Income Tax Appellate Tribunal - Bangalore
Telsima Communications Pvt Ltd, New ... vs Deputy Commissioner Of Income Tax,, ... on 3 August, 2018
IN THE INCOME TAX APPELLATE TRIBUNAL
"C" BENCH : BANGALORE
BEFORE SHRI SUNIL KUMAR YADAV, JUDICIAL MEMBER AND
SHRI ARUN KUMAR GARODIA, ACCOUNTANT MEMBER
IT(TP)A No. 1112/Bang/2014
Assessment Year : 2009-10
M/s. Telsima
Communications Pvt. Ltd.,
The Assistant Commissioner of Salarpuria Touch Stone,
Income Tax, 1st Floor, Kadubeesanahalli,
Vs.
Circle - 12 (4), Varthur, Hobli, Marathahalli,
Bangalore. Sarjapura Outer Ring Road,
Bangalore - 560 087.
PAN: AABCT9826D
APPELLANT RESPONDENT
IT(TP)A No. 1148/Bang/2014
Assessment Year : 2009-10
M/s. Telsima Communications
Pvt. Ltd., The Deputy Commissioner of
401, Pragati Deep Building, Income Tax,
Vs.
Laxmi Nagar District Centre, Circle - 12 (4),
Delhi - 110 092. Bangalore.
PAN: AABCT9826D
APPELLANT RESPONDENT
Assessee by : Shri Sharath Rao, CA & Smt. Vaidehi .G, CA
Revenue by : Dr. P.V. Pradeep Kumar, Addl. CIT (DR)
Date of hearing : 25.07.2018
Date of Pronouncement : 03.08.2018
ORDER
Per Shri A.K. Garodia, Accountant Member
These are cross appeals filed by the assessee and revenue and these are directed against the order of ld. CIT (A)-IV, Bangalore dated 24.06.2014 for Assessment Year 2009-10.
IT(TP)A Nos. 1112 & 1148/Bang/2014 Page 2 of 12
2. The grounds raised by the assessee are as under.
"I. Corporate Tax Grounds:
Capitalization of Research & Development Expenditure amounting to Rs.10,89,853/-
• The learned Commissioner of Income-Tax (Appeals) [`CIT(A)1 erred in upholding the order of the learned Assessing Officer (`A0') in disallowing Rs.1,089,853/- incurred towards the research and development expenditure by treating the same as capital in nature.
• The learned CIT(A)/AO erred in not observing that the research and development expenditure typically included cost of prototypes, salary cost of the employees and all other incidental costs incurred in connection with the product development of the telecommunication product and did not include any expenditure relatable to the purchase of capital equipment. • The learned CIT(A)/AO has erred in not observing that the research and development expenditure is revenue in nature which is wholly and exclusively laid out or expended for the purposes of the business and hence needs to be allowed as a deduction under section 37(1) of the Act.
• The learned CIT(A)/AO ought to have observed that research and development expenditure did neither result in any enduring benefit to the appellant nor led to creation of a capital asset.
Notwithstanding and without prejudice to the above • The learned CIT(A)/AO has erred in not allowing deduction of research and development expenditure under section 35(1)(iv) of the Act as expenditure towards scientific research • The learned DCIT ought to have followed the principles laid down by the Jurisdictional High Court in the case of Talisma Corporation Private Limited vs. CIT (ITA No. 515 of 2007) and the Bangalore Tribunal in the case of Tejas Network vs. CIT (ITA No 470/Bangalore/2006).
II. Transfer Pricing Grounds:
The learned Commissioner of Income Tax (Appeals) - IV ("Ld CIT(A)") grossly erred in facts and law in confirming the action of the learned Deputy Commissioner of Income-tax, Circle 12(4), Bangalore ("Ld AO") and the Asst. Commissioner of Income Tax (Transfer Pricing)-VI, Bangalore ("Transfer Pricing Officer- or ''TP0") of making an adjustment to the transfer price of the Appellant in the software development services segment amounting to Rs 57,96,823/- holding that the international transactions do not satisfy the arm's length principle envisaged under the Act.
