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Income Tax Appellate Tribunal, ‘B’ BENCH : BANGALORE
Before: SMT. P. MADHAVI DEVI & SHRI JASON P.BOAZ
IN THE INCOME TAX APPELLATE TRIBUNAL ‘B’ BENCH : BANGALORE
BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER and SHRI JASON P.BOAZ, ACCOUNTANT MEMBER
IT(TP)A No.23/Bang/2015 (Assessment year: 2009-10)
M/s.Rambus Chip Technologies (India) Pvt. Ltd. (‘Rambus India’), 12th floor, Tower C&D, IBC Knowledge Park, 4/1, Bannerghatta Road, Bangalore-560029. … Appellant PAN: AACCR8522M Vs. Deputy Commissioner of Income-tax, Circle 12(4), Bangalore. … Respondent
AND
IT(TP)A No.61/Bang/2015 (Assessment year: 2009-10)
Deputy Commissioner of Income-tax, Circle 5(1)(1), Bangalore. … Appellant Vs. M/s.Rambus Chip Technologies (India) Pvt. Ltd. Bangalore. … Respondent
Assessee by: Shri G.C.Srivastava, Advocate. Revenue by: Dr.P.K.Srihari, Addl.CIT(DR).
Date of hearing : 21/05/2015 Date of pronouncement: 22/07/2015
IT(TP)A Nos.23 & 61/Bang/20115 M/s.Rambus Chit Technologies (India) Pvt. Ltd. Page 2 of 38 O R D E R Per Smt. P. MADHAVI DEVI, JM:
These are cross appeals by the assessee as well as the revenue against the order of the CIT(A)-IV, Bangalore dt.10/11/2014 for the assessment year 2009-10.
Brief facts of the case are that the assessee-company which is engaged in the business of rendering software development services, filed its original return of income on 25/09/2009 declaring a total income of Rs.92,520/-. Subsequently revised return of income was filed on 2/8/2010 declaring a total income of Rs.83,253/- after claiming deduction u/s 10A of the Income-tax Act, 1961 [hereinafter referred to as 'the Act' in short] of Rs.5,21,48,541/-. The assessee also declared income under MAT provisions of sec.115JB at Rs.2,20,24,606/-. During the assessment proceedings u/s 143(3) of the Act, the Assessing Officer (AO) observed that the assessee had entered into an international transaction with its Associated Enterprises (AE) for rendering software development services. The determination of the arms’ length price (ALP) of the international transaction was referred to the Transfer Pricing Officer (TPO) u/s 92CA of the Act and on receipt of the order from the TPO, the AO proposed the draft assessment order proposing to make an addition of Rs.2,79,48,656/- u/s 92CA of the Act. The draft assessment order was forwarded to the assessee-
IT(TP)A Nos.23 & 61/Bang/20115 M/s.Rambus Chit Technologies (India) Pvt. Ltd. Page 3 of 38 company in response to which assessee expressed its willingness to file an appeal before the CIT(A) and requested the AO to pass final order. The AO therefore, passed final assessment order making addition of the adjustment u/s 92CA of the Act as proposed by the TPO and also making the following disallowances:
i. Salary expenses of Mr.Prakash Bare, an expatriate employee on whose behalf income-tax of Rs.14,85,677/- was paid by the assessee and claimed as an expenditure.
ii. Reimbursement of Rs.9,37,988/- to M/s.Rambus Incorporation on account of ‘Oracle license’ for failure of non-deduction of tax at source though it was in the nature of fees for technical services.
iii. Telecommunication expenses of Rs.37,66,683/-; insurance of Rs.2,14,056/- which are attributable to the delivery of software outside India; and expenditure of Rs.28,18,006/- incurred towards travelling and conveyance holding it to be for providing technical services outside India while computing deduction u/s 10A of the Act.
iv. In addition to the above disallowances, depreciation at the rate of 25% only was allowed on Circuit Test Boards.
Aggrieved by these disallowances and the consequential additions, assessee preferred an appeal before the CIT(A) who partly allowed the same. Against denial of relief to the assessee,
IT(TP)A Nos.23 & 61/Bang/20115 M/s.Rambus Chit Technologies (India) Pvt. Ltd. Page 4 of 38 assessee is in appeal before us while against the relief given by the CIT(A), revenue also is in appeal before us.
In the assessee’s appeal, assessee is challenging the adoption of certain companies as comparables by the TPO and also against exclusion of companies adopted by the assessee as comparable companies to the assessee by limiting the working capital adjustment to 1.71%. The assessee has filed additional grounds of appeal for inclusion of LGS Global Ltd., and Sasken Communication Technologies Ltd., and Persistent Systems Ltd., as comparable companies in the final list of comparable companies. In addition to the above, the assessee has also raised grounds of appeal against disallowance of tax paid on expatriate employee’s salary; disallowance of reimbursement of software expenses and levy of interest u/s 234B of the Act.
At the time of hearing, the learned counsel for the assessee has stated that the assessee does not wish to press ground Nos.3(a) 3(c), 3(d) and (3e) and therefore they are rejected as not pressed. As regards ground Nos.1 and 2, we find that they are general in nature and need no adjudication.
As regards ground No.3(b) relating to transfer pricing issue, we find that it is against inclusion of certain companies in the final list of comparable companies on the ground that they are functionally not comparable to the assessee. With regard to this ground, the learned counsel for the assessee has filed a chart
IT(TP)A Nos.23 & 61/Bang/20115 M/s.Rambus Chit Technologies (India) Pvt. Ltd. Page 5 of 38 showing the list of companies adopted by the TPO in the final list of comparables and the companies that the assessee wants exclusion on functional dissimilarity and as to how the issues are covered in favour of the assessee by various decisions of the Tribunal. The assessee is seeking exclusion of only three companies i.e. Bodhtree Consulting Ltd., Tata Elxsi (segment) and Infosys Technologies Ltd., from the final list of comparables. It is stated by the learned counsel for the assessee that the assessee itself had adopted all these companies as comparables in its TP study, but however, it had challenged the said companies before the TPO as well as the CIT(A) on functional dissimilarity.
The learned Departmental Representative was also heard who relied upon the orders of the authorities below.
Having regard to the rival contentions and the material on record, we find that the assessee is a subsidiary of Rambus Ltd., Cayman Islands. Assessee is engaged in the business of rendering software design and development services for its AE in USA. Assessee has accordingly entered into an agreement with its AE for rendering such software development and support services. The financial results of the assessee for the relevant transaction are as under:
IT(TP)A Nos.23 & 61/Bang/20115 M/s.Rambus Chit Technologies (India) Pvt. Ltd. Page 6 of 38 Particulars Amount (Rs.) Operating Revenues* 29,40,41,810 Operating Expenses 28,06,01,229 Operating (Profit)/Loss 1,34,40,581 Op Profit on cost% 4.79% *Excluding other income The most appropriate method (MAM) adopted by the assessee in its T.P. Study and accepted by the TPO is, TNMM. The assessee in its T.P. Study had adopted 17 companies as comparables whose average profit margin was 13% on cost and therefore the margin earned by the tax payer at 11% on cost was treated as being at Arm’s Length, whereas the TPO has finalized 11 companies as comparable companies with the average arithmetical mean of the final comparable companies at 24.32%. Out of the companies adopted by the assessee, the TPO had accepted 6 companies as comparables. The TPO then conducted independent search and finally adopted 11 companies amongst which, the assessee is not specifically challenging 6 companies as comparables for the relevant assessment year. The learned counsel for the assessee submitted that this should not, however, be construed as the assessee’s acceptance of these companies as comparable companies. The companies not specifically challenged by the assessee during this year are: i. Larsen & Toubro Infotech ii. Mindtree Ltd.(segment) iii. Zylog Systems Ltd. iv. Kals Information Systems Ltd. v. Akshay Software Technologies Ltd. vi. R K Software (India) Ltd.
