2015 (4) TMI 803 - AT - Income Tax

Transfer pricing adjustment - Determination of Arm s length price in international transactions - Adjustment in Software development services transaction - Selection / Rejection of comparables companies - Comparable collected from public domain u/s 133(6) - Risk adjustment - Depreciation on net working equipments - Interest u/s 234B & 234D - Penalty u/s 271(1)(c) - Held that - The common ground for rejection of comparable companies are - Non-furnishing the information obtained under section 133(6) of the Act to the assessee has vitiated the selection of this company as a comparable - Functionally different from the assessee in the case on hand - to exclude this company from the list of comparables as it is engaged both in software development and product development, owns IPR s, intangibles, etc. and cannot be held as comparable to a pure software service provider - it is predominantly engaged in a variety of functions like product designing services and not purely software development services. Accordingly companies selected/ rejected for comparables. Risk adjustment - We have heard both the learned Authorised Representative and the learned Departmental Representative in the matter and perused and carefully considered the material on record. While the submission of the assessee may be based on principles, we find that it has merely put forth its claim but has not filed any basis of the quantification of the risk adjustment either before the authorities below or before us. In this view of the matter, the assessee s claim for risk adjustment is rejected. Interest u/s 234B & 234D - The charging of interest is consequential and mandatory and the Assessing Officer has no discretion in the matter. This proposition has been upheld by the Hon ble Apex Court in the case of Anjum H Ghaswala 252 ITR 1. In this view of the matter, we uphold the action of the Assessing Officer in charging the assessee the said interest. The Assessing Officer is, however, directed to recompute the interest chargeable under Sections 234B and 234D of the Act, if any, while giving effect to this order. Penalty proceedings under Section 271(1)(c) of the Act - This ground is not maintainable in this appeal as no penalty has been levied on the assessee under Section 271(1)(c) of the Act for any cause of grievance to arise in the assessee s case and for us to adjudicate upon in the impugned order. This ground being not maintainable is dismissed accordingly. Depreciation on net working equipments -Following the above decision of the co-ordinate bench of this Tribunal in the assessee s own case for Assessment Year 2007-08, we remand the issue back to the file of the Assessing Officer for fresh consideration, after affording the assessee adequate opportunity of being heard and to file details / submissions required. It is ordered accordingly. Consequently, the Grounds at S.Nos.3.1 to 3.3 are treated as allowed for statistical purposes only. Following the above decision of the co-ordinate bench of this Tribunal in the assessee s own case for Assessment Year 2007-08, we admit the additional ground raised by the assessee for adjudication and remand the matter to the file of the Assessing Officer for his examination and consideration of the issue in the light of the directions issued by the Tribunal at paras 49 and 50 of its order for Assessment Year 2007-08 in the assessee s own case. - Decided partly in favour of assessee.

Issues Involved:
1. Incorrect interpretation of law and assessment of total income.
2. Claim of depreciation on networking equipment.
3. Transfer pricing adjustments and comparability analysis.
4. Risk adjustment.
5. Levy of interest under Sections 234B and 234D.
6. Initiation of penalty proceedings under Section 271(1)(c).
7. Depreciation on goodwill arising from a slump sale agreement.

Detailed Analysis:

1. Incorrect Interpretation of Law and Assessment of Total Income:
The assessee contended that the order of the AO and directions of the DRP were based on incorrect interpretation of law, leading to an assessment of total income at Rs. 54,10,24,876 against the returned income of Rs. 32,37,84,304. This general ground was dismissed as infructuous since it was not specifically urged before the Tribunal.

2. Claim of Depreciation on Networking Equipment:
The assessee claimed depreciation on networking equipment at 60%, classifying them as "computers," whereas the AO allowed depreciation at 15%, treating them as "plant and machinery." The Tribunal remanded the issue back to the AO for fresh consideration, following a similar decision in the assessee's own case for the previous year.

3. Transfer Pricing Adjustments and Comparability Analysis:
The Tribunal addressed various grounds related to the transfer pricing adjustments made by the TPO:

- Inclusion/Exclusion of Comparables:
- Avani Cincom Technologies Ltd., Celestial Biolabs Ltd., KALS Information Systems Ltd., Infosys Technologies Ltd., Wipro Ltd., Tata Elxsi Ltd., Bodhtree Consulting Ltd., E-Zest Solutions Ltd., Thirdware Solutions Ltd., Lucid Software Ltd., Persistent Systems Ltd., Quintegra Solutions Ltd., Softsol India Ltd.: These companies were excluded from the list of comparables based on functional dissimilarity, engagement in software products, R&D activities, and other factors, following decisions in similar cases.

- Indium Software (India) Ltd., VMF Softech Ltd., KPIT Cummins Infosystems Ltd.: The issue of their comparability was remanded back to the TPO for fresh examination.

- Risk Adjustment:
The assessee's claim for risk adjustment was rejected due to the lack of basis for quantification of the risk adjustment.

4. Levy of Interest under Sections 234B and 234D:
The Tribunal upheld the AO's action of charging interest under Sections 234B and 234D as it is consequential and mandatory. However, the AO was directed to recompute the interest while giving effect to the Tribunal's order.

5. Initiation of Penalty Proceedings under Section 271(1)(c):
The ground challenging the initiation of penalty proceedings under Section 271(1)(c) was dismissed as not maintainable since no penalty had been levied on the assessee.

6. Depreciation on Goodwill Arising from a Slump Sale Agreement:
The Tribunal admitted the additional ground raised by the assessee regarding the claim for depreciation on goodwill arising from the acquisition of business under a slump sale agreement. The issue was remanded to the AO for examination and consideration, following the Tribunal's decision in the assessee's own case for the previous year.

Conclusion:
The Tribunal partly allowed the assessee's appeal, remanding several issues back to the AO/TPO for fresh consideration and examination, while dismissing some grounds as infructuous or not maintainable. The Stay Petition was dismissed as infructuous.

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