2017 (1) TMI 1626 - AT - Income Tax

TPA - ALP determination - comparable selection - Held that - Assessee is engaged in providing only engineering design services thus companies functionally dissimilar with that of assessee need to be deselected from final list. Working capital adjustment under rule 10 B(3)(ii) of the Income tax Rules - Held that - In the entire exercise of Transfer Pricing the objective is to have better comparability and the purpose of working capital adjustment is to increase the comparability of tested party and its comparables. Working capital adjustment irons out the differences between assessee and comparables. In various decisions including the decision cited by the assessee it is held that if there are differences with comparables which can be adjusted then adjustment are required to made including the working capital adjustment. Accordingly we direct the Assessing Officer/TPO to grant an appropriate working capital adjustment to the assessee. Nature of expenditure - sub-license software package - revenue or capital - Held that - The Hon ble High Court after considering the principles laid down in the case of Commissioner of Income Tax Vs. JK Synthetics Ltd. 2008 (12) TMI 21 - DELHI HIGH COURT and other decisions upheld the finding of the Tribunal that the expenditure in question was revenue in nature. We also find that special leave petition filed by the Department against the said decision of the Hon ble jurisdictional High Court has also been dismissed by the Hon ble Supreme Court. Thus amount for use of sublicense software package was revenue expenditure. Since the expenditure in question towards royalty for use of sublicense software package has already been allowed as revenue expenditure the question of allowing depreciation does not arise

Issues Involved:

1. Validity of the order passed by the Assessing Officer (AO).
2. Jurisdictional error in the reference made by the AO to the Transfer Pricing Officer (TPO).
3. Intention of shifting profits outside India.
4. Determination of Arm's Length Price (ALP) of international transactions.
5. Errors in addition to the value of international transactions.
6. Adjustment due to idle capacity.
7. Adjustment for differential working capital.
8. Denial of 5% margin benefit under Section 92C(2).
9. Treatment of software license payments as capital expenditure.
10. Denial of depreciation on capitalized royalty.
11. Validity of initiation of penalty proceedings under section 271(l)(c).

Detailed Analysis:

1. Validity of the Order Passed by the AO:
The appellant argued that the order passed by the AO was "bad in law and void ab-initio." However, this ground was not specifically pressed and was dismissed as infructuous.

2. Jurisdictional Error in the Reference to TPO:
The appellant did not press this ground, and thus, it was dismissed as infructuous.

3. Intention of Shifting Profits Outside India:
This ground was also not pressed by the appellant and was dismissed as infructuous.

4. Determination of Arm's Length Price (ALP):
The appellant contested the ALP determined by the AO/TPO/DRP, arguing that the ALP of their international transaction was incorrectly computed at ?73,14,59,416 against ?63,96,88,383 determined by the appellant, resulting in an addition of ?9,17,71,033. The Tribunal upheld the use of current year data for determining the ALP, rejecting the appellant's argument for using multiple year data due to cyclic nature of operations. The Tribunal found no credible reasoning to justify the use of multiple year data.

5. Errors in Addition to the Value of International Transactions:
- 5(i) Use of Multiple Year Data: The Tribunal rejected the appellant's argument for using multiple year data, citing lack of credible reasoning and evidence.
- 5(ii) Comparable Selection: The Tribunal directed the exclusion of Alphageo (India) Ltd. from the set of comparables due to functional dissimilarity and significant difference in asset intensity.
- 5(iii) Profit Level Indicator (PLI): The AO/TPO's selection of OP/OC as PLI was upheld.
- 5(iv) Characterization of the Appellant: The Tribunal did not specifically address this issue.

6. Adjustment Due to Idle Capacity:
This ground was not specifically pressed and was dismissed as infructuous.

7. Adjustment for Differential Working Capital:
The Tribunal directed the AO/TPO to grant an appropriate working capital adjustment to the appellant, emphasizing the importance of such adjustments to increase comparability.

8. Denial of 5% Margin Benefit:
This ground was not specifically pressed and was dismissed as infructuous.

9. Treatment of Software License Payments as Capital Expenditure:
The Tribunal held that the amount of ?3,69,91,451 paid for the use of sublicense software package was revenue expenditure, following the decision of the jurisdictional High Court and the Supreme Court.

10. Denial of Depreciation on Capitalized Royalty:
Since the expenditure towards royalty for the use of sublicense software package was allowed as revenue expenditure, the question of allowing depreciation did not arise. This ground was dismissed as infructuous.

11. Validity of Initiation of Penalty Proceedings:
This ground was not specifically pressed and was dismissed as infructuous.

Conclusion:
The appeal was allowed partly, with specific directions for the exclusion of Alphageo (India) Ltd. from the set of comparables and the granting of working capital adjustment. The Tribunal upheld the revenue expenditure treatment of software license payments, dismissing the alternative ground for depreciation. Other grounds were either dismissed as infructuous or not specifically addressed.

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