2019 (8) TMI 1839 - AT - Income Tax

TP Adjustment - Under utilization of capacity - assessee contends that the TPO erred in not appreciating the fact that the losses incurred by the assessee in the manufacturing segment was mainly due to under utilization of capacity and that both the TPO and DRP had erred in computing the capacity utilized by the assessee - only difference between the contentions of the assessee and the TPO was on whether the mean average of capacity utilization should be adopted or whether the capacity utilization of only Motors should be adopted - HELD THAT - We find merit in the contentions put forth by the learned AR of the assessee that the capacity utilization of only the main product i.e. the Motors should be considered. The other two components namely coils and parts in our considered opinion are only incidental components and cannot by any stretch of imagination be equated and treated on par with the main product i.e. Motors. The installed capacity of Motors Coils and Parts are 38, 000 80, 000 and 3, 82, 000 respectively whereas the price of these are Rs. 18, 426/- per motor Rs. 312/0 per coil and Rs. 172/- per part. In these factual circumstances as narrated above assigning of equal weight age to motors coils and parts and taking the mean average for computing the capacity utilization will clearly result in distortion of the real picture on this issue. We hold and direct the TPO that the weighted mean of the capacity utilization should be adopted for computing the adjustment for under utilization of capacity as was taken by the assessee. Comparable selection - Exclusion of NGEF (Hubli) Ltd. - In the case on hand however it is not ascertainable as to whether this company NGEF has satisfied all the filters applied by the TPO. In this factual matrix of the case we concur with the plea of the learned DR for Revenue that the comparability of this company NGEF needs to be tested on the touchstone of satisfying all the filters that have been applied for ascertaining the comparability of all other companies - We remand the issue of comparability of NGEF back to the file of the TPO for fresh consideration. Needless to add the TPO shall accord the assessee adequate opportunity to put forth its contentions/submissions in the matter which shall be duly considered before deciding the issue of comparability of NGEF . We hold and direct accordingly. Consequently ground of assessee s appeal is treated as allowed for statistical purposes. Disallowance of Software Expenses - Nature of expenses - HELD THAT - As in the assessee s own case for Assessment Year 2009-10 2015 (11) TMI 1719 - ITAT BANGALORE we hold that these software expenses incurred towards payments towards licence fees for usage of leased licences and application are revenue in nature and are to be allowed as deduction. While giving effect to this order the AO is also directed to withdraw the depreciation allowed by him to the assessee on this issue in impugned order of assessment. We and direct the AO accordingly Consequently grounds of assessee s appeal are allowed. Deduction u/s 10A - DRP directing the AO to recomputed the deduction allowable u/s. 10A when there is no provision stipulated in the section that the expenses required to be reduced from the export turnover as per clause (iv) of the explanation to section 10A to be reduced from the total turnover also - HELD THAT - As respectfully following the decision in the case of CIT Vs. HCL Technologies L td. 2018 (5) TMI 357 - SUPREME COURT we direct the AO to allow assessee s claim for deduction u/s 10A of the Act. Consequently the grounds raised by revenue are dismissed.

Summary

Issues Involved:
1. Transfer Pricing (TP) adjustment.
2. Disallowance of software expenses.
3. Deduction under Section 10A of the Income Tax Act.

Comprehensive, Issue-wise Detailed Analysis:

1. Transfer Pricing (TP) Adjustment:
Ground Nos. 1 to 5 and 8:
- These grounds were not pressed by the assessee during the appeal proceedings and were dismissed as not pressed.

Ground No. 6 and Additional Ground No. 6A:
- The assessee contended that the TPO erred in not appreciating the fact that the losses incurred were due to underutilization of capacity and that the computation of capacity utilization was erroneous.
- The TPO had denied the adjustment because the capacity utilization difference between the assessee and comparable companies was minimal.
- The Tribunal found merit in the assessee's contention that the capacity utilization of only the main product (motors) should be considered rather than the average of all products.
- The Tribunal directed the TPO to adopt the weighted mean of the capacity utilization for computing the adjustment, allowing the assessee’s grounds.

Ground No. 7 - Exclusion of NGEF (Hubli) Ltd.:
- The TPO rejected NGEF as a comparable because it was a government company.
- The Tribunal cited the decision in IKA India (P) Ltd. Vs. ACIT, stating that being a government company does not disqualify a company from being a comparable if it passes the filters.
- The Tribunal remanded the issue back to the TPO to examine if NGEF satisfies all the filters for comparability.

2. Disallowance of Software Expenses:
Ground Nos. 9 to 12:
- The assessee challenged the disallowance of software expenses treated as capital expenditure by the AO.
- The Tribunal referred to its earlier decision in the assessee's own case for Assessment Year 2009-10, where such expenses were allowed as revenue in nature.
- The Tribunal noted the Karnataka High Court's affirmation of this decision.
- The Tribunal directed the AO to allow the software expenses as revenue expenditure and withdraw the depreciation allowed, thereby allowing the assessee’s grounds.

3. Deduction under Section 10A:
Revenue's Appeal:
- The Revenue challenged the DRP's direction to recompute the deduction allowable under Section 10A by reducing expenses from both export turnover and total turnover.
- The Tribunal referred to the Karnataka High Court’s decision in CIT vs. Tata Elxsi Ltd. and the Supreme Court’s decision in CIT V. HCL Technologies Ltd., which held that expenses excluded from export turnover should also be excluded from total turnover.
- The Tribunal directed the AO to allow the assessee's claim for deduction under Section 10A, dismissing the Revenue's grounds.

Conclusion:
- The assessee's appeal was partly allowed, with specific directions to the TPO regarding capacity utilization adjustment and the inclusion of NGEF as a comparable.
- The software expenses were allowed as revenue expenditure.
- The Revenue's appeal was dismissed, and the assessee’s claim for deduction under Section 10A was upheld.