2022 (10) TMI 1149 - AT - Income Tax

TP Adjustment - applicability of principle laid down in the Advance Pricing Agreement APA for benchmarking the international transactions - HELD THAT - When in the APA entered into between the tax payer and the CBDT though for the subsequent years, application of most appropriate transfer pricing method and arms length price of these transactions have already been agreed upon between the tax payer and CBDT and there is no change in the FAR and nature of the international transactions entered into during the year under consideration vis- vis subsequent years, principle laid down in the APA for benchmarking the international transactions in question shall have a guidance value. Moreover, in these days it is endeavor of the Union of India to stop multiplicity of the litigation and this case falls in the category of cases where litigation can be minimized. Consequently, we are of the considered view that APA already entered into between the tax payer and CBDT has the persuasive value so the matter is remitted back to the TPO to decide afresh in the light of the APA already entered into by providing opportunity of being heard to the tax payer. So aforesaid grounds are determined in favour of the assessee for statistical purposes. Nature of expenses - computer software expenses - revenue or capital expenditure - HELD THAT - This issue has already been decided in assessee s own case by the co-ordinate Bench of the Tribunal which has since been confirmed by the Hon ble Bombay High Court 2020 (7) TMI 648 - BOMBAY HIGH COURT by treating the software expenses as revenue expenditure. The AO is directed to treat the computer software expenses claimed by the assessee as revenue expenses.

Summary

Issues Involved:
1. Transfer Pricing Adjustment
2. Disallowance of Software Expenses
3. Non-Compliance with Directions Issued by the Dispute Resolution Panel (DRP)
4. Initiation of Penalty Proceedings

Detailed Analysis:

Transfer Pricing Adjustment:
Grounds No. 1.1 to 1.10:
The primary issue revolves around the adjustment of Rs. 45,600,001 determined by the Assessing Officer (AO) and the Dispute Resolution Panel (DRP) as the arm's length price (ALP) for the payment of management charges to the associated enterprise (AE) at NIL. The taxpayer argued that the Advance Pricing Agreement (APA) signed for subsequent financial years should have persuasive value for the year under consideration. The Tribunal found that the business model of the taxpayer had not changed vis-à-vis subsequent financial years where the APA was applicable. Citing case precedents, the Tribunal held that the APA could be applied as a guidance value for the year under consideration. The matter was remitted back to the Transfer Pricing Officer (TPO) to decide afresh in light of the APA, providing the taxpayer an opportunity to be heard.

Disallowance of Software Expenses:
Ground No. 2:
The AO and DRP disallowed computer software expenses of Rs. 14,74,19,626, treating them as capital in nature. The taxpayer contended that this issue had already been decided in its favor by the Tribunal for the assessment year 2009-10, a decision confirmed by the Hon'ble Bombay High Court. The DRP had acknowledged this fact but did not follow the Tribunal's decision to protect the revenue's interest. The Tribunal directed the AO to treat the software expenses as revenue expenses, following the earlier decision.

Non-Compliance with Directions Issued by the DRP:
Ground No. 3:
The taxpayer argued that the AO did not comply with the specific directions issued by the DRP regarding the negative turnover and prior period expenses of Rs. 15,34,411 and the disallowance of Rs. 72,23,445 under section 14A read with rule 8D. The Tribunal directed the AO to comply with the DRP's directions within two months.

Initiation of Penalty Proceedings:
Ground No. 4:
The taxpayer contested the initiation of penalty proceedings under section 271(l)(c). However, the Tribunal did not provide a specific ruling on this issue within the summarized judgment.

Conclusion:
The appeal filed by the taxpayer was allowed for statistical purposes, with the Tribunal directing the AO to reconsider the transfer pricing adjustment in light of the APA, treat software expenses as revenue expenses, and comply with the DRP's specific directions. The Tribunal emphasized minimizing litigation and ensuring compliance with established decisions and guidelines.