2018 (1) TMI 1394 - AT - Income Tax

TPA - comparable selection criteria - Held that - Assessee is a company engaged in the business of providing services in the field of Information Technology and Information Technology enabled engineering services (ITES) etc. thus companies functionally dissimilar with that of assessee need to be deselected from final list. Deduction u/s 10A - Held that - Although the DRP had directed the Assessing Officer to recalculate the deduction u/s 10A by not reducing insurance expenses from export turnover the Assessing Officer according for the assessee has not followed the direction of the DRP. We therefore direct the Assessing Officer to adjudicate the issue afresh as per fact and law and in the light of the direction given by the DRP. The grounds raised by the assessee are accordingly allowed for statistical purposes. Depreciation on computer peripherals - at the 15% allowed by the Assessing Officer as against 60% claimed by the assessee - Held that - The Hon ble Delhi High Court in the case of CIT vs. BSES Yamuna Powers Ltd. 2010 (8) TMI 58 - DELHI HIGH COURT has held that computer accessories and peripherals such as printers scanners and server etc. form an integral part of computer system and hence they are entitled to depreciation at higher rate of 60%. Thus we hold that the assessee is entitled to depreciation at the rate of 60% on computer peripherals. The ground raised by the assessee is allowed. Deduction u/s 10A on the income enhanced on account of disallowances made in the assessment order. It has been held in various decisions that whenever there is enhancement of income by the Assessing Officer on account of disallowance of expenses the profit goes up and the enhanced profit is entitled to deduction u/s 10A of the I.T. Act. Therefore the ground raised by the assessee is allowed.

Summary

Issues Involved:
1. Adjustment of ?2,60,26,695/- towards the arm's length price of international transactions.
2. Exclusion of insurance expenses from export turnover for deduction u/s 10A.
3. Depreciation rate on computer peripherals.
4. Deduction u/s 10A on income enhanced due to disallowances.
5. Clerical errors in the assessment order.
6. Initiation of penalty u/s 271(1)(c).
7. Levy of interest u/s 234B.

Detailed Analysis:

1. Adjustment of ?2,60,26,695/- towards the arm's length price of international transactions:
The assessee's international transactions were scrutinized, and the TPO rejected the use of multiple year data and the separate benchmarking of engineering design and software development segments. The TPO adopted an entity-level approach and selected new comparables, resulting in an adjustment of ?2,60,26,695/-. The assessee contested the inclusion of five comparables: Alphageo (India) Ltd., Mahindra Engineering Services Ltd., Mitcon Consultancy Services Ltd., Oil Field Instrumentation (India) Ltd., and TCE Consulting Engineers Ltd. The Tribunal found that the TPO's order was cryptic and the DRP had not provided observations on these comparables. The Tribunal restored the issue to the Assessing Officer/TPO for fresh adjudication, directing them to consider the functional dissimilarities and other relevant factors.

2. Exclusion of insurance expenses from export turnover for deduction u/s 10A:
The Assessing Officer excluded insurance expenses from the total export turnover, impacting the deduction u/s 10A. The DRP directed the Assessing Officer to recalculate the deduction without reducing insurance expenses from export turnover. The Tribunal directed the Assessing Officer to follow the DRP's directions and adjudicate the issue afresh.

3. Depreciation rate on computer peripherals:
The Assessing Officer allowed depreciation at 15% on computer peripherals, treating them as plant and machinery. The DRP partially upheld this but allowed 60% depreciation on some items. The Tribunal held that computer peripherals are integral to the computer system and are eligible for 60% depreciation, citing the Delhi High Court's decision in CIT vs. BSES Yamuna Powers Ltd.

4. Deduction u/s 10A on income enhanced due to disallowances:
The Tribunal held that enhanced income due to disallowances should be eligible for deduction u/s 10A, following established legal principles.

5. Clerical errors in the assessment order:
The Tribunal acknowledged clerical errors in the assessment order, directing the Assessing Officer to verify and correct the income figures.

6. Initiation of penalty u/s 271(1)(c):
The Tribunal deemed the issue of penalty initiation premature and dismissed this ground.

7. Levy of interest u/s 234B:
The Tribunal stated that the levy of interest u/s 234B is mandatory and consequential, thus dismissing this ground.

Conclusion:
The appeal was partly allowed for statistical purposes, with several issues remanded to the Assessing Officer/TPO for fresh adjudication. The Tribunal emphasized the need for a detailed and reasoned approach in the assessment and transfer pricing adjustments.