2021 (11) TMI 1032 - AT - Income Tax

TP Adjustment - Comparable selection - HELD THAT - ICRA Techno Analytics Ltd comparable has been considered as not comparable in the case of Electronics and Imaging India Pvt. Ltd. cited 2016 (2) TMI 1123 - ITAT BANGALORE Accordingly, we direct the AO /TPO to exclude the same from list of comparables. Infosys Ltd. having a huge brand value and intangibles as well as having bargaining power, the same cannot be compared with the assessee who is providing services to its AE. Persistent Systems Ltd is functionally dissimilar, being engaged in software product development and intellectual property led business. Tata Elxsi company even in the software development segment is engaged in diversified activities of product design services, innovation design, engineering services, visual computing labs, etc. No contrary view has been brought to our notice regarding comparability of this company with that of a pure software development service provider. Accordingly we direct to exclude from the list of comparables. Cat Technologies Ltd.- This has to go back to the file of AO/TPO to verify the related party transaction and if there is no related party transaction, this comparable is to be considered as comparable, while determining ALP of international transactions. With these observations, we remit the issue to the file of AO/TPO for fresh consideration. Disallowance u/s 40(a)(ia) on deprecation claimed on purchase of Software - HELD THAT - We find force in the argument of the ld.AR in view of the judgment in the case of Engineering Analysis Center of Excellence Pvt. Ltd., 2021 (3) TMI 138 - SUPREME COURT wherein it is held that software purchased from nonresident is rightly capitalized by assessee in its books of account and are entitled for depreciation u/s 32 of the Act and not allowable to deduct TDS. As such, it cannot be denied depreciation on the purchase of software which has been actually capitalized by the assesee and directed to grant rate of depreciation on purchase of software and this been capitalized by the assessee. Disallowance of depreciation on goodwill - HELD THAT - Similar issue came up for consideration in assessee s own case before the Hon ble Supreme Court in the case of CIT Vs. Simfs Securities Ltd. 2012 (8) TMI 713 - SUPREME COURT wherein it is held that A reading of the words any other business or commercial rig nature in clause (b) of Explanation 3 to section 32(1) indicates that good-will would fall under the expression. The principle of ejusdem generis would strictly apply while interpreting the expression which finds place in Explanation 3(b). Goodwill is an asset under Explanation 3(b) to section 32(1) of the Act. Where the Commissioner (Appeals) held that the difference between cost of an asset and the amount paid by the assessee constituted good-will and that the assessee in the process of amalgamation had acquired right in the form of goodwill because of which the market worth of the assessee stood increase. Depreciation @ 60% of turnover and net working equipment allowed.

Summary

Issues Involved:
1. Transfer Pricing Adjustments
2. Rejection of Comparables
3. Working Capital Adjustment
4. Depreciation Disallowance on Software and Goodwill
5. Inclusion and Exclusion of Specific Companies as Comparables
6. Depreciation on Servers and Network Equipment

Issue-wise Detailed Analysis:

1. Transfer Pricing Adjustments:
The assessee challenged the TP adjustment of ?29,15,57,492/- made by the AO/TPO. The CIT(A) partly allowed the appeal, but the assessee was aggrieved by the rejection of certain comparables and the working capital adjustment. The CIT(A) directed the inclusion of Akshay Software Technologies Ltd. and LGS Global Ltd., and the exclusion of Kals Information Systems Ltd. However, the CIT(A) upheld the inclusion of ICRA Techno Analytics Ltd., Infosys Ltd., Persistent Systems Ltd., and Tata Elxsi Ltd. The CIT(A) also rejected the working capital adjustment granted by the TPO.

2. Rejection of Comparables:
The assessee argued for the exclusion of ICRA Techno Analytics Ltd., Infosys Ltd., Persistent Systems Ltd., and Tata Elxsi Ltd. The Tribunal agreed with the assessee, citing functional dissimilarities and the inclusion of diversified services, and directed the AO/TPO to exclude these companies from the list of comparables.

3. Working Capital Adjustment:
The CIT(A) rejected the assessee's claim for a working capital adjustment on actuals without an ad-hoc upper cap. The Tribunal did not specifically address this issue in the final order, implying acceptance of the CIT(A)'s decision to delete the entire working capital adjustment granted by the TPO.

4. Depreciation Disallowance on Software and Goodwill:
The assessee contested the disallowance of depreciation on software and goodwill. The Tribunal, referencing the Supreme Court judgment in Engineering Analysis Center of Excellence Pvt. Ltd. vs. CIT, directed that depreciation on software capitalized by the assessee should be allowed. Similarly, depreciation on goodwill was allowed, following the Supreme Court judgment in CIT vs. Simfs Securities Ltd.

5. Inclusion and Exclusion of Specific Companies as Comparables:
- ICRA Techno Analytics Ltd.: Excluded due to functional differences and lack of segmental data.
- Infosys Ltd.: Excluded due to its significant brand value, high turnover, and diversified services.
- Persistent Systems Ltd.: Excluded due to involvement in product development and lack of segmental data.
- Tata Elxsi Ltd.: Excluded due to its engagement in diversified activities within the software development segment.
- Cat Technologies Ltd.: Remanded to AO/TPO for verification of related party transactions.
- LGS Global Ltd.: Remanded to CIT(A) for fresh consideration regarding forex earnings repatriation.
- KALS Information Systems Ltd.: Excluded due to involvement in software product business.
- Akshay Software Technologies Ltd.: Included as it passes all filters and is functionally comparable.

6. Depreciation on Servers and Network Equipment:
The Tribunal upheld the assessee's claim for depreciation at 60% on servers and network equipment, following its decision in the assessee's own case for the previous assessment year.

Conclusion:
The Tribunal partly allowed both the assessee's and the Revenue's appeals. The Tribunal directed the exclusion of certain comparables and remanded specific issues for fresh consideration. Depreciation on software and goodwill was allowed, and the assessee's claim for higher depreciation on servers and network equipment was upheld.