2016 (3) TMI 1126 - AT - Income Tax

Transfer pricing adjustment - comparable selection - Held that - 12 companies out of 13 sought by the assessee are required to be excluded from the list of comparables where as the company Bodhtree Consulting Ltd. is accepted as a good comparable of software development services provided by the assessee. Accordingly, we direct the TPO/A.O to exclude 12 companies as mentioned in para 25 of the order of the co-ordinate bench (supra) from the set of comparables and recomputed the ALP after considering the claim of risk adjustment as well as the benefit of tolerance range of / - 5% as per the proviso to section 92C(2). Rejection of travel expenses incurred in foreign currency from the export turnover - computation of deduction u/s 10A - Held that - This issue is covered by the decision of the Hon ble jurisdictional High Court of Karnataka in the case of CIT V Tata Elxsi Ltd & Others (2011 (8) TMI 782 - KARNATAKA HIGH COURT ) wherein it has been held that while computing the exemption u/s 10A, if the export turnover in the numerator is to be arrived at after excluding certain expenses, the same should also be excluded from the total turnover in the denominator. Disallowance of interest paid to Telelogic Sweden (AE) - revenue or capital - Held that - Though the assessee has failed to establish that the acquisition of fixed assets was made out of its own free reserves, however we find that there is a substance in the alternate plea of the assessee that the addition if any can be made only in respect of addition to the fixed assets post issuance of debentures because prior to the receipt of the debenture proceeds the borrowed fund cannot be utilized for the purpose of purchasing the asset. Accordingly, we direct the Assessing Officer to verify the exact date of acquisition of the fixed assets and then to decide the issue of disallowance of interest only in respect of the fixed assets acquired post issuance of debentures or payment of which is made post issuance of debentures. Disallowance of rent equalization amount - Held that - We allow the claim of the assessee on this issue regarding rent equilisation amount. Disallowance of consultancy charges - Held that - When the DRP has already directed the Assessing Officer to afford an opportunity to the assessee to present its case and relevant evidence, then we do not find any reason to interfere with the finding of the DRP. The learned Authorised Representative has submitted that the Assessing Officer has not given effect to the directions of the DRP. Accordingly, we direct the Assessing Officer to reconsider this issue after giving an opportunity of hearing to the assessee. Disallowance of the ratio adopted by the assessee for apportionment of the common expenses - Held that - We find that the common expenses are invariably in the nature of head office expenses and on account of salary of the office staff and other expenses relating to head office. Therefore these common expenses have no direct or proximate relation with the ratio of the turnover. When the assessee has been consistently following the apportionment of common expenses on the basis of head count ratio then without giving any finding that this method of apportionment resulting in distortion of profits, the Assessing Officer is not justified in rejecting the same and applying some other method. In view of the above facts and circumstances and following the rule of consistency, we decide this issue in favour of the assessee and delete the addition. Set off of unabsorbed depreciation of earlier year for computation of deduction under Section 10A allowed. See CIT vs. M/s.Biocon Ltd. 2014 (12) TMI 838 - ITAT BANGALORE

Issues Involved:
1. Legality of assessment and reference to Transfer Pricing Officer (TPO).
2. Comparability analysis for determining arm's length price.
3. Erroneous data used by AO/TPO.
4. Non-allowance of appropriate adjustments.
5. Variation of 5% from the arithmetic mean.
6. Computation of deduction under Section 10A.
7. Disallowance of interest paid to Telelogic Sweden.
8. Disallowance of rent equalization amount.
9. Disallowance of consultancy charges paid to Telelogic Germany.
10. Ratio adopted for apportioning items of disallowance.
11. Set-off of unabsorbed depreciation of earlier years.
12. Directions issued by the Dispute Resolution Panel (DRP).
13. Levy of interest under Section 234B.
14. Initiation of penalty proceedings under Section 271(1)(c).

Detailed Analysis:

1. Legality of Assessment and Reference to TPO:
The assessee challenged the assessment order dated 30.11.2011 and the reference to the TPO, arguing that the AO/TPO failed to establish that the appellant shifted profits outside India. The Tribunal did not provide specific adjudication on this general ground.

2. Comparability Analysis for Determining Arm's Length Price:
The assessee contested the TPO's comparability analysis, which rejected the filters and search process adopted by the assessee in the Transfer Pricing Study. The TPO included 20 comparable companies, rejecting 12 out of the 17 comparables selected by the assessee. The Tribunal directed the exclusion of 12 companies from the set of comparables based on functional dissimilarity and previous Tribunal decisions, including Avani Cimcon Technologies Ltd., Celestial Biolabs Ltd., E-Zest Solutions Ltd., Infosys Technologies Ltd., KALS Information Systems Ltd., Lucid Software Ltd., Persistent Systems Ltd., Quintegra Solutions Ltd., Softsol India Ltd., Tata Elxsi Ltd., Thirdware Solutions Ltd., and Wipro Ltd. The Tribunal upheld the inclusion of Bodhtree Consulting Ltd. as a comparable.

3. Erroneous Data Used by AO/TPO:
The Tribunal did not provide specific adjudication on this ground.

4. Non-Allowance of Appropriate Adjustments:
The Tribunal did not provide specific adjudication on this ground.

5. Variation of 5% from the Arithmetic Mean:
The Tribunal did not provide specific adjudication on this ground.

6. Computation of Deduction under Section 10A:
The Tribunal directed the AO to exclude travel expenses incurred in foreign currency from the total turnover as well, following the judgment of the Hon'ble jurisdictional High Court in the case of CIT V Tata Elxsi Ltd & Others.

7. Disallowance of Interest Paid to Telelogic Sweden:
The Tribunal directed the AO to verify the exact date of acquisition of the fixed assets and decide the issue of disallowance of interest only in respect of the fixed assets acquired post issuance of debentures.

8. Disallowance of Rent Equalization Amount:
The Tribunal allowed the claim of the assessee regarding the rent equalization amount, following the judgment of the Hon'ble jurisdictional High Court in the case of M/s. Prakash Leasing Limited.

9. Disallowance of Consultancy Charges Paid to Telelogic Germany:
The Tribunal upheld the DRP's direction to the AO to afford a final opportunity to the assessee to present its case and relevant evidence regarding the consultancy charges.

10. Ratio Adopted for Apportioning Items of Disallowance:
The Tribunal decided in favor of the assessee, directing the AO to follow the method of apportionment of common expenses on the basis of head count ratio, which had been consistently followed by the assessee in the past.

11. Set-off of Unabsorbed Depreciation of Earlier Years:
The Tribunal directed the AO to allow deduction under Section 10A without setting off the unabsorbed depreciation, following the judgment of the Hon'ble jurisdictional High Court in the case of CIT vs. Yokogawa India Ltd. & others.

12. Directions Issued by the DRP:
The Tribunal did not provide specific adjudication on this ground.

13. Levy of Interest under Section 234B:
The Tribunal noted that the levy of interest under Section 234B is mandatory and consequential in nature.

14. Initiation of Penalty Proceedings under Section 271(1)(c):
The Tribunal noted that the initiation of penalty proceedings under Section 271(1)(c) is premature at this stage.

Conclusion:
The Tribunal partly allowed the appeal of the assessee, directing the exclusion of certain comparables, allowing the claim regarding rent equalization, directing verification of acquisition dates for interest disallowance, and upholding the method of apportionment of common expenses on the basis of head count ratio. The Tribunal also directed the AO to allow deduction under Section 10A without setting off the unabsorbed depreciation.

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