IT(TP)A Nos.23 & 61/Bang/20115 M/s.Rambus Chit Technologies (India) Pvt. Ltd. Page 7 of 38
Let us now consider the companies, specifically challenged by the assessee for this year, i.e. Bodhtree Ltd., Tata Elxsi Ltd. and Infosys Technologies Ltd.
On perusal of the material on record and the decisions relied upon by the learned counsel for the assessee, we find that for exclusion of the comparables challenged by the assessee, the learned counsel for the assessee has relied on the decision of this Tribunal in the case of M/s.Airbus India Operations Pvt. Ltd. Before applying the said decision, we have to first see if the facts and circumstances of these two cases are similar. We find that the assessment year in both the cases is 2009-10 and that both the companies are 100% captive service providers and are engaged in providing ‘software development services’ to their AEs. Further, we also find that the comparables adopted by the TPO in both the cases are also the same. Therefore, we agree with the contentions of the learned counsel for the assessee that the findings of this Tribunal in the case of M/s.Airbus India Operations Pvt. Ltd., are applicable to the case before us. i) As regards Bodhtree Consulting Co., is concerned, the learned counsel for the assessee submitted that though the assessee had selected Bodhtree Ltd. as a comparable company in its T.P. Study, it had challenged it before CIT (Appeals) on the ground of functional dis-similarity but CIT(A) has confirmed the
IT(TP)A Nos.23 & 61/Bang/20115 M/s.Rambus Chit Technologies (India) Pvt. Ltd. Page 8 of 38 assessment order and now the assessee is challenging its inclusion in the final list of comparables. He submitted that it is to be rejected as a comparable as it is a software product company and not a software development services company like assessee and also as it earns fluctuating profit margin due to the ‘revenue recognition’ method followed by it as against the ‘cost plus’ method (CPM)’followed by the assessee. The learned counsel for the assessee placed specific reliance upon the decision of this Tribunal in IT(TP)A No.35/Bang/2014 dated 10/10/2014 in the case of M/s.Airbus India Operations Pvt. Ltd., in support of his contentions. We find that Tribunal in the case of M/s. Airbus India Operations Pvt. Ltd., (cited supra) has considered the comparability of Bodhtree Consulting Ltd., with the assessee therein, and at para 15 and 16 of its order held as under: “15. BODHTREE CONSULTING LTD.: This company is listed at Sl.No.3 in the final list of comparables chosen by the TPO which is set out in para-4 of this order. The comparability of this company with a software development services company such as the Assessee for AY 09-10 was considered by this Tribunal in the case of M/s. Cisco Systems (India) Pvt.Ltd., IT(TP)A No.271/Bang/2014 for AY 09-10 order dated 14.8.2014. This Tribunal held as follows: “26.1 Bodhtree Consulting Ltd.:- As far as this company is concerned, it is not in dispute that in the list of comparables chosen by the assessee, this company was also included by the assessee. The
IT(TP)A Nos.23 & 61/Bang/20115 M/s.Rambus Chit Technologies (India) Pvt. Ltd. Page 9 of 38 assessee, however, submits before us that later on it came to the assessee’s notice that this company is not being considered as a comparable company in the case of companies rendering software development services. In this regard, the ld. counsel for the assessee has brought to our notice the decision of the Mumbai Bench of the Tribunal in the case of Nethawk Networks Pvt. Ltd. v. ITO, ITA No.7633/Mum/2012, order dated 6.11.2013. In this case, the Tribunal followed the decision rendered by the Mumbai Bench of the Tribunal in the case of Wills Processing Services (I) P. Ltd., ITA No.4547/Mum/2012. In the aforesaid decisions, the Tribunal has taken the view that Bodhtree Consulting Ltd. is in the business of software products and was engaged in providing open & end to end web solutions software consultancy and design & development of software using latest technology. The decision rendered by the Mumbai Bench of the Tribunal in the case of Nethawk Networks Pvt. Ltd. (supra) is in relation to A.Y. 2008- 09. It was affirmed by the learned counsel for the Assessee that the facts and circumstances in the present year also remains identical to the facts and circumstances as it prevailed in AY 08-09 as far as this comparable company is concerned. Following the aforesaid decision of the Mumbai Bench of the Tribunal, we hold that Bodhtree Consulting Ltd. cannot be regarded as a comparable. In this regards, the fact that the assessee had itself proposed this company as comparable, in our opinion, should not be the basis on which the said company should be retained as a comparable, when factually it is shown
IT(TP)A Nos.23 & 61/Bang/20115 M/s.Rambus Chit Technologies (India) Pvt. Ltd. Page 10 of 38 that the said company is a software product company and not a software development services company.”
Respectfully following the decision of the Tribunal referred to above and taking note of the fact that the facts and circumstances under which the aforesaid company was considered by the TPO as comparable with a software development service provider such as the Assessee for identical reasons, we direct the TPO to exclude the aforesaid company from the list of comparable companies for the purpose of computation of ALP.”
Respectfully following the decision of the Tribunal on similar set of facts, we direct the AO/TPO to exclude Bodhtree Consulting Ltd. from the final list of comparable companies.
The other two companies challenged by the assessee are Tata Elxsi Ltd., and Infosys Ltd., For exclusion of the same, the learned counsel for the assessee had relied upon the decision of the Tribunal in the case of Cisco Systems (India) Pvt. Ltd., (supra) and M/s. Airbus India Operations Pvt.Ltd.(cited supra) wherein it was held that Tata Elxsi and Infosys Ltd., are functionally dissimilar as compared to software development services provider.
Having regard to the rival contentions and the material on record and the decisions cited by the learned counsel for the assessee, we find that the Tribunal in the cases cited supra relied upon by the learned counsel for the assessee, has held that
IT(TP)A Nos.23 & 61/Bang/20115 M/s.Rambus Chit Technologies (India) Pvt. Ltd. Page 11 of 38 the Tata Elxsi is not engaged solely in the software development services but that the services of the company include embedded product design, industrial services and engineering services and visual computing labs and system integrating services which makes it functionally dissimilar to the assessee.
