2017 (7) TMI 1345 - AT - Income Tax

TP Adjustment - Comparable selection - exclusion of certain comparables by the DRP for the purpose of determining the ALP in respect of international transactions in software segment - HELD THAT - In the present case, as most of the comparables taken by the TPO were directed to be deleted by the Tribunal, therefore number of comparables available after giving effect to the order of the Tribunal would be less than 6, therefore We direct the TPO to apply RPT filter of 25% on all comparable instead of 15% and find out the fresh comparables, which are otherwise functionally comparable with that of the assessee. After exclusion of the above company i.e., L T Ltd, the only two comparables that remain are Persistent Systems Solutions Ltd and Tinksoft Global Services Ltd. As indicated hereinabove, as the' comparables remain are less than six, therefore, the TPO is required to apply RPT of 25% so as to bring in more comparable companies which are functionally similar to that of the assessee. In view thereof, we direct the AO/TPO to bring in more comparables for determining the ALP on the basis of the directions given herein above, subject to fulfilment of other parameters mentioned herein above. Accordingly, the TP grounds of the revenue as well assessee are allowed for statistical purpose. Working capital adjustment - TPO has restricted the working capital adjustment from 2.3% to 1.91% on the ground that the same represents optimum working capital adjustment - HELD THAT - The issue of working capital adjustment is no more a res integra and the assessee is required to be given working capital adjustment based on actual basis. This has been so held by the Tribunal following ARM Embedded Technologies (P.) Ltd. v. Dy. CIT 2015 (8) TMI 1437 - ITAT BANGALORE AND Mercedes-Benz Research Development India P. Ltd v. Asstt. CIT 2016 (6) TMI 1322 - ITAT BANGALORE - Following the above decisions of the coordinate bench of the Tribunal, we dismiss the ground raised by the Revenue in respect of working capital adjustment. Disallowance u/s 40(A) - HELD THAT - Deduction has not been claimed on the basis of any provision made in the books of account of the assessee. The deduction had been claimed on account of the gratuity actually deposited in the fund. Tims the deduction was not claimed in respect of a provision. Such a claim could only have been disallowed if it had been proved that the gratuity, in respect of which the said payment had been made, had not become payable during the previous year relevant to assessment year 1979-80. No such case has been made out by the Revenue. Thus, in our view, the Tribunal was right in holding that the grant of approval to the gratuity fund was not relevant for the purposes of this case as the deduction was not being claimed on account of any provision. The deduction was in respect of the amount actually deposited in the fund which had become payable during the previous year relevant to assessment year 1979-80. This factual position has not been disputed nor has the Counsel for the Revenue controverted the factual findings that in the earlier years, similar claims of the assessee had been allowed by the Assessing Officer or by the CIT (Appeals) and the orders stand accepted by the Revenue. Disallowance under section 14A r.w.r 8D - HELD THAT - Once the AO has recorded the satisfaction that the assessee has earned the exempt income, however the AO is not satisfied that no expenses was incurred by the assessee (in the present case - nil), was not correct. Therefore, the necessary sequel of recording the satisfaction is the AO shall embark upon to apply Rule 8D and calculate the expenditure. In the present case, the AO has applied the Rule 8D and has calculated the expenditure by applying % of the value of the investment which comes to ₹ 62,500/-. In our view, there is no irregularity in the order passed by the AO/TPO. Accordingly, the objection of the assessee in ground No.4 is dismissed. calculate the expenditure. In the present case, the AO has applied the Rule 8D and has calculated the expenditure by applying % of the value of the investment which comes to ₹ 62,500/-. In our view, there is no irregularity in the order passed by the AO/TPO

Summary

Issues Involved:
1. Exclusion of certain comparables for determining the Arm's Length Price (ALP) in respect of international transactions in the software segment.
2. Foreign exchange loss/gain treated as operating revenue for determining the ALP.
3. Working capital adjustment.
4. Disallowance under section 40A(7) regarding contribution to the gratuity fund.
5. Disallowance under section 14A read with Rule 8D for alleged expenditure.

Detailed Analysis:

1. Exclusion of Certain Comparables:
The Revenue contested the exclusion of eight comparables by the Dispute Resolution Panel (DRP) for determining the ALP in the software segment. These comparables were:
- ICRA Techno Analytics Ltd (seg)
- Infosys Ltd
- Kals Information Systems Ltd (seg)
- Mindtree Ltd (seg)
- Persistent Systems Ltd
- R S Software (India) Ltd
- Sasken Communication Technologies
- Tata Elxsi

The Tribunal upheld the DRP's decision, noting that these companies were functionally different from the assessee, which is a pure software development service provider. The Tribunal referred to its previous decision in the case of Electronics for Imaging India (P.) Ltd., which had similar facts and comparables. The Tribunal found that the excluded companies were engaged in diversified activities, had significant brand value, or lacked segmental information, making them unsuitable for comparison.

2. Foreign Exchange Loss/Gain:
The DRP directed the Assessing Officer (AO) to treat foreign exchange gain/loss as operating in nature if it arises from the realization of sales proceeds or payments against supplies. This was in line with the Tribunal's decision in the case of SAP Labs India (P.) Ltd. The Tribunal upheld this direction, emphasizing that foreign exchange fluctuations related to trading receipts or payments should be considered part of the operating profit margin.

3. Working Capital Adjustment:
The DRP directed that the working capital adjustment should be based on actual figures without any cap. The Tribunal upheld this direction, citing previous decisions that support the calculation of working capital adjustment on an actual basis. The Tribunal dismissed the Revenue's ground on this issue.

4. Disallowance under Section 40A(7):
The DRP directed the AO to delete the addition made under section 40A(7) for the contribution to the gratuity fund. The Tribunal upheld this direction, noting that the contribution was an actual payment to the LIC and not a mere provision. The Tribunal referred to the decision of the Hon'ble Punjab & Haryana High Court in the case of Bitoni Lamps Ltd., which supported the deduction of actual payments made towards an approved gratuity fund.

5. Disallowance under Section 14A read with Rule 8D:
The AO disallowed ?62,500 under section 14A read with Rule 8D for expenses related to earning exempt income. The DRP upheld this disallowance. The Tribunal also upheld the AO's decision, noting that the AO had correctly applied Rule 8D after recording his dissatisfaction with the assessee's claim of no expenses incurred for earning exempt income.

Conclusion:
The Tribunal upheld the DRP's decisions on the exclusion of certain comparables, treatment of foreign exchange gain/loss as operating revenue, and working capital adjustment. It also upheld the deletion of the addition under section 40A(7) for the contribution to the gratuity fund. However, it dismissed the assessee's objection regarding the disallowance under section 14A read with Rule 8D. The appeal of the Revenue and the cross-objection of the assessee were partly allowed.