2018 (12) TMI 198 - AT - Income Tax

TPA - exclusion of certain companies from the final list of comparables - functional criteria - Held that - The assessee is engaged in the business of market research and data processing, thus companies functionally dissimilar with that of assessee need to be deselected from final list. Rate of depreciation to be allowed on software license fee - Capitalization of license fees - Held that - We uphold the direction of the DRP to treat the amount as capital in nature to allow the depreciation. However, the rate of depreciation is to be determined at 60%. With the above directions, the ground is considered partly allowed TDS receivables as advance written off/bad debt - Held that - AO observed that though the assessee has claimed it as advances written off, it has not given full details and therefore, he disallowed the same and brought to tax. Even before us also, the assessee has not filed any evidence. The learned Counsel for the assessee requested that this issue may be remanded to the TPO to give another opportunity of filing all the evidence. But since the assessee has not been able to produce any evidence before us, we do not see any reason to remand the issue at this juncture without any evidence. In view of the same, this ground of appeal is rejected. Exemption u/s 10A on enhanced income - Held that - Issue is covered in favour of the assessee by various decisions, particularly in the case of CIT vs. Gem Plus Jewellery India Ltd 2010 (6) TMI 65 - BOMBAY HIGH COURT wherein it was held that the exemption u/s 10A should be granted even on the income which is enhanced due to the disallowance of certain expenditure. Respectfully following the same, we direct the AO to allow the deduction u/s 10A of the Act to the assessee on enhanced income as well.

Issues Involved:
1. Rejection of Transfer Pricing (TP) documentation and fresh economic analysis.
2. Aggregation of Market Research (MR) and Information Technology Enabled Services (ITES) transactions.
3. Rejection of Internal Transactional Net Margin Method (TNMM) for determining Arm's Length Price (ALP).
4. Determination of ALP for management fees and license fees as 'Nil'.
5. Rejection of use of multiple year data.
6. Use of additional filters in comparative analysis.
7. Selection and rejection of comparable companies.
8. Exclusion of specific companies from comparables.
9. Margin computation of comparables.
10. Negative working capital adjustment.
11. Adjustment for risk differences.
12. No incentive to shift profits.
13. Capitalizing expenses on software license fee and depreciation rate.
14. Disallowing advances written off.
15. TDS credit.
16. Imposition of interest under section 234D.
17. Initiating penalty proceedings under section 271(1)(C).
18. Deduction under section 10A for disallowed software license fees.

Detailed Analysis:

1. Rejection of Transfer Pricing Documentation and Fresh Economic Analysis:
The assessee's TP documentation was rejected by the TPO who then performed a fresh economic analysis, leading to an adjustment of ?12,85,58,406 to the international transactions with Associated Enterprises (AEs).

2. Aggregation of MR and ITES Transactions:
The TPO aggregated MR business with ITES business for determining the ALP, rejecting the segmental financials provided by the assessee.

3. Rejection of Internal TNMM:
The TPO did not apply the TNMM to the internal uncontrolled transactions of the assessee for determining the ALP.

4. ALP for Management Fees and License Fees:
The TPO determined the ALP of management fees and license fees paid to AEs as 'Nil'.

5. Rejection of Use of Multiple Year Data:
The TPO rejected the use of multiple year data and used data for FY 2009-10 only.

6. Use of Additional Filters:
Additional filters such as diminishing revenue/persistent loss and different financial year-end were used by the TPO in the comparative analysis.

7. Selection and Rejection of Comparable Companies:
The TPO selected the following companies as comparable: Accentia Technologies Ltd, Acropetal Technologies Ltd (Seg), Crossdomain Solutions Pvt. Ltd., Eclerx Services Ltd, Infosys BPO Ltd, TCS e-Serve International Ltd, and TCS e-Serve Ltd. The DRP directed the exclusion of Infosys Technologies Ltd and L&T Infotech Ltd, which were not selected by the TPO.

8. Exclusion of Specific Companies from Comparables:
The assessee sought the exclusion of the following companies from the final list of comparables: Accentia Technologies Ltd, Acropetal Technologies Ltd (Seg.), Eclerx Services Ltd, Infosys BPO Ltd, TCS e-Serve International Ltd, TCS e-Serve Ltd, and Crossdomain Solutions Pvt Ltd.

9. Margin Computation of Comparables:
The TPO excluded provision for bad and doubtful debts in computing the net margin under TNMM for certain comparables.

10. Negative Working Capital Adjustment:
The TPO made a negative working capital adjustment by considering incorrect receivables and payables, without appreciating that the assessee does not bear any working capital risks.

11. Adjustment for Risk Differences:
The TPO did not adjust the net margins of the comparable companies for functional and risk differences as per Rule 10B(1)(e) of the Rules.

12. No Incentive to Shift Profits:
The assessee argued that it was availing tax holiday under section 10A, and therefore, had no motive to shift profits out of India.

13. Capitalizing Expenses on Software License Fee and Depreciation Rate:
The AO disallowed the expenditure on software license fees by treating it as capital in nature and granted depreciation at 25% instead of 60%. The Tribunal directed to allow depreciation at 60%.

14. Disallowing Advances Written Off:
The AO disallowed the amount claimed as advances written off due to lack of evidence. The Tribunal did not remand the issue due to the absence of evidence.

15. TDS Credit:
The AO allowed TDS credit of ?6,54,93,323 instead of ?6,87,39,406 as claimed. The Tribunal remanded this issue for verification.

16. Imposition of Interest under Section 234D:
The imposition of interest under section 234D was deemed consequential, and the AO was directed to give consequential relief if any.

17. Initiating Penalty Proceedings under Section 271(1)(C):
The initiation of penalty proceedings under section 271(1)(C) was considered premature and thus rejected.

18. Deduction under Section 10A for Disallowed Software License Fees:
The Tribunal directed the AO to allow the deduction under section 10A on the enhanced income due to the disallowance of software license fees, following the precedent set by the Hon'ble Bombay High Court in CIT vs. Gem Plus Jewellery India Ltd.

Conclusion:
The Tribunal partly allowed the appeal, directing the exclusion of certain companies from the list of comparables, allowing higher depreciation on software license fees, and remanding the issue of TDS credit for verification. Other grounds, including the disallowance of advances written off and initiation of penalty proceedings, were rejected. The Tribunal also allowed the deduction under section 10A on the enhanced income.

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