Income Tax Appellate Tribunal - Chennai
S.R.A.Systems Ltd., Chennai vs Assessee on 6 January, 2014
आयकर अपील य अ धकरण, 'सी' यायपीठ, चे नई
IN THE INCOME TAX APPELLATE TRIBUNAL
"C" BENCH, CHENNAI
डॉ. ओ.के. नारायणन, उपा य एवं ी वकास अव थी, या यक सद य के सम
BEFORE Dr. O.K. NARAYANAN, VICE PRESIDENT &
SHRI VIKAS AWASTHY, JUDICIAL MEMBER
आयकर अपील सं./ I.T.A. No. 1547/Mds/2012
आयकर अपील सं./ I.T.A. No. 262/Mds/2013
नधारण वष / Assessment Year : 2008-09
S.R.A.Systems Ltd., Asst. Commissioner of Income
No.100, Tax,
Vallur Kottam High Road, Vs Company Circle-VI(1),
Nungambakkam, CHENNAI
CHENNAI - 600 034.
[PAN: AAECS 7014 H]
(अपीलाथ /Appellant) ( यथ /Respondent)
अपीलाथ क ओर से / Appellant by : Shri T.Banusekar, C.A.,
यथ क ओर से / Respondent by : Shri P.B.Sekaran, CIT
सन
ु वाई क तार ख/Date of hearing : 06-01-2014
घोषणा क तार ख /Date of Pronouncement : 21-02-2014
आदे श / O R D E R
PER VIKAS AWASTHY, JUDICIAL MEMBER:
The aforesaid two appeals have been filed by the assessee. In ITA No.1547/Mds/2012, the assessee has assailed the assessment order dt.06-07-2012 for the Assessment Year (AY) 2008-09 passed u/s.143(3) r.w.s.144C(8) of the Income Tax Act, 2 I.T.A. Nos. 1547/Mds/12 & 262/Mds/13 1961 (herein after referred to as 'the Act'). In ITA No.262/Mds/2013 for the same AY i.e., 2008-09 the assessee has impugned the directions of the Dispute Resolution Panel [DRP] dated 30-01-2013 u/s.144C(5) r.w.r.13 of the DRP Rules. The second appeal is consequent to the rectification petition filed by the assessee under rule 13 of the DRP Rules which was dismissed by the DRP vide impugned order.
I.T.A. No. 1547/Mds/2012:
2. The assessee is a company registered under the provisions of the Companies Act, 1956 and is engaged in providing computer software consultancy and development services to customers worldwide in various business areas. For the AY.2008-09, the assessee filed its return of income on 28-09-2008 declaring its income as 'NIL', after claiming deduction u/s.10A of the Act. The case of the assessee was selected for scrutiny and notice u/s.
143(2) was issued to the assessee on 12-08-2009. The case of the assessee was referred to the Transfer Pricing Officer [TPO] u/s.92CA for computing of Arms' Length Price [ALP] in respect of international transactions. The TPO vide order dated 31-10-2011 made upward adjustment of `6.91 Crores in ALP. The TPO while 3 I.T.A. Nos. 1547/Mds/12 & 262/Mds/13 determining ALP, accepted the method i.e., Transactional Net Margin Method [TNMM] adopted by the assessee as the most appropriate method to determine the ALP of its Associate Enterprise [AE] transaction. However, the TPO rejected the three companies selected by the assessee as comparables. The TPO selected another set of ten companies to determine the PLI. The TPO on the basis of the arithmetic mean of the comparable companies determined the PLI as 21.86% as against PLI of 3.68% determined by the assessee. The TPO accordingly made upward adjustment of `6.91 Crores in the income of the assessee. The Assessing Officer further made additions in the income returned by the assessee on account of exclusion of internet charges from export turnover only, dis-allowance of deduction u/s.10A on the ground that the assessee-company has been formed by re- construction and transfer of Plant & Machinery previously used and disallowing brought forward losses and un-absorbed depreciation of the previous year before allowing deduction u/s.10A of the Act.
Aggrieved against the draft assessment order dt.29-11-2011, the assessee filed objections before the DRP, Chennai. The DRP rejected the objections of the assessee with regard to exclusion of 4 I.T.A. Nos. 1547/Mds/12 & 262/Mds/13 internet charges from export turnover, dis-allowance of deduction u/s.10A and the addition made with regard to setting off of brought forward depreciation before allowing deduction u/s.10A. As regard the objections of the assessee in respect of determination of ALP, the DRP rejected the objections of the assessee on merits but directed the TPO to adopt arithmetic mean of PLI of comparables at 13.35% as against 21.86% adopted by TPO. The Assessing Officer on the basis of the directions of the DRP passed final assessment order u/s.143(3) r.w.s.144C(8) of the Act on 06-07-2012.