As regards Infosys Technologies Ltd., the Tribunal has held that it is a product company and owns significant inventory and also earns brand related profits and owns significant intangibles. We find that the Tribunal, in the case of M/s. Airbus India Operations Pvt. Ltd.(cited supra), has in para 19 and 20 of its order considered the comparability of the above two companies and has held as under:
“19. The next submission of the learned Counsel for the Assessee was that though, Infosys Technologies Ltd., & Tata Elxsi Ltd. (seg.) have to be excluded by applying the Turnover filter, they are also additionally functionally not comparable as held by this Tribunal in the case of Genisys Integrating Systems (India) Ltd. (supra) and Cisco Systems (India) (supra). We have considered his submission and we find that in the case of Cisco Systems (India) (supra), this tribunal has also held that the aforesaid two companies are also not functionally comparable to a company such as the Assessee rendering purely software development services. The following were the relevant observations of the Tribunal. “26.2 Infosys Ltd.:- As far as this company is concerned, it is not in dispute before us that this company has been considered to be functionally different from a company providing simple software development services, as this company owns significant intangibles and has huge revenues from software products. In this regard, we find that the Bangalore Bench of the Tribunal in the case of M/s. 3DPLM Software Solutions Ltd. v. DCIT, ITA No.1303/Bang/2012, by order dated 28.11.2013 with regard to this comparable has held as follows:-
IT(TP)A Nos.23 & 61/Bang/20115 M/s.Rambus Chit Technologies (India) Pvt. Ltd. Page 12 of 38 “11.0 Infosys Technologies Ltd. 11.1 This was a comparable selected by the TPO. Before the TPO, the assessee objected to the inclusion of the company in the set of comparables, on the grounds of turnover and brand attributable profit margin. The TPO, however, rejected these objections raised by the assessee on the grounds that turnover and brand aspects were not materially relevant in the software development segment. 11.2 Before us, the learned Authorised Representative contended that this company is not functionally comparable to the assessee in the case on hand. The learned Authorised Representative drew our attention to various parts of the Annual Report of this company to submit that this company commands substantial brand value, owns intellectual property rights and is a market leader in software development activities, whereas the assessee is merely a software service provider operating its business in India and does not possess either any brand value or own any intangible or intellectual property rights (IPRs). It was also submitted by the learned Authorised Representative that :- (i) the co-ordinate bench of this Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. in ITA No.227/Bang/2010 has held that a company owning intangibles cannot be compared to a low risk captive service provider who does not own any intangible and hence does not have an additional advantage in the market. It is submitted that this decision is applicable to the assessee's case, as the assessee does not own any intangibles and hence Infosys Technologies Ltd. cannot be comparable to the assessee ; (ii) the observation of the ITAT, Delhi Bench in the case of Agnity India Technologies Pvt. Ltd. in ITA No.3856 (Del)/2010 at para 5.2 thereof, that Infosys Technologies Ltd. being a giant company and market leader assuming all risks leading to higher profits cannot be considered as comparable to captive service providers assuming limited risk ;
IT(TP)A Nos.23 & 61/Bang/20115 M/s.Rambus Chit Technologies (India) Pvt. Ltd. Page 13 of 38 (iii) the company has generated several inventions and filed for many patents in India and USA ; (iv) the company has substantial revenues from software products and the breakup of such revenues is not available ; (v) the company has incurred huge expenditure for research and development; (vi) the company has made arrangements towards acquisition of IPRs in ‘AUTOLAY’, a commercial application product used in designing high performance structural systems. In view of the above reasons, the learned Authorised Representative pleaded that, this company i.e. Infosys Technologies Ltd., be excluded from the list of comparable companies. 11.3 Per contra, opposing the contentions of the assessee, the learned Departmental Representative submitted that comparability cannot be decided merely on the basis of scale of operations and the brand attributable profit margins of this company have not been extraordinary. In view of this, the learned Departmental Representative supported the decision of the TPO to include this company in the list of comparable companies. 11.4 We have heard the rival submissions and perused and carefully considered the material on record. We find that the assessee has brought on record sufficient evidence to establish that this company is functionally dis-similar and different from the assessee and hence is not comparable and the finding rendered in the case of Trilogy E-Business Software India Pvt. Ltd. (supra) for Assessment Year 2007-08 is applicable to this year also. We are inclined to concur with the argument put forth by the assessee that Infosys Technologies Ltd is not functionally comparable since it owns significant intangible and has huge revenues from software products. It is also seen that the break-up of revenue from software services and software products is not available. In this view of the matter, we hold that this company ought to be
IT(TP)A Nos.23 & 61/Bang/20115 M/s.Rambus Chit Technologies (India) Pvt. Ltd. Page 14 of 38 omitted from the set of comparable companies. It is ordered accordingly.” The decision rendered as aforesaid pertains to A.Y. 2008-09. It was affirmed by the learned counsel for the Assessee that the facts and circumstances in the present year also remains identical to the facts and circumstances as it prevailed in AY 08-09 as far as this comparable company is concerned. Respectfully following the decision of the Tribunal referred to above, we hold that Infosys Ltd. be excluded from the list of comparable companies.” 26.3 …….. “26.4 Tata Elxsi Ltd.:- As far as this company is concerned, it is not in dispute before us that in assessee’s own case for the A.Y. 2007-08, this company was not regarded as a comparable in its software development services segment in ITA No.1076/Bang/2011, order dated 29.3.2013. Following were the relevant observations of the Tribunal:- II. UNREASONABLE COMPARABILITY CRITERIA : 19. The learned Chartered Accountant pleaded that out of the six comparables shortlisted above as comparables based on the turnover filter, the following two companies, namely (i) Tata Elxsi Ltd; and (ii) M/s. Flextronics Software Systems Ltd., deserve to be eliminated for the following reasons : (i) Tata Elxsi Ltd., : The company operates in the segments of software development services which comprises of embedded product design services, industrial design and engineering services and visual computing labs and system integration services segment. There is no sub- services break up/information provided in the annual report or the databases based on which the margin from software services activity only could be computed. The company has also in its response to the notice u/s.133(6) stated that it cannot be considered as comparable to any other software services company because of its complex nature. Hence, Tata Elxsi Ltd., is to be excluded from the list of comparables.
