2013 (6) TMI 500 - AT - Income Tax

Transfer pricing adjustment - addition as difference in arm s length price - TPO took net operating cost at ₹ 11,54,91,263/- for a revenue of ₹ 12,13,93,695/- as against total revenue cost of ₹ 11,54,91,263/- for a total revenue of ₹ 13,59,91,472/- rectification of mistake application - DRP rejected the appellant s contention of excluding comparables of Wipro Ltd. and Infosys Technology Ltd. & KALS Information System (P) Ltd - Held that - DRP rejected the appellant s contention without giving cogent reasons. Thus following the case laws, both giant comparables are to be excluded. Wipro Ltd. is into entirely a different business having a turnover of ₹ 8066 crore and Infosys Technology Ltd. is also absolutely un-comparable having a turnover of ₹ 15,648 crore as against a few crore of Rupees turnover of the appellant company. Reliance is placed on Agnity India Technologies Pvt Ltd v. ITO (2010 (11) TMI 852 - ITAT DELHI), DCIT v. Deloitte Consulting India (P.) Ltd. 2011 (7) TMI 583 - ITAT HYDERABAD , Telcordia Technologies India (P.) Ltd. v. ACIT 2012 (6) TMI 388 - ITAT MUMBAI . As KALS Information System (P) Ltd activities are different hence need to be excluded as relying on Bind View India P. Ltd. vs DCIT 2013 (6) TMI 113 - ITAT PUNE . Apropos the assessee s contentions about the arithmetical mistakes same have not been controverted and it is find that in the first round the TPO himself agreed to correct the mistake and in second round without pointing out any reason, the same has not been corrected. Since the assessee has been able to demonstrate that though DRP agreed with the assessee s contentions about the software testing services, however, while computing the same has been reduced. Consequently the mistake in this behalf is apparent from the order of the lower authorities. Thus merit in the argument of the assessee in this behalf and these mistakes are directed to be rectified as requested by the assessee. Loss of expenditure incurred on software holding - capital v/s revenue - Held that - Disallowing of technical consulting fee - Held that - AO in the preceding years accepted the allowability of deferred revenue expenditure in three years. First instalment of 1/3rd has already been allowed to the assessee. Once the expenditure is treated as revenue in nature, it is to be allowed either in one year or if the AO accepts then on the deferred revenue basis in the agreed years. Therefore, no justification in disallowance of this expenditure which is deleted. If alternate claim of the assessee is accepted in that case the assessee will be entitled to more deduction by way of depreciation if the legal provisions about the WDV and block are strictly applied. In view thereof the corporate addition in respect of 1/3rd expenses is also deleted. Assessee s appeal is allowed

Summary

Issues Involved:
1. Validity of the order passed by ACIT u/s 143(3) r.w.s. 144C of the Act.
2. Addition of Rs. 2,34,68,530/- as difference in arm's length price determined by the Transfer Pricing Officer (TPO).
3. Calculation errors in net operating cost and revenue.
4. Classification of expenditure on software as capital expenditure.
5. Application of proviso to Section 92(c) of the Act.
6. Disallowance of Rs. 11,60,000/- on account of technical consulting fee.
7. Charging of interest u/s 234B and 234D of the Act.

Issue-wise Detailed Analysis:

1. Validity of the Order Passed by ACIT:
The assessee challenged the validity of the order passed by ACIT under sections 143(3) and 144C of the Income Tax Act. The Tribunal did not specifically address this issue in isolation but focused on the substantive grounds of appeal related to transfer pricing adjustments and corporate disallowances.

2. Addition of Rs. 2,34,68,530/- as Difference in Arm's Length Price:
The major issue in the appeal was the transfer pricing adjustment of Rs. 2,34,68,530/-. The assessee contended that the TPO had erred in selecting comparables like Satyam Computers Ltd., Wipro Ltd., and Infosys Technology Ltd., which were giants in the industry and not comparable to the assessee's small-scale operations. The Tribunal noted that the DRP had excluded Satyam Computers Ltd. but retained Wipro Ltd. and Infosys Technology Ltd. The Tribunal found merit in the assessee's argument that these companies were not comparable due to their significantly higher turnover and different business models. The Tribunal cited various judgments, including Agnity India Technologies Pvt Ltd v. ITO, to support the exclusion of such giants as comparables.

3. Calculation Errors in Net Operating Cost and Revenue:
The assessee pointed out arithmetical errors in the computation of net operating cost and revenue by the TPO and DRP. The Tribunal agreed that there were apparent mistakes in the calculations, specifically in the inclusion of software testing services revenue and the proportionate reduction of operating costs. The Tribunal directed the rectification of these errors, acknowledging that the correct revenue to be considered for transfer pricing should be Rs. 12,53,41,525/- and the total cost should be proportionately reduced.

4. Classification of Expenditure on Software as Capital Expenditure:
The Tribunal addressed the issue of disallowance of Rs. 11,60,000/- incurred on software, which was treated as capital expenditure by the AO and DRP. The Tribunal noted that the assessee had incurred this expenditure over three years, with 1/3rd claimed each year. The Tribunal found that the expenditure should be allowed as revenue expenditure, as it had been accepted in the preceding year. Alternatively, if treated as capital expenditure, the Tribunal held that the assessee should be entitled to depreciation on the written down value, resulting in a higher allowable amount.

5. Application of Proviso to Section 92(c) of the Act:
The Tribunal did not specifically address the application of the proviso to Section 92(c) in isolation. However, it implicitly dealt with this issue while discussing the transfer pricing adjustments and the exclusion of certain comparables, thereby impacting the arm's length price determination.

6. Disallowance of Rs. 11,60,000/- on Account of Technical Consulting Fee:
The Tribunal did not provide a separate analysis for the disallowance of Rs. 11,60,000/- on account of technical consulting fee. This issue appears to be subsumed under the broader discussion of transfer pricing adjustments and corporate disallowances.

7. Charging of Interest u/s 234B and 234D of the Act:
The Tribunal did not specifically address the issue of charging interest under sections 234B and 234D. The focus remained on the primary grounds of appeal related to transfer pricing and corporate disallowances.

Conclusion:
The Tribunal allowed the assessee's appeal, directing the rectification of arithmetical errors in the computation of net operating cost and revenue, and excluding Wipro Ltd., Infosys Technology Ltd., and KALS Information System (P) Ltd. as comparables. The Tribunal also deleted the disallowance of expenditure on software, treating it as revenue expenditure. Consequently, the transfer pricing adjustment and corporate addition were deleted. The appeal was allowed in favor of the assessee.