2021 (1) TMI 1215 - AT - Income Tax

Transfer pricing adjustment made in respect of Engineering Design Segment - non-USA related transactions - HELD THAT - USA related transactions constituted 96.30% of the total turnover of EDS segment for margin was agreed to be 15.85% under MAP resolution. The coordinate bench has taken the view that the same rate may be adopted for non-USA related transactions also in the assessee's own case relating to 2008-09 2021 (7) TMI 84 - ITAT BANGALORE - Accordingly, following the decision rendered by the coordinate bench in AY 2008-09, we direct the AO/TPO to adopt the margin of 15.85% to non-USA related transactions also under engineering design services segment. Transfer Pricing adjustment made in respect of Marketing Support Services - Comparable selection - HELD THAT - We notice that M/s. Asian Business Exhibition Conferences Ltd. and ICC international Agencies Ltd. have been directed to be excluded by the coordinate bench in the case of Electronic Imaging India Pvt. Ltd. 2017 (7) TMI 1335 - ITAT BANGALORE . Following the above decision, we direct exclusion of both these companies. After exclusion of the above said 2 companies, only M/s. Cyber Media Research Ltd. would remain. The TPO may determine the sufficiency or otherwise of one comparable company after considering the facts of the case and after hearing the assessee. Working capital adjustment is supported by the decision of coordinate bench in the case of Huawei Technologies India Pvt. Ltd. 2018 (10) TMI 1796 - ITAT BANGALORE we direct the A.O. to allow working capital adjustment on actual basis. Disallowance u/s. 40(a)(ia) in respect of broad band connectivity charges - HELD THAT - As decided in own case 2021 (7) TMI 84 - ITAT BANGALORE we direct the A.O. to delete the disallowance of broadband charges made u/s. 40(a)(ia) as held assessee has simply obtained broadband/Internet facility from the service provider M/s. Tata Indicom. It is not a case where a service contract has been entered into. The facility is open to all and sundry and any member of the public can avail of it. In such circumstances, the view of the AO that the nature of service rendered as an element of implicit contract is struck down and therefore, the addition cannot be sustained in first appeal. Disallowance u/s. 40(a)(ia) of depreciation claimed on software purchases for non-deduction of tax at source - as submitted by Ld. A.R., depreciation is not an item included u/s. 40(a)(ia) of the Act and hence the depreciation cannot be disallowed - HELD THAT - We find support by this proposition on the decision rendered by the coordinate bench in the case of UKN Properties Pvt. Ltd. 2021 (7) TMI 106 - ITAT BANGALORE - Accordingly, the disallowance of depreciation u/s. 40(a)(ia) of the Act is liable to be deleted. The Ld. DRP however has directed the A.O. to treat software purchases as revenue expenditure and disallow the same u/s. 40(a)(ia) of the Act. In this regard, the Ld. CIT(A) has followed the decision rendered in the case of Samsung Electronics Company Ltd. 2011 (10) TMI 195 - KARNATAKA HIGH COURT which has since been reversed by Hon'ble Supreme Court in the case of Engineering Analysis Centre of Excellence Pvt. Ltd. 2021 (3) TMI 138 - SUPREME COURT Accordingly, in our view, the disallowance of entire amount of software purchases u/s. 40(a)(ia) of the Act treating the same as revenue expenditure requires fresh examination at the end of the A.O Business profits eligible for deduction u/s. 10A of the Act - A.O. had taken the view that the expenses deducted from export turnover cannot be deducted from the total turnover for the purpose of computation of deduction u/s. 10A - HELD THAT - DRP directed the Assessing officer to deduct the expenses from total turnover also following the decision rendered by jurisdictional Hon'ble Karnataka High Court in the case of Tata Elxsi Ltd. 2011 (8) TMI 782 - KARNATAKA HIGH COURT . The above said decision of Hon'ble High Court has since been upheld by Honourable Supreme Court in the case of HCL Technologies Ltd. 2018 (5) TMI 357 - SUPREME COURT . Accordingly, we do not find any infirmity in the direction given by Ld. DRP.

Issues Involved:
1. Transfer pricing adjustment in respect of "Engineering Design Segment".
2. Transfer pricing adjustment in respect of "Marketing Support Services".
3. Disallowance under section 40(a)(ia) for broadband connectivity charges.
4. Disallowance under section 40(a)(ia) of depreciation claimed on software purchases for non-deduction of tax at source.
5. Alternative claim that disallowances increase business profits eligible for deduction under section 10A.
6. Revenue's appeal on granting of risk adjustment and deduction of expenditure from total turnover while computing deduction under section 10A.

Detailed Analysis:

1. Transfer Pricing Adjustment in Respect of "Engineering Design Segment":
The assessee settled the issue relating to transfer pricing adjustment for USA-related transactions under Engineering Design Services (EDS) through a Mutual Agreement Procedure (MAP) with competent authorities of the USA and India. The margin was determined at 15.85% for USA-related transactions, which constituted 96.30% of the total turnover. The Tribunal directed the Assessing Officer (AO) to apply the same margin to non-USA related transactions, following a similar decision in the assessee's case for the assessment year 2008-09.

2. Transfer Pricing Adjustment in Respect of "Marketing Support Services":
The Transfer Pricing Officer (TPO) made an adjustment of ?70,71,129/- instead of ?40,71,129/- due to an arithmetical error. The Tribunal directed the AO/TPO to verify and correct this error. Additionally, two comparable companies selected by the TPO were excluded, following a decision in a similar case. The AO/TPO was directed to determine the sufficiency of one remaining comparable company and allow working capital adjustment on an actual basis.

3. Disallowance Under Section 40(a)(ia) for Broadband Connectivity Charges:
The Tribunal deleted the disallowance of ?62,459/- paid to BSNL, following a decision in the assessee's own case for the assessment year 2008-09. It was held that the payment for broadband/Internet facility does not constitute "technical services" requiring tax deduction at source under section 194J.

4. Disallowance Under Section 40(a)(ia) of Depreciation Claimed on Software Purchases:
The AO disallowed depreciation on software purchases for non-deduction of tax at source. The Tribunal noted that depreciation is not an item mentioned under section 40(a)(ia) and thus cannot be disallowed. The issue was restored to the AO for fresh examination in light of the Supreme Court decision in Engineering Analysis Centre of Excellence Pvt. Ltd.

5. Alternative Claim Regarding Disallowances and Deduction Under Section 10A:
The Tribunal did not specifically address this issue in the detailed analysis, implying that the primary issues were resolved without needing to consider the alternative claim.

6. Revenue's Appeal on Risk Adjustment and Deduction Under Section 10A:
The TPO granted risk adjustment as per the DRP's direction, supported by decisions in similar cases. The Tribunal found no infirmity in this. Regarding the computation of deduction under section 10A, the Tribunal upheld the DRP's direction to deduct expenses from total turnover as well, following the Karnataka High Court's decision in Tata Elxsi Ltd., which was upheld by the Supreme Court in HCL Technologies Ltd.

Conclusion:
The appeal filed by the assessee was allowed, while the appeal by the revenue and the cross objection filed by the assessee were dismissed. The Tribunal provided specific directions for the AO/TPO to follow, ensuring compliance with established legal precedents and correcting any errors in the assessment process.

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