IT(TP)A Nos.23 & 61/Bang/20115 M/s.Rambus Chit Technologies (India) Pvt. Ltd. Page 15 of 38 (ii) Flextronics Software Systems Ltd. : The learned TPO has considered this company as a comparable based on 133(6) reply wherein this company reflected its software development services revenues to be more than 75% of the "software products and services" segment revenues. Flextronics has a hybrid revenue model and hence should be rejected as functionally different. Based on the information provided under "Revenue recognition" in its annual report, it can be inferred that the software services revenues are earned on a hybrid revenue model, and the same is not similar to the regular models adopted by other software service providers. The learned representative pleaded that a regular software services provider could not be compared to a company having such a unique revenue model, wherein the revenues of the company from software/product development services depends on the success of the products sold by its clients in the marketplace. Hence, it would be inappropriate to compare the business operations of the assessee with that of a company following hybrid business model comprising of royalty income as well as regular software services income, for which revenue break-up is not available. He finally submitted that this was a good reason to exclude this company also from the list of comparables. 20. On the other hand, the learned DR supported the order of the lower authorities regarding the inclusion of Tata Elxsi and Flextronics Software Systems Ltd., in the list of comparables. He reiterated the contents of para 14.2.25 of the TPO's order. He also read out the following portion from the TPO's order : "Thus as stated above by the company, the following facts emerge : 1. The company's software development and services segment constitutes three sub-segments i) product design services; ii) engineering design services and iii) visual computing labs. 2. The product design services sub- segment is into embedded software
IT(TP)A Nos.23 & 61/Bang/20115 M/s.Rambus Chit Technologies (India) Pvt. Ltd. Page 16 of 38 development. Thus this segment is into software development services. 3. The contribution of the embedded services segment is to the tune of Rs.230 crores in the total segment revenue of Rs.263 crores. Even if we consider the other two sub-segments pertain to IT enabled services, the 87.45% (›75%) of the segment's revenues is from software development services. 4. This segment qualifies all the filters applied by the TPO." Regarding Flextronics Software Systems, the following extract from page 143 of TPO's order was read out by him as his submissions: "It is very pertinent to mention here that the company was considered by the taxpayer as a comparable for the preceding assessment year i.e., AY 2006- 07. When the same was accepted by the TPO as a comparable, the same was not objected to it by the taxpayer. As the facts mentioned by the taxpayer are the same and these were there in the earlier FY 2005-06, there is no reason why the taxpayer is objecting to it. How the company is functionally similar in the earlier FY 2005-06 but the same is not functionally similar for the subsequent FY 2006-07 even when no facts have been changed from the preceding year. Thus the taxpayer is arguing against this comparable as the company was not considered as a comparable by the taxpayer for the present FY 2006-07." 21. We have heard the rival submissions and considered the facts and materials on record. After considering the submissions, we find that Tata Elxsi and Flextronics are functionally different from that of the assessee and hence they deserve to be deleted from the list of six comparables and hence there remains only four companies as comparables, as listed below:”
IT(TP)A Nos.23 & 61/Bang/20115 M/s.Rambus Chit Technologies (India) Pvt. Ltd. Page 17 of 38 26.5. Following the aforesaid decision of the Tribunal, we hold that M/S.Tata Elxsi Ltd. should not be regarded as a comparable.” 20. Respectfully following the decision of the Tribunal referred to above and taking note of the fact that the facts and circumstances under which the aforesaid company was considered by the TPO as comparable with a software development service provider such as the Assessee for identical reasons, we direct the TPO to exclude the aforesaid two companies from the list of comparable companies for the purpose of computation of ALP.”
Respectfully following the above decision to which one of us i.e. the Accountant Member is the signatory, we direct the AO/TPO to exclude these two companies also from the final list of comparable companies for the purpose of computation of ALP. The assessee is also seeking inclusion of Sasken Communications Technologies (segment) and Persistent Systems Ltd. The learned counsel for the assessee submitted that the CIT(A), in his order had directed the AO to consider assessee’s contentions and upon satisfaction to perform rectificatory actions and prayed that the AO may therefore be directed to follow the CIT(A)’s directions while computing the ALP. Since the CIT(A) has already given a direction, we find no reason to interfere with the same and direct the AO/TPO to follow the directions of the CIT(A) while computing the ALP.
As regards ground of appeal No.3(g), the learned counsel for the assessee submitted that the assessee is challenging the rejection of otherwise comparable companies rejected by the TPO
IT(TP)A Nos.23 & 61/Bang/20115 M/s.Rambus Chit Technologies (India) Pvt. Ltd. Page 18 of 38 on account of working capital adjustment. At the time of hearing, this bench asked the learned counsel for the assessee, if the average arithmetic margin of the comparables after exclusion of the above mentioned companies would fall within + or -5% of the assessee’s margin. The learned counsel for the assessee submitted that if these companies are excluded, the assessee’s margin would fall within + or -5% of the average arithmetic margin of the comparable companies and therefore there would not arise any occasion for any adjustment on account of ALP adjustment and the assessee would not seek their inclusion seriously for this year. Taking the same into consideration, we are not inclined to go into the grounds of appeal raised by the assessee for inclusion of the companies as it would only result in academic exercise at this stage. Therefore, the ground of appeal No.3(g) is rejected as not contested by the assessee for the above reasons.
As regards ground No.3(f), learned counsel for the assessee submitted that the AO/TPO while considering the working capital adjustment to be made while computing the ALP, has arrived at the working capital adjustment in the case of the assessee at 5.97%, but while giving effect to the working capital adjustment, has restricted the said adjustment to 1.71%. The learned counsel for the assessee submitted that the TPO has not given any basis for such restriction of the working capital adjustment. He submitted that the CIT(A) also has not applied
IT(TP)A Nos.23 & 61/Bang/20115 M/s.Rambus Chit Technologies (India) Pvt. Ltd. Page 19 of 38 his mind to this issue but has summarily confirmed the order of the AO and therefore it has to be set aside.
On going through the TPO’s order as well as annexure D referred to in the transfer pricing order on working capital adjustment, we find that the TPO has computed it at 5.97% but has not given any basis for restricting the adjustment to 1.71%. In various cases relating to transfer pricing adjustment, this Tribunal has been directing to give working capital adjustment on actual basis and the TPO, having arrived at 5.97%, ought to have adopted the same instead of restricting it to 1.71%. In view of the same, we deem it proper to remand this issue to the file of the AO/TPO for working out the ALP after giving adjustment of working capital as per the calculation of the AO in annexure D annexed to the transfer pricing order. This ground of appeal is accordingly allowed.
As regards grounds No.4, 5 & 6 are concerned; we find that they relate to corporate matters.
As regards ground No.4(a) is concerned, brief facts are that during the assessment proceedings u/s 143(3) r.w.s.144C(13) of the Act, the AO observed that the assessee had paid income-tax of Rs.14,85,677/- in respect of one expatriate employee Mr.Prakash Bare and claimed the same as business expenditure. The AO held that income-tax of Mr.Prakash Bare is the personal liability of the employee and is not the liability in the
IT(TP)A Nos.23 & 61/Bang/20115 M/s.Rambus Chit Technologies (India) Pvt. Ltd. Page 20 of 38 hands of the assessee-company as per the provisions of the Act. Therefore, he disallowed the same and added it back to the returned income of the assessee. On appeal, the CIT(A) has confirmed the said disallowance.
The learned counsel for the assessee, has drawn our specific attention to pages 130 and 131 of paper book, where the assessee’s detailed submissions on this issue before the CIT(A) are placed. It is stated therein that the amount of Rs.14,85,677/- was debited to profit and loss account of the assessee during the year under consideration on account of tax of indian income of the expatriate employee and as per the agreement between the assessee and the employee Mr.Prakash Bare, the income-tax liability on his salary is to be borne by the company and therefore it is the liability contractually agreed upon by the assessee and is wholly and exclusively for the purpose of business of the assessee and is an allowable deduction u/s 37 of the Act. The learned counsel for the assessee placed reliance upon the following decisions in support of his contention that it is an allowable expenditure:
i. Tata Yadogawa Ltd. vs. CIT (2011) 196 Taxman 353 (Jharkhand) and ii. ABN Amro Bank vs. JCIT (2005) 96 TTJ Kol. 1041
The learned Departmental Representative, however, supported the orders of the authorities below and submitted that the
IT(TP)A Nos.23 & 61/Bang/20115 M/s.Rambus Chit Technologies (India) Pvt. Ltd. Page 21 of 38 employee has to pay his personal income-tax and it cannot be held to be a liability of the assessee-company and therefore it is not allowable as a business expenditure u/s 37 of the Act.
