2021 (12) TMI 1422 - AT - Income Tax

TP Adjustment - comparable selection - HELD THAT - Companies functionally dissimilar with that of assessee as engaged in the business of providing Software Development Services, Provision of Technical Support Services and Provision of Sales and Marketing support services to its Associate Enterprises (AEs) need to be deselected. Amortization of goodwill as operating expenses while computing the operating margin of provisions of sales and marketing - contention of the appellant before DRP that amortization of goodwill is treated as operating cost depreciation on the same should be allowed as a deduction u/s 32 - HELD THAT - DRP rejected the claim by returning finding that the amortization of goodwill debited to P L account was allowed as a deduction and no claim u/s 32 was made in the return of income. No fallacy in the findings of the Hon ble DRP as the claim for deduction of depreciation only on AO being satisfied with the fulfillment of the condition laid down u/s 32 of the I.T. Act. Thus, we do not find any merit in the ground of appeal no.5 and 6. Accordingly, the ground of appeal no.5 and 6 stands dismissed. Denying grant of risk adjustments - HELD THAT - The assessee has not demonstrated as to how the difference in risk undertaken by a bank in advancing a loan to a borrower as compared to the risk involved in a loan advanced by RBI to a bank or by a bank to another bank is similar to the difference between the risk undertaken by the comparable company and the risk undertaken by the assessee. Hence, the difference between the Prime Lending Rate and the Bank Rate cannot be considered as a reliable and accurate measure of the Risk adjustment required to be made. In the absence of a reliable and accurate measure of the risk difference between the assessee and the comparables, no risk adjustment can be granted. Deduction of education cess from computation of taxable income - HELD THAT - we note that the assessee paid Education Cess while computing the taxable income under normal provision of the I.T. Act. The Hon ble High Court of Bombay in the case of Sesa Goa Ltd. 2020 (3) TMI 347 - BOMBAY HIGH COURT was pleased to hold that the Education Cess is an allowable expenditure as per the provision of the I.T. Act. Thus the issue of education cess‟ is an allowable expenditure as per provisions of Section 40(a)(ii) of the Act and placing reliance on the decision (supra.), we direct the Assessing Officer to allow deduction in respect of Education Cess paid by the assessee. Accordingly, the additional ground of appeal no.1 raised by the assessee is allowed. Levy of interest u/s 234C - HELD THAT - This additional ground of appeal is consequential in nature. Once the default within the meaning of section 234C takes place, levy of interest is automatic and mandatory, is not open to challenge in the appeal proceedings. Hence, we do not find any merit in the said additional ground of appeal no.2 and the same is dismissed.

Issues Involved:

1. Transfer Pricing Adjustment for Software Development Services, Technical Support Services, and Sales and Marketing Support Services.
2. Comparable Companies in relation to Software Development Services.
3. Comparable Companies in relation to Technical Support Services.
4. Comparable Companies in relation to Sales and Marketing Support Services.
5. Treatment of Goodwill Amortization Cost.
6. Double Disallowance due to Treatment of Goodwill Amortization Cost.
7. Risk Adjustment.
8. Initiation of Penalty Proceedings.
9. Deduction of Education Cess.
10. Levy of Interest under Section 234C.

Detailed Analysis:

1. Transfer Pricing Adjustment for Software Development Services, Technical Support Services, and Sales and Marketing Support Services:
The National e-Assessment Centre (NeAC) enhanced the income of the appellant by INR 63,36,98,426 due to non-compliance with the arm's length principle in international transactions. The appellant challenged the transfer pricing (TP) adjustment of INR 24,39,53,671 for software development services, INR 5,01,93,449 for technical support services, and INR 33,95,51,306 for sales and marketing support services.

2. Comparable Companies in relation to Software Development Services:
The appellant contested the exclusion of certain companies from the comparable set and the inclusion of others by the TPO. The TPO applied specific filters and selected different comparables, leading to a TP adjustment of INR 24,39,53,671. The Tribunal reviewed the inclusion and exclusion of various companies, such as Nihilent Technologies Pvt. Ltd., Persistent Systems Ltd., Aspire Systems (India) Pvt. Ltd., Thirdware Solutions Ltd., Cybage Software Pvt. Ltd., Dun & Bradstreet Technologies & Data Services Pvt. Ltd., and E-Infochips Ltd. The Tribunal directed the exclusion of Persistent Systems Ltd., Aspire Systems (India) Pvt. Ltd., Thirdware Solutions Ltd., and E-Infochips Ltd. from the list of comparables due to functional dissimilarities and lack of segmental data.

3. Comparable Companies in relation to Technical Support Services:
The appellant objected to the inclusion of certain companies in the comparable set for technical support services. The Tribunal examined the inclusion of companies like Manipal Digital Systems Pvt. Ltd., CES Ltd., MPS Ltd., and Domex E-Data Pvt. Ltd. The Tribunal directed the exclusion of Manipal Digital Systems Pvt. Ltd., CES Ltd., and MPS Ltd. due to functional dissimilarities and lack of segmental data.

4. Comparable Companies in relation to Sales and Marketing Support Services:
The appellant did not pursue this issue further, and the ground of appeal was dismissed as withdrawn.

5. Treatment of Goodwill Amortization Cost:
The appellant argued that the amortization of goodwill should be treated as a non-operating cost. The Tribunal upheld the findings of the lower authorities, stating that the amortization of goodwill was correctly treated as an operating expense.

6. Double Disallowance due to Treatment of Goodwill Amortization Cost:
The appellant contended that treating the amortization of goodwill as an operating cost resulted in double disallowance. The Tribunal found no merit in this argument and dismissed the ground of appeal.

7. Risk Adjustment:
The appellant sought a risk adjustment for differences in the level of risk borne by comparable companies. The Tribunal upheld the DRP's decision to deny the risk adjustment, as the appellant failed to demonstrate the differences in risk accurately.

8. Initiation of Penalty Proceedings:
The Tribunal did not address this issue in detail, as it was not pursued by the appellant.

9. Deduction of Education Cess:
The appellant raised an additional ground seeking deduction of education cess. The Tribunal allowed this ground, citing the Bombay High Court's decision in the case of Sesa Goa Ltd., which held that education cess is an allowable expenditure under the Income Tax Act.

10. Levy of Interest under Section 234C:
The Tribunal dismissed the additional ground challenging the levy of interest under Section 234C, stating that the levy of interest is automatic and mandatory once the default occurs.

Conclusion:
The appeal was partly allowed, with the Tribunal directing the exclusion of certain companies from the list of comparables and allowing the deduction of education cess. Other grounds raised by the appellant were dismissed.

← Previous Next →