2018 (10) TMI 1947 - AT - Income Tax

TP Adjustment - comparable selection - HELD THAT - Clearly the assessee has admitted itself in the business of content developments and on line tutoring, thus the assessee itself is in the KPO services, therefore it would be held that ICRA Online Ltd., or E4e Health Business, or in any different functioning, consequently the same has correctly taken as comparable. M/s.R.Systems has been additionally identified by the assessee as comparable, but has been excluded by the TPO and DRP on account of different financial years, cannot be excluded in so far as the said M/s.R.systems is also doing the system of KPO and the finance of the said M/s.R.Systems has been re-worked on quarterly basis and the average of the same has also been determined by the assessee. The average of which has been produced before the TPO and the DRP. The same being comparable to the assessee s business, the ld. TPO is directed to re-work the PLI after taking into consideration M/s.R.systems as the comparable. The assessee is to provide the financial re-working to the TPO for the necessary adjustments. In the circumstances, the prayer of exclusion of M/s.Harton Communictions, M/s.Infosys BPO Ltd., M/s.ICRA Online Ltd., and E4e Health Business from the list of comparables stands rejected and the assessee s request for including of M/s.R.Systems as comparable stands accepted. Working capital adjustments - As mentioned earlier the methodology applied herein is TNMM, no specific adjustments towards working capital is permitted, in so far as making only an adjustment of one item being working capital will make the financials of the comparable unworkable. What is comparable is the percentage of the margins, and obviously when arriving at the margins for each of the comparables, such comparables would have taken into consideration their cost of working capital. Therefore, any tinkering to that would have a negative impact, which could be many of the financials of comparables unworkable. It must be remembered that when arriving at margins, various components would go into its calculations, such as the cost of capital, the number of employees, number of working days, type of assets, cost of assets etc. If each of these is to be adjusted, then there would be no comparison. Basically, TNMM what is being looked at, is the margin that normally comparable business would generate. This being so, the working capital adjustments applied for stand rejected. Depreciation on the software - Whether software integral part of the computer? - HELD THAT - A perusal of the decision of the Bombay High Court in the case of CIT Vs.I-Flex Solutions Ltd., 2014 (3) TMI 1162 - BOMBAY HIGH COURT says that the Appellate Authority therein had held that the software therein was an integral part of the computer. The software in the case of the assessee is not an integral part of the computer, but are softwares which are used in the computers for the specific business purpose of the assessee. For computer to run there are basic specific software, these softwares are an integral part of the computer. As without such software, the computer would be just a box incapable of doing anything or function as a computer. Now to such a computer, further softwares are added, depending upon the business requirements of the assessee, those softwares are not an integral part of the computers. In the present case, the softwares on which the assessee is claiming depreciation @ 60% are not such softwares, which are the integral part of the computers, but that the list of software mentioned by the assessee, which are used for the specific business purpose of the assessee, in consequence the same cannot be held as integral part of the computer, and cannot be eligible for depreciation @ 60%. Ground No.12 of the assessee s appeal stands dismissed.

Summary

Issues Involved:
1. Transfer Pricing Matters
2. Corporate Tax Matters
3. Erroneous Levy of Interest under Section 234B and 234C
4. Initiation of Penalty Proceedings

Issue-wise Detailed Analysis:

1. Transfer Pricing Matters:

Ground 2 - Rejection of Economic Analysis:
The assessee contended that the AO/TPO and DRP erred by disregarding the economic analysis undertaken by the appellant for determining the arm's length price (ALP) of international transactions. The TPO conducted a fresh economic analysis for selecting comparable companies without providing cogent reasons.

Ground 3 - Objection on Comparable Companies:
The AO/TPO and DRP considered companies that did not satisfy the comparability parameters. The DRP accepted the functional comparability of additional companies identified by the assessee but inadvertently rejected the ground of objection.

Ground 4 - Application of Invalid Filters:
The AO/TPO and DRP modified certain quantitative and qualitative filters applied by the appellant without providing reasons and applied additional arbitrary filters for determining the ALP.

Ground 5 - Non-grant of Working Capital Adjustment:
The AO/TPO and DRP did not make suitable adjustments for working capital differences between the appellant and comparables, neglecting Indian transfer pricing regulations, OECD guidelines, and judicial precedents.

Ground 6 - Non-grant of Risk Adjustment:
The AO/TPO and DRP did not make suitable adjustments for differences in the level of risk between the appellant and comparable companies under Rule 10B(3).

Ground 7 - Erroneous Re-characterization of Segments:
The AO/TPO and DRP erroneously understood the business of the company and adopted erroneous segmentation for comparability analysis.

Ground 8 - Cherry Picking of Comparable Companies:
The AO/TPO and DRP violated principles of natural justice by not providing the detailed process of the fresh economic analysis conducted for identifying comparable companies and resorted to cherry-picking companies undertaking non-comparable activities.

Ground 9 - Erroneous Treatment of Expenses:
The AO/TPO considered the provision for bad and doubtful debts as a non-operating item.

Ground 10 - Use of Single Year Data:
The AO/TPO and DRP used only Financial Year 2012-13 data for determining the ALP instead of multiple-year data, which the appellant argued influences transfer prices.

Ground 11 - +/-3% Tolerable Range:
The AO/TPO and DRP computed the ALP without giving the benefit of +/- 3% under the proviso to Section 92C of the Act.

Judgment on Transfer Pricing Matters:
The Tribunal found that the AO/TPO's rejection of the assessee's economic analysis and comparables was not justified. The Tribunal directed the inclusion of M/s. R. Systems as a comparable and upheld the exclusion of M/s. Hartron Communications, M/s. Infosys BPO Ltd., M/s. ICRA Online Ltd., and E4e Health Business. The Tribunal rejected the working capital adjustment claim and upheld the AO/TPO's treatment of expenses and use of single-year data.

2. Corporate Tax Matters:

Ground 12 - Depreciation on Computer Software:
The AO treated computer software as 'Intangible assets' eligible for 25% depreciation instead of 'Computers including computer software' eligible for 60% depreciation as claimed by the appellant.

Judgment on Corporate Tax Matters:
The Tribunal upheld the AO's decision, stating that the software in question was not integral to the computer but used for specific business purposes, thus not eligible for 60% depreciation.

3. Erroneous Levy of Interest under Section 234B and 234C:

Ground 14 - Erroneous Levy of Interest:
The AO and DRP levied interest under sections 234B and 234C despite the additions being unanticipated, and there would be a consequential reduction in interest once the application is allowed.

Judgment on Levy of Interest:
The Tribunal dismissed this ground as not pressed.

4. Initiation of Penalty Proceedings:

Ground 15 - Initiation of Penalty Proceedings:
The AO initiated penalty proceedings under Section 271(1)(c) without appreciating that the transfer pricing adjustments arose from differences in approaches and did not amount to concealment of income or furnishing inaccurate particulars.

Judgment on Penalty Proceedings:
The Tribunal dismissed this ground as not pressed.

Conclusion:
The appeal was partly allowed, with the Tribunal directing the inclusion of M/s. R. Systems as a comparable and rejecting the claims for working capital adjustment and higher depreciation on software. The Tribunal upheld the AO/TPO's decisions on other transfer pricing and corporate tax matters.