2020 (3) TMI 946 - AT - Income Tax

TP Adjustment - comparable selection - HELD THAT - Assessee undertook to provide sales support services, software development services as a contract software development services provider, thus companies functionally dissimilar with that of assessee need to be deselected from final list. Disallowance of depreciation under section 40 (a) (ia) - HELD THAT - It is observed that this tribunal in many cases has analysed applicability of section 40(a)(i) of the act for disallowance of depreciation on such capitalised expenditure and has held that no section 40 (a) (i) of the Act, cannot be applied for claim of deduction under section 32 of the Act. However by way of abundant caution we direct Ld.AO to verify the fact whether assets in respect of which expenditure has been capitalised have been used for business of assessee for a period more than 180 days. AO shall verify all these details in light of arguments advanced by Ld.AR - Accordingly this ground raised by assessee stands allowed for statistical purposes.

Summary

Issues Involved:
1. General grounds against the Final Assessment Order (FAO)
2. Reopening of Assessment
3. Transfer Pricing Grounds
4. Disallowance of depreciation under section 40(a)(ia) of the Act
5. Disallowance under section 14A of the Act
6. Brought forward losses not granted
7. Other consequential grounds

Detailed Analysis:

1. General Grounds Against the Final Assessment Order:
The appellant contended that the FAO dated January 20, 2017, passed under sections 143(3) read with 147 and 144C(13) of the Income-tax Act, 1961, is not in accordance with the law and contrary to the facts and circumstances of the case. This ground was not pressed for adjudication.

2. Reopening of Assessment:
The appellant challenged the reassessment proceedings initiated under section 147 of the Act, arguing that no "fresh tangible material" was available with the AO to form a belief that the appellant had not made a full and true disclosure of material facts leading to income escaping assessment. The DRP upheld the reassessment proceedings and the notice issued under section 148, even though it was beyond four years from the end of the Assessment Year, and there was no failure on the appellant's part to fully and truly disclose all material facts. This ground was dismissed as not pressed.

3. Transfer Pricing Grounds:
The appellant raised several issues regarding the Transfer Pricing assessment:
- The TPO completed the assessment without providing an opportunity of being heard and relied on an earlier quashed order.
- The DRP and TPO erred in making an adjustment of ?17,302,490 to the Arm's Length Price (ALP) of international transactions.
- The TPO rejected the TP study and modified the filters adopted by the appellant, leading to a fresh set of comparables.
- The DRP upheld the inclusion of companies that were functionally different from the appellant, such as Avani Cimcon Technologies Limited, Celestial Labs Limited, and Infosys Technologies Ltd.
- The DRP and TPO did not grant an appropriate working capital adjustment based on the appellant's computation.
- The AO/TPO erred in considering the Prime Lending Rate (PLR) applicable for FY 2005-06 instead of FY 2006-07.

The Tribunal directed the exclusion of certain comparables (Avani Cimcon Technologies Ltd, Celestial Labs Ltd, e-Zest Solutions Ltd, Infosys Technologies Ltd, KALS Information Systems Ltd (seg), Wipro Ltd (seg), Helios & Matheson Information Technology Ltd, Persistent Systems Ltd, Tata Elxsi Ltd (seg), and Thirdware Solutions Ltd) and ordered the AO/TPO to rework the segmental results for Megasoft Solutions Ltd. Ishir Infotech Ltd was also excluded from the final list of comparables.

4. Disallowance of Depreciation Under Section 40(a)(ia) of the Act:
The appellant argued that once the expenditure is capitalized and only depreciation is claimed, section 40(a)(ia) cannot be invoked for disallowance. The Tribunal remitted the issue back to the AO for verification, directing the AO to verify whether the assets were used for more than 180 days and to apply the principles laid down in previous Tribunal decisions.

5. Disallowance Under Section 14A of the Act:
The appellant did not press this ground, and it was dismissed as not pressed.

6. Brought Forward Losses Not Granted:
The appellant contended that the AO did not follow the DRP's directions regarding the set-off of brought forward depreciation allowance. The Tribunal directed the AO to consider the claim as per the DRP's directions.

7. Other Consequential Grounds:
These grounds were consequential in nature and did not require adjudication.

Conclusion:
The Tribunal allowed the appeal filed by the assessee, directing the exclusion of certain comparables and remitting specific issues back to the AO for verification and re-computation in line with the Tribunal's observations and previous decisions. The appeal was allowed for statistical purposes.