2019 (6) TMI 1090 - AT - Income Tax

Nature of expenditure - software license fees paid to AE - AO rejected contentions of assessee and disallowed expenditure claimed. However, Ld.AO granted depreciation at 25% - HELD THAT - As decided in assessee's own case 2017 (8) TMI 281 - ITAT DELHI assessee made payment for software licenses purchased from parent entity. Ld.AO disallowed, considering it to be capital expenditure, and provided corresponding depreciation at 25%. On perusal of order for assessment year 2007-08, it is observed that similar disallowance was made by AO on license expenses, and factual matrices of this issue as submitted by both parties are similar with that of assessment year 2007-08. DRP has also recorded that this Tribunal in assessee s own case for assessment year 2007-08 and 2008-09 deleted such disallowance made by AO, against which revenue has not filed any appeal before Hon ble High Court . Thus the issue has attained finality. Addition of advance and debts - HELD THAT - It is observed that details has been furnished, however, Ld.AO has not verified same. While taking a look at details of advances to venders, it is observed that these are small payments all made on one single day in the month of May, 2012 totalling to ₹ 1,75,895/-, which is difficult for AO to verify. Upon a query being raised to Ld.Counsel regarding same, he submitted that, what is necessary to be verified is details of bad debts for which invoices have been placed. T here is no dispute that sum of ₹ 8,03,982/- has been written off by assessee in its books of accounts. From invoices placed at page 90-94, it is apparent that they pertain to preceding assessment years. Thus assessee satisfies requirements specified under section 36 (1) (vii) of the Act. TP adjustment - comparable selection - HELD THAT - Referring to functions performed, assets involved and risk assumed by assessee under software development service segment companies functionally dissimilar with that of assessee need to deselected from final list. Infosys Ltd. company was owning brand and having substantial intangible assets which cannot be held to be suitable comparable for assessee who was only providing software deployment services - this company is not functionally comparable to assessee inasmuch as, it is also engaged in software development services and generate substantial revenue from the sale of its own products. Larsen and Toubro Infotech Ltd. to de rejected for nonavailability of segmental data. See SAXO INDIA PVT. LTD VERSUS. ACIT, 2016 (2) TMI 604 - ITAT DELHI Comparable having extraordinary event during year should be excluded. Under software deployment service segment, assessee is rendering deployment services of its skilled employees to the AE, is or their customers, which is remunerated on cost plus basis. It is also peculiar to note that the cost is determined to be salary earned by such employee who is put on the project. The working module of assessee need to matched with comparable selected. No benefit from services for which payments has been made, - TPO determined ALP of the international transaction at Nil Assessee could not establish whether such services were needed by assessee (i.e. Need Test) - HELD THAT - It is pertinent to note that requirement of services should be judged from viewpoint of assessee as a businessman. Therefore in this regard we are of view that assessee has to substantiate that these services are required by it. Since assessee, as service receiver received certain services as per agreement dated 23/10/2008, proves that such services were required by assessee. Further, assessee belongs to MNE organization and that Aircom UK provided service to its group companies across the globe. It is observed that all companies are situated in different countries, operating in different geographies have also received and used these services which is evident from allocation list submitted by assessee reproduced hereinabove. Therefore this itself proves that, for assessee to remain competitive in its business such services are required. Therefore, in our considered opinion, assessee stands satisfied need test, which is alleged by ld.TPO to have not been satisfied by assessee. Whether such services are rendered to assesse by AE ( i.e. Rendition test) - Whether assessee has derived any economic or commercial benefit from these services ( i.e. Benefit test) - these services, assessee has to demonstrate and satisfy Evidence Test or rendition test and benefit test, as envisaged u/s 92 (2) of the Act, and that, services provided by AE are neither duplicative nor shareholder s activity. Ld. AO/ TPO is then directed to determine Arm s length price of these services based on documents submitted by assessee by determining most appropriate method‟ and Comparability analysis.

Summary

Issues Involved:
1. Validity of the impugned order and unjustified adjustments under Chapter X of the Act.
2. Disallowance of software license fee and management fees.
3. Corporate Tax Matters: Disallowance of capital expenditure and enduring nature of expenses.
4. Transfer Pricing Matters: Adjustments to the arm’s length price (ALP) of international transactions.
5. Charging of interest under sections 234A and 234B of the Act.
6. Initiation of penalty proceedings under section 271(1)(c) of the Act.

Detailed Analysis:

1. Validity of the Impugned Order and Unjustified Adjustments:
The Appellant contended that the impugned orders passed by the AO, following the directions of the DRP, were based on extraneous and irrelevant presumptions, leading to unjustified adjustments under Chapter X of the Act. The Tribunal observed that the issues raised by the Appellant were similar for both assessment years under consideration and decided to address the assessment year 2013-14 first.

2. Disallowance of Software License Fee and Management Fees:
The Tribunal noted that the disallowance of software license fees was a recurring issue and had been addressed in the Appellant's favor in previous assessment years (2007-08 and 2008-09). The Tribunal found that the Appellant had made payments for software licenses purchased from its parent entity, which were initially disallowed as capital expenditure by the AO. Following the Tribunal's previous decisions, the Tribunal directed the deletion of the addition made by the AO, considering the software license fees as revenue expenditure.

Regarding the management fees, the Tribunal observed that the AO disallowed the claim due to the Appellant's failure to provide adequate evidence. However, the Tribunal allowed the Appellant's claim for bad debts written off, as the Appellant had satisfied the requirements specified under section 36(1)(vii) of the Act.

3. Corporate Tax Matters:
The Tribunal addressed various grounds related to corporate tax matters, including the disallowance of capital expenditure and the enduring nature of expenses. The Tribunal referred to its previous decisions and found that the facts and circumstances were similar. Therefore, it directed the deletion of the disallowance made by the AO, following the Tribunal's earlier rulings.

4. Transfer Pricing Matters:
The Tribunal extensively analyzed the transfer pricing adjustments made by the TPO. The Tribunal noted that the TPO had rejected the economic analysis undertaken by the Appellant and included certain companies as comparables, which were functionally dissimilar to the Appellant. The Tribunal directed the exclusion of certain comparables, such as Infosys Ltd. and Larsen & Toubro Infotech Ltd., based on functional dissimilarity and unavailability of segmental data.

The Tribunal also addressed the issue of intra-group services and management fees. The Tribunal referred to its previous decision for the assessment year 2011-12, where it had held that the management fees apportioned to different segments were accepted by the TPO. The Tribunal directed the AO/TPO to determine the arm's length price of intra-group services based on the documents submitted by the Appellant and to conduct a proper FAR analysis.

5. Charging of Interest under Sections 234A and 234B:
The Tribunal did not specifically address the issue of charging interest under sections 234A and 234B of the Act in detail. However, it is implied that the Tribunal's directions on the adjustments and disallowances would impact the computation of interest.

6. Initiation of Penalty Proceedings under Section 271(1)(c):
The Tribunal did not provide a detailed analysis of the initiation of penalty proceedings under section 271(1)(c) of the Act. The outcome of the penalty proceedings would likely depend on the final adjustments and disallowances after the Tribunal's directions.

Conclusion:
The Tribunal allowed the appeals filed by the Appellant for both assessment years 2012-13 and 2013-14 partly for statistical purposes. The Tribunal directed the deletion of certain disallowances and adjustments, following its previous decisions and based on the functional dissimilarity of comparables. The Tribunal also set aside the issue of intra-group services to the AO/TPO for proper determination of the arm's length price.