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Income Tax Appellate Tribunal, “C’’ BENCH : BANGALORE
Before: SHRI B.R BASKARAN & SHRI PAVAN KUMAR GADALE
Per B.R Baskaran, Accountant Member :
The assessee has filed this appeal challenging the assessment order passed by the AO for assessment year 2013-14 u/s 143(3) r.w.s 144C(1) of the Act in pursuance of directions given by Ld Dispute Resolution Panel (DRP).
The revised grounds of appeal filed by the assessee along with Additional grounds read as under:-
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“1. The order of the Learned Dispute Resolution Panel ('DRP') and the consequent order of the Learned Assessing Officer ('AO') is opposed to Law and facts of the case. Corporate Tax 2. The learned AO has erred in making a disallowance of INR 2,12,69,220 being contractor expenses. 3. Learned AO has erred in ignoring the fact that the said amount was included in the cost base for recognising revenue as a percentage thereof following the percentage of completion method. Thus, if the expense was to be treated as not pertaining to the year under appeal the revenue of the year warranted a corresponding reduction. 4. The learned AO as erred in disallowing INR 2,67,886 by invoking the provisions of section 36(1)(va). Transfer Pricing. 5. The learned DRP has erred in upholding and enhancing the transfer pricing adjustment proposed by learned Transfer Pricing Officer (TPO'). Without prejudice to the generality of foregoing : 6. The Learned DRP has erred in ignoring the fact that in violation of Instruction No. 3 of 2016 no opportunity was provided by the learned Assessing Officer to the Appellant before referring the transfer pricing issues to the TPO.
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Without prejudice to the above grounds, Learned DRP has erred in confirming the list of comparable selected by Ld. TPO and disregarding the submissions made by the Appellant for exclusion/ inclusion of certain comparable. Without prejudice to the generality of this Ground, specific grounds of appeal in this respect are given as Ground 7A and 7B. 7A. The Learned DRP has erred in declining to deal with the following grounds of objection on merits citing procedural lapses: exclusion of Larsen & Toubro and Persistent Systems Ltd. from the final list of comparable and ii. inclusion of following in the said list:
• CTIL Ltd • CAT Technologies Ltd • Sankhya infotech • Lucid Software Limited 7B. Learned. DRP/ TPO has erred in not dealing with the submissions made by the Appellant for: I. Exclusion of following from the list of final comparable companies: • Mindtree Ltd (Seg.) • R S Software (India) Pvt Ltd • Tech Mahindra Ltd. (Seg) ii. Inclusion of Thinksoft Global Services Ltd in the list of comparable companies 8. The learned Dispute Resolution Panel ought to have directed the learned TPO to exclude the
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reimbursements received by the taxpayer from profit level indicator. 9. The learned DRP erred in law and in facts in denying adjustments towards depreciation. 10. The learned TPO erred in holding that the proviso to Sec 92C(2) of the Income Tax Act neutralises the risk profile. 11. The learned Dispute Resolution Panel has erred, in law and in facts, in denying the working capital adjustments granted by learned TPO. Levy of interest 12. In view of the Law and facts of the case the DRP ought to have held that the provisions of section 234 B and Section 234C were not attracted as the same are not necessarily consequential. 13. The Appellant craves for leave to add to delete from or amend the grounds of appeal. Additional Grounds of Appeal 14. The learned TPO/ DRP has erred in considering subcontract expenses amounting to Rs. 2,12,69,220 as a part of operating cost for transfer pricing analysis, despite the fact that aforesaid expenses have already been disallowed by the Ld. AO while computing Total Income of Appellant in the final assessment order, resulting in double taxation of the same income. 15. The learned TPO/ DRP have erred in characterising Appellant as a software development service provider with respect to all the international transactions
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undertaken by the Appellant, without acknowledging the fact that the Appellant is also engaged in the business of design, development, manufacture and supply of Marine Automation Systems, which is unconnected with its business of provision of software development services. 16. The learned TPO/ DRP erred in aggregating the international transactions for applying Transactional Net Margin method and not benchmarking each international transaction separately, even though the international transactions were not closely linked.”
At the time of hearing, the Ld A.R did not press grounds numbered as 2 & 3 by making necessary endorsement in the revised grounds of appeal. Accordingly, those grounds are dismissed as Not Pressed.
Ground No.1 is general in nature and Ground no.4 relates to the disallowance made u/s 36(1)(va) of the Act. The AO disallowed a sum of Rs.2,67,886/-, being the PF contribution remitted by the assessee beyond the due date prescribed under the PF Act. The Ld. A.R submitted that the above said amount was paid before the due date prescribed u/s 139(1) of the Act and hence the same is allowable as deduction as per the decision rendered by the Hon’ble jurisdictional Karnataka High Court in the case of Spectrum Consultants vs. CIT (266 CTR 94)(Kar).
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We heard Ld D.R and perused the record. Since the claim of the assessee is supported by the binding decision of jurisdictional High Court, we direct the AO to delete the disallowance after due verification, if the above said amount has been paid before the due date prescribed u/s 139(1) of the Act for filing return of income of the year under consideration.
