2017 (7) TMI 1263 - AT - Income Tax

Nature of expenditure - allowability of expenditure on maintenance and upgradation of ERP systems wherein the assessee was using ERP system and expenditure was incurred on upgradation of the said system - Disallowance of Prime Project expenses and other software development charges net of depreciation - AO had disallowed the said expenses to be capital in nature - HELD THAT - Issue arose before the Tribunal in assessee s own case in assessment year 2009-10 and the Tribunal had directed the Assessing Officer to verify the claim of assessee. Following the same parity of reasoning we direct the Assessing Officer to verify the claim of assessee in this regard that the expenditure has been incurred on upgradation of ERP system and allow the same in accordance with the ratio laid down by the jurisdictional High Court in UHDE INDIA P. LTD. 2013 (12) TMI 309 - BOMBAY HIGH COURT . Thus the grounds of appeal raised by the assessee allowed. TPA - MAM selection - application of CPM method adopted by the TPO - Whether domestic market segment and the export market segment were distinct and not comparable? - plea of assessee before us is that TNNM method should be applied as the most appropriate method after aggregation approach applied by the assessee in the equipment division - HELD THAT - Tribunal in assessee s own case in assessment year 2008-09 held that CPM method should not be applied and TNNM method is to be applied as most appropriate method. We apply the parity of reasoning as in assessment year 2009-10 to decide the issue in favour of the assessee. The TPO is thus directed to exclude five concerns i.e. Axtel Industries Ltd. Anup Engineering Ltd. Thermax Ltd. Walchandnagar Industries Ltd. and GMM Pfaudler Ltd. and after excluding the said comparables the average margin of balance comparables work to 14.01% against which the assessee has shown the margins of 25.27%. Hence no adjustment is to be made on account of arm s length price of international transactions. The ground of appeal No.1 raised by the Revenue is thus dismissed. Addition u/s 14A - CIT(A) deleted the said addition accepting the plea of assessee that no satisfaction was recorded by the Assessing Officer before making the aforesaid addition - HELD THAT - In the facts of the present case the Assessing Officer has failed to record any satisfaction before making the aforesaid disallowance and in the absence of recording of satisfaction the provisions of section 14A of the Act cannot be invoked as the Assessing Officer has failed to come to a finding as to why the disallowance made by the assessee under section 14A of the Act at Rs. 3 lakhs is incorrect. Accordingly we uphold the order of CIT(A). See KALYANI STEELS LTD. VERSUS ADDL. COMMISSIONER OF INCOME TAX 2014 (2) TMI 661 - ITAT PUNE - Decided in favour of assessee

Summary

Issues Involved:
1. Disallowance of Prime Project expenses and other software development charges.
2. Distinction between domestic market segment and export market segment for Transfer Pricing.
3. Deletion of disallowance of IT service charges.
4. Deletion of disallowance under section 14A of the Income Tax Act.

Detailed Analysis:

1. Disallowance of Prime Project expenses and other software development charges:
The assessee challenged the disallowance of Rs. 1,36,12,281/- (Rs. 95,28,597/- net of depreciation) for Prime Project expenses and software development charges, which were considered capital expenditure by the CIT(A). The assessee argued that the expenses were for maintenance and upgradation of the existing ERP system, not for acquiring new software or enduring benefits. The Tribunal found support from the Bombay High Court's decision in CIT Vs. UHDE India P. Ltd. and directed the Assessing Officer to verify the claim that the expenses were for upgradation, thus allowing the appeal in favor of the assessee.

2. Distinction between domestic market segment and export market segment for Transfer Pricing:
The Revenue contested the CIT(A)'s decision that domestic and export market segments were distinct, making the cost-plus method (CPM) adopted by the TPO incorrect. The Tribunal noted that the issue was similar to previous years where the Tribunal had directed the application of the Transactional Net Margin Method (TNNM) as the most appropriate method. The Tribunal upheld the CIT(A)'s decision, directing the TPO to apply TNNM and exclude certain comparables, resulting in no adjustment to the arm's length price of international transactions.

3. Deletion of disallowance of IT service charges:
The Revenue appealed against the deletion of Rs. 3.76 crores disallowance for IT service charges. The Tribunal referred to the previous year's decision where a similar issue was remitted back to the Assessing Officer for verification. Following the same reasoning, the Tribunal remitted the issue back to the Assessing Officer for fresh verification.

4. Deletion of disallowance under section 14A of the Income Tax Act:
The Revenue challenged the deletion of Rs. 36,65,694/- disallowance under section 14A. The CIT(A) had deleted the addition as the Assessing Officer failed to record satisfaction regarding the correctness of the assessee's claim. The Tribunal supported this view, referencing the Tribunal's decision in Kalyani Steels Ltd. Vs. Addl.CIT, which emphasized the necessity of recording objective satisfaction before invoking Rule 8D. The Tribunal upheld the CIT(A)'s order, dismissing the Revenue's appeal on this ground.

Conclusion:
The appeal of the assessee was allowed for statistical purposes, and the appeal of the Revenue was partly allowed. The Tribunal directed the Assessing Officer to verify specific claims and apply appropriate methods as per the Tribunal's and High Court's previous rulings.