2018 (11) TMI 1743 - AT - Income Tax

TP Adjustment - Comparable selection - segment of provision of software development services by the assessee to its associated enterprises - HELD THAT - Exclusion of companies not functionally comparable to the concern assessee which was providing software development services to its associated enterprises. We direct the Assessing Officer/TPO to exclude five concerns i.e. Bodhtree Consulting Ltd., KALS Information Systems Ltd., FCS Software Solution Ltd., E-Infochip Ltd. and E-Zest Solutions Ltd. Disallowance of foreign travel expenses - HELD THAT - The assessee has incurred similar expenditure in the preceding year also, wherein the Tribunal had held that beneficiaries of foreign travel were solely the employees of assessee and the visits were meant for business purpose of assessee, who was captive service provider to associated enterprises, hence the expenditure was allowed as business expenditure. The factual aspects of the issue raised are similar and in the nature of business carried on by the assessee, wherein it is providing services to its associated enterprises in all the divisions, then the expenditure incurred on foreign travel expenses on the employees of assessee concerned, are to be allowed as business expenditure. Computation of deduction under section 10B - Assessing Officer had set off all the losses of other units with profits of manufacturing unit prior to computing the deduction under section 10B of the Act - HELD THAT - In M/S YOKOGAWA INDIA LTD. 2016 (12) TMI 881 - SUPREME COURT has laid down that losses or unabsorbed depreciation is to be set off against profits of eligible unit after the deduction under section 10A of the Act has been allowed. Similar proposition has been laid down in M/S. VISHAY COMPONENTS INDIA PVT. LTD. VERSUS THE ADDL. COMMISSIONER OF INCOME TAX, RANGE 7, PUNE AND VICA-VERSA 2015 (11) TMI 118 - ITAT PUNE Since the issue is settled by the Hon'ble Supreme Court, then the deduction claimed under section 10B of the Act is to be allowed against profits of manufacturing unit before adjusting losses of other units or brought forward losses. We hold so. However, the Assessing Officer shall compute working and for this limited purpose, we remit the issue back to the file of Assessing Officer, after allowing deduction under section 10B of the Act, losses of other units shall be set off against balance profits in the hands of assessee and if available profits are there, then brought forward losses also shall be set off against profits of manufacturing unit. The assessee is directed to file working before the Assessing Officer in this regard, who shall re-compute balance income and balance losses, if any, to be carried forward in the hands of assessee.

Summary

Issues Involved:
1. Transfer Pricing Adjustment
2. Disallowance of Foreign Travel Expenses
3. Set-off of Losses Prior to Deduction under Section 10B of the Income-tax Act, 1961
4. Penalty Proceedings under Section 271(1)(c)
5. Incomplete Order by the Dispute Resolution Panel (DRP)

Issue-wise Detailed Analysis:

1. Transfer Pricing Adjustment:
The primary issue revolves around the transfer pricing adjustment of ?2,780,728 related to the provision of software development services to Associated Enterprises (AE). The assessee challenged the selection of comparables by the Transfer Pricing Officer (TPO), asserting that five of the eight selected comparables were not functionally comparable and one excluded comparable should be included. The Tribunal examined the functional comparability of the selected companies and found that:
- KALS Information Systems Ltd.: Excluded as it was engaged in developing and selling software products, not purely software services.
- Bodhtree Consulting Ltd.: Excluded due to different business models and fluctuating margins.
- FCS Software Solutions Ltd.: Excluded due to abnormal profit margins and engagement in diverse activities.
- E-Zest Solutions Ltd.: Excluded as it provided KPO services, not comparable to software development services.
- E-Infochips Ltd.: Excluded due to the absence of segmental data and involvement in both software development and ITES.

The Tribunal directed the inclusion of SIP Technologies Ltd., which was not a persistent loss-making entity. Consequently, the arithmetic mean margins of the revised set of comparables worked out to 12.96%, which was within the permissible range of the assessee's margin of 13.49%. Thus, the upward adjustment of ?2,780,728 was deleted.

2. Disallowance of Foreign Travel Expenses:
The assessee contested the disallowance of foreign travel expenses amounting to ?1,335,310, arguing that these expenses were incurred wholly and exclusively for business purposes. The Tribunal noted that similar expenses had been allowed in the previous assessment year (2007-08) and accepted the assessee's claim. The expenses were deemed necessary for the business, especially as the assessee was a captive service provider to its associated enterprises.

3. Set-off of Losses Prior to Deduction under Section 10B:
The assessee challenged the Assessing Officer's decision to set off losses of other units before computing the deduction under Section 10B. The Tribunal referred to the Supreme Court's judgment in CIT Vs. Yokogawa India Ltd., which established that losses or unabsorbed depreciation should be set off against profits of eligible units after allowing the deduction under Section 10A. The Tribunal directed the Assessing Officer to allow the deduction under Section 10B before adjusting the losses of other units or brought forward losses.

4. Penalty Proceedings under Section 271(1)(c):
The Tribunal did not explicitly address the penalty proceedings under Section 271(1)(c) as the primary adjustments related to transfer pricing and disallowance of expenses were resolved in favor of the assessee.

5. Incomplete Order by the DRP:
The assessee argued that the DRP's order was incomplete and lacked sufficient detail in rejecting the assessee's submissions and evidence. The Tribunal's resolution of the primary issues rendered this ground moot.

Conclusion:
The appeal was partly allowed, with the Tribunal directing the exclusion and inclusion of specific comparables for transfer pricing, allowing the foreign travel expenses, and clarifying the computation of deduction under Section 10B. The upward transfer pricing adjustment was deleted, and the matter was remanded to the Assessing Officer for re-computation of income and losses.