Having regard to the rival contentions and the material on record, we find that the Hon’ble Jharkhand High Court in the case of Tata Yadogawa Ltd. (cited supra) was considering the case of a company which has entered into a technical collaboration agreement with an Austrian company, ESW to acquire know-how for certain consideration in terms of which taxes, if any, on payment of consideration were also to be borne by the assessee therein. The assessee therein had applied for grant of permission u/s 195(2) to remit the said consideration without deduction of tax at source which was rejected by the AO and which travelled up to the Hon’ble High Court. The Hon’ble High Court at para.15 of its order has considered the liability of the assessee to pay income-tax on behalf of the payee and has held as under: “15. On the facts of this case the obligation of the assessee under the agreement with ESW extended not merely to remitting the amount of two million DM to ESW, but also extended to payment of taxes which would include the income tax as well as the R&D Cess. It seems quite obvious that if the assessee had not paid the tax or the R&D cess, and had merely made payment of the two million DM to ESW, the latter would not be obliged to part with the know-how in view of the terms of the collaboration agreement. Therefore, payment of these
IT(TP)A Nos.23 & 61/Bang/20115 M/s.Rambus Chit Technologies (India) Pvt. Ltd. Page 22 of 38 taxes are as integral a part of the ‘consideration’ as the payment of two million DM. In fact, the income tax department is itself treating not merely the amount of two million DM paid to ESW but also the R&D Cess, as part of ‘consideration’. In these circumstances we find no logical reason for not treating the income tax paid by the assessee in terms of the collaboration agreement as part of the ‘consideration’ for acquisition of the know-how. We hold accordingly and answer the first question as above. A reference in this connection may be made to the decision of the Supreme Court in the case of McDowell & Co. Ltd. vs. CTO(1985) 154 ITR 148 wherein it was held that excise duty was part of the ‘consideration’. Another direct decision covering the question is by the Madras High Court in the case of CIT vs. Standard Polygraph Machines (P) Ltd. (2000) 243 ITR 788.
Before leaving this issue we may say that the words ‘lumpsum’ as used before the word ‘consideration’ in section 35AB, only exclude periodical or turnover based payments like royalty etc., and any one time payment for the know-how would fall within the expression ‘lump sum’ if it is fixed and specified in the agreement, although it may be payable in instalments.”
Further, the Special Bench of the Tribunal at Calcutta in the case of ABN Amro Bank (cited supra) was seized of similar issue i.e. whether tax and interest on the offshore remuneration paid by the assessee therein to its expatriate employee is allowable as business expenditure and at paras.23 to 34 of its order, the Tribunal has held as under:
IT(TP)A Nos.23 & 61/Bang/20115 M/s.Rambus Chit Technologies (India) Pvt. Ltd. Page 23 of 38 “23. Tax deducted at source in respect of remuneration paid outside India to the expatriate employees: As pointed out earlier, the assessee had neither deducted nor paid any tax in respect of the remuneration paid to the expatriate employees. It is the claim of the assessee that expatriate employees are paid remuneration net of taxes all over the world. The assessee has taken into account the tax perquisite while working out the tax deductible in respect of remuneration paid to expatriate employees. In asst. yr. 1994-95 in the written submissions filed before the CIT(A), reproduced by him in the appellate order, we find a reference to the policy of the assessee in regard to the payment of remuneration to its employees working in all branches around the world. Since it is relevant for deciding the issue on hand, it will be worthwhile to reproduce the same: "For the year under consideration the appellant paid Rs. 35,86,781 (Pl. refer attachment 1 for details) as the tax deductible at source from the total remuneration of the expatriate employees taxable in India under the Amnesty Scheme announced by the CBDT vide Circular No. 685, dt. 17/20th June, 1994. This amount has been separately claimed as deductible expenses vide letter filed in the course of assessment. A brief background of the appellant's policy in regard to taxation of expatriate employee's income is given hereunder : Expatriate employees all over the world cannot be transferred from one country to another country if there is not a continuity and consistency in their remuneration. Therefore, the bank has a worldwide salary policy for its expatriate staff. This policy is laid down in the Bank's Guide Expatriate Staff and Guide International Career Bankers. 'Guide Expatriate Staff'--Principle Expatriate employees all over the world cannot be transferred from one country to another if there is not a certain continuity and consistency in their remuneration. Therefore, the bank has a worldwide salary policy for its expatriate staff. In order to ensure that changes in local taxes and social security regulations do not influence the application of this policy, a net salary system is effective for all expatriates.
IT(TP)A Nos.23 & 61/Bang/20115 M/s.Rambus Chit Technologies (India) Pvt. Ltd. Page 24 of 38 Net salary package--The net salary allowance and benefits to which the employees is entitled are determined by head office. Both the expatriate staff member and the local management will be duly informed by International Human Resources of the actual amounts to be paid. Gross up : Once an employee's net salary, allowance and benefits are determined, his/her gross income for (a part of) the current fiscal year should be calculated by or in consultation with the bank's external tax adviser. Payment of taxes and social security Taxes and social security premiums (employer's as well as employee's share) should, if possible be paid by the bank direct to the respective authorities as soon as these are due. Guide International Career Bankers (ICB) Expatriate salary-- System--General. In order to ensure that changes in local taxes and social security regulations do not influence the application of this policy a net salary system is effective for all ICBs. The net base salary is defined as a base salary less tax, social security, schooling and housing expenses. It includes typical expatriate allowances. Net Guarantee/Gross up The ICB's salary is a net salary which means that tax, social security premiums, etc., related to the employment income will be for account of the bank. Exception is made for the Line of Business Bonus. Tax and social security premiums from other personal income are not for account of the bank. We, thus, submit that it is the bank's responsibility and obligation to bear the Indian taxes on offshore remuneration of expatriate employees rendering services in India. In the computation of remuneration and tax of the expatriate employees (for the purpose of deduction of tax at source) apart from salary also included is the local taxable remuneration being inter alia the perquisite value on account of rent-free accommodation, utilities and the additional remuneration/benefit of the tax borne. In effect, the total
IT(TP)A Nos.23 & 61/Bang/20115 M/s.Rambus Chit Technologies (India) Pvt. Ltd. Page 25 of 38 taxable remuneration is thus increased/ grossed up to include the tax deductible on the offshore remuneration. This methodology of increasing/grossing up the amount of tax has been done in accordance with the provisions of Section 195A of the Act. The amount by which the income is thus grossed up is in the nature of a taxable perquisite under Section 17(2) in the hands of the employee and thereby an allowable expenditure in the hands of the appellant. To summarise we wish to state as under with regard to the local remuneration and perquisites. Without prejudice to our contention that offshore remuneration is an allowable deduction, we wish to distinguish the fact that the local remuneration paid to the expatriate employees stands on a completely different footing as compared to the offshore remuneration. The local remuneration is paid in India. The tax borne by the appellant on the offshore remuneration is part and parcel of the local remuneration and is grossed up for the purpose of calculation of taxable income. In fact, the tax on the total income is only a measure for calculating the additional remuneration/benefit for inclusion in the total income as such the result (is the additional remuneration) does not partake the character of tax. Reference is drawn to the Supreme Court judgment in the case of Senairam Doongarmall v. CIT . From the above reasons the local remuneration (which includes, inter alia, the gross up of the tax) is an allowable expense. We enclose a copy of letter from International Human Resource Department of the bank at Amsterdam confirming that the tax in respect of the offshore remuneration payable to the expatriate employees is to be borne by the bank. In view of the above submission made we urge that the claim of the appellant for Rs. 35,86,781 on account of the local remuneration being the tax paid in India on the expatriate employees taxable income should be allowed as deductible expense."
