2016 (5) TMI 1180 - AT - Income Tax

Transfer pricing adjustment - Held that - We agree with the contention of the Ld. Counsel that adjustment if at all is required to be made then the same should be made in respect of transactions with the AE only accordingly, the TPO is directed to make the adjustment only with respect to transaction with the AE and not for the entire revenue as costs. Whatever disallowances which has been made by the AO under various heads should be reduced from the operating cost as it will amount to double addition. Disallowances of software and license - alternatively, as claimed by assessee that if the same is treated as capital expenses, then depreciation under section 32 should be directed to be allowed - Held that - It can be seen that, some of the expenditures are periodical and recurring in nature, which cannot be held to be capital in nature. Because these expenditures are part and parcel for running of and maintenance of computer programmes essential for business. However, all these details and bills and vouchers along with the nature of expenditures have not been examined properly by the AO as well as by the DRP, therefore, in the interest of justice, we feel that the issue of software expenses should be remitted back to the file of the AO and should be decided afresh after considering these bills and vouchers and also the nature of expenses. It is clarified that if payment is recurring in nature purely for software then same cannot be disallowed as capital. In case some of the expenditures are treated as capital then, needless to say that AO will allow deprecation of such expenditure. Disallowance of travelling expenses being 50% claim - Held that - Even before us, the entire details have not been furnished. However, looking to the fact that foreign travelling expenses has been recurring expenditure in all the assessment years and in this year, the percentage is only 3% of the total turnover, therefore, in the interest of justice, we feel that the disallowance made should be restricted to 25% of the total expenditure debited on account of travelling expenses. Thus, the assessee gets part relief on this score. Similarly, on ad-hoc disallowance of telephone and communication, the same was made 50% on total expenditure claimed at ₹ 14,76,748/- on the ground that relevant details have not been furnished. Since similar position is continuing at the stage of the Tribunal also, therefore, like in the travelling expenses, we direct the AO to disallow 25% of the total expenditure debited on this head. Thus, assessee gets part relief on this score also.

Issues Involved:
1. Rejection of Comparable Uncontrolled Price (CUP) method and application of Transactional Net Margin Method (TNMM).
2. Addition of negative margin to the positive margin of comparable companies.
3. Application of margin on total cost without excluding disallowed expenses.
4. Determination of proportionate Arm's Length Price (ALP) of international transactions.
5. Disallowance of software and licensing expenses as capital expenditure.
6. Non-allowance of depreciation on software and licensing expenses.
7. Disallowance of lease rent despite DRP's direction to delete the proposed addition.
8. Disallowance of 50% of postage and courier expenses despite DRP's direction to delete the proposed addition.
9. Disallowance of 50% of printing and stationery expenses despite DRP's direction to delete the proposed addition.
10. Disallowance of 50% of travelling expenses incurred for business purposes.
11. Disallowance of 50% of telephone and communication expenses incurred for business purposes.
12. Addition of advances received in the course of business.
13. Non-allowance of set-off of brought forward business loss and unabsorbed depreciation.

Detailed Analysis:

1. Rejection of Comparable Uncontrolled Price (CUP) Method and Application of Transactional Net Margin Method (TNMM):
The Transfer Pricing Officer (TPO) rejected the CUP method adopted by the assessee for international transactions and applied the TNMM. The TPO determined an arm's length margin of 31.06% and converted the assessee's negative margin of (-)20.07% into a positive margin of 10.99%.

2. Addition of Negative Margin to the Positive Margin of Comparable Companies:
The TPO added the negative margin of the assessee (-20.07%) to the positive margin of comparable companies (10.99%), resulting in an arm's length margin of 31.06%. The assessee disputed this calculation, arguing that the margin should be only 10.99% of the operating cost.

3. Application of Margin on Total Cost Without Excluding Disallowed Expenses:
The assessee contended that the TPO applied the margin of 31.06% on the total cost without excluding expenses already disallowed by the Assessing Officer (AO). The disallowed expenses included software and licensing expenses, travelling expenses, and telephone and communication expenses, totaling Rs. 29,95,256/-.

4. Determination of Proportionate Arm's Length Price (ALP) of International Transactions:
The assessee argued that the ALP should be determined only for transactions with associated enterprises (AE) and not for the entire revenue. The proportionate operating cost for AE transactions was Rs. 6,60,08,689/-, and applying the arm's length margin of 10.99% resulted in an ALP of Rs. 7,32,63,044/-. The adjustment should be Rs. 1,82,92,463/- instead of Rs. 4,62,94,166/-.

5. Disallowance of Software and Licensing Expenses as Capital Expenditure:
The AO disallowed software and licensing expenses of Rs. 10,91,131/- as capital expenditure. The assessee argued that these expenses were recurring and periodical, essential for business operations. The Tribunal directed the AO to re-examine the nature of these expenses and allow depreciation if treated as capital.

6. Non-Allowance of Depreciation on Software and Licensing Expenses:
The Tribunal directed that if the software and licensing expenses are treated as capital, the AO should allow depreciation under section 32.

7. Disallowance of Lease Rent Despite DRP's Direction to Delete the Proposed Addition:
The AO disallowed lease rent of Rs. 1,83,95,052/- despite the DRP's direction to delete the proposed addition. This ground was not pressed by the assessee and was dismissed.

8. Disallowance of 50% of Postage and Courier Expenses Despite DRP's Direction to Delete the Proposed Addition:
The AO disallowed 50% of postage and courier expenses of Rs. 58,65,470/- despite the DRP's direction to delete the proposed addition. This ground was not pressed by the assessee and was dismissed.

9. Disallowance of 50% of Printing and Stationery Expenses Despite DRP's Direction to Delete the Proposed Addition:
The AO disallowed 50% of printing and stationery expenses of Rs. 30,08,194/- despite the DRP's direction to delete the proposed addition. This ground was not pressed by the assessee and was dismissed.

10. Disallowance of 50% of Travelling Expenses Incurred for Business Purposes:
The AO disallowed 50% of travelling expenses of Rs. 23,33,502/- on the ground that no business was procured from foreign countries. The Tribunal reduced the disallowance to 25%, considering the recurring nature of these expenses.

11. Disallowance of 50% of Telephone and Communication Expenses Incurred for Business Purposes:
The AO disallowed 50% of telephone and communication expenses of Rs. 14,74,748/-. The Tribunal reduced the disallowance to 25%, similar to the travelling expenses.

12. Addition of Advances Received in the Course of Business:
The AO added Rs. 40,39,826/- as advances received in the course of business. The Tribunal directed the AO to re-examine the evidence provided by the assessee, including confirmations and ledger accounts.

13. Non-Allowance of Set-Off of Brought Forward Business Loss and Unabsorbed Depreciation:
This ground was not pressed by the assessee and was dismissed.

Conclusion:
The appeal was partly allowed for statistical purposes. The Tribunal directed the AO to re-examine certain disallowances and adjustments, ensuring that any transfer pricing adjustment is restricted to transactions with associated enterprises and not the entire revenue. The Tribunal also provided relief by reducing disallowances on travelling and communication expenses and directed the AO to allow depreciation on capitalized software and licensing expenses.

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