Aggrieved against the assessment order, the assessee has come in appeal before the Tribunal.
3. Shri T.Banusekar, appearing on behalf of the assessee submitted that the first issue in appeal with regard to exclusion of internet expenses from export turnover as well as total turnover is squarely covered by the decision of the Special Bench of the Tribunal in the case of ITO Vs. M/s. Saksoft Ltd reported as 121 TTJ Chennai (SB). The second issue in appeal relates to dis-allowance of deduction u/s.10A on the ground that the assessee-company has been formed by splitting up or re- 5 I.T.A. Nos. 1547/Mds/12 & 262/Mds/13 construction of an existing business. This issue was considered by the Tribunal in assessee's appeal for the AY.2002-03 in ITA No.2255/Mds/2006 decided on 16-05-2008. The Tribunal had decided the issue in favour of the assessee. The third issue in appeal relates to the method of computation of income for claiming deduction u/s.10A. The ld.AR contended that the Assessing Officer has erred in holding that deduction u/s.10A has to be considered after setting off of brought forward losses. This issue has already been adjudicated by the co-ordinate bench of the Tribunal in assessee's own case for the AY.2005-06 and AY.2007-
08. The Tribunal followed the judgment of the Hon'ble Karnataka High Court in the case of CIT Vs. Yokogawa India Ltd. reported as 341 ITR 385 and held that the deduction u/s.10A is to be allowed before setting off of brought forward losses. The fourth issue in appeal is in respect of upward adjustment of `5,12,00,000/- made by the DRP. The ld.AR contended that the DRP has erred in arriving at the arithmetic mean of PLI of comparables at 13.35%. The authorities below have erred in not adopting the PLI based on the study carried out by the assessee. The DRP as well as the Assessing Officer has failed to take into consideration the fact that the comparables adopted by the TPO have functional differences and had related party transactions. Moreover, there was huge 6 I.T.A. Nos. 1547/Mds/12 & 262/Mds/13 variance in the turnover of comparable companies viz-a-viz assessee. The ld.AR submitted that the last ground in the appeal is that the Assessing Officer erred in adopting the operating cost at `20.93 Cores as against the total operating cost of `20.09 Crores as per the audited accounts for the year ending 31-03-2008.
4. On the other hand, Shri P.B.Sekaran , appearing on behalf of the Revenue vehemently supported the assessment order and the reasoning given by the DRP in rejecting the objections of the assessee. The ld.DR fairly conceded that the issue No.1 with regard to exclusion of the amount of internet expenses from the export turnover as well as total turnover is covered by the decision of the Special Bench of the Tribunal in the case of ITO Vs. M/s. Saksoft Ltd (supra) in favour of the assessee. The ld.DR submitted that the issue with regard to setting off of brought forward business losses have recently been decided in favour of the Revenue by the Hon'ble Supreme Court of India. In Civil Appeal No.1501/2008 in the case of M/s.Himatsingka Seide Ltd., Vs. CIT decided on 19-09-2013, the Hon'ble court dismissed the appeal of the assessee and decided the issue in favour of the Revenue.
7 I.T.A. Nos. 1547/Mds/12 & 262/Mds/13
5. We have heard the submissions made by the representatives of both the sides. We have also perused the orders of the authorities below and the decisions on which the representatives of both the sides have placed reliance.
The first issue in appeal relates to the exclusion of the amount of internet expenses from export turnover as well as total turnover. The Assessing Officer has excluded an amount of `11,23,288/- being internet expenses for export of software from export turnover without excluding the same from total turnover. The Special Bench of the Tribunal in the case of ITO Vs. M/s. Saksoft Ltd (supra) has held that the eligible expenditure has to be excluded from export turnover as well as total turnover. Respectfully following the same, this ground of appeal of the assessee is allowed. The expenditure incurred on account of the internet expenses for export of software is to be excluded from export turnover as well as total turnover.
6. The second issue in appeal is dis-allowance u/s.10A on the ground that the assessee has been formed by splitting up or/and re-construction of the business activities already in existence. We find that this issue had cropped up in the case of assessee in the 8 I.T.A. Nos. 1547/Mds/12 & 262/Mds/13 AY.2002-03 as well. The co-ordinate bench of the Tribunal in ITA No.2255/Mds/2006 decided on 16-05-2008 had held that the assessee has not been formed by splitting up of the existing business or re-construction of the business at a new place by splitting up of existing business. Therefore, this issue is decided in favour of the assessee.
