2016 (8) TMI 324 - AT - Income Tax

Transfer pricing adjustment - royalty payment - Held that - It it is not necessary for the assessee to show that any legitimate expenditure incurred by him was also incurred out of necessity. It is also not necessary for the assessee to show that any expenditure incurred by him for the purpose of business carried on by him has actually resulted in profit or income either in the same year or in any of the subsequent years. The only condition is that the expenditure should have been incurred wholly and exclusively for the purpose of business and nothing more. The TPO has no role to play in examining the decision of commercial nature. Under the guise of TPO provisions, the TPO cannot determine the ALP at NIL as held by the Hon ble Delhi High Court in the case of EKL Appliances Ltd., 2012 (4) TMI 346 - DELHI HIGH COURT . Therefore, rejecting the entire payment without there being any analysis cannot be accepted. In the instant case, the TPO did not examine the arms length price of the impugned royalty payment in accordance with the provisions of Sec.92C of the Act. Accordingly, we are of the opinion that the ALP of the impugned payment for royalty has been wrongly determined as NIL by the TPO and the issue needs to be examined afresh. Accordingly we set aside the order of Assessing Officer/TPO on this issue and restore the same to the file of the TPO for examination of the same afresh in accordance with the law, after affording opportunity of being heard to the assessee. - Decided in favour of assessee for statistical purposes.

Issues Involved:

1. Use of assessment year data vs. multiple year data for comparability analysis.
2. Application of various filters by the AO/TPO in rejecting/including comparables.
3. Denial of adjustments on account of working capital and risk.
4. Determination of Royalty value at NIL.
5. Claim of +-5% standard deduction for computing ALP.
6. Reduction of communication charges from Export Turnover for deduction u/s 10A.
7. Disallowance of prior period expenses.
8. Initiation of penalty under section 271(1)(c).
9. Withdrawal of interest under section 244A and charging interest under section 234D and 234B.

Detailed Analysis:

1. Use of Assessment Year Data vs. Multiple Year Data:
The assessee objected to the AO/TPO's use of assessment year data instead of multiple year data. The DRP rejected this objection, stating that it is advisable to use current year data unless there are compelling reasons to adopt previous year data for comparability analysis.

2. Application of Various Filters by the AO/TPO:
The assessee contested the AO/TPO's application of various filters in rejecting/including comparables. The DRP upheld the AO/TPO's actions on several grounds:
- Rejection of companies with ITes income less than 75% of total income.
- Rejection of companies with export revenues less than 75% of total revenue.
- Rejection of companies maintaining accounts in terms other than the financial year.
- Rejection of companies with diminishing revenues/persistent losses and negative net-worth.
- Use of a Related Party Transaction (RPT) filter of 25%.
- Specific inclusions and exclusions of comparables were also upheld.

3. Denial of Adjustments on Account of Working Capital and Risk:
The DRP accepted the assessee's contention regarding working capital adjustment and directed the TPO to provide it. However, the objection to not allowing risk adjustment was rejected.

4. Determination of Royalty Value at NIL:
The assessee objected to the AO/TPO's determination of the Royalty value at NIL. The DRP upheld the TPO's action, maintaining the adjustment of ?28,36,01,903.

5. Claim of +-5% Standard Deduction for Computing ALP:
The assessee's claim for a +-5% standard deduction for computing ALP was rejected by the DRP.

6. Reduction of Communication Charges from Export Turnover for Deduction u/s 10A:
The assessee objected to the AO's proposal to reduce communication charges of ?25,12,78,420 from the Export Turnover for claiming deduction u/s 10A. The DRP overruled this objection.

7. Disallowance of Prior Period Expenses:
The assessee objected to the disallowance of prior period expenses amounting to ?54,33,214. This objection was also rejected by the DRP.

8. Initiation of Penalty Under Section 271(1)(c):
The assessee contested the initiation of penalty under section 271(1)(c), arguing it was done mechanically without recording any satisfaction. The Tribunal did not adjudicate this issue, considering it premature.

9. Withdrawal of Interest Under Section 244A and Charging Interest Under Section 234D and 234B:
The assessee objected to the withdrawal of interest under section 244A and the charging of interest under sections 234D and 234B. The Tribunal did not adjudicate this issue, considering it consequential.

Judgment:

Comparable Companies:
- Infosys BPO Ltd.: The issue was restored to the DRP for recording its finding after giving due opportunity to the assessee.
- Eclerx Services Ltd.: Excluded on the grounds of functional dissimilarity, providing high-end KPO services.
- Cosmic Global Ltd.: Restored to the TPO for adjudication after giving the assessee a reasonable opportunity to be heard.
- Acropetal Technologies Ltd. (Seg.): Excluded due to involvement in high-end engineering design services.
- Coral Hub (formerly Vishal Information Technologies Ltd.): Excluded based on the Hon'ble Delhi High Court's decision in Rampgreen Solutions Pvt. Ltd. vs. CIT.

Royalty Issue:
The Tribunal set aside the TPO's determination of the Royalty value at NIL and restored the issue to the TPO for fresh examination in accordance with the law, after affording the assessee an opportunity to be heard.

Prior Period Expenses:
The issue was restored to the AO for verification and allowance if the payments were found to have crystallized in the year under appeal.

Other Grounds:
- Ground No. 4 was dismissed as not being pressed.
- Ground No. 6 was dismissed as being premature.
- Ground No. 7 was not adjudicated upon as it was consequential.

Conclusion:
The appeal of the assessee was partly allowed, with specific issues being restored to the TPO/DRP/AO for fresh examination and adjudication. The Tribunal emphasized the need for a detailed and fair examination of the issues, particularly concerning the comparables and the Royalty payment.

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