i. The Ld. CIT(A) erred in upholding the Ld. TPO/AO's action of rejecting the economic analysis performed by the Appellant in the transfer pricing documentation and adjusting the transfer price of the Appellant under Section 92CA of the Act in the IT(TP)A Nos. 1112 & 1148/Bang/2014 Page 3 of 12 software development services segment.
ii. The Ld. CIT(A) erred in upholding the Ld. TPO/AO's action of arbitrarily rejecting the transfer pricing documentation maintained by the Appellant, prepared in good faith and in accordance with Section 92D of the Act read with Rule 10D of the Income-tax Rules, 1962. (`Rules').
iii. The Ld. CIT(A) erred in upholding the Ld. TPO/AO's contention in rejecting the use of multiple year data adopted by the appellant in justifying the arm's length nature of the international transactions relating to the appellant's software development services segment.
iv. The Ld. CIT(A) erred in upholding the Ld. TPO/AO's contention in modifying/rejecting the filters applied by the appellant in the transfer pricing documentation in respect of software development services segment.
v. The Ld. CIT(A) erred in upholding the Ld. TPO/AO's action of introducing the following additional filters for selection/ rejection of companies as comparable in the software development services segments:
• Rejected companies with controlled party transaction in excess of 25% • Rejected companies which have export sales less than 75% of the operating revenue • Rejected companies in the software development segment which have employee cost less than 25% of operating revenue vi. The Ld. CIT(A) erred in upholding the Ld. TPO/AO's contention in rejecting Thinksoft Global Services Ltd. and FCS Software Solutions Ltd as comparable companies on the ground that these companies have substantial working capital impact despite accepting that the companies are functionally comparable to the appellant.
vii. The Ld. CIT(A) erred in upholding the Ld. TPO/AO's contention in introducing additional companies as comparable to the software development services segment of the appellant despite the companies being functionally dissimilar. viii. The Ld. TPO failed to give effect to the Ld. CIT(A)'s direction of rectifying the mistake of computation of adjustment towards working capital difference between the Appellant and the companies selected as comparable in the software development services segment.
ix. The Ld. CIT(A) erred in disregarding the fact that the Ld. TPO/AO did not provide appropriate adjustment towards the various entrepreneurial risks borne by the companies selected as comparable in respect of software development services segment despite accepting the fact that the Appellant operates as a low risk captive service provider.
x. The Ld. CIT(A) erred in upholding the Ld. TPO/AO's action of selecting Bodhtree Limited as comparable in respect of software development services segment despite the fact that it has highly IT(TP)A Nos. 1112 & 1148/Bang/2014 Page 4 of 12 fluctuating margins.
xi. The Appellant retains the right to have the benefit of applying the range of +/-5% in determination of the ALP.
The appellant craves to leave, add, alter, amend, rescind and modify the grounds herein above or produce further documents, facts and evidence before or at the time of hearing this appeal.
For the above and any other grounds which may be raised at the time of hearing, it is prayed that necessary relief may be provided."
3. The assessee has also raised four additional grounds which are also reproduced herein under.
"Ground No. xii: The Hon'ble CIT(A) failed to appreciate that the following comparable companies selected by the Ld. TPO are functionally dissimilar:
a) Tata Elxsi Ltd. (seg.)
b) Sasken Communication Technologies Ltd. (seg.
c) Persistent Systems Ltd.
d) Larsen & Toubro Infotech Ltd. (seg.)
e) Infosys Ltd.
Ground No. xiii: The Ld. CIT(A)/ Ld. TPO erred in not excluding Kals Information Systems Ltd. from the list of comparable companies as it is functionally dissimilar.
Ground No. xiv. The Ld. TPO erred in proposing a restriction to the working capital adjustment without giving any cogent reason.
Ground No. xv. The Ld. CIT(A)/ Ld. TPO erred in in not appreciating that negative working capital adjustment should not be allowed.
The Appellant craves leave to add/ modify/ alter any additional grounds.
The Appellant submits that the omission to raise the aforesaid Additional Grounds of Appeal in the original grounds of appeal was neither deliberate nor willful and prays that the Hon'ble ITAT may consider it as part of the original Grounds of Appeal."
4. The grounds raised by the revenue are as under.
"1. The order of the learned CIT(A) is opposed to law and facts of the case.
