2014 (8) TMI 1035 - AT - Income Tax

Transfer pricing adjustment - selection of comparable - Held that - UTV Software Communication should be included in the list of comparables. However, we find that in the order of TPO, as per submission of the assessee UTV Software Communication was having PLI of (-) 2.64%. However, in the submissions made before us such margin has been taken as (-) 3.81%. Thus, there is a variation in computing the PLI of UTV Software Communication. Though this would also not make much difference as the difference between the PLI of the assessee and arithmetic mean of final comparable even after this difference & other minor adjustment with regard to depreciation etc. which is dealt elsewhere in this order will be within the safe harbour of /- 5%, however, for the purpose of verification of the PLI of UTV Software Communication we restore this issue to the file of TPO and we direct that if after including UTV Software Communication in the list of comparables and after adjustment on account of depreciation, which is dealt elsewhere in the order, difference between the PLI of the assessee and arithmetic mean of the comparable parties is within the safe harbour of /-5%, then no addition on account of TP adjustment should be made. Adjustment on account of depreciation - Applicability of rule 10B(1)(e)(iii) - Held that - We direct the TPO to adopt the adjusted profit margin of the comparables as well as assessee after brining at par the treatment of the claim of depreciation. This exercise has been done by TPO in the remand proceedings and those figures should be adopted for the purpose of computing arithmetic mean of the margin of the comparables and the profit margin of the assessee Computation of PLI - Held that - A uniform approach has been adopted by the TPO in respect of computation of PLI in the case of assessee as well as in the case of comparables. If the uniform approach is adopted, unless any contrary material has been brought on record, we see no infirmity in such basis of the calculation.

Issues Involved:
1. Acceptance of additional evidence under Rule 46A of the I.T. Rules, 1962.
2. Consideration of sundry balances, excess provisions, and foreign exchange fluctuations as operating revenues.
3. Rejection of depreciation adjustment by the TPO.
4. Application of Related Party Transaction (RPT) and Turnover (TO) filters.
5. Selection of comparable companies for Transfer Pricing (T.P) adjustments.
6. Segment accounts and margin computation.
7. Disallowance under section 14A of the Income Tax Act.

Detailed Analysis:

1. Acceptance of Additional Evidence under Rule 46A:
The Revenue challenged the Ld. CIT(A)'s acceptance of additional evidence filed by the assessee as fresh evidence under Rule 46A of the I.T. Rules, 1962. The Tribunal found no error in the Ld. CIT(A)'s decision to admit the additional evidence, which included audited accounts for correct PLI calculations. The TPO did not object to these evidences and recomputed margins accordingly. Thus, Grounds No. 1, 2, and 3 of the Revenue's appeal were dismissed.

2. Consideration of Sundry Balances, Excess Provisions, and Foreign Exchange Fluctuations as Operating Revenues:
The Tribunal upheld the TPO's uniform approach in computing PLI for both the assessee and comparables. It was found that sundry balances written back, excess provisions written back, and gains on foreign exchange fluctuations were considered as operating revenues. The Tribunal saw no infirmity in this uniform approach unless contrary material was presented. Therefore, Grounds No. 4, 5, and 6 of the Revenue's appeal were dismissed.

3. Rejection of Depreciation Adjustment by the TPO:
The Tribunal agreed with the Revenue that adjustments on account of depreciation should be made as per Rule 10B(1)(e)(iii) of the Income Tax Rules, 1962. It was noted that the TPO's adjustment brought the assessee and comparables at par regarding depreciation claims, impacting net profit margins materially. The Ld. CIT(A)'s decision to reject the TPO's depreciation adjustment was set aside, and Grounds No. 7 and 8 of the Revenue's appeal were allowed.

4. Application of Related Party Transaction (RPT) and Turnover (TO) Filters:
The Tribunal reviewed the TPO's application of a 15% RPT filter and found that recent ITAT decisions suggested a 25% RPT filter as more appropriate. The Tribunal directed the inclusion of UTV Software Communications Ltd. in the list of comparables, as its RPT was 18.19%, within the 25% threshold. This inclusion was critical for determining the PLI within the safe harbor of +/- 5%.

5. Selection of Comparable Companies for Transfer Pricing (T.P) Adjustments:
The Tribunal addressed the selection of comparables, noting that the TPO excluded companies with RPT above 15% and turnover less than Rs. 10 crores. The Tribunal accepted the assessee's contention that UTV Software should be included as a comparable, leading to a revised arithmetic mean of comparables. The Tribunal directed the TPO to verify UTV Software's PLI and ensure the final PLI of the assessee falls within the safe harbor range.

6. Segment Accounts and Margin Computation:
The Tribunal did not delve into the detailed segment accounts and margin computation issues raised by the assessee, as the inclusion of UTV Software in the comparables list resolved the primary TP adjustment concerns. Other grievances related to TP adjustments were deemed academic and infructuous.

7. Disallowance under Section 14A of the Income Tax Act:
The Tribunal addressed the disallowance under section 14A, noting that Rule 8D was not applicable for the assessment year 2007-08. Following the Bombay High Court's decision in Godrej & Boyce Mfg. Co. Ltd. vs. DCIT, the Tribunal restricted the disallowance to 5% of the exempted income, directing the AO to work out the disallowance accordingly.

Conclusion:
Both appeals were partly allowed, with specific directions provided for the TPO to include UTV Software in the comparables list and recompute the PLI. The disallowance under section 14A was restricted to 5% of the exempted income, and the Tribunal upheld the uniform approach in computing PLI for both the assessee and comparables.

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