2017 (3) TMI 1316 - AT - Income Tax

TPA - working capital adjustment - Held that - The working capital adjustment is required to be provided for bringing the comparables and the assessee at par for benchmarking the international transactions otherwise rationale behind the comparability for the purpose of benchmarking would get frustrated. However in order to provide the working capital adjustment to the assessee vis- -vis comparables assessee shall provide the complete audit pertaining to the working capital deployed to identify the difference to the margins earned by the assessee and the comparables. And the assessee shall also be at liberty to bring on record the evidence to demonstrate the difference in working capital deployed for working out further difference in the margin earned by assessee vis- -vis comparables. So we set aside the order passed by TPO/DRP denying the working capital adjustment to the assessee to decide afresh by the TPO by providing an opportunity of being heard to the assessee. Treating foreign exchange gain/loss as non-operating in nature - Held that - DRP treated foreign exchange gain/loss as non-operating in nature by relying upon Notification of CBDT issued on 18.09.2013 which is a notification on Safe Harbour Rules . As it is apparent from the date of Notification of the Rule relied upon by the ld. DRP dated 18.09.2013 the same is not applicable to the case of the assessee which is qua Assessment Year 2009-10. So in view of the matter order passed by TPO/DRP in not considering the foreign exchange gain / loss as operating in nature is not tenable in the eyes of law hence hereby set aside. Ld. TPO is directed to treat the foreign exchange gain / loss as operating in nature in calculating the operating margin of the assessee as well as final comparable companies Selection of comparable - Held that - The assessee being a hardware designer a captive service provider involved at the design and development stage only with a limited scope of work and is not involved in the process of conceptualization of any products or works and works only on the specification provided by the STE Group for the implementation of IC design its maintenance verification and software development. So the role of STE is that of a contract captive design centre and as such the findings of the TPO in this regard cannot be interfered with. Basis of high risk profile nature of services number of employees ownership of branded products and giant status of the company need to be matched with that of assessee to be selectied for final list of comparable. Expenditure on time based licences - revenue v/s capital - Held that - When the aforesaid fixed licences were rented for a limited period only which is less than one year no enduring benefit accrues to the assessee nor any ownership right vests in the assessee. So these expenses to our mind are in the nature of revenue expenses incurred for the purpose of business. Moreover one time expenditure to purchase time based software licenses cannot be deferred and as such are revenue expenses to run the business. So the AO is directed to re-examine the issue accordingly and as such this ground is determined in favour of the assessee. Depreciation on goodwill - Held that - It has not been disputed by both the ld. Representatives of the parties that the judgment cited as Goetze (India) Ltd. 2006 (3) TMI 75 - SUPREME Court as relied upon by DRP is not applicable to the facts and circumstances of the case and when the issue has been raised during assessment proceedings though no depreciation was claimed in the return of income AO was duty bound to decide this issue. So we hereby restore this ground to the AO to decide afresh after providing an opportunity of being heard to the assessee. Accordingly this ground is determined in favour of the assessee

Summary

Issues Involved:
1. Validity of the order passed by the TPO/AO/DRP.
2. Determination of total income and upward adjustment.
3. Selection and rejection of comparable companies for benchmarking.
4. Working capital adjustment.
5. Treatment of foreign exchange gain/loss.
6. Nature of software expenses and training expenses.
7. Depreciation on goodwill.
8. Levy of interest under sections 234B, 234C, and 234D.
9. Initiation of penalty proceedings under section 271(1)(c).

Detailed Analysis:

1. Validity of the Order:
The assessee contended that the order passed by the TPO, AO, and DRP was "bad in law and void ad-initio." However, this ground was deemed general and academic, requiring no specific adjudication.

2. Determination of Total Income:
The AO determined the total income of the assessee at Rs. 213,195,622 against the returned income of Rs. 122,498,921, resulting in an upward adjustment of Rs. 90,696,701. This adjustment was based on the TPO's selection of comparables and the application of filters.

3. Selection and Rejection of Comparable Companies:
The assessee challenged the TPO/DRP's rejection and inclusion of certain companies for benchmarking international transactions. The Tribunal examined the inclusion of CAT Technologies, Infosys Technologies Ltd., Tata Consultancy Services Ltd., Tata Elxsi Ltd., and Thirdware Solutions Ltd., and the exclusion of SIP Technologies & Exports Ltd. The Tribunal concluded:
- CAT Technologies: Issue restored to TPO for re-examination.
- Infosys Technologies Ltd.: Excluded due to functional disparity and high risk profile.
- Tata Consultancy Services Ltd.: Excluded as it is a giant company with diverse services and high R&D expenditure.
- Tata Elxsi Ltd.: Excluded as it is involved in software product development.
- Thirdware Solutions Ltd.: Excluded due to substantial revenue from non-comparable segments.
- SIP Technologies & Exports Ltd.: Included as it passes the employee cost and export revenue filters.

4. Working Capital Adjustment:
The Tribunal held that working capital adjustment is necessary to bring comparables and the assessee at par for benchmarking international transactions. The TPO was directed to re-examine this issue after providing an opportunity to the assessee.

5. Treatment of Foreign Exchange Gain/Loss:
The TPO and DRP treated foreign exchange gain/loss as non-operating based on a CBDT notification dated 18.09.2013. The Tribunal found this inapplicable for the assessment year 2009-10 and directed the TPO to treat foreign exchange gain/loss as operating in nature.

6. Nature of Software Expenses and Training Expenses:
- Software Expenses: The Tribunal found that time-based software licenses are revenue expenses and directed the AO to re-examine the issue.
- Training Expenses: The Tribunal, relying on the Delhi High Court judgment in Munjal Showa Ltd., directed the AO to re-examine the nature of training expenses, considering them as revenue expenses.

7. Depreciation on Goodwill:
The Tribunal restored the issue to the AO for re-examination in light of the Supreme Court decision in Smifs Securities Ltd., as the DRP's reliance on Goetze (India) Ltd. was found inapplicable.

8. Levy of Interest:
The Tribunal noted that the ground regarding the levy of interest under sections 234B, 234C, and 234D is consequential and requires no specific adjudication.

9. Initiation of Penalty Proceedings:
The Tribunal found the ground regarding the initiation of penalty proceedings under section 271(1)(c) premature and needing no adjudication.

Conclusion:
The appeal was allowed for statistical purposes, with directions to the AO/TPO to re-examine the issues as per the Tribunal's observations and provide the assessee an opportunity of being heard.