2014 (10) TMI 936 - AT - Income Tax

Disallowance of indirect expenditure for increasing the share capital - Held that - Disallowance was made by the Assessing Officer purely on guess work and on adhoc basis without any iota of evidence that the assessee has incurred further expenditure over and above what is recorded in the books. It is the settled proposition of law that presumptions and surmises however strong may be cannot be the basis for addition. Since in the instant case, there is no direct or indirect evidence brought on record by the Assessing Officer that the assessee has incurred further indirect expenses for the purpose of increasing the share capital of the company, therefore, the addition made by the Assessing Officer deserves to be deleted. We accordingly direct the Assessing Officer to delete the same. Disallowance u/s 14A - amount incurred for increasing the share capital - Held that - From the various details furnished by the assessee we find the disallowance claimed as deduction u/s.35D was disallowed by the Assessing Officer and the assessee did not press the grounds of appeal No.1 in which it has challenged the order of the Assessing Officer in disallowing the claim of deduction u/s.35D. Once the same is disallowed, there cannot be any further addition u/s.14A since it amounts to double disallowance. We accordingly direct the Assessing Officer to delete the addition. Claim of deduction u/s.10A - Held that - Assessing Officer is not justified in restricting the deduction u/s.10A on account of disallowance u/s.40(a)(ia) and 43B. Comparable selection - Held that - Considering the software development services rendered by the assessee the companies dissimilar with that of assessee need to be deselected from final list of comparables.

Issues Involved:
1. Disallowance of deduction under section 35D.
2. Disallowance of indirect expenditure for increasing share capital.
3. Disallowance under section 14A.
4. Restriction of deduction under section 10A.
5. Transfer pricing adjustments under section 92CA.

Detailed Analysis:

1. Disallowance of deduction under section 35D:
The assessee's first ground of appeal was dismissed as 'not pressed' since the counsel for the assessee did not pursue this ground during the hearing.

2. Disallowance of indirect expenditure for increasing share capital:
The Assessing Officer (AO) disallowed Rs. 33,174 on the presumption that the assessee must have incurred indirect expenses for increasing share capital, beyond the direct expenses of Rs. 33,17,360 on stamp duty and registration. The Tribunal found the disallowance to be based on guesswork without evidence, emphasizing that presumptions cannot justify additions. The AO was directed to delete this disallowance, and the assessee's appeal on this ground was allowed.

3. Disallowance under section 14A:
The AO disallowed Rs. 6,63,472 under section 35D, treating the direct expenditure of Rs. 33,17,360 for increasing share capital as disallowable under section 14A. The Tribunal noted that since the deduction under section 35D was already disallowed, any further disallowance under section 14A would amount to double disallowance. Therefore, the AO was directed to delete the addition of Rs. 33,17,360, and the assessee's appeal on this ground was allowed.

4. Restriction of deduction under section 10A:
The AO restricted the deduction under section 10A to Rs. 6,38,86,434 against the claimed Rs. 9,22,90,403 by apportioning expenses between eligible and non-eligible undertakings based on turnover. The AO also disallowed deductions under sections 40(a)(ia) and 43B, reducing the eligible deduction under section 10A. The Tribunal held that increased income due to disallowance under sections 40(a)(ia) and 43B should be considered for deduction under section 10A, following the Bombay High Court's decision in CIT vs. Gem Plus Jewellery India Pvt. Ltd. The Tribunal directed the AO to allow the full deduction under section 10A, and the assessee's appeal on this ground was allowed.

5. Transfer pricing adjustments under section 92CA:
The AO made adjustments totaling Rs. 10,29,90,870 under section 92CA for various services provided to the assessee's Associated Enterprises (AEs). The Tribunal addressed the following points:

- Software Development Services Segment:
- The Tribunal included Maars Software International Ltd., VJIL Consulting Ltd., and Quintegra Solutions Ltd. as comparables, rejecting the AO's exclusion.
- Infosys Technologies Ltd., Transworld Infotech Ltd., and Helios and Matherson Information Technology Ltd. were excluded from the comparables list due to significant functional differences and other factors.
- Kals Information Systems Ltd. and Compucom Software Ltd. were excluded based on prior Tribunal decisions highlighting their non-comparability.

- Design Engineering, Testing, and Authoring Services Segment:
- KLG Systel Ltd. was excluded as a comparable due to its minimal revenue from export services and functional differences.

- Business Support Services Segment:
- ICRA Online Ltd. was excluded as a comparable due to its engagement in functionally different business activities.

The Tribunal also directed the AO/TPO to grant appropriate working capital adjustments and to consider the +/- 5% adjustment as per section 92C(2). The assessee's appeal on transfer pricing adjustments was allowed for statistical purposes.

Conclusion:
The appeal filed by the assessee was partly allowed, with the Tribunal providing detailed directions on the various grounds of appeal, including the deletion of specific disallowances and adjustments, and the inclusion/exclusion of certain comparables in the transfer pricing analysis.

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