2. On the facts and in the circumstances of the case the learned CIT(A) erred in holding that the Internet services, i.e. leased. line benefits/broadband services are not in the nature of technical services IT(TP)A Nos. 1112 & 1148/Bang/2014 Page 5 of 12 and TDS need not be made u/s 1943 without appreciating the fact that the services rendered for providing the leased line/broadband connection is in the nature of technical services and as such the provisions of Section 194) of the(' IT Act are applicable. Further, the decisions relied upon by the CIT(A) are not pronounced by the jurisdictional courts and the matter is yet to reach finality.
3. On the facts and in the circumstances of the case the learned CIT(A) erred it holding that size and turnover of the company are deciding factors for treating a company as a comparable and accordingly erred in excluding the Persistent systems Ltd., Zylog Systems Ltd., Mindtree Ltd, L & T Infotech, Infosys Ltd, Sasken Communication technologies Ltd. and Tata Elxsi Ltd. without appreciating that economies of scale is not relevant in the software industry.
4. For these and other grounds that may be urged at the time of hearing, it is prayed that the order of the CIT(A) in so far as it relates to the above grounds may be reversed and that of the Assessing Officer may be restored.
5. The appellant craves leave to add, alter, amend and / or delete any of the grounds mentioned above."
5. At the very outset, it was submitted by ld. DR of revenue that out of various comparables considered by the TPO/AO, for making TP adjustment, the ld. CIT (A) has decided that 7 comparables as noted in ground no. 3 of the revenue's appeal are to be excluded on this basis alone that these comparable companies are hit by turnover filter. He submitted that as per the judgment of Hon'ble Delhi High Court rendered in the case of Chryscapital Investment Advisors (India) (P.) Ltd. vs. DCIT as reported in 376 ITR 183, only because turnover of a comparable company is high or low, it cannot be the basis to exclude such comparable merely because of this reason and in such a situation, it has to be looked into as to whether such high or low turnover is affecting the prices and even if it is found that high or low turnover is affecting the prices, this is also to be examined as to whether suitable adjustment can be made. In reply, it was submitted by ld. AR of assessee that matter should go back to the file of CIT(A) for a fresh decision on entire TP issue except the exclusion of Bodhtree Consulting Ltd. because only in respect of Bodhtree Consulting Ltd., the ld. CIT(A) has examined and decided the issue in respect of functional comparability and in respect of remaining comparables, this aspect IT(TP)A Nos. 1112 & 1148/Bang/2014 Page 6 of 12 of functional comparability has not been examined and decided by CIT(A). He submitted that the issue regarding exclusion of Bodhtree Consulting Ltd. has to be decided and for the remaining comparables, it should be restored back to the file of CIT(A) for fresh decision on all aspects of the matter including functional comparability aspect. Regarding the exclusion of Bodhtree Consulting Ltd., he submitted that this aspect of the matter is covered in favour of the assessee by the Tribunal order rendered in the case of TE Connectivity Global Shared Services India (P.) Ltd. Vs. ITO as reported in [2018] 89 taxmann.com 190 (Bangalore -Trib.), copy available on pages 1672 to 1692 and in particular our attention was drawn to page no. 1679 of the paper book which contains Para no. 8 of this Tribunal order as per which it was held by the Tribunal in that case that Bodhtree Consulting Ltd. is a software product company and it should not be considered as a comparable in that case. Regarding the profile of that company i.e. TE Connectivity Global Shared Services India (P.) Ltd., she submitted that the business profile of that company is noted by Tribunal in Para 2.1 available on page no. 1674 of paper book where it is noted that the assessee company is engaged in the profession of software development services and shared services (ITES) to its AE and the Assessment Year involved is same i.e. Assessment Year 2009-10. The ld. DR of revenue had nothing to say in this regard i.e. regarding exclusion of Bodhtree Consulting Ltd.
