2018 (12) TMI 518 - AT - Income Tax

Transfer pricing adjustment - addition towards Account of Management charges - Held that - Following the order of the Hon ble High Court in AYs 2005- 06 and 2006-07 and taking note of the Hon ble jurisdictional High Court decision in assessee s own case 2016 (2) TMI 406 - CALCUTTA HIGH COURT the submission of the appellant that the adjustment of TPO towards Account of Management charges is arbitrary has been dealt by the First as well as the Second Appellate Authority and a concurrent finding of fact has been recorded that the TPO in principle accepted the remuneration model of 25% revenue sharing and the same has been substantiated and justified by the documents so submitted before the authorities below. Further, the genuineness of the documents which were relied on by the authorities have not been doubted by the Department. Thus, in view of the above, we do not find any illegality and infirmity in the orders and further we are of the opinion that a concurrent finding of fact on the basis of the documents on records was recorded by the First Appellate Authority as well as the Second Appellate Authority. Accordingly, no question of law arises out of the judgment rendered by the authorities below. Disallowance of software expenses - non business expenses - Held that - Respectfully following the order of the Tribunal in AY 2005-06 2015 (1) TMI 870 - ITAT KOLKATA as well as taking note of the Hon ble jurisdictional High Court decision in Indian Aluminium Co. ltd. Vs. CIT 2016 (3) TMI 691 - CALCUTTA HIGH COURT wherein has held that software development expenditure which was application software was revenue in nature, and also the fact that the revenue has accepted the view of the Ld. CIT(A)/Tribunal on this issue, we confirm the action of the Ld. CIT(A) and dismiss this ground of appeal of revenue.

Summary

Issues Involved:
1. Deletion of transfer pricing adjustment.
2. Treatment of software purchase expenses as revenue or capital expenditure.

Detailed Analysis:

1. Deletion of Transfer Pricing Adjustment:
The revenue challenged the deletion of a transfer pricing adjustment amounting to ?5,73,70,465 by the CIT(A). The Tribunal noted that this issue had already been adjudicated in the assessee's favor for the Assessment Years (AYs) 2005-06 and 2006-07. The Tribunal had upheld the CIT(A)'s decision, and the revenue's appeal against this was dismissed by the Hon'ble High Court. The Tribunal reiterated that the functional and risk profiles of the assessee and its Associated Enterprises (AEs) were consistent across different business models. The Tribunal emphasized that the essential factor for awarding a service contract was the technical and commercial expertise of the assessee, not the local presence or standalone financial capabilities of the AEs. The Tribunal also highlighted the importance of contractual relationships and the conduct of the parties in determining risk allocation. The Tribunal concluded that the Transfer Pricing Officer (TPO) erred in making the adjustments based on conjectures and surmises. Consequently, the Tribunal confirmed the CIT(A)'s order and dismissed the revenue's appeal on this ground.

2. Treatment of Software Purchase Expenses:
The revenue also contested the deletion of an addition of ?35,41,376 made by the Assessing Officer (AO) on the purchase of software, arguing it was capital expenditure. The Tribunal noted that this issue had been similarly adjudicated in favor of the assessee for AYs 2005-06 and 2006-07, where the Tribunal upheld the CIT(A)'s decision. The Tribunal observed that the software expenses were incurred for business purposes and did not result in any enduring benefit. The software acquired was application software used for developing client projects, thus qualifying as revenue expenditure under Section 37(1) of the Income Tax Act. The Tribunal further noted that the software had a limited useful life and was used as a business tool, not as a standalone profit-generating apparatus. The Tribunal dismissed the revenue's appeal on this ground, affirming the CIT(A)'s order.

Conclusion:
The Tribunal dismissed the revenue's appeal in its entirety, confirming the CIT(A)'s orders on both issues. The Tribunal's decision was consistent with previous rulings in the assessee's favor for earlier assessment years, which had been upheld by the Hon'ble High Court. The Tribunal reiterated that the transfer pricing adjustments were made without proper basis and that the software expenses were rightly treated as revenue expenditure.