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2022 (7) TMI 1400 - AT - Income TaxTP adjustment in SWD segment - Comparable selection - application of different filters - assessee filed its objections before the DRP contending that the turnover filter should have an upper limit and the same is not applied by the TPO - DRP rejected the contention of the assessee stating that there is no correlation between the profit margins and the turnover of companies as far as service sector - HELD THAT - We direct the AO / TPO to apply the appropriate upper turnover filter and exclude the companies having turnover in excess of Rs.200 crores. Exclusion of Inteq Software Ltd. on the basis that the RPT filter for AY 2014-15 fails while computing the margin of the company on an average - Margin of Inteq Software Ltd. for AY 2014-15 should not be considered and therefore direct to exclude this company from the comparables. Exclusion of Infobeans Technologies Ltd. on the basis that it is functionally not comparable for AY 2015-16 and therefore the margin of that year should be exclude while computing the average margin of that company - As relying on BORQS Software Solutions P. Ltd. case. 2021 (10) TMI 1351 - ITAT BANGALORE we direct the AO to exclude the margin for AY 2015-16 of while arriving at the 3 year average profit of Infobeans Technologies Ltd. Working capital adjustment - TPO did not allow any adjustment on the working capital as upheld by DRP - In the view of the ruling in the case of M/s. Huawei Technologies India (P) Ltd. 2018 (10) TMI 1796 - ITAT BANGALORE the basis of rejection of the relief by the DRP is no longer valid -We therefore direct the AO/TPO to consider the working capital adjustment in the light of the aforesaid ruling and allow appropriate adjustment in arriving at an arm s length price. TP adjustment towards interest on outstanding receivables - TPO treated the outstanding receivables from AE as in the nature of loan facility given to the AE and imputed interest @ 6 months LIBOR plus 450 basis points which works out to 4.985% - HELD THAT - Respectfully following the decision of the coordinate Bench of the Tribunal in the case of Barracuda Networks (I) P. Ltd. 2022 (5) TMI 322 - ITAT BANGALORE we hold that interest on receivables is a separate international transaction and separate benchmarking is required to be done. We therefore remit the issue to the TPO for fresh examination and take into consideration the guidelines laid down in the aforesaid decision of the Tribunal. The TPO is also directed to verify and consider the fact that the payables from AE is more than the receivable from AE as submitted by the assessee. Disallowance of Depreciation on Goodwill - HELD THAT - We notice the coordinate Bench of this Tribunal in the assessee s own case 2022 (5) TMI 722 - ITAT BANGALORE depreciation claimed by the assessee on goodwill acquired deserves to be allowed in accordance with law. AO is directed to compute depreciation in accordance with the principles laid down in case of Smifs Securities Ltd. 2012 (8) TMI 713 - SUPREME COURT - We hold that depreciation on goodwill deserves to be allowed. We direct the AO to recompute the depreciation with similar directions as in AY 2015-16.
Issues Involved:
1. Turnover Filter 2. Exclusion of Companies 3. Inclusion of Companies 4. Working Capital Adjustment 5. Interest on Receivables 6. Disallowance of Depreciation on Goodwill Detailed Analysis: 1. Turnover Filter: The assessee contended that the turnover filter should have an upper limit which was not applied by the TPO. The Tribunal referenced the decision in BORQS Software Solutions P. Ltd. v. ITO, where it was held that the application of the turnover filter is justified based on the classification of companies. The Tribunal directed the AO/TPO to apply the appropriate upper turnover filter and exclude seven companies having turnover in excess of Rs.200 crores, including Larsen and Toubro Infotech Limited and Infosys Limited. 2. Exclusion of Companies: The assessee sought exclusion of Inteq Software Ltd. based on the RPT filter for AY 2014-15. The Tribunal, following the decision in BORQS Software Solutions P. Ltd., directed that the margins of Inteq Software Ltd. for FY 2013-14 should not be considered. Similarly, Infobeans Technologies Ltd. was sought to be excluded for being functionally not comparable for AY 2015-16. The Tribunal directed the AO to exclude the margin for AY 2015-16 while arriving at the 3-year average profit of Infobeans Technologies Ltd. 3. Inclusion of Companies: The Tribunal did not specifically address any additional companies for inclusion in the comparables set in the provided text. 4. Working Capital Adjustment: The TPO did not allow any adjustment on the working capital, which was upheld by the DRP. The Tribunal referenced the decision in Huawei Technologies India (P) Ltd. v. JCIT, which held that working capital adjustment should be allowed as per actuals. The Tribunal directed the AO/TPO to consider the working capital adjustment in light of the ruling and allow appropriate adjustment in arriving at an arm's length price. 5. Interest on Receivables: The TPO treated outstanding receivables from AE as a loan facility and imputed interest, which was upheld by the DRP, resulting in an enhancement of TP adjustment. The assessee contended that outstanding receivables should not be treated as a separate international transaction. The Tribunal referenced the decision in Barracuda Networks India Pvt. Ltd., holding that interest on receivables is a separate international transaction requiring separate benchmarking. The Tribunal remitted the issue to the TPO for fresh examination, considering that the payables from AE were more than the receivables. 6. Disallowance of Depreciation on Goodwill: The AO disallowed the depreciation claimed on goodwill, which was upheld by the DRP. The Tribunal referenced its own decision in the assessee's case for AY 2015-16, which allowed the claim of depreciation on goodwill in accordance with the Supreme Court ruling in Smifs Securities Ltd. The Tribunal directed the AO to recompute the depreciation on goodwill with similar directions as in AY 2015-16. Conclusion: The appeal by the assessee was partly allowed, with specific directions provided for each issue. The Tribunal's decisions were based on precedents and detailed analysis of the facts presented. The AO/TPO was directed to apply the appropriate filters, consider working capital adjustments, and recompute depreciation on goodwill as per established legal principles.
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