7. The third issue in appeal relates to the method of computation of deduction u/s.10A of the Act. The assessee has claimed deduction u/s.10A before setting off of unabsorbed depreciation and brought forward losses. The ld.AR of the assessee in order to fortify the stand of assessee has placed reliance on the decision of the Tribunal in assessee's appeal for the AY.2005-06 and AY.2007-08 (supra). The ld.AR has also drawn support from the judgment of the Hon'ble Karnataka High Court in the case of CIT Vs. Yokogawa India Ltd.(supra). On the other hand, the ld.DR has relied on the latest decision of the Hon'ble Apex Court in the case of M/s.Himatsingka Seide Ltd., Vs. CIT (supra). The Hon'ble Supreme Court of India dismissed the appeal of the assessee and has upheld the judgment of the Hon'ble Karnataka High Court. The Hon'ble High Court has held that the brought forward depreciation has to be adjusted against 9 I.T.A. Nos. 1547/Mds/12 & 262/Mds/13 the profits of the EOU before computing the exemption allowable u/s.10B. The provisions of section 10A are pari materia with the provisions of section 10B of the Act.
We find that as far as un-absorbed depreciation is concerned, the Hon'ble Supreme Court of India in the case of M/s.Himatsingka Seide Ltd., Vs. CIT (supra), has up-held the findings of the Hon'ble Karnataka High Court and as such, un-absorbed depreciation has to be set-off before computing the exemption allowable u/s.10A. In respect of setting-off of the brought forward losses, the decision of the Hon'ble Karnataka High Court in the case of CIT Vs. Yokogawa India Ltd.(supra) still holds good. Accordingly, the assessee can claim deduction u/s.10A before setting off of brought forward losses. In view of the above, this ground of appeal of the assessee is partly allowed.
8. The fourth issue in appeal relates to upward adjustment of `5,12,00,000/- made by DRP on the basis of difference in PLI of the assessee viz-a-viz PLI of comparables. The TPO did not accept the submissions of the assessee that the prices charged by the assessee from its associate enterprises were at arm's length. The TPO rejected the transfer pricing study of the assessee on the 10 I.T.A. Nos. 1547/Mds/12 & 262/Mds/13 ground that out of three companies selected by the assessee as comparables, two were operating in domestic market only. The comparables of assessee did not pass the test of FAR. The TPO selected ten companies for comparative study. The assessee objected to the comparables selected by the TPO on the ground that the comparables are not in the same line of business as carried on by the assessee. The assesse is being compared to BPOs whereas the assessee is in the business of software development. As per the assessee, its PLI after adjustment is 3.68% whereas DRP determined the AM of PLI of comparables as 13.35%. Admittedly, there is no dispute with regard to the method adopted by the assessee i.e., TNMM as the most appropriate method to determine the ALP of its AE transactions.
We find that on same set of facts, the Tribunal in the appeal of the assessee i.e., ITA No.1813/Mds/2011 for the AY.2007-08 decided on 08-01-2013 had determined the PLI of the assessee at 7%. While determining the PLI for the AY.2007-08, the Tribunal had also taken into consideration the directions of the DRP for the AY.2008-09. We are of the considered opinion that in view of the above, it would be appropriate to adopt the PLI at 7% as against 13.35% determined by the DRP. Accordingly, this ground of 11 I.T.A. Nos. 1547/Mds/12 & 262/Mds/13 appeal of the assessee is partly allowed. The quantum of ALP has to be re-calculated in accordance with the PLI determined herein above.
9. The assessee has raised an additional ground of appeal in respect of the value of operating cost. The Assessing Officer has adopted operating cost as `20.93 Crores, whereas the assessee's contention is that as per audited accounts for the financial year ending on 31-03-2008, the total operating cost of the assessee is `20.09 Crores. This is a factual error which is to be rectified after referring to the books of accounts of the assessee. This issue is remitted back to the Assessing Officer to adopt the correct value of operating cost after verifying the same from the audited accounts of the assessee for the year ending 31-03-2008. This ground of appeal is allowed for statistical purpose.
In view of our above findings, the appeal of the assessee is partly allowed in the aforesaid terms.
12 I.T.A. Nos. 1547/Mds/12 & 262/Mds/13ITA No.262/Mds/2013:
10. In this appeal, the assessee has assailed the order of DRP dated 30-01-2013 arising out of rectification petition filed by the assessee. Since all the issues in the present appeal have already been considered and adjudicated on merits in ITA No. 1547/Mds/2012, this appeal has become infructuous. The appeal is dismissed, accordingly.
Order pronounced on Friday, the 21st February, 2014 at Chennai.
Sd/- Sd/- (Dr. O.K. NARAYANAN) (VIKAS AWASTHY) VICE PRESIDENT JUDICIAL MEMBER Dated: 21st February, 2014 TNMM
Copy to: Appellant/Respondent/CIT(A)/CIT/DR