6. We have considered the rival submissions and we find that as per the TPO's order in the present case, the profile of the present assessee company is noted by the TPO in Para no. 2.1 of his order and as per the same, it is engaged in providing software development services to its AE. As per the Tribunal order rendered in the case of TE Connectivity Global Shared Services India (P.) Ltd. vs. ITO (supra), the business profile of that assessee is also similar and that order is also for same Assessment Year i.e. Assessment Year 2009-10 and hence, in our considered opinion, this Tribunal order is applicable in the present case. In that case, the Tribunal has held that Bodhtree Consulting Ltd. is not a good comparable because it was found that Bodhtree Consulting Ltd. is a software product company and therefore, it should not be considered as IT(TP)A Nos. 1112 & 1148/Bang/2014 Page 7 of 12 comparable to the assessee who is merely providing software development services to its AE. No difference in facts could be pointed out by ld. DR of revenue and therefore, by respectfully following this Tribunal order, we hold that Bodhtree Consulting Ltd. should be excluded from the list of final comparables.
7. Regarding the remaining comparables which were excluded by CIT (A) by applying turnover filter and which were approved by him and the assessee is in appeal before us seeking exclusion/inclusion, we respectfully follow the judgment of Hon'ble Delhi High Court rendered in the case of Chryscapital Investment Advisors (India) (P.) Ltd. vs. DCIT (supra) and restore the matter back to the file of CIT(A) for fresh decision in the light of that judgment of Hon'ble Delhi High Court. We also direct the CIT (A) to decide other aspects of the matter also i.e. functional comparability aspect etc. in respect of all comparables in dispute by way of speaking and reasoned order after providing adequate opportunity of being heard to both sides. The TP issue in both cross appeals stands decided in this manner.
8. Now we take up the corporate tax issue in the appeal of the revenue which is raised by the revenue in ground no. 2 of its appeal. The ld. DR of revenue supported the assessment order and he also placed reliance on Tribunal order rendered in the case of Reliance Communications Infrastructure Ltd. Vs. CIT as reported in [2009] 34 SOT 241 (Mumbai). He also placed reliance on judgment of Hon'ble Apex Court rendered in the case of CIT Vs. Bharti Cellular Ltd. as reported in [2010] 193 Taxman 97 (SC). He pointed out that in this case, Hon'ble Apex Court has noted in Para no. 7 of this judgment that there is no expert evidence from the side of the Department to show how human intervention takes place, particularly, during the process when calls take place. He submitted that in that case, as per Para 9 of that judgment, Hon'ble Apex Court has restored back the matter to the file of AO for fresh decision. He submitted that in the present case also, the issues should be restored back to the file of AO for fresh decision in the light of this judgment of Hon'ble Apex Court. At this juncture, it was observed by the bench that this judgment of Hon'ble Apex Court is dated 12.08.2010 and the assessment order in the IT(TP)A Nos. 1112 & 1148/Bang/2014 Page 8 of 12 present case is dated 18.04.2013 and therefore, the guidelines given by Hon'ble Apex Court was very much available at the time when the assessment order was passed by the AO. Therefore, the bench wanted to know as to whether these facts are examined by the AO. In reply, the ld. DR of revenue submitted that these aspects were not examined by the AO as per the present order but the matter should be restored back to the file of AO for fresh decision in the light of this judgment of Hon'ble Apex Court. In reply, it was submitted by ld. AR of assessee that since there is no finding given by the AO, as per the decision of Hon'ble Apex Court being relied upon by the revenue, the order of CIT (A) on this issue should be upheld.
9. We have considered the rival submissions. We find that this issue was decided by CIT(A) as per Para 4 of his order by following the Tribunal order rendered in the case of ACIT Vs. Twenty First Century Shares & Securities Ltd. as reported in [2013] 39 taxmann.com 176 (Mumbai - Trib.) and this judgment is dated 15.05.2013. In our considered opinion, this issue is squarely covered in favour of the assessee by this Tribunal order and therefore, we find no infirmity in the order of CIT (A) on this issue. Regarding the judgment of Hon'ble Apex Court cited by ld. DR of revenue having been rendered in the case of CIT Vs. Bharti Cellular Ltd. (supra), we find that in that case, the assessee was a cellular service provider and the dispute was regarding interconnect agreement of that assessee with BSNL/MTNL whereas in the present case, the assessee is not a cellular service provider. Moreover in that case, as per the judgment dated 12.08.2010, guidelines were given by Hon'ble Apex Court to establish that human intervention takes place in the process of providing telecommunication services and then only such services can be considered as Fee for Technical Services (FTS) and section 194J can be made applicable. The present assessment order has been passed by AO after about 3 years after this judgment of Hon'ble Apex Court and this is admitted position that no such expert evidence has been brought on record by AO to establish that there was any human intervention making services received by the assessee as FTS. In our considered opinion, as per this judgment of Hon'ble Apex Court, required finding is not given by the AO and hence, this judgment does not render any IT(TP)A Nos. 1112 & 1148/Bang/2014 Page 9 of 12 help to the revenue and restoring back the matter to AO as requested by DR is not considered proper by us because sufficient time of more than three years was available with the AO after this judgment to examine this aspect and record a finding. This ground of the revenue's appeal is rejected. There is no other ground in the revenue's appeal.
