2023 (4) TMI 1263 - AT - Income Tax

TP Adjustment - additional ground before the DRP rejecting economic analysis undertaken by the assessee, most specifically that of depreciation adjustment - AR submitted that the assessee before the DRP by way of an additional ground claimed adjustment on account of depreciation vis- -vis comparable companies - assessee sought adjustment because of the difference in the rates of depreciation charged by the assessee vis- vis the comparable companies - HELD THAT - It is pertinent to note that the assessee has taken additional ground before the DRP while filing the objection to the draft Assessment Order thereby making adjustment on account of depreciation vis-a-vis the comparable companies. This aspect was not taken into account by the DRP and the DRP simplicitor stated that this aspect is discussed in other ground of objection but there were no speaking directions in this regard. DR also could not point out that the DRP has taken into account this additional ground. The depreciation adjustment on account of comparable companies has to be taken into account as the assessee depreciates its fixed assets at a rate higher than the rate prescribed under Schedule-XIV of the Companies Act, 1956. Thus, this needs verification and, therefore, it will be appropriate to remand back this issue to the file of the Assessing Officer/TPO for proper verification and adjudication. Needless to say the assessee be given opportunity of hearing by following the principles of natural justice. Comparable selection - E-lnfochips Limited is a product engineering and software research development service company. The portfolio of the EInfochips Limited is totally different as the product based company cannot be the criteria for including the same as it is not the proper comparable with the assessee company. There are no segmental details available for this comparable. There are abnormally fluctuating margin related to this comparable. Besides this, the TPO has accepted in the remand report that the hardware sales during the year is 15.07% and whereas in the last year it was 18% and therefore, rejected this comparable in A.Y. 2010-11. Thus, all these aspect held this company as noncomparable to the assessee company. E-zest Solutions Limited is engaged in the diversified activities and providing product engineering services and, therefore, it cannot be treated as comparable to assessee company. Besides this, it also undertakes ITes-BPO/KPO services. There were no segmental details available for this company. Therefore, we direct the TPO/AO to exclude this company from the list of comparables. iGate Global Solutions Limited is in the nature of engineering design services which are completely different from software development services. There are no segmental information available for the particular year before us. In fact, in assessee s own case for A.Y. 2010-11 this comparable was excluded and hence this is not a valid comparable. We direct the TPO/AO to exclude iGate Global Solutions Limited from the comparable list. Lucid Software Limited is engaged in development of software products and the assessee is not dealing in software product. Thus, functionally this comparable is not a valid comparable - no segmental research are available for the current Assessment Year in respect of Lucid Software Limited. There is an observation that the company has fluctuating margins for a period of three years. Therefore, this comparable is not justifiable. We direct the TPO/AO to exclude this comparable from the final list of comparables. Persistent Systems Limited in rendering outsourced product development services and product design services but the assessee company is primarily relates to provision of software development service. Thus, there is dissimilar function in this comparable. Also merger/demerger activities during the F.Y. 2010-11 and thus this is unusual event which will set out as non-comparable company. Besides that, income from sale of software product and IP business was not bifurcated and no segmental information is available. Therefore, we direct the TPO/AO to exclude this comparable. Sankhya Infotech Limited is engaged in the field of simulation operations which are functionally different from software development business. There are no segmental available regarding software related to this comparable. This comparable company undertakes R D and owns intangibles which makes it dissimilar from the assessee s portfolio. Therefore, we direct the TPO/AO to exclude this comparable from the final list of comparables. Wipro Technology Services Limited engaged in providing software related support services, software application development, integration, maintenance support as well as technology infrastructure operations. These services are totally different than the provisions of software development services. The brand Wipro Technology Services Limited has substantial presence and, therefore, it is earning super normal profit compare to that of assessee company. Therefore, this company is not a valid comparable. Thus, we direct the TPO/AO to exclude this comparable. Maveric Systems Limited - From the annual report of this comparable, it is pertinent to note that this comparable company is in the same field to that of assessee company and merely excluding the said comparable in A.Y. 2010-11 for persistent loss was not applicable in the present A.Y. as loss was not in the Indian entity but related to government policies in U.K. Therefore, we direct the TPO/AO to include this company after due verification for the final comparable list. Thinksoft Global Services Limited - TPO has not disputed final portfolio and only rejected on the basis of high RPT but from the perusal of annual report the observation of the TPO appears to be factually incorrect. Therefore, we direct the TPO/AO to verify the same and if all the filters are applied, then include this comparable in the final list of comparable. R System International Limited has two segments, the segmental quarter-wise audited financial details are available wherein these two segments have been bifurcated. It appears that the Software development and customization services are identical to the assessee s functions relating to this company. Therefore, we direct the TPO/AO to verify the said aspect and if all the criteria are applicable, then include the same in the final list of comparable. Kulzia Technologies Limited - It is pertinent to note that for A.Y. 2011-12 this comparable company has incurred losses and, therefore, there was abnormal profit pattern. Filters taken by the TPO has not been satisfied by this comparable and, therefore, rightly rejected by the TPO. This comparable, therefore, should not be included in final list of comparables. Foreign Exchange Gain which is considered non-operating in nature - In respect of foreign exchange gain which is considered as non-operating in nature, it is justified by the assessee that it has a major impact while taking into account export of software services. The tabulation form given by the assessee needs to be verified and, therefore, we direct the TPO/AO to verify the same and as per the directions given in A.Y. 2010-11, the matter may be remanded back to the file of the TPO/AO for taking into account foreign exchange gain/loss in respect of non-operating/operating margins. Working capital adjustment - As after taking into consideration inclusion and exclusion of losses hereinabove as well as the updated working capital computation alongwith submissions given by the assessee to the TPO/AO for giving effect to the DRP Directions, the same may be taken into account and verify the same. Ground are partly allowed for statistical purposes. Disallowance u/s 14A - AR submitted that the assessee has identified expenditure representing salary cost of two employees, related to long term investment in subsidiary and current investments in non-trading in various mutual funds, also expenditure was in respect of treasury operation and managing such investments which was incurred for earning the exempt income - HELD THAT - Though the assessee has stated that the long term investment was in subsidiary and the correct investment related to non-trade is in respect of mutual funds. The aspect of exempt income has not been properly demonstrated by the assessee and, therefore, suo moto disallowance was not justifiable at this juncture. This aspect needs to be verified and, therefore, it is remanded back to the file of the AO for substantial verification though the contention of the assessee that the expenditure incurred on two employees handling treasury functions was the only expenditure in relation to earning of dividend income or any other substantial expenditure was incurred. Needless to say, the assessee be given opportunity of hearing by following principles of natural justice. Therefore, ground is partly allowed for statistical purpose.

