2019 (5) TMI 1828 - AT - Income Tax

TP Adjustment - comparable selection - HELD THAT - Assessee is mainly engaged in provision of software development services related to design, implementation, maintenance with respect to ICs as per the specifications prescribed by the AEs, thus companies functionally dissimilar with that of assessee need to be deselected from final list. Exclude Persistent Systems Ltd., Thirdware Solutions Ltd, Wipro Technology Services Ltd, E-Zest Solutions Ltd, Tata Elxsi Ltd,Acropetal Technologies Limited (Seg.),E-Infochips from the list of comparables on account of functional dissimilarities. Larsen Toubro Infotech Ltd. (L T) - We find the Tribunal in assessee s own case for assessment year 2010-11 has discussed the issue of exclusion of L T as a comparable and has restored the issue to the file of Assessing Officer/TPO for deciding the issue afresh. Respectfully following the above we deem it proper to restore this issue to the file of the TPO for considering the exclusion of this company from the list of comparables. Persistent Systems Ltd excluded from the list of comparables on account of FAR differences. Persistent Systems and Solutions Ltd. is concerned, we find this company is functionally different since it provides support in software development, consultancy and systems integration services to Persistent group of companies and also enjoys the benefit being a part of the Special Economic Zone Scheme in India. It has incurred huge expenditure on account of Research Development activities and has abnormal profit during the year since its turnover has increased by 184% and the net profit has increased by 250% for the year ending 2011. Sankhya Infotech Ltd. , Sasken Communication Technologies Ltd. (Sasken) is functionally different from that of the assessee company. R. Systems International Ltd on the ground of its financial year being calendar year - We find the Tribunal in assessee s own case for assessment year 2010-11, has held that the comparables cannot be rejected merely on the ground that financial year followed is different. We, therefore, restore this issue to the file of A.O./TPO with a direction to include R. Systems International Ltd. in the list of comparables after extrapolation of the financial results. While doing so the TPO shall give due opportunity of being heard to the assessee. CG VAK Software Exports Ltd. - We find the TPO rejected this company as it is making persistent losses in software services segment. It is the submission of the ld. counsel that this company is not making persistent losses and has earned profit in one of the two preceding years. Further, this company was accepted by the TPO as a comparable for assessment yea₹ 2009-10 and 2013-14. We, therefore, restore this issue to the file of the A.O./TPO to examine the record and decide the issue afresh and as per law after giving due opportunity of being heard to the assessee. CAT Technologies Ltd. company earned revenue from information technology services and, therefore, should be accepted as a comparable. Thinksoft Global Services - Assessee is not engaged in high end activity and is a routine and intermediary as it provides software development and design services as per the specifications provided by the AE. Therefore, this company should be considered as a comparable. Caliber Point Business Solutions Ltd. - This company does not pass the different financial year ending filter. We find the Tribunal in assessee s own case for assessment year 2010-11 has held that the comparable cannot be rejected merely on the ground that financial year followed is different - restore this issue to the file of the A.O./TPO to decide the issue afresh by extrapolating the result after giving due opportunity of being heard to the assessee. Maveric Systems Ltd. - TPO has not demonstrated that any indirect cost is involved and its impact on the net margin. It is his submission that the revenue of the company has increased in the year over the previous year. Further, the company passes all the filters applied by the TPO himself and, therefore, this company should be taken as a comparable. It is also his submission that the TPO himself in assessee s own case for assessment year 2010-11 has accepted Maveric Systems Ltd. as a comparable. We, therefore, restore this issue to the file of the A.O./TPO with a direction to adjudicate the issue afresh as per fact and law after giving due opportunity of being heard to the assessee. Computation of operating margin of the assessee and comparable companies - whether bank charges, provision for doubtful debts and provision no longer required written back cannot be considered as non-operating expenditure/income - HELD THAT - TPO held that bank charges are usually not separately reported by the company and are clubbed along with the interest charges and, hence, these are to be treated in the same manner as interest. Similarly, provision for bad debt being in the nature of unascertained liability, has to be treated as non-operating income. The DRP simply upheld the action of the Assessing Officer/TPO. It is the submission of the ld. counsel for the assessee that bank charges and interest can be separately computed. Relying on various decisions it is his submission that the lower authorities have not given any valid reason to negate the claim of the assessee. We find the facts are not coming out clearly from the orders of the TPO/DRP. We, therefore, remit this issue back to the file of the Assessing Officer/TPO with a direction to adjudicate the issue afresh after giving due opportunity of being heard to the assessee. Risk adjustment - HELD THAT - We are of the considered view that the assessee is entitled for risk adjustment to the net margin of the comparables for bringing them at par with the taxpayer on supplying the complete data by the assessee - Respectfully following the decision of the Tribunal in assessee s own case for the immediately preceding assessment year, this ground is restored to the file of the A.O./TPO for deciding this issue afresh and in accordance with the law, after giving due opportunity of being heard to the assessee Treatment of software expenses - Revenue or capital expenditure - addition as capital expenditure after allowing depreciation - HELD THAT - Tribunal in assessee s own case for assessment year 2010-11 has treated the software expenses as revenue in nature. Therefore, following the decision of the Tribunal in assessee s own case for assessment year 2009-10 and 2010-11 and in absence of any distinguishable feature brought before us by the Revenue, we direct the Assessing Officer to treat the expenses on rental of time based software licence as revenue in nature. The ground raised by the assessee is accordingly allowed. Expenditure on training of employees - Revenue or capital expenditure - HELD THAT - Respectfully following the decision of the Tribunal in assessee s own case and in absence of any contrary material brought to our notice against the order of the Tribunal, this ground of the assessee is allowed. Depreciation on goodwill - DRP, relying on the decision of the Hon'ble Supreme Court in the case of Goetze (India) Ltd 2006 (3) TMI 75 - SUPREME COURT rejected the claim of the assessee on the ground that the assessee has not made such claim in the return of income - HELD THAT - Respectfully following the decision of the Tribunal in assessee s own case for assessment year 2010-11, we restore this issue to the file of the Assessing Officer with a direction to decide the issue afresh and in accordance with law after giving due opportunity of being heard to the assessee.