IT(TP)A Nos.23 & 61/Bang/20115 M/s.Rambus Chit Technologies (India) Pvt. Ltd. Page 26 of 38 24. It is evident from above that the salary paid to the expatriate employees is net of taxes. The assessee had neither paid nor deducted taxes in asst. yrs. 1992-93 to 1994-95. However, in asst. yr. 1995-96, the assessee has paid the tax deductible at source. Therefore, in principle the assessee would be entitled to deduction in respect of the tax component of the salary also if the salary is found to be deductible as per the directions of the Tribunal for asst. yr. 1996-97 (supra), which has also been adopted by us. So, however, no deduction will be permissible in asst. yrs. 1992-93 to 1994-95 by operation of Section 40(a)(i) of the IT Act, 1961. The claim for the said assessment years shall have to be disallowed for the reason of non-deduction of tax. So, however, the deduction shall have to be considered for asst. yr. 1995-96 as per proviso to Section 40(a)(i). 25. Thus, subject to verification that the claim of remuneration and tax deductible has not been taken into account under Section 44C in regard to the expatriate employees, the deduction relating to asst. yrs. 1992-93 to 1994-95 would be permissible in asst. yr. 1995-96 as per proviso to Section 40(a)(i). For asst. yr. 1995-96, the assessee has paid the tax and, therefore, Section 40(a) is not attracted. The assessee shall be entitled to deduction in respect of remuneration as well as the tax paid pertaining to asst. yr. 1995-96. It is pertinent to mention that the objection raised by the Revenue about the assessee having failed to establish as to whether the services have been rendered by the expatriate employees in regard to the PE of the assessee in India, we find, is uncalled for. If the employees have not rendered services in India, for which the remuneration had been received abroad, then how is it that the assessee was under an obligation to deduct tax from their remuneration. The very fact that the assessee has accepted its obligation to deduct taxes from the salary paid to the expatriate employees is, in our view, sufficient to infer that the services had been rendered by them in India. 26. The second objection raised by the Revenue is that the assessee has only paid the tax deducted at source and not the tax on behalf of the expatriate employees. This objection is also, in our view, unfounded. Section 199 provides that any deduction made in accordance with provisions of Section 192 and paid to the Central Government shall be treated as a
IT(TP)A Nos.23 & 61/Bang/20115 M/s.Rambus Chit Technologies (India) Pvt. Ltd. Page 27 of 38 payment of tax on behalf of the person from whose income deduction is made. Under Section 205 of the IT Act, 1961, there is a bar for the Revenue to demand tax from the assessee to the extent the amount has been deducted from his income. Thus, the tax deducted at source by the assessee and paid to the Government is treated as the tax paid on behalf of the expatriate employees. It is true that the expatriate employees have a right to demand refund of the tax deducted at source if not found chargeable in the assessment in their hands. However, in this case the assessee has paid remuneration net of tax. Therefore, refund, if any, claimed on behalf of the expatriate employees would be assessable to tax in the year of refund in the hands of the appellant. Therefore, the objection of the Revenue is overruled. We, accordingly, direct the AO to consider the claim of the assessee in regard to the remuneration and the taxes paid relating to asst. yrs. 1992-93 to 1995-96 in asst. yr. 1995-96 in accordance with the directions contained in this order. 27. In asst. yr. 1995-96, the assessee has also claimed a deduction for remuneration and tax paid in regard to the asst. yrs. 1990-91 and 1991-92. No evidence has been placed on record to establish that the assessee had at any stage made the claim for deduction in the said assessment years. In principle, the claim of the assessee has got to be considered in the assessment year to which the claim pertains to. It is only when the claim is considered and found allowable but for provisions of Section 40(a) that the same can be allowed in the year of payment. Since the claim for asst. yrs. 1990-91 and 1991-92 is not established to have been made and considered in earlier years, the benefit is not permissible in asst. yr. 1995-96 merely because the tax has been paid in the year under appeal. The benefit of the proviso to Section 40(a)(i) is thus not available to the assessee for which no claim is made in the respective assessment years. Therefore, the claim of the assessee does not fall for consideration in asst. yr. 1995-96 on the basis of provisions ofSection 40(a) read with proviso. The disallowance pertaining to asst. yrs. 1990-91 and 1991-92 in regard to the remuneration and the tax component in asst. yr. 1995-96 is upheld.
IT(TP)A Nos.23 & 61/Bang/20115 M/s.Rambus Chit Technologies (India) Pvt. Ltd. Page 28 of 38 28. Interest : That leaves us to consider the interest paid by the assessee under Section 201(1A). Before proceeding to consider this issue, we would like to make it clear that for asst. yrs. 1992- 93 to 1994-95, interest paid by the assessee was neither claimed in the course of assessment proceedings nor in the grounds of appeal before the CIT(A) or before us. The claim was however, made in asst. yr. 1995-96. Thus, at the very outset the claim of interest pertaining to the period falling in asst. yrs. 1990-91 to 1994-95 is disallowable in any case for the reason that no such claim has ever been made for the relevant years. 29. We now proceed to consider if the claim is otherwise allowable. At the cost of repetition, it is stated that the assessee had not deducted tax in respect of remuneration paid to expatriate employees for the services rendered in India, for which the payment was made abroad by the head office. The interest was paid under Section 201 of the IT Act on account of non-deduction and non-payment of the tax deducted at source. The deduction was claimed in asst. yr. 1995-96 which has been disallowed. The learned counsel for the assessee contended that the assessee is entitled to deduction in respect of interest paid under Section 201(1A) for delayed payment of TDS as the same is compensatory and not penal in character. In this connection reliance is placed on the decisions of the Supreme Court in the cases of Mahalakshmi Sugar Mills Co. Ltd. v. CIT ,Prakash Cotton Mills (P) Ltd. v. CIT and CIT v. Ahmedabad Cotton Mfg. Co. Ltd. and Ors. . The learned counsel contended that Section 221 provides for payment of penalty in the event of default for non-payment of TDS. Section 271C provides for penalty for non-deduction of tax. Section 201(1A) provides for payment of interest. According to the learned counsel, it is evident from the aforesaid provisions of the Act that the interest under Section 201(1A) is purely compensatory and not penal in character. According to him, since the interest has been paid in the year under appeal, the same is allowable as a deduction in the year of payment by virtue ofSection 40(a)(i) as part of remuneration. The learned counsel contended that the deduction may be considered under Section 37 for the expenditure having been incurred for the purposes of business.
