2018 (4) TMI 82 - AT - Income Tax

TPA - comparable selection criteria - Held that - Assessee is engaged in the business of rendering software development and ITES and IT services, thus companies functionally dissimlar with that of assessee need to be deselected from final list. Disallowance of depreciation under software on the ground that the TDS was not deducted at source - Held that - The assessee lower authorities was not correct in not allowing the depreciation on the software and therefore we direct the AO to allow the depreciation on the software. See M/s. Vogue Vestures Pvt. Ltd. Vs. DCIT 2018 (4) TMI 29 - ITAT BANGALORE . - Decided in favour of assessee.

Issues Involved:

1. Transfer Pricing Adjustment.
2. Selection and Rejection of Comparable Companies.
3. Disallowance of Depreciation on Software.
4. Jurisdictional Error in Reference to TPO.
5. Use of Multiple Year Data for ALP.
6. Application of Inappropriate Filters.
7. Risk Adjustment.
8. Super Normal Profits.
9. Set Off of MAT Credit.
10. Computation of Interest under Section 234B.
11. Initiation of Penalty Proceedings under Section 271(1)(c).

Detailed Analysis:

1. Transfer Pricing Adjustment:
The assessee-company's international transactions were scrutinized, and the Transfer Pricing Officer (TPO) computed a transfer pricing adjustment of ?3,11,93,643/- for the ITES segment. The TPO accepted the TNMM method but rejected the assessee's comparables, applying various filters to select new comparables.

2. Selection and Rejection of Comparable Companies:
- Infosys BPO Ltd.: Excluded due to functional dissimilarity, high brand value, and possession of intangibles, as it engages in high-end KPO activities.
- TCS e-Serve Limited: Excluded for similar reasons as Infosys BPO Ltd., including functional dissimilarity and high brand value.
- Universal Print Systems Ltd.: Excluded due to its primary business in printing and allied activities, making it functionally incomparable.
- BNR Udyog Limited (Medical Transcription segment): Included as it falls within ITES and there was no evidence to support the assessee's objections.
- Excel Infoways Limited: Included as the assessee failed to provide sufficient evidence to exclude it.
- R Systems International Ltd.: Excluded due to different financial year endings.
- Caliber Point Business Solutions Ltd.: Excluded for the same reason as R Systems International Ltd.
- Informed Technologies Ltd.: Excluded due to unreliable financial statements and lack of segmental data.

3. Disallowance of Depreciation on Software:
The AO disallowed depreciation on software purchased due to non-deduction of TDS. The Tribunal held that disallowance under section 40(a)(ia) is not applicable to capital assets, following the decision in CIT vs. Mark Auto Industries Ltd. Thus, the AO was directed to allow the depreciation.

4. Jurisdictional Error in Reference to TPO:
The assessee contended that the AO did not record reasons for referring the matter to the TPO. However, this issue was not elaborated further in the judgment.

5. Use of Multiple Year Data for ALP:
The TPO rejected the use of multiple-year data, adhering to single-year data. The Tribunal upheld this approach, aligning with the prescribed rules for comparability.

6. Application of Inappropriate Filters:
The assessee contested the filters applied by the TPO, including low turnover and different financial year endings. The Tribunal upheld the TPO's filters, emphasizing their appropriateness in the selection of comparables.

7. Risk Adjustment:
The assessee sought a risk adjustment due to its status as a captive service provider. The Tribunal did not provide specific relief on this ground, focusing instead on the functional comparability of the selected comparables.

8. Super Normal Profits:
The assessee argued against the inclusion of companies with super normal profits. The Tribunal excluded such companies based on functional dissimilarity and the presence of intangibles, rather than profit margins alone.

9. Set Off of MAT Credit:
The Tribunal did not specifically address the issue of MAT credit set-off in the detailed analysis provided.

10. Computation of Interest under Section 234B:
The Tribunal did not specifically address the computation of interest under section 234B in the detailed analysis provided.

11. Initiation of Penalty Proceedings under Section 271(1)(c):
The Tribunal did not specifically address the initiation of penalty proceedings under section 271(1)(c) in the detailed analysis provided.

Conclusion:
The appeal was partly allowed, with significant adjustments to the list of comparables and directions to allow depreciation on software. The Tribunal emphasized functional comparability and adherence to prescribed rules for comparability in transfer pricing analysis.

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