2016 (3) TMI 1242 - AT - Income Tax

TPA - comparability - Held that - The assessee engaged in R & D services in the field of e-commerce, e-solutions, internet security and management, thus companies functionally dissimilar with that of assessee need to be deselected from final list of comparable. To summarise we direct exclusion of Avani Cimcon Technologies Ltd, Celestial Labs Ltd, E- Zest Solutions Ltd, Flextronics Software Systems Ltd (seg), Helios & Matheson Information Technology Ltd, Infosys Technologies Ltd, Ishir Infotech Ltd, Kals Information Systems Ltd, Lucid Software Ltd, Persistent Systems Ltd, and Wipro Ltd (seg), from the list of comparables. Comparability of M/s. Tata Elxsi Ltd (seg), is remitted back to the TPO / AO for consideration afresh as per law. We also direct that Megasoft Ltd, shall be considered for inclusion only after segmentation of its results. Needless to say working capital adjustment shall be reworked by the AO / TPO confining to the comparables that are left after exclusions. Deduction u/s 10A computation - foreign currency expenditure on telecommunication expenditure not excluded from the export turnover - Held that - Submission of the assessee that what has been reduced from export turnover should also be deducted from the total turnover while working out the deduction u/s.10A of the Act, needs to be accepted in view of the judgment of Hon ble jurisdictional High Court in the case of CIT v. Tata Elxsi Ltd (2011 (8) TMI 782 - KARNATAKA HIGH COURT ). Allowability of software expenditure - revenue or capital expenditure - Held that - What we find is that the nature of software expenditure was not analysed by the lower authorities. AO had simply considered it as a capital outgo without verifying whether the expenditure was relatable to application software or system software, which gave enduring benefit to the assessee. It is true that some application software can have enduring quality. A close analysis of the expenditure is required for coming to a reasoned conclusion We are of the opinion that the matter requires a fresh look by the AO. We remit the issue back to the file of the AO for consideration in accordance with law.

Summary

Issues Involved:
1. Transfer Pricing Adjustments
2. Exclusion of Foreign Currency Expenditure from Export Turnover
3. Treatment of Software Expenditure as Capital or Revenue

Detailed Analysis:

1. Transfer Pricing Adjustments:
In the appeal, the assessee challenged the adjustments made on the value of international transactions by the AO/TPO, which were confirmed by the DRP. The primary contention was regarding the comparables selected by the TPO for determining the Arm's Length Price (ALP) of the international transactions.

- Assessee's Argument: The assessee argued for the exclusion of certain comparables, asserting they were functionally different. They relied on a coordinate bench order in the case of Hewlett Packard Global Soft P. Ltd., which had a similar profile.
- Tribunal's Decision: The Tribunal agreed with the assessee, directing the exclusion of several companies (e.g., Avani Cimcon Technologies Ltd, Celestial Labs Ltd, E-Zest Solutions Ltd, etc.) from the list of comparables, as they were functionally different. The Tribunal also remitted the comparability of Accel Transmatics Ltd (seg), Quintegra Solutions Ltd, and Tata Elxsi Ltd (seg) back to the AO/TPO for fresh consideration.
- Megasoft Ltd: The Tribunal directed that Megasoft Ltd could be considered as a comparable only after proper segmentation of its results.

2. Exclusion of Foreign Currency Expenditure from Export Turnover:
The assessee contended that foreign currency expenditure on telecommunication should not be excluded from the export turnover, or alternatively, it should also be reduced from the total turnover while computing the relief under Section 10A of the Income-tax Act.

- Tribunal's Decision: The Tribunal accepted the assessee's submission, referencing the judgment of the Hon'ble jurisdictional High Court in the case of CIT v. Tata Elxsi Ltd, which mandated that amounts reduced from export turnover should also be deducted from the total turnover.

3. Treatment of Software Expenditure as Capital or Revenue:
The assessee claimed software expenditure as a revenue outgo, which the AO considered as capital expenditure, allowing depreciation at 60%.

- Assessee's Argument: The assessee argued that the expenditure was for acquiring application software, which did not provide enduring benefit and should be treated as revenue expenditure.
- Tribunal's Decision: The Tribunal found that the nature of the software expenditure was not adequately analyzed by the lower authorities. It remitted the issue back to the AO for a fresh examination to determine whether the expenditure was for application software or system software, which could have enduring benefits.

Conclusion:
The Tribunal provided a detailed analysis and directions on the issues raised by the assessee. It allowed the appeal partly by directing the exclusion of certain comparables, accepting the treatment of foreign currency expenditure as per the jurisdictional High Court's ruling, and remitting the issue of software expenditure back to the AO for fresh consideration. The appeal was thus allowed protanto.