IT(TP)A Nos.23 & 61/Bang/20115 M/s.Rambus Chit Technologies (India) Pvt. Ltd. Page 29 of 38 30. The learned Departmental Representative, on the other hand, contended that the assessee is not entitled to deduction on account of interest for non-deduction of tax and non- payment of the same as it is neither part of remuneration nor as an expenditure incurred for purposes of business. 31. We have given our careful consideration to the rival contentions. The issue relating to the claim of interest is peculiar in this case insofar as the interest is on account of income-tax, which the assessee was required to deduct at source and pay to the Government. We have dealt with this issue relating to the remuneration and tax component on the remuneration and in principle agreed that the assessee would be entitled to deduction subject to the verification as laid down in the order. It would appear that when the assessee is entitled to deduction on account of income-tax, the same principle would apply to the interest charged for non-payment of tax--the interest being compensatory in nature. 32. For appreciation of the issue in proper perspective, it would be relevant to consider as to whether the income-tax is allowable as a deduction. If income-tax is allowable as a deduction, the interest payable on such tax being compensatory in nature may qualify for deduction. Interest on sales-tax of compensatory nature is allowable as a deduction not merely because it is not penal in character but because the sales-tax is chargeable on the commodities sold by the assessee as an incidence of business. The interest is thus allowable as part of tax. In this case the assessee has paid remuneration to the expatriate employees. The assessee as an employer has undertaken to pay taxes on their behalf. Since the income of the expatriate employees is liable to tax, the assessee would be obliged to file the returns of income and discharge the obligations which, but for the agreement of employment with the assessee, the expatriate employees had to discharge. The monetary consequence of failure to discharge the obligation on behalf of the expatriate employees may, in certain circumstances, qualify for deduction as an incidence of business. Section 17(2)(iv) treats any sum paid by the employer in respect of any obligation which, but for such payment, would have been payable by the employee as perquisite assessable in the hands of the employee. So, however, it is interesting to note that in this case the assessee has not discharged the obligation on behalf of the expatriate
IT(TP)A Nos.23 & 61/Bang/20115 M/s.Rambus Chit Technologies (India) Pvt. Ltd. Page 30 of 38 employees insofar as taxes have not been paid as an obligation on behalf of the employees. The assessee has neither filed the returns nor has any assessment made. No interest has been charged by the Revenue for non-payment of taxes by the employees. That is one aspect of the matter. 33. The other side of the matter is that the assessee was under a statutory obligation to deduct tax from the remuneration paid/payable to the nonresident expatriate employees and pay the same to the Government. This is an independent statutory obligation imposed upon the assessee. The tax deducted at source by the assessee and payment thereof to the Government does not by itself qualify for deduction as business expenditure by reason of the compliance of statutory obligation made by the assessee. It is important to bear in mind that the deduction of tax claimed by the assessee is as part of the agreement for payment of remuneration net of salary and not as part of the fulfillment of the statutory obligation. For better appreciation of this issue, relevant sections may be quoted hereunder : "192(1). Any person responsible for paying any income chargeable under the head "Salaries" shall, at the time of payment, deduct income-tax on the amount payable at the average rate of income-tax computed on the basis of the rates in force for the financial year in which the payment is made, on the estimated income of the assessee under this head for that financial year. 195A. Where, under an agreement or other arrangement, the tax chargeable on any income referred to in the foregoing provisions of this Chapter is to be borne by the person by whom the income is payable, then, for the purposes of deduction of tax under those provisions, such income shall be increased to such amount as would, after deduction of tax thereon at the rates in force for the financial year in which such income is payable, be equal to the net amount payable under such agreement or arrangement. 200. Any person deducting any sum in accordance with the provisions of Sections 192 to 194, Section 194A, Section 194B, Section 194BB, Section 194C, Section 194D, Section 194E, Section 194EE, Section
IT(TP)A Nos.23 & 61/Bang/20115 M/s.Rambus Chit Technologies (India) Pvt. Ltd. Page 31 of 38 194F, Section 194G, Section 194H, Section 194-I, Section 194J, Section 194K,Section 194L, Section 195, Section 196A, Section 196B, Section 196C and Section 196D shall pay within the prescribed time, the sum so deducted to the credit of the Central Government or as the Board directs. 201(1). If any such person and in the cases referred to in Section 194, the principal officer and the company of which he is the principal officer does not deduct or after deducting fails to pay the tax as required by or under this Act, he or it shall, without prejudice to any other consequences which he or it may incur, be deemed to be an assessee-in-default in respect of the tax : Provided that no penalty shall be charged under Section 221 from such person, principal officer or company unless the AO is satisfied that such person or principal officer or company, as the case may be, has without good and sufficient reasons failed to deduct and pay the tax. (1A) Without prejudice to the provisions of Sub-section (1), if any such person, principal officer or company as is referred to in that sub-section does not deduct or after deducting fails to pay the tax as required by or under this Act, he or it shall be liable to pay simple Interest at eighteen per cent per annum on the amount of such tax from the date on which such tax was deductible to the date on which such tax is actually paid. (2) Where the tax has not been paid as aforesaid after it is deducted, the amount of the tax together with the amount of simple interest thereon referred to in Sub- section (1A) shall be a charge upon all the assets of the person, or the company, as the case may be, referred to in Sub-section (1)." 34. It is noteworthy from abovementioned provisions of the Act that the interest levied by the Department is for the assessee having been treated as the "assessee-in-default" for the payment of tax deductible at source. This obligation is independent of the obligation of the assessee as an agent of the expatriate employees. Therefore, the payment of interest
IT(TP)A Nos.23 & 61/Bang/20115 M/s.Rambus Chit Technologies (India) Pvt. Ltd. Page 32 of 38 does not partake the character of the part of the remuneration package in respect of the expatriate employees. As already pointed out, the interest has been paid as the assessee-in- default. Since the assessee is not entitled to deduction in respect of the tax deducted at source per se, as such the interest paid for the default in payment of tax deducted/deductible at source also does not qualify for deduction. Reference may be useful to the decision of the Calcutta High Court in the case of Jubilee Investments & Industries Ltd. v. Asstt. CIT and Ors. . Their Lordships observed as under : "The Asstt. CIT has rightly pointed out that once the TDS is deducted from the income of somebody, the assessee is merely a custodian of the TDS amount. He cannot touch the amount. That amount is to be deposited within the time prescribed in the Central Government account and any loss or profit in the business of the assessee has nothing to do with deposit of the TDS amount." Reference may be made to the definition of tax under the DTAA. Article 3(d) reads as under : "(d) the term "tax" means Indian tax or Netherlands tax as the context requires, but shall not include any amount which is payable in respect of any default or omission in relation to the taxes to which this Convention applies or which represents a penalty imposed relating to those taxes;" It is evident from the above definition that even DTAA does not cover such a levy. It may also be pertinent to mention that income-tax paid by the assessee does not qualify for deduction as such. This view is supported by the decision of the Supreme Court in the case of Smt. Padmavati Jaikrishna v. Addl. CIT . In the case of East India Pharmaceutical Works Ltd. v. CIT their Lordships of the Supreme Court held that the interest paid on the overdraft utilized for payment of income-tax is also not allowable as a deduction as it is not an expenditure laid out wholly and exclusively for the purposes of business as contemplated by Sub-section (1) of Section 37 of the IT Act, 1961. On the basis of the above principle of law, the interest paid by the assessee as "an assessee-in-default of the tax" is not eligible for deduction as expenses incurred for purposes of business. The decisions relied upon by the learned counsel for
IT(TP)A Nos.23 & 61/Bang/20115 M/s.Rambus Chit Technologies (India) Pvt. Ltd. Page 33 of 38 the assessee are accordingly inapplicable to the facts of this case.”
We find that in both the above decisions, it has been held that remuneration and the income-tax thereon paid on behalf of the employee therein, is an allowable expenditure u/s 37 of the Act. In view of the same, we allow the assessee’s ground of appeal.