10. As per the assessee's appeal, the only corporate tax issue is regarding disallowance made by the AO of Rs. 10,89,853/- by holding that Research & Development expenditure incurred by the assessee is capital expenditure whereas the same was claimed by the assessee as revenue expenditure. It was submitted by ld. AR of assessee that this issue was before the Tribunal in assessee's own case for Assessment Year 2006-07 in IT(TP)A No. 1178/Bang/2010 dated 17.11.2017 copy available on pages 1518 to 1552 of paper book. In particular, our attention was drawn to Para nos. 5, 5.1 to 5.5.3 available on pages 1535 to 1539 of paper book. He pointed out that in that year, the matter was restored back by the Tribunal to the file of AO for a fresh decision. The ld. DR of revenue supported the orders of authorities below.
11. We have considered the rival submissions. First of all, we reproduce paras 5, 5.1 to 5.5.3 of this Tribunal order in assessee's own case for Assessment Year 2006-07. These paras are as under.
"5. Ground No: 2 (2.1 to 2.4) - Research & Development Expenses ('R&D') 5.1 In these grounds (Supra), the assessee contends that the authorities below erred in disallowing the R&D expenses claimed on the grounds that the expenditure is capital in nature and therefore not allowable u/s 37(1) of the Act, and that the assessee was not eligible for deduction u/s 35 of the Act as it was not carrying on any scientific research.
5.2.1 The facts of the matter as emanate from the record before us is that in the course of assessment proceedings the AO noticed that the assessee had debited an amount of Rs. 10,95,353/- towards R&D expenses. On being queried in this regard, the assessee contended that these expenses were revenue in nature and were incurred in the normal course of its business. The AO rejected the assessee's contentions, as he was of the view that the assessee was carrying out scientific research and is therefore not eligible for deduction u/s 35 of the Act. The AO was also of the view that the R&D expenditure is of enduring benefit to the assessee and is therefore capital in nature. In IT(TP)A Nos. 1112 & 1148/Bang/2014 Page 10 of 12 that view of the matter, the AO disallowed the assessee's claim. 5.2.2 The DRP upheld the AO's decision observing that the benefit accruing to the assessee is enduring in nature and such expenditure cannot be categorized as expenditure incurred on scientific research. The DRP also observed that though such expenditure can be claimed u/s 37 of the Act, however, in the case on hand even such a claim u/s 37 of the Act is not allowable as the expenditure incurred is capital in nature.
5.3.1 In the course of proceedings before us, the assessee filed a petition with details of the break-up of the R&D expenses as additional evidence, on the grounds that these details were neither called for nor examined by the authorities below. It was submitted that these details are necessary to understand the nature of such expenses and for deciding on their allowability as revenue expenditure. The ld AR for the assessee submitted that though these expenses were shown under the head 'Research and Development' in the financial statements, the expenses were in the nature of clearing charges, consumables, customs duty, processing charges and testing charges. According to the ld AR, these expenses are clearly revenue in nature and merely because they were classified under the head R&D, they cannot be construed as rendering any enduring benefit to the assessee's business.
