considered the rival submissions. The substantial question of law (Question No. 1 to 3) which was framed by the Hon'ble Delhi High Court in the case of Chryscapital Investment Advisors (India) Pvt. Ltd., (supra) was as to whether comparable can be rejected on the ground that they have exceptionally high profit margins or fluctuation profit margins, as compared to the Assessee in transfer pricing analysis. Therefore as rightly submitted by the learned counsel for the Assessee the observations of the Hon'ble High Court, in so far as it refers to turnover, were in the nature of obiter dictum. Judicial discipline requires that the Tribunal should follow the decision of a non-jurisdiction High Court, even though the said decision is of a non-jurisdictional High Court. We however find that the Hon'ble Bombay High Court in the case of Pentair Wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have already held that the decision rendered in the case of Chriscapital Investment (supra) is obiter dicta and that the ratio decidendi laid down by the Hon'ble Bombay High Court in the case of Pentair (supra) which is favourable to the Assessee has to be followed. Therefore, the decisions cited by the learned DR before us cannot be the basis to hold that high turnover is not relevant criteria for deciding on comparability of companies in determination of ALP under the Transfer Pricing regulations under the Act. For the reasons given above, we uphold the order of the CIT(A) on the issue of application of turnover filter and his action in excluding companies by following the ratio laid down in the case of Genisys Integrating (supra). 44.2 Based on the above findings of the ITAT, we are inclined to exclude companies with a turnover exceeding Rs. 200 crores as comparables while calculating the ALP for the international transactions carried out by the assessee with its Associated Enterprise (AE). According to the assessee, the list of companies with a turnover exceeding Rs. 200 crores is as follows: (i) Infosys BPO Limited (ii) TCS E-Services Ltd 44.3 Hence, we direct the TP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the learned AR that exclusion on account of non-availability of data is no longer valid if the requisite data is now accessible. However, since the functional similarity and other comparability criteria require verification, we remand the matter to the AO/TPO for necessary verification. If, upon examination, the functions of Cameo Corporate Services Ltd. are found to be similar to those of the assessee, and the company satisfies the required filters, it shall be included in the list of comparables for determining the ALP. 46.9 The next contention raised by the learned AR relates to an error in the computation of the margin of the comparable company, E4e Healthcare Services Ltd. The learned AR has pointed out that the TPO, while computing the margin, erroneously treated bank charges as a non-operating cost, which has impacted the margin calculation. 46.10 We find merit in the argument of the learned AR, as bank charges are generally considered an operating expense in the context of transfer pricing analysis. However, this issue requires factual verification to determine whether the treatment of bank charges as non-operating cost was indeed an error. 46.11 Accordingly, we rema ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cordingly, we set aside the issue to the file of the AO for fresh adjudication as per the provisions of law. Hence the additional ground raised by the assessee is allowed for statistical purposes. 47.2 The assessee in the 2nd additional ground of appeal requested to allow the deduction for the education cess, and higher and secondary education cess while computing the income under normal computation. The assessee in the additional ground of appeal has claimed the deduction of the cess paid on the income tax on the reasoning that same is revenue expenditure. However, we note that there is an amendment under the provisions of section 40(a)(ii) of the Act by the Finance Act 2022 wherein an explanation has been inserted with retrospective effect i.e. assessment year 2005-06. The amendment reads under: [Explanation 3.-For the removal of doubts, it is hereby clarified that for the purposes of this sub-clause, the term "tax" shall include and shall be deemed to have always included any surcharge or cess, by whatever name called, on such tax;] 47.3 As per the above amendment, there remains no ambiguity to the fact that the assessee cannot claim the deduction of the cess by treating the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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