As regards groundNo.5 against the disallowance of reimbursement of software expenses, we find that during the assessment proceedings, the AO has observed that the assessee- company has claimed an amount of Rs.9,37,998/- towards reimbursement of expenses to M/s.Rambus Incorporation on account of Oracle license and the assessee did not deduct TDS even though, in the opinion of the AO, it was in the nature of ‘fees for technical services’. He, therefore, disallowed the same and added to the returned income of the assessee.
On appeal, the CIT(A) held it to be a payment of royalty for use of the software and therefore not allowable as expenditure due to non deduction of TDS in view of the judgment of the jurisdictional High Court in the case of Samsung Electronics Co. Ltd. reported in 345 ITR 494.
The learned counsel for the assessee, though fairly agreed that the issue is covered against the assessee by the
IT(TP)A Nos.23 & 61/Bang/20115 M/s.Rambus Chit Technologies (India) Pvt. Ltd. Page 34 of 38 decision of the jurisdictional High Court, placed reliance upon the following judgments in favour of the assessee:
(i) Director of Income-tax vs. Infrasoft Ltd. (220 Taxmann 274(HC)(Delhi) (ii)Director of Income-tax vs. Ericsson A.B. (16 Taxman.com 371)(2011) 343 ITR 470(Del)
However, since the issue is covered in favour of the revenue by the decision of the jurisdictional High Court, in the case of Samsung Electronic Co. Ltd. (cited supra) we see no reason to interfere with the order of the CIT(A).
In the result, grounds of appeal No.5(a) and (b) are rejected.
Ground No. 6 being against levy of interest u/s 234B of the Act, we find that it is consequential in nature and therefore the AO is directed to give consequential relief to the assessee.
In the result, the assessee’s appeal is partly allowed.
IT(TP)A No.61/Bang/2015 (Revenue’s appeal):
In the revenue’s appeal, the only grievance of the revenue is against the direction of the CIT(A) to reduce the expenditure incurred in travel, telecommunication etc., both from export turnover as well as total turnover for the purpose of computation of deduction u/s 10A of the Act and also in directing
IT(TP)A Nos.23 & 61/Bang/20115 M/s.Rambus Chit Technologies (India) Pvt. Ltd. Page 35 of 38 the AO to allow depreciation at the rate of 60% on Circuit Test Boards as against 25% allowed by the AO.
On the ground Nos.1 and 2 relating to the deduction u/s 10A of the Act, we find that the issue is covered in favour of the assessee by the decision of the jurisdictional High Court in the case of CIT vs. Tata Elxsi (349 ITR 98) which has been followed by the CIT(A) in allowing relief to the assessee. The only argument raised by the learned Departmental Representative is that the judgment has not become final and the department has filed appeals before the Hon’ble Supreme Court. However, since the issue is covered in favour of the assessee by the decision of the jurisdictional High Court which has neither been stayed nor set aside, we see no reason to interfere with the order of the CIT(A). The revenue’s grounds No.1 and 2 are rejected.
As regards ground No.3 relating to the rate of depreciation at 60% on circuit test boards, brief facts are that during the assessment proceedings, the AO, while considering the claim of the assessee of Rs.2,57,232/- towards payment of customs duty on purchase of circuit test boards, held that it is capital expenditure and that depreciation thereon is to be allowed at 25%. Before the CIT (Appeals), the assessee claimed that ‘Circuit Test Boards’ are used as specialized functional accessory to computers and therefore depreciation on them should be allowed
IT(TP)A Nos.23 & 61/Bang/20115 M/s.Rambus Chit Technologies (India) Pvt. Ltd. Page 36 of 38 @ 60%. The CIT(A) allowed depreciation @ 60% against which the revenue is in appeal before us.
The learned counsel for the assessee submitted that circuit test boards are to be classified as computers for the purpose of allowing depreciation in accordance with the depreciation schedule annexed to the Act and further that when an asset is included in a particular block, customs duty paid thereon should also take the same colour. Therefore, he submitted that the customs duty paid on circuit test boards would also be eligible for depreciation @ 60% as is applicable to computers. Further the learned counsel for the assessee drew our attention to the definition of the term ‘computer system’ under Explanation (a) to sec.36(1)(xi) of the Act and also the definition of the word ‘computer’ u/s 2(1)(i) of the Information Technology Act of 2002 to submit that the term ‘computer’ not only includes input output devices but also includes the processor and memory facilities connected to the computer system, or network, including the printer, UPS etc. It is submitted that circuit test boards are used as a specialised functional accessories to the computer system and hence should be classified accordingly. In support of his contention, the learned counsel for the assessee has placed reliance upon the following decisions:
a. CIT vs. BSES Rajadhani Powers Ltd. in ITA 1266 of 2010 wherein the Hon’ble High Court of Delhi held that computer accessories and peripheral form an integral part of
IT(TP)A Nos.23 & 61/Bang/20115 M/s.Rambus Chit Technologies (India) Pvt. Ltd. Page 37 of 38 computers and are eligible for depreciation at the rate of 60%.
b. ITO vs. Samiran Majumdar (2006) 98 ITD 119 (Cal) c. DCIT vs. Datacraft India Ltd. (2010) 40 SOT 295 (Mumbai)(SB) d. Container Corporationof India Ltd. Vs. ACIT (2009) 30 SOT 284. The learned Departmental Representative, however, tried to distinguish the ‘Circuit Test Boards’ from ‘the accessories and peripherals of computers’ and submitted that they have independent functions as well and therefore they cannot be classified as ‘computers’ or ‘accessories and peripherals of computers’ and are only Plant & Machinery and are eligible for depreciation @ 25% only.
Having regard to the rival contentions and the material on record, we find that the depreciation schedule to the Income-tax Act classified ‘computers’ to include computer software. The Hon'ble Delhi High Court in the case of BSES Rajadhani Powers Ltd. has held that computer accessories and peripherals form integral part of computers. For coming to this conclusion the Hon'ble Delhi High Court considered the decision of ITAT in the case of Expeditors Intl. (India) P. Ltd. Vs. CIT reported in (2008) 118 TTJ 652. The Special Bench of the Tribunal in the case of Datacraft India (supra) has held that ‘when a devise is used as part of the computer in its functions, then it would be termed as computer’. It was further held that ‘the predominant function of
IT(TP)A Nos.23 & 61/Bang/20115 M/s.Rambus Chit Technologies (India) Pvt. Ltd. Page 38 of 38 the device determines its classification’. In the case before us, the assessee had submitted before CIT (Appeals) that the ‘Circuit Test Boards’ are used as a specialized functional accessory to the ‘computer systems’. The CIT (Appeals) has accepted this contention of the assessee and following the decisions cited supra, held the ‘circuit test boards’ to be accessories and peripherals of computers and further held that the customs duty paid for purchase of such circuit test boards also qualifies for depreciation at the rate of 60%. We find that the CIT(A) has followed the precedents to allow depreciation at the rate of 60% and the learned Departmental Representative has not been able to rebut this finding with any evidence to the contrary. Therefore, we see no reason to interfere with the same.
In the result, the revenue’s appeal is dismissed and assessee’s appeal is partly allowed..
Pronounced in the open court on 22nd July, 2015.
sd/- sd/- (Jason P Boaz) (Smt. P.Madhavi Devi) ACCOUNTANT MEMBER JUDICIAL MEMBER eksrinivasulu Copy to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. 6. Guard file By order Assistant Registrar Income-tax Appellate Tribunal Bangalore