5.3.2 The Id AR submitted that the assessee is engaged in the business of rendering of software development services and support services for the products developed by its AE and it is in the course of rendering such services that the assessee incurred these expenses like clearing charges, consumables etc., which arc in the nature of revenue expenditure allowable u/s 37 of the Act. 5.4 Per contra, the Id DR for revenue opposed the admission of additional evidence sought for by the assessee. It was submitted that the assessee, having failed to furnish these details before the AO and DRP, cannot be permitted another opportunity to further its case by submission of these additional evidence. The ld DR further submitted that the proceedings before the DRP also afforded an opportunity to the assessee and as can be seen from the DRP order, the assessee had referred to these expenses as R&D expenditure only and therefore cannot be permitted to change its stand before the Tribunal at this stage.
5.5.1 We have heard the rival contentions and perused and carefully considered the submissions made in regard to the details of R&D expenses as additional evidence and other material on record. It is not in dispute that these expenses have been shown under the head 'Research & Development' expenses in the financial statements of the assessee. Though the assessee has all along maintained that these expenses are revenue in nature, the AO rejected the assessee's contentions as he was of the view that the R&D expenses are of enduring benefit to the assessee and therefore capital in nature. The DRP upheld the AO's view that the assessee claim was not allowable u/s 37 of the Act.
5.5.2 The question for consideration before us is whether the expenses IT(TP)A Nos. 1112 & 1148/Bang/2014 Page 11 of 12 placed under R&D expenditure are revenue or capital in nature and whether these expenses give any benefit of enduring nature. For deciding this issue, it is important and necessary to examine the nature of these expenses. Merely because these expenses were grouped under 'Research and Development' does not automatically render such services as such. No doubt it is the responsibility of the assessee to furnish the details of the expenses to establish its claim that these expenses are revenue in nature. We find that neither has the assessee furnished these details/break up of these expenses nor has the Isth called for details of the R&D expenses and has decided the issue only on the basis of the nomenclature 'R&D'. The DRP also has proceeded to decide the issue on principles without calling for and examining the actual nature of these expenses and the assessee has also not furnished the details/breakup before that forum. 5.5.3 It is clear from the above discussion of the facts of the matter that neither did the assessee furnish the details before the authorities below nor did the AO/DRP call for details of R&D expenses for examination of the nature of these expenses before deciding this issue. This position does not mean that the Tribunal should close its eyes to the nature/details of expenses placed before us. From the details furnished, it appears to us that these expenses are revenue in nature. However, the details of these expenses have not been examined and in our considered view, an examination thereof is necessary to conclusively decide on the nature of these expenses. In this factual view of the matter, we, in the interest of justice and equity, are inclined to admit the additional evidence submitted and therefore remit this issue of 'R&D' expenses to the file of the AO for examination and adjudication of this issue afresh in the light of the additional evidence placed before us. Needless to add, the assessee shall be afforded adequate opportunity of being heard and file details/submissions that shall be duly considered by the AO while deciding this issue. Consequently, ground No.2 is allowed for statistical purposes."
12. From the above paras reproduced from the Tribunal order, it is seen that in that year, the details were not furnished by the assessee before the lower authorities. In the present year, it is the claim of the ld. AR of assessee that these details were submitted but as per the orders of authorities below, the details were not furnished and even if the details were furnished, the same were not examined and commented upon by the authorities below and therefore, by respectfully following the Tribunal order in earlier year, we set aside the order of CIT(A) on this issue in the present year and restore the matter back to the file of AO for fresh decision with similar directions as were IT(TP)A Nos. 1112 & 1148/Bang/2014 Page 12 of 12 given by Tribunal in assessee's own case for Assessment Year 2006-07. This ground is allowed for statistical purposes.
13. In the result, the appeal filed by the assessee is allowed for statistical purposes whereas the appeal of the revenue is partly allowed for statistical purposes. Order pronounced in the open court on the date mentioned on the caption page.
Sd/- Sd/-
(SUNIL KUMAR YADAV) (ARUN KUMAR GARODIA)
Judicial Member Accountant Member
Bangalore,
Dated, the 3rd August, 2018.
/MS/
Copy to:
1. Appellant 4. CIT(A)
2. Respondent 5. DR, ITAT, Bangalore
3. CIT 6. Guard file
By order
Senior Private Secretary,
Income Tax Appellate Tribunal,
Bangalore.