2019 (7) TMI 24 - AT - Income Tax

TP Adjustment - comparable selection - functional dissimilarity - HELD THAT - Inclusion of concern Excel Infoways Ltd. - where a concern is selected was showing low employee cost to sales ratio, then such concern cannot be selected while benchmarking international transactions of assessee in ITES segment, which is an employee oriented segment. Hence, we find no merit in the order of Assessing Officer/TPO/DRP to include Excel Infoways Ltd. in the final list of comparables, hence we direct to exclude the same. Universal Print Systems Ltd. - We have already decided similar issue in Emerson Climate Technologies (India) Pvt. Ltd. Vs. DCIT 2018 (4) TMI 1635 - ITAT PUNE wherein vide para 19 vis- -vis Universal Print Systems Ltd., it was held that employee cost ratio versus sales needed verification at the end of Assessing Officer / TPO and it was directed that in case same was less than 25%, then the same is not to be included as comparable in the final list of comparables. Following the same parity of reasoning, we direct the Assessing Officer / TPO to verify the claim of assessee and after giving reasonable opportunity of hearing to the assessee, determine arm's length price of international transactions, if any. Hence, ground of appeal No.2 raised by assessee is allowed. Depreciation on wireless devices - @ 25% OR 60% - HELD THAT - The claim of assessee before us is that the said devices were multipurpose devices used in BPO industries and since it was supposed to be intelligent wireless systems, which were ideal for BPO office professionals and the said devices were compatible with certain types of PCs only, could be connected to computers via Bluetooth and similar technology, hence claim of depreciation @ 60%. We find no merit in the plea of assessee in this regard. The systems / devices are helping the assessee undoubtedly, but the same are to be connected with computers and mere connection with computers would not make it part of computers eligible for deduction under section 32 of the Act. Accordingly, we direct the Assessing Officer to allow depreciation on the said devices under the head plant machinery @ 25%. The plea of assessee is thus, partly allowed. Disallowance of repairs maintenance expenses - HELD THAT - assessee has failed to file any breakup of expenditure or furnish any evidence vis- -vis same. In such circumstances, we uphold the order of authorities below in disallowing repairs maintenance expenses. The onus is upon the assessee to establish its claim of repairs maintenance by way of supporting documents. In the absence of same being filed even before us, except referring to the Note before the DRP, no other details were provided.

Summary

Issues Involved:
1. Adjustment made by DCIT on international transactions and depreciation claim.
2. Selection and rejection of comparable companies by DCIT.
3. Calculation of working capital adjustment by DCIT.
4. Risk adjustment not granted to the Appellant.
5. Disallowance of depreciation claim on professional wireless devices.
6. Disallowance of repairs and maintenance expenses under section 37 of the Act.

Issue 1: Adjustment on International Transactions and Depreciation Claim:
The appeal was against the DCIT's order regarding assessment year 2012-13 under section 143(3) r.w.s. 144C(13) of the Income-tax Act, 1961. The DCIT made adjustments totaling INR 38,25,56,571 on international transactions, depreciation claim, and repairs and maintenance expenses. The Appellant challenged the adjustments, arguing they were erroneous and not in compliance with the DRP's directions.

Issue 2: Selection and Rejection of Comparable Companies:
The DCIT selected four companies as comparables for benchmarking international transactions, resulting in an upward adjustment of INR 37.81 crores due to higher margins of comparables compared to the Appellant. The Appellant contested the inclusion of Excel Infoways Ltd. and Universal Print Systems Ltd. as comparables, citing low employee cost to sales ratios and fluctuating margins. The Tribunal directed the exclusion of these companies from the final list of comparables.

Issue 3: Calculation of Working Capital Adjustment:
The DCIT was criticized for not complying with the DRP's directions in computing the working capital adjustment and for not allowing adjustments on companies with segmental accounts. The Appellant argued that the directions were not correctly considered, leading to a significant adjustment in their favor.

Issue 4: Risk Adjustment Not Granted:
The Appellant contended that the DCIT erred in not granting a risk adjustment. However, the judgment did not provide detailed analysis or resolution on this specific issue.

Issue 5: Disallowance of Depreciation Claim on Wireless Devices:
The Appellant claimed depreciation at a higher rate for professional wireless devices, arguing they were akin to computers. The DCIT disallowed the claim, allowing depreciation at a lower rate. The Tribunal partially allowed the claim, directing the DCIT to allow depreciation under 'plant & machinery' at a specified rate.

Issue 6: Disallowance of Repairs and Maintenance Expenses:
The DCIT disallowed repairs and maintenance expenses of INR 5,67,481, considering them capital in nature. The Appellant failed to provide sufficient evidence to support the claim, leading to the dismissal of this ground of appeal.

In conclusion, the Tribunal partly allowed the appeal, directing adjustments in the selection of comparable companies and depreciation claim while upholding the disallowance of repairs and maintenance expenses due to lack of supporting evidence. The judgment highlighted the importance of complying with DRP's directions and considering industry-specific factors in selecting comparable companies for benchmarking international transactions.