2020 (5) TMI 235 - AT - Income Tax

TP Adjustment - comparable selection - HELD THAT - Assessee is a company engaged in the business of software development activities relating to electronic integrated circuits and form where development circuits and marketing support services, thus companies functionally dissimilar with that of assessee need to be deselected. Sale of wireless division of assessee as slump sale - treated the gains arising as short term capital gains - grant indexation while computing capital gains - assessee is 100% export oriented unit engaged in business of software research and development services as well as marketing support services - HELD THAT - Transaction is a slum sale or not is not only based on interpretation of terms and conditions of the entire agreement but it is also based on the manner in which the gains has been accounted by assessee in its books of accounts. From the extracts of the accounts of assessee it is clear that it has not accounted for profits on itemised assets. In the instant case there is a sale of an entire undertaking as a going concern and assessing officer should have computed the capital gains under section 45 to 50 of Income tax Act. Ld.AO has also not identified the items that have been sold independently but has considered the lump sum valuation made by the buyer in the hands of assessee which is not in accordance with the provisions of the act. We therefore direct Ld.AO to compute the quantum of capital gains in accordance with law as a slum sale. Ld.AO is directed to decide the cost of undertaking for purpose of computing capital gains that is arisen on transfer of asset as a going concern and is directed to value it as per section 55 of the act Ld.AO is also directed to grant indexation while computing capital gains. Ld.AO is also directed to decide the depreciation on block of assets and the capital gains has to be computed in accordance with section 45 to 50 of the Act. Accordingly, we allow this ground raised by assessee. Software expenses under section 40(a)(ia) - HELD THAT - As the issue is against assessee by decision of Hon ble Karnataka High Court in case of CIT vs Samsung Electronics Ltd 2009 (9) TMI 526 - KARNATAKA HIGH COURT as held held purchase of software to fall within the ambit of royalty - we do not find any infirmity in the action of Ld.AO.

Summary

Issues Involved:

1. Application of "onsite revenue filter" by DRP.
2. Exclusion of certain comparables by DRP.
3. Adjustment of working capital.
4. Classification of the sale of the wireless division as a slump sale.
5. Disallowance of software expenses under section 40(a)(ia).
6. Computation of interest under section 234C.

Detailed Analysis:

1. Application of "onsite revenue filter" by DRP:

The DRP applied the "onsite revenue filter" selectively, which was challenged by the revenue. The Tribunal referred to the decision in Hewlett Packard India Software Operations (P) Ltd vs DCIT, noting that the DRP excluded certain comparables based on functional dissimilarities and the absence of segmental information. The Tribunal agreed that no new filter could be applied post-TPO analysis but upheld the DRP's decision to exclude Acropetal Technologies Ltd. and L&T Infotech Ltd. due to their functional dissimilarities with the assessee, who is a contract service provider working on a cost-plus model. RS Software Ltd. was directed to be included as there was no objection from either party.

2. Exclusion of certain comparables by DRP:

The DRP excluded E-Infochips Ltd. as it failed the service income filter. The Tribunal referred to the decision in Autodesk India Pvt Ltd. vs ACIT, which excluded E-Infochips Ltd. for lacking segmental information and having major profit fluctuations. The Tribunal upheld the DRP's decision to exclude E-Infochips Ltd. due to its functional dissimilarity with the assessee.

3. Adjustment of working capital:

The Tribunal noted that the TPO restricted the working capital adjustment to 1.63% without a proper basis. It directed the TPO to recompute the working capital adjustment based on actual data, following the decision in Huawei Technologies India Pvt. Ltd vs JCIT, and to consider the same for computing the arm's length margin.

4. Classification of the sale of the wireless division as a slump sale:

The Tribunal analyzed the transfer of the wireless division under section 50B, noting that the business was transferred as a going concern for a lump sum consideration without assigning value to individual assets and liabilities. It referred to the Supreme Court decision in CIT vs Equinox Solutions Pvt. Ltd. and the Karnataka High Court decision in CICB Pvt. Ltd. vs CIT. The Tribunal directed the AO to compute the capital gains as a slump sale, considering the net worth of the undertaking as per section 50B and granting indexation while computing the capital gains.

5. Disallowance of software expenses under section 40(a)(ia):

The Tribunal upheld the AO's disallowance of software expenses, referring to the Karnataka High Court decision in CIT vs Samsung Electronics Ltd, which held that the purchase of software falls within the ambit of royalty, necessitating withholding tax.

6. Computation of interest under section 234C:

The Tribunal directed the AO to compute interest under section 234C based on the returned income, acknowledging that the computation of interest is consequential in nature.

Conclusion:

The Tribunal partly allowed the appeals filed by both the revenue and the assessee, directing specific inclusions and exclusions of comparables, recomputation of working capital adjustment, and reclassification of the sale of the wireless division as a slump sale. It upheld the disallowance of software expenses and directed the AO to compute interest under section 234C based on the returned income.