2018 (2) TMI 1783 - AT - Income Tax

Depreciation on computer peripherals, assessee claimed depreciation on the equipment like UPS, stabilizer, LAN/WAN, catalyst switches, network switches etc. at 60% - Held that - We find that the equipment forms integral part of the computer systems and the assessee is entitled to the claim of depreciation at 60% by treating the peripherals as part of block of computers. Disallowance of TDS receivables written off - Held that - In view of the above factual and legal position, it has become necessary to verify whether the assessee had recognized the income as and when the services are rendered or goods are dispatched and subsequently, whether the assessee written off the difference amount of deficit payment and the amount under the TDS certificate issued, in their books of accounts. It would be conveniently verified by the learned AO and if he finds that initially the assessee recognized the total invoice amount and subsequently, identified the bad debt with reference to the deficit payment by the party and the amount under TDS certificate issued. On verification of compliance with these two conditions, learned AO will allow this expense. Ground allowed for statistical purposes. Allocation of common expenses to the unit claiming benefit u/s 10A - Held that - AO to verify whether the recomputation of the deductible amount is properly done, in the light of the submission that the deduction of the amount allocated to the STP unit s net profit is incorrect and instead of the same the learned AO should have deducted the same from the assessee s operating income. For this purpose, we remand issue to the learned AO for verification. Grounds allowed for statistical purposes. Disallowance u/s 40A(i) - assessee had incurred expenditure in foreign currency under the head royalty - Held that - We are satisfied that the disallowance under section 40(a)(i) of the Act is revenue neutral and the learned AO is directed to allow the corresponding deduction to the assessee u/s 10A of the Act. Expenditure represents the purchase of spares from foreign affiliates - TDS liability - PE in India - Held that - Inasmuch as the payees are not identifiable, it would not be possible for the assessee to deposit any TDS even in case of its deduction. We are, therefore, deem it just and proper to direct the learned AO has to verify from the evidence to be produced by the assessee relating to the creation of provisions for project accruals and the year end reversal of such provisions, and accordingly to delete the disallowance. This ground is set aside to the file of learned AO for verification. TPA - ALP determination - comparable selection - Held that - Assessee as a tested party has been characterized as provider of software development services to its AEs which had used Transactional Net Margin Method (TNMM) as the most appropriate method for its benchmarking of international transaction, thus companies functionally dissimilar need to be deselected from final list. Working capital adjustment to account for difference in working capital employed by the Assessee -Held that - We consider it just and proper to direct the Ld. TPO to grant working capital adjustment to account for difference in working capital employed by the Assessee and the comparable companies.

Summary

Issues Involved:
1. Depreciation on computer peripherals.
2. Disallowance of TDS receivables written off.
3. Allocation of common expenses to the unit claiming benefit under section 10A.
4. Disallowance under section 40(a)(i).
5. Transfer pricing issues.
6. Working capital adjustment.

Detailed Analysis:

Depreciation on Computer Peripherals:
The assessee claimed depreciation at 60% on equipment like UPS, stabilizer, LAN/WAN, catalyst switches, and network switches, arguing they form an integral part of the computer system. The AO disallowed this, allowing only 15% depreciation, treating them as part of plant and machinery. The Tribunal referenced the Hon’ble Delhi High Court decision in CIT vs. BSES Yamuna Power Ltd., which held that computer accessories and peripherals form an integral part of the computer system and are entitled to depreciation at 60%. The Tribunal allowed the assessee's claim, finding that these peripherals are part of the computer systems.

Disallowance of TDS Receivables Written Off:
The assessee argued that the TDS receivables written off should be allowed as an expense under section 36(1)(vii) and section 36(2) of the Act. The AO rejected this, stating that unclaimed TDS does not form part of the P&L account and is recoverable. The Tribunal referred to the Supreme Court decision in TRF Ltd. vs. CIT, which clarified that bad debts written off in the books of accounts are admissible. The Tribunal remanded the issue to the AO for verification of whether the income was initially recognized and subsequently written off, directing the AO to allow the expense upon verification.

Allocation of Common Expenses to the Unit Claiming Benefit under Section 10A:
The AO apportioned 5% of total traveling expenses and legal and professional expenses to the STP unit, reducing the profit eligible for deduction under section 10A. The assessee argued that direct costs were already charged to the STP unit, and the directors of the telecom division did not perform functions for the STP unit. The Tribunal remanded the issue to the AO for verification, directing the AO to recompute the deductible amount correctly.

Disallowance under Section 40(a)(i):
The AO disallowed expenses under section 40(a)(i) for non-deduction of TDS on foreign payments. The assessee argued that disallowance under section 40(a) is revenue-neutral for a unit entitled to 100% deduction under section 10A. The Tribunal, referencing the Gujarat High Court decision in ITO vs. Keval Constructions and the Ahmedabad ITAT decision in DCIT vs. Ascendum Solutions India (P.) Ltd., held that disallowance under section 40(a)(i) is revenue-neutral and directed the AO to allow the corresponding deduction under section 10A.

Transfer Pricing Issues:
The assessee disputed the inclusion of 18 comparables and the exclusion of three desired comparables. The Tribunal excluded several comparables on grounds of functional dissimilarity, lack of segmental data, and extraordinary events during the year. The Tribunal directed the inclusion of certain comparables like CG Vak Software Exports Limited and SIP Technologies Limited, while confirming the exclusion of Indium Software India Ltd. The Tribunal also directed the AO to grant working capital adjustment to account for differences in working capital employed by the assessee and the comparables.

Working Capital Adjustment:
The Tribunal noted that the working capital adjustment was given by the TPO in the previous assessment year and directed the TPO to grant the working capital adjustment for the current year as well, referencing the Tribunal's decisions in SAIC India (P.) Ltd. v. Deputy Commissioner of Income-tax and Qualcom India (P.) Ltd. v. ACIT.

Conclusion:
The appeal was allowed in part, with several issues remanded to the AO for verification and recomputation, and directions issued to grant appropriate adjustments and deductions as per the Tribunal's findings.