Summary

Issues Involved:
1. Transfer Pricing Adjustment
2. Treatment of Software Expenses
3. Treatment of Training Expenses
4. Depreciation on Goodwill
5. Levy of Interest under Sections 234B and 234D
6. Initiation of Penalty Proceedings under Section 271(1)(c)

Detailed Analysis of the Judgment:

1. Transfer Pricing Adjustment:
The main issue was the upward adjustment of ?26,32,08,740/- proposed by the TPO for the international transactions undertaken by the assessee. The assessee argued against the inclusion and exclusion of certain comparable companies used by the TPO to determine the Arm's Length Price (ALP).

- Inclusion of Comparables: The Tribunal admitted the additional ground raised by the assessee regarding the inclusion of certain entities in the list of appropriate comparables. The Tribunal directed the TPO to exclude companies like Persistent Systems Ltd., Thirdware Solutions Ltd., Wipro Technology Services Ltd., E-Zest Solutions Ltd., Tata Elxsi Ltd., Acropetal Technologies Ltd., E-Infochips Ltd., Larsen & Toubro Infotech Ltd., Persistent Systems and Solutions Ltd., Sankhya Infotech Ltd., and Sasken Communication Technologies Ltd. from the list of comparables due to functional dissimilarities, different business models, and other factors.

- Exclusion of Comparables: The Tribunal also directed the TPO to include companies like R. Systems International Ltd., CG VAK Software & Exports Ltd., CAT Technologies Ltd., Thinksoft Global Services Ltd., Caliber Point Business Solutions Ltd., and Maveric Systems Ltd. as comparables after verifying their financial data and ensuring they meet the criteria for comparability.

- Risk Adjustment: The Tribunal allowed the assessee's request for risk adjustment, directing the TPO to provide risk adjustment to the net margin of the comparables to bring them at par with the assessee.

2. Treatment of Software Expenses:
The Tribunal addressed the issue of whether software expenses amounting to ?69,45,581/- should be treated as capital expenditure. The Tribunal followed its earlier decisions for assessment years 2009-10 and 2010-11, holding that expenses on time-based software licenses are revenue in nature and should not be capitalized. Consequently, the Tribunal directed the Assessing Officer to treat these expenses as revenue expenditure.

3. Treatment of Training Expenses:
The Tribunal examined the treatment of training expenses amounting to ?9,85,574/-. Following its previous decisions for assessment years 2009-10 and 2010-11, the Tribunal held that such expenses are revenue in nature and should not be capitalized. Therefore, the Tribunal directed the Assessing Officer to allow the training expenses as revenue expenditure.

4. Depreciation on Goodwill:
The Tribunal dealt with the assessee's claim for depreciation on goodwill amounting to ?2,45,01,457/-. The Tribunal noted that the DRP had rejected the claim based on the Supreme Court's decision in Goetze (India) Ltd. However, following its earlier decision for assessment year 2010-11, the Tribunal restored the issue to the Assessing Officer for fresh examination and decision, providing an opportunity for the assessee to be heard.

5. Levy of Interest under Sections 234B and 234D:
The Tribunal did not press grounds related to the levy of interest under sections 234B and 234D, and these grounds were dismissed as not pressed.

6. Initiation of Penalty Proceedings under Section 271(1)(c):
The Tribunal did not press the ground related to the initiation of penalty proceedings under section 271(1)(c), and this ground was dismissed as not pressed.

Conclusion:
The appeal filed by the assessee was partly allowed for statistical purposes, with directions to the Assessing Officer/TPO to re-examine certain issues and comparables based on the Tribunal's findings and previous decisions. The decision emphasized the need for functional comparability and appropriate adjustments to ensure the ALP determination aligns with the assessee's business model and risk profile.