2013 (9) TMI 191 - AT - Income Tax

Transfer pricing adjustments - ALP - Selection of comparables with functional dissimilarities - Turnover filter - Purchase of software, a revenue or capital expenditure Held that - Assessing Officer/TPO directed to exclude, after due verification, those comparables from the list with the related party transactions or controlled transactions in excess of 15% of the total revenue for the financial year 2006-07. It is to be mentioned here, Geometric Ltd. is also to be removed from the comparable list, since that company was having RPT at 19.98% (going by assessee s own calculation), however, no argument was raised for its exclusion by the assessee, probably, on account of low margin of Geometric Ltd. Reimbursement of expenses - Held that - these reimbursements were not received against any specific services rendered by the assessee to its AEs. These were pure cost reimbursements (travel expenses, hotel stay expenses and other related expenditures) which the assessee had incurred on behalf of its AE for administrative convenience and later got reimbursed at cost. Therefore, the DRP has erred in including the reimbursements received for the purpose of calculating the adjustment under section 92CA. - Decided in favor of assessee. Software produce is an enduring benefit to the assessee in the sense that it would accelerate to enhance the income due to its usage in its usage in software programme which was ultimately developed and sold by the assessee - Software produce is a part of profit making apparatus of the assessee which had, subsequently, helped the assessee in conducting its business more proficiently - The assessee had not brought any evidence to controvert the findings of the Revenue that software produce expense is a capital in nature - AO was justified in treating the expenditure on purchase of computer software as capital in nature Depreciation on it will be provided. - Decided against the assessee. Disallowance of rental deposits written off - Since the assessee had difficulty in recovering the deposit from the landlord, it had filed a suit before the Hon ble High Court of Karnataka, which was dismissed on the ground that the lease deed was not duly registered. Hence, the assessee wrote off the rental deposit in its books and claimed as deduction while computing business profits of the assessee. The AO has disallowed the same with the contention that the same is not revenue in nature and, hence, not deductible under the Act Held that - Relying upon the Mumbai Bench of the Hon ble Tribunal in the case of United Motors (India) Ltd. v. ITO 2010 (4) TMI 726 - ITAT, MUMBAI , it has been held that the write off of the interest free deposit made by the assessee to the licensor against rental properties was a loss incidental to the business and, hence, the assessee was entitled to claim the same as allowable deduction Decided in favor of Assessee.

Issues Involved:

1. Transfer pricing adjustment.
2. Reimbursement of expenses.
3. Disallowance of purchase of computer software.
4. Disallowance of rental deposits.

Detailed Analysis:

I. Transfer Pricing Adjustment:

(A) Software Development:

The assessee engaged in software development had international transactions with its Associated Enterprises (AE) amounting to Rs. 91,84,72,964/-. The Transfer Pricing Officer (TPO) made an adjustment of Rs. 11,07,50,525/- under section 92CA of the Act. The assessee adopted the Transactional Net Margin Method (TNMM) and selected 17 comparables, arriving at an operating margin of 11.29%. The TPO, however, selected 26 comparables, fixing the arithmetical mean at 23.79% after working capital adjustment. The Dispute Resolution Panel (DRP) upheld the TPO's adjustment.

The assessee raised several objections, including the application of the related party transactions filter of 25% instead of 15%, the lack of an upper limit on sales turnover, and the selection of functionally dissimilar comparables. The Tribunal, referencing previous cases like Trilogy E-Business Software India (P.) Ltd., agreed to exclude eight companies with turnovers exceeding Rs. 200 crores and five companies due to functional dissimilarity. The Tribunal also directed the TPO to exclude comparables with related party transactions exceeding 15% of total revenue.

After these exclusions, 12 companies were retained as comparables. The Tribunal directed the Assessing Officer (AO) to rework the Arm's Length Price (ALP) and make adjustments if the differential margin exceeds the 5% bandwidth recognized in the proviso to section 92C(2) of the Act.

(B) Reimbursement of Expenses:

The assessee received Rs. 5,99,87,648/- as reimbursement of expenses from its AE. The TPO added an ALP mark-up to the cost of the cross charge, which was affirmed by the DRP. The Tribunal noted that the details of the reimbursement expenses were not clear and remitted the issue back to the AO/TPO for detailed verification. If the receipts were mere recovery of expenses without any service, they should not be added back to the cost base for the purpose of mark-up.

II. Corporate Tax Issue:

(A) Disallowance of Purchase of Computer Software:

The AO disallowed the expenditure on the purchase of computer software, treating it as capital expenditure. The DRP affirmed this view. The Tribunal agreed, noting that the software provided an enduring benefit to the assessee and was part of the profit-making apparatus. The Tribunal upheld the AO's decision to treat the expenditure as capital in nature, granting depreciation at 60%.

(B) Disallowance of Rental Deposits:

The assessee wrote off a rental deposit of Rs. 24,93,600/- after failing to recover it from the landlord. The AO disallowed the claim, treating it as non-revenue in nature. The Tribunal, referencing the Mumbai Tribunal's decision in United Motors (India) Ltd., held that the write-off of the interest-free deposit made by the assessee was a loss incidental to the business and therefore allowable as a deduction.

Conclusion:

The Tribunal partly allowed the assessee's appeal, directing the AO/TPO to rework the ALP and make necessary adjustments, and allowing the write-off of the rental deposit as a deductible business loss. The order was pronounced on 22/03/2013 at Bangalore.

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