2015 (3) TMI 92 - AT - Income Tax

Transfer pricing adjustment - selection/rejection of comparables - Held that - For Infosys BPO Ltd. contentions with regard to the brand value and brand building exercise, having huge asset base, can be considered to arrive at the conclusion that Infosys is functionally not similar to that of assessee. Infosys BPO stands on its own as an exclusive BPO of the Infosys Technologies and in earlier years, generally Infosys BPO is excluded in many of the cases. Therefore, we direct the Assessing Officer/TPO to exclude this company. Genesys International Ltd. - Respectfully following the decision of Mercer Consulting (India) (P.) Ltd. 2014 (10) TMI 467 - THE ITAT DELHI there is vast difference between the functions of the above company and that of assessee. This company as such, cannot be treated as comparable on FAR analysis. Eclerx Services Ltd. - As seen from the Annual Report, the above company is involved in diverse nature of services and there was no segmental data for diversified service port folio. Moreover this company can be considered as KPO and we are of the opinion that this company is not comparable to assessee s services. We therefore, direct the Assessing Officer/TPO to exclude this company. Cosmic Global Ltd. - Respectfully following the decision of Mercer Consulting (India) (P.) Ltd. 2014 (10) TMI 467 - THE ITAT DELHI this company cannot be treated as comparable on FAR analysis. Acropetal Technologies Ltd. (Seg.) - As seen from the Annual Report, this company is involved in engineering design services and has products also, which makes it functionally not comparable. Even at the segmental level, it provides engineering design services, which was considered as high end by the coordinate bench of the Tribunal in the case of Hyundai Motors India Engineering (supra) in earlier year. Therefore, we are of the opinion that this company cannot be selected as a comparable. We accordingly direct the Assessing Officer/TPO to exclude this company. Accentia Technologies Limited. - Considering the profit margins of the company and insufficient segmental data, we are of the opinion that this company cannot be selected as a comparable. Moreover, this is also not a comparable in the case of M/s. Mercer Consulting (India) P. Ltd. (2014 (10) TMI 467 - THE ITAT DELHI), which indicates that the TPO therein has excluded it at the outset. Allsec Technologies Ltd. - On a perusal of the annual report of company it is seen that during the relevant FY, it has acquired a company. Further, it is clear that company has made losses and it is not clear whether loss is on account of acquisition or not. Moreover, the Tribunal has been consistent in its view that a company in the year of acquisition cannot be treated as a comparable. Accordingly, we uphold the rejection of the aforesaid comparable. Cepha Imaging Pvt. Ltd - Considering the functionality of the company and following the observations made by Delhi Bench of the Tribunal in case of Mercer Consulting Pvt. Ltd. (2014 (10) TMI 467 - THE ITAT DELHI) held the aforesaid company as uncomparable to assessee. As ld. AR has failed to bring any material to contradict the aforesaid finding of the coordinate bench, we are inclined to follow the decision of the coordinate bench in upholding the view of the TPO - we uphold the rejection of the aforesaid comparable. Determination of ALP of management fees and licence fee paid to AEs at Nil - Held that - TPO went beyond his jurisdiction in denying the payment out-rightly, whereas, his role is limited to determining the ALP. In the guise of determination of ALP, the TPO cannot question the business decision of payment and determine that no services were rendered. In that view of the matter, the direction of the TPO cannot be upheld at all. While determining the PLI, payment of management fees is also considered as an expenditure. In that sense, even after paying the management fee at 4%, the profit level indicator is more than the comparable cases. Therefore, assessee s transactions are deemed to be at arm s length. Considering that also, denial of management fees is not proper on the part of the TPO/ Assessing Officer. Considering the above, we are of the opinion that the action of the TPO in determining the ALP at NIL is not according to the provisions of law and also on facts. Though, in principle we agree with assessee that determination of