Summary

Issues Involved:
1. Jurisdiction of the Assessment Order and Directions of the Dispute Resolution Panel (DRP).
2. Transfer Pricing Adjustments.
3. Disallowance under Section 14A of the Income Tax Act.
4. Interest under Sections 234B, 234D, and 244A of the Income Tax Act.

Summary:

Jurisdiction of the Assessment Order and Directions of the DRP:
The assessee challenged the jurisdiction of the assessment order passed under Section 143(3) read with Section 144C(13) and the directions issued by the DRP under Section 144C(8). The Tribunal dismissed these grounds as general in nature and not pressed by the assessee.

Transfer Pricing Adjustments:
The assessee disputed the upward adjustment of Rs. 220,97,90,410/- to the Arm's Length Price (ALP) determined by the Transfer Pricing Officer (TPO) concerning international transactions for software development services.

1. Depreciation Adjustment: The Tribunal remanded the issue back to the Assessing Officer (AO)/TPO for verification, noting that the DRP did not provide speaking directions on the depreciation adjustment claimed due to higher depreciation rates used by the assessee compared to the comparable companies.

2. Exclusion of Comparables: The Tribunal directed the exclusion of certain companies (E-Infochips Limited, E-zest Solutions Limited, iGate Global Solutions Limited, Lucid Software Limited, Persistent Systems Limited, Sankhya Infotech Limited, and Wipro Technology Services Limited) from the list of comparables due to functional dissimilarities, lack of segmental data, and fluctuating margins.

3. Inclusion of Comparables: The Tribunal directed the inclusion of Maveric Systems Limited and Thinksoft Global Services Limited after verification, noting that the TPO had accepted these comparables in other assessment years and that the rejection reasons were not applicable.

4. Foreign Exchange Gain and Working Capital Adjustment: The Tribunal remanded the issue of considering foreign exchange gain as part of operating income and the working capital adjustment back to the AO/TPO for verification.

Disallowance under Section 14A:
The Tribunal remanded the issue of disallowance under Section 14A back to the AO for verification, noting that the assessee had made a suo moto disallowance of Rs. 20,37,506/- but the AO had not recorded satisfaction regarding the correctness of the assessee's claim. The Tribunal directed verification of the nexus between the expenditure and the earning of exempt income.

Interest under Sections 234B, 234D, and 244A:
These grounds were noted as consequential and not adjudicated at this juncture.

Conclusion:
The Tribunal partly allowed the appeals for statistical purposes, remanding several issues back to the AO/TPO for verification and proper adjudication, ensuring the assessee is given an opportunity of hearing by following the principles of natural justice. The Stay Application was also disposed of accordingly.