The remaining grounds relate to the addition made towards Transfer Pricing adjustment made. The facts relating thereto are discussed as under by the assessing officer in the final assessment order:-
“10. It is seen from the assessment details, that the assessee has incurred an amount of 13,88,33,026/-. Towards sub-contractor charges. It is pertinent to note that the assessee is engaged in the business of design, development, manufacture (assembly) of an automation system, specific to the mission requirements of warship, and is following Percentage Completion Method. It is seen from the details submitted by the assessee, the assesssee has achieved the 84.68% Completion. Accordingly, pro- rata expense incurred towards subcontractor charge should be claimed 84.68% only. Here, the assessee has claimed 100 percent expense. Therefore, expense towards sub-contractor is restricted to 84.68% which amount to Rs.11,75,63,806/-. Hence, difference of' Rs.2,12,69,220/- is hereby disallowed
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and added back to the income returned by the assessee.”
The Ld A.R submitted that the assessing officer has disallowed “sub-contractor charges” to the tune of Rs.2,12,69,220/- and the assessee has accepted the same by not pressing the ground no.2 and 3. He submitted that the amount so disallowed and accepted by the assessee shall not form part of operating cost and hence it should be excluded. In fact, the above said amount has been allowed as deduction in the subsequent year. Accordingly he submitted that the above said amount should be reduced from the Operating Cost and accordingly the net profit of the assessee should be increased correspondingly. Accordingly the PLI should be computed by considering the net profit so increased and the operating cost so reduced. He submitted such course of action is permissible as per the decision rendered in the following cases:- (a) Pole to Win India (P) Ltd vs. DCIT (2015)(60 taxmann.com 311)(Bang. – Trib). (b) Haworth (India)(P) Ltd vs. DCIT (2011)(11 taxmann.com 76)(Delhi – Trib).
The Ld A.R submitted that if the PLI of the assessee is revised by considering the above said claim of the assessee, then its international transactions shall be at arms length. With regard to the grounds raised on inclusion/exclusion of comparables, the Ld A.R submitted that the right of the assessee to press those contentions may be kept open, if the above said claim of the assessee is accepted.
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We heard Ld D.R and perused the record. We notice that the Bangalore bench of Tribunal has considered an identical issue in the case of Pole to Win India (P) Ltd (supra), wherein the decision rendered by the Delhi bench of Tribunal in the case of Haworth (India)(P) Ltd (supra) has been followed and held that the expenses disallowed by the assessee should be excluded from operating cost. In the case before the Bangalore bench of Tribunal (supra), the assessee had included a sum of Rs.30.00 lakhs as Telecom expenses and the same was considered as contingent in nature as disclosed under clause 17(k) of Form 3CD. The Assessee disallowed the above said amount while computing total income and accordingly contended that the above said amount should be excluded from operating cost while computing PLI. The co-ordinate bench held as under:-
“8.9 With respect to the contingent expenses in the nature of provision for telecom expenses, it is seen that the assessee has itself disallowed these expenses in the computation of taxable income on the ground on the decision in the case of Haworth India Pvt. Ltd. (supra), wherein it has been held that expenses disallowed should be excluded from operating cost, is well placed and therefore agree with the assessee’s contention that expenses disallowed in computation of taxable income should be excluded from operating cost. The assessee’s claim is allowed.”
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In the instant case, the assessing officer has disallowed a sum of Rs.2,12,69,220/- out of “sub-contracting expenses”, which formed part of Operating Cost. The assessee has accepted the said disallowance by not pressing the Grounds relating to the same. It is the submission of the assessee that above said amount has been allowed as deduction in the subsequent year, meaning thereby, the position that the above said expenditure is not related to the year under consideration is accepted both by the assessing officer and the assessee. Accordingly, by following the decision rendered by the co-ordinate bench in the case of Pole to Win India (P) Ltd (supra), we hold that the same should be excluded from operating cost and hence there will be corresponding increase in Net profit amount. Accordingly the PLI of the assessee needs to be computed. We order accordingly.
It is the submission of Ld A.R that, in view of the revised PLI, its international transactions shall be at arms length. We direct the AO/TPO to examine this contention of the assessee and if it is found to be correct, then no transfer pricing adjustment is called for. In case, if the claim of the assessee is found correct, then the grounds relating to exclusion/inclusion of comparables do not require adjudication, as the same would be academic in nature. Accordingly, at this stage, we leave all those grounds open.
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In the result, the appeal of the assessee is treated as partly allowed.
Order pronounced in the open court on 11th December, 2019.
Sd/- Sd/- (Pavan Kumar Gadale) (B.R Baskaran) Judicial Member Accountant Member
Bangalore, Dated, the 11th December, 2019.
/Vms/
Copy to:
Appellant (s) / Cross Objector(s) 2. Respondent(s) 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. 6. Guard file
By order
Asst. Registrar, ITAT, Bangalore
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Date of Dictation ……………………………………… 2. Date on which the typed draft is placed before the dictating Member ……………………. 3. Date on which the approved draft comes to Sr.P.S .……………………………. 4. Date on which the fair order is placed before the dictating Member ……………….. 5. Date on which the fair order comes back to the Sr. P.S. ………………….. 6. Date of uploading the order on website…………………………….. 7. If not uploaded, furnish the reason for doing so ………………………….. 8. Date on which the file goes to the Bench Clerk ………………….. Dictation note enclosed 9. Date on which order goes for Xerox & endorsement…………………………………… 10. Date on which the file goes to the Head Clerk ……………………. 11. The date on which the file goes to the Assistant Registrar for signature on the order ………………………………. 12. The date on which the file goes to dispatch section for dispatch of the Tribunal Order …………………………. 13. Date of Despatch of Order. …………………………………………….. 14. Dictation note enclosed …………………………………………