ALP at Nil and denial of management fee is not correct, we remit the issue back to the file of the AO/TPO to determine the quantum of management fee and licence fee with reference to agreement between the parties. - Decided in favour of assessee for statistical purposes. Non-consideration of provision for bad and doubtful debts in computation under TNMM for certain comparables - Held that - Bad debts and provision for bad and doubtful debts are part of the operating expenses and be included for the purpose of computing profit and loss of comparable companies as relying on Kenexa Technologies Pvt. Ltd. Vs. DCIT 2014 (11) TMI 587 - ITAT HYDERABAD - Decided in favour of assessee Risk adjustment - Held that - As risk adjustment has to be quantified on certain scientific basis, it cannot be granted in a routine manner by fixing certain percentage on adhoc basis. It is for assessee, to demonstrate risk assumed by each of the company vis- -vis assessee and quantify the allowance to be made in that regard. As assessee has not undertaken any such exercise, at this stage, we cannot direct AO/TPO to allow risk adjustment at a certain percentage on a purely estimate basis. Remit this issue back to the file of AO for considering afresh Nonconsideration of revised computation of income filed by assessee claiming deduction u/s 10A - Held that - When assessee has filed revised computation along with certificate in Form 56F, AO should have verified correctness of assessee s claim instead of discarding it at the threshold. - Decided in fvaour of assessee for statistical purposes. Disallowance of expenditure on software licence fee - Held that - In the present case, assessee has not brought any material on record to establish that by applying the functional test, the expenditure can be said to be of a revenue nature. Moreover, after 01/04/2003 computer software has been specifically brought into the schedule at par with computer as far as eligibility of depreciation is concerned. Therefore, after 01/04/2003, computer software in the nature of application software and not mere licence for renewal have to be treated as capital assets eligible for depreciation at the same rate as of computer. Therefore, expenditure incurred for acquiring such asset will be capital expenditure. However, we accept ld. AR s alternative contention that depreciation should be allowed at 60%. As per the new appendix applicable from AY 2006-07, depreciation on computer and computer software is to be allowed at 60%. As AO has not brought any material on record to show that computer software acquired by assessee is not in the nature of software as mentioned in the appendix, in our view, AO is not justified in allowing depreciation at 25%. We, therefore, direct AO to allow depreciation on the computer software at 60%. - Decided partly in favour of assessee. Disallowance of depreciation - asset not used for the purpose of business - Held that - While we uphold the view of AO that the amount cannot be written off till it exists in the block of assets, but at the same time, we are of the view that if depreciation is allowed in the preceding years on such assets and it still forms part of the block, depreciation cannot be disallowed in the impugned AY. Accordingly, we remit the issue back to the file of AO for deciding afresh after verifying facts. - Decided in favour of assessee for statistical purposes. TDS credit - Held that - As can be seen, DRP has specifically directed AO to allow TDS credit as per form 26AS. Considering the aforesaid fact, we remit this issue to the file of the AO with a direction to allow TDS credit to assessee as per Form 26AS - Decided in favour of assessee for statistical purposes. Wrong calculation of interest u/s 234D on the excess refund issued u/s 143(1) - Held that - Remit this issue back to the file of AO for deciding afresh after considering the submissions of assessee and verifying the evidences produced before him - Decided in favour of assessee for statistical purposes. Adoption of foreign exchange gain/loss as operating income/loss - Held that - Having considered the submissions of the parties and perused the materials on record and reying on case of Foursoft Ltd. 2008 (9) TMI 919 - ITAT HYDERABAD , we do not find any infirmity in the order of DRP holding that foreign exchange gain/loss has to be treated as part of operating income/loss. - Decided against revenue.

