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2018 (5) TMI 1785 - AT - Income TaxMAT - Manner of computation of brought forward loss or unabsorbed depreciation whichever is less to be deducted while computing books profit - Accounting treatment of MAT credit entitlement - Held that - In principle we hold that the assessee is eligible for claiming MAT credit entitlement as reversal for Income Tax provisions. At the time of assessment proceedings the Assessing Officer has failed to examine as to whether MAT credit entitlement claimed by the assessee is on account of prepayment of tax. This fact requires verification. Accordingly we direct the Assessing Officer to verify the same and decide the issue accordingly. Comparable selection - Held that - Companies functionally different from that of assessee as engaged in software development business need to be deselected from final list. Addition is to be made by applying net profit rate the same should be applied to be expenditure incurred by the assessee for providing services to its AEs only - Held that - In the case of Commissioner of Income Tax Vs. Thyssen Krupp Industries India (P.) Ltd. 2015 (12) TMI 1076 - BOMBAY HIGH COURT affirming the view of Tribunal on this issue held that the adjustment which is mandated in terms of Chapter X is only in respect of international transaction and not transactions entered into by assessee with independent unrelated third parties. The adjustment in respect of international transactions should be restricted to international transactions and not to the transactions entered into with independent parties. AR has pointed that the CIT(Appeals) has accepted this proposition in assessment years 2002-03 and 2003-04 and the Department did not file any appeal against the order of Commissioner of Income Tax (Appeals) on this issue. This fact has not been rebutted by the DR. Thus in view of the fact that this issue has been settled by the Jurisdictional High Court we find merit in the ground raised by the assessee.
Issues Involved:
1. Computation of Book Profits under MAT provisions (Section 115JB) 2. Transfer Pricing issues Detailed Analysis: 1. Computation of Book Profits under MAT provisions (Section 115JB): Issue 1.1: Computation of Book Profit at ?8,40,79,191/- vs. ?1,00,54,626/- as declared by the assessee: The assessee computed book profit as ?1,00,54,626/- after deducting unabsorbed depreciation of ?7,32,38,000/-. The Assessing Officer (AO) recomputed book profit at ?8,40,79,191/-, reducing unabsorbed depreciation to ?44,79,000/- and adding back MAT credit entitlement of ?52,65,565/-. The AO relied on the decision of the Authority for Advance Ruling (AAR) in Rastriya Ispat Nigam Ltd., asserting that the assessee has no discretion in the manner of set-off of brought forward loss or unabsorbed depreciation. The Tribunal, referencing the case of Kirloskar Ferrous Industries Ltd., remitted the issue back to the AO for fresh computation of book profits in line with the principles established in that case. Issue 1.2: Inclusion of MAT credit entitlement of ?52,65,565/- in book profit: The assessee argued that MAT credit entitlement represents prepaid Income Tax and should be reduced from book profit. The AO rejected this claim, stating there is no provision in Section 115JB for such a reduction. The Tribunal, referencing the Supreme Court decision in Tulsyan NEC Ltd., held that MAT credit entitlement is indeed akin to prepaid Income Tax. The Tribunal directed the AO to verify if the MAT credit claimed by the assessee is on account of prepayment of tax and decide accordingly. 2. Transfer Pricing Issues: Issue 2.1: Rejection of CUP method for certain transactions: The assessee did not press this ground, and it was dismissed accordingly. Issue 2.2: Rejection of various companies as comparables by the AO: The Tribunal addressed the inclusion and exclusion of specific companies as comparables: - Aztec Soft Ltd.: Rejected due to turnover exceeding the filter applied by the TPO. - SIP Technologies and Exports Ltd.: Included as it was not a persistent loss-making company. - CG-VAK Software Exports Ltd. (Segmental): Included as it was accepted as comparable in subsequent years. - ThinkSoft Global Services Ltd.: Included as it was functionally comparable to the assessee. Issue 2.3: Inclusion of certain companies as comparables: The Tribunal directed the exclusion of the following companies due to functional disparity: - Bodhtree Consulting Ltd.: Engaged in product engineering and engineering services, not comparable to software development services. - E-Zest Solutions Ltd.: Engaged in ITES and KPO services, functionally different from software development. - Helios & Matheson Information Tech.: Functionally different, as held in previous years. - Kals Information System: Engaged in development and sale of software products, not comparable. - Goldstone Technologies Ltd.: Engaged in activities related to Media & IP TV, functionally dissimilar. Issue 2.4: Exclusion of foreign exchange gain/loss from operating margin: The assessee did not press this ground, and it was dismissed accordingly. Issue 2.5: Application of net profit rate to expenditure incurred for services to AEs only: The Tribunal upheld the assessee's contention, referencing the Bombay High Court's decision in Thyssen Krupp Industries India (P.) Ltd., that adjustments should be restricted to international transactions with AEs and not to transactions with unrelated third parties. Conclusion: The appeal by the assessee was partly allowed, with directions for the AO to revisit the computation of book profits and transfer pricing adjustments in line with the Tribunal's findings and established legal principles.
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