2016 (2) TMI 995 - AT - Income Tax

Addition on account of transfer pricing adjustment - Held that - Unable to accept argument that the comparables should be selected on the basis of similarity even under TNMM. The Hon ble High Court has laid down that selection of comparables does not differ with the method adopted. Ex consequenti, it is no more open to argue that the functional dissimilarity of the companies under the overall broader category can be ignored under the TNMM. In view of the foregoing discussion, we find the functional similarity of Apitco Limited lacking on entity level with the assessee company. As such, we order for its exclusion from the final set of comparables. Global Procurement Consultants Ltd. can be considered as comparable to the assessee company. We, therefore, order for the elimination of this company from the final list of comparables. NTPC Electric Supply Ltd. s activities carried out by the assessee in facilitating purchase and sale of goods for its AEs, can by no standard, be compared with the nature of activity carried out by NTPC Electric Supply Ltd. We, therefore, order for the exclusion of this company from the list of comparables. Askme Info Hubds Ltd. hardly bears any similarity with the assessee company. We, therefore, reject the assessee s contention for including this company in the list of comparables. Crisil Research & Information Services Ltd only reason given for its exclusion is the nonavailability of data for the relevant financial year. The ld. AR fairly admitted that it is not possible to deduce operating profit margin of this company for the financial year ending 31.3.2007 on the basis of information as is available in public domain. As such, we hold that the authorities were justified in excluding this company from the list of comparables on this score alone. Addition towards the expenditure incurred on account of leasehold improvements by treating the same as capital in nature - Held that - It is evident from the description of the items on which the above referred expenditure has been incurred that it is a case of renovation of premises immediately after taking it on lease. As such, there can be no question of replacement. We cannot help if the Revenue has accepted the part deletion of disallowance by the ld. CIT(A). Be that as it may we are concerned only with the items of disallowance raked up in the appeal before us and hold that the ld. CIT(A) has taken unimpeachable view in treating the instant amount as capital expenditure. Claim of depreciation - Held that - In order to bring any amount within the ambit of Explanation 1 to section 32, it is paramount that the expenditure incurred by the assessee on the premises in the capacity of non-owner should firstly be in the nature of capital expenditure and then it should fall within any or both the clauses as discussed above. If these conditions get satisfied, as is the case under consideration, then the amount incurred for such works falls for consideration under Explanation 1 to section 32. In other words, the amount so incurred would be capitalized entitling the assessee to depreciation as per the eligible rate. In view of the foregoing discussion, we uphold the impugned order on this issue subject to grant of depreciation.

Summary

Issues Involved:
1. Confirmation of addition on account of transfer pricing adjustment.
2. Non-granting of working capital adjustment.
3. Confirmation of addition towards expenditure incurred on account of leasehold improvements by treating the same as capital in nature.

Detailed Analysis:

1. Confirmation of Addition on Account of Transfer Pricing Adjustment:

The primary issue in this case was the confirmation of the addition on account of transfer pricing adjustment. The assessee, a service provider to Marubeni Itochu Steel Inc., Tokyo, Japan (MCJ), reported four international transactions. The dispute centered around the transaction of 'Provision of support services for transactions, information support services' valued at Rs. 4,07,07,698/-. The Transfer Pricing Officer (TPO) disputed the nature of these services, categorizing them as business support services rather than IT-enabled services. The assessee used the Transactional Net Margin Method (TNMM) with the Profit Level Indicator (PLI) of Operating profit to Total cost (OP/TC), calculating its OP/TC at 10.39%. The TPO, however, selected nine new companies as comparables, determining an average operating profit margin of 19.3%, leading to a transfer pricing adjustment of Rs. 25,36,526/-.

The Tribunal noted that the TPO had correctly characterized the services as business support services and not ITES. The Tribunal rejected the Revenue's request to restore the matter to the TPO for a fresh determination, as the TPO had already recorded the nature of services rendered by the assessee. The Tribunal then examined the comparability of the companies selected by the TPO and the assessee.

Apitco Ltd.: The Tribunal found that Apitco Ltd. provided services in the nature of Project management consulting, Feasibility studies, and other diverse services, which were not comparable to the assessee's services. Therefore, Apitco Ltd. was excluded from the list of comparables.

Global Procurement Consultants Ltd.: This company provided procurement advisory services and conducted procurement audits, which were significantly different from the services provided by the assessee. Thus, it was excluded from the list of comparables.

NTPC Electric Supply Ltd.: The Tribunal found that NTPC Electric Supply Ltd. was engaged in consultancy and project management services under various government schemes, which were not comparable to the assessee's services. Therefore, it was excluded from the list of comparables.

Askme Info Hubds Ltd.: The Tribunal rejected the inclusion of Askme Info Hubds Ltd. as a comparable, as it was engaged in information vending services, which were not similar to the assessee's services.

Crisil Research & Information Services Ltd.: The Tribunal upheld the exclusion of this company due to the non-availability of data for the relevant financial year, despite its functional similarity.

2. Non-Granting of Working Capital Adjustment:

The assessee requested a working capital adjustment, which was denied by the TPO and the CIT(A). The Tribunal agreed in principle with the grant of working capital adjustment, noting that it is essential to neutralize differences in inventory, trade payables, and trade receivables to bring the assessee's case at par with other functionally comparable entities. However, due to insufficient material on record, the Tribunal remitted the matter to the AO/TPO for computation of the working capital adjustment.

3. Confirmation of Addition Towards Expenditure Incurred on Account of Leasehold Improvements by Treating the Same as Capital in Nature:

The assessee claimed leasehold improvement expenses of Rs. 23.90 lakhs and architect fees of Rs. 33.14 lakhs as revenue expenses. The AO treated these as capital expenditure, allowing depreciation on the capitalized amount. The CIT(A) allowed the architect fees as revenue expenditure but upheld the capitalization of the leasehold improvement expenses. The Tribunal upheld the CIT(A)'s decision, noting that the expenditure was incurred on total renovation of the leased premises, which is capital in nature. The Tribunal referred to the Supreme Court's judgment in Ballimal Naval Kishore vs. CIT and the jurisdictional High Court's decision in Bigjo's India Ltd. vs. CIT, which supported the capitalization of such expenses. The Tribunal also noted that as per Explanation 1 to section 32, the capital expenditure on leasehold premises is eligible for depreciation.

Conclusion:

The Tribunal set aside the transfer pricing addition and remitted the matter to the AO/TPO for a fresh determination of the ALP of the international transaction. The Tribunal upheld the CIT(A)'s decision on the capitalization of leasehold improvement expenses, subject to the grant of depreciation. The appeal was partly allowed for statistical purposes.