Summary

Issues Involved:
1. Delay in filing of the department's appeal.
2. Transfer pricing adjustments and selection/rejection of comparables.
3. Determination of ALP of management fees and license fees.
4. Non-consideration of provision for bad and doubtful debts in computation under TNMM.
5. Risk adjustment in transfer pricing.
6. Non-consideration of revised computation of income for deduction u/s 10A.
7. Disallowance of software license fee expenditure.
8. Disallowance of depreciation on business commercial rights.
9. Credit for TDS.
10. Calculation of interest u/s 234D.
11. Initiation of penalty proceedings u/s 271(1)(c).
12. Treatment of foreign exchange gain/loss as operating income/loss.

Detailed Analysis:

1. Delay in Filing of the Department's Appeal:
The department's appeal was initially noted to have an eleven-day delay. However, it was determined that the final assessment order was passed on 30/01/2014, and the appeal was filed on 12/03/2014, within the time limit prescribed u/s 253(3A) r.w.s. 253(2A). Consequently, the delay was ignored, and the appeal was admitted for hearing on merit.

2. Transfer Pricing Adjustments and Selection/Rejection of Comparables:
The assessee objected to the selection of six companies as comparables by the TPO. The Tribunal reviewed the objections and found that the selected companies were not functionally comparable to the assessee, an ITES provider. The Tribunal directed the exclusion of these companies based on previous rulings and functional dissimilarity.

3. Determination of ALP of Management Fees and License Fees:
The TPO had determined the ALP of management fees and license fees at Nil, arguing that the assessee failed to substantiate the need for such services and their benefits. The Tribunal, however, held that the TPO's approach was incorrect as it did not align with statutory provisions. The matter was remitted back to the AO/TPO to determine the quantum of fees with reference to the agreement between the parties.

4. Non-Consideration of Provision for Bad and Doubtful Debts in Computation under TNMM:
The Tribunal agreed with the assessee that provision for bad and doubtful debts should be considered as part of operating expenditure. The issue was remitted to the AO/TPO for reconsideration in light of the Tribunal's decision in a similar case.

5. Risk Adjustment in Transfer Pricing:
The Tribunal noted that the assessee did not provide quantification for risk adjustment. Therefore, it could not direct AO/TPO to allow risk adjustment on an ad-hoc basis. The issue was remitted back to the AO for fresh consideration if warranted after following the Tribunal's directions on comparables.

6. Non-Consideration of Revised Computation of Income for Deduction u/s 10A:
The AO and DRP had rejected the revised computation of income filed by the assessee. The Tribunal directed the AO to verify the correctness of the revised claim and allow the deduction accordingly, following the coordinate bench's decision in the assessee's own case for a previous year.

7. Disallowance of Software License Fee Expenditure:
The AO treated the software license fee as a capital expenditure and allowed depreciation at 25%. The Tribunal held that the expenditure should be considered capital in nature but directed the AO to allow depreciation at 60%, aligning with the new appendix applicable from AY 2006-07.

8. Disallowance of Depreciation on Business Commercial Rights:
The AO disallowed the write-off of business commercial rights, and the Tribunal upheld the AO's view that the amount cannot be written off till it exists in the block of assets. However, the Tribunal directed the AO to allow depreciation if the assets still form part of the block.

9. Credit for TDS:
The Tribunal remitted the issue back to the AO to allow TDS credit as per Form 26AS, following the DRP's specific direction to do so.

10. Calculation of Interest u/s 234D:
The Tribunal remitted the issue back to the AO for fresh consideration after verifying the assessee's submissions and evidence.

11. Initiation of Penalty Proceedings u/s 271(1)(c):
The Tribunal dismissed this ground as premature at this stage.

12. Treatment of Foreign Exchange Gain/Loss as Operating Income/Loss:
The DRP directed that foreign exchange gain/loss should be treated as part of operating income/loss, following the decisions of the coordinate benches of the Tribunal. The Tribunal upheld this view, dismissing the department's ground.

Conclusion:
The assessee's appeal was partly allowed, and the department's appeal was dismissed. The Tribunal provided detailed directions on various issues, emphasizing the need for proper verification and adherence to statutory provisions.