2020 (9) TMI 911 - AT - Income Tax

TP Adjustment - determination of Arms' Length Price (ALP) in respect of the international transaction of rendering ITeS to the AE - Comparable selection - distinction between the KPO BPO - HELD THAT - Assessee in engaged in the business of provision of Information Technology Enabled Services (ITES) to its wholly owned holding company thus companies functionally dissimilar with that of assessee need to be deselected from final list. Companies providing high end services cannot be compared to companies providing back office support services. See MAERSK GLOBAL CENTRES (INDIA) PRIVATE LIMITED VERSUS ASST. COMMISSIONER OF INCOME TAX- CIRCLE 6 (3) , MUMBAI. 2014 (3) TMI 1159 - ITAT MUMBAI . Depreciation on capital assets - Disallowance on the basis that no tax has been deducted at source while making payment for such asset - argument of assessee that depreciation is a statutory allowance and it cannot be disallowed by invoking the provisions of section 40a(i)/(ia) - HELD THAT - The question whether in such circumstances, provisions of section 40a(i)/(ia) can be invoked has already been decided by the Mumbai Tribunal in the case of SKOL Breweries Ltd. 2013 (1) TMI 623 - ITAT MUMBAI as held The deduction under section 32 is not in respect of the amount paid or payable which is subjected to TDS; but it is a statutory deduction on an asset which is otherwise eligible for deduction of deprecation. Depreciation is not an outgoing expenditure and therefore, the provisions of Section 40(a)(i) are not attracted on such deduction. Also see M/S MARK AUTO INDUSTRIES LTD. 2013 (1) TMI 448 - PUNJAB AND HARYANA HIGH COURT - Decided against revenue.

Summary

Issues Involved:
1. Determination of Arm's Length Price (ALP) for international transactions.
2. Exclusion of certain companies from the list of comparables.
3. Inclusion of certain companies in the list of comparables.
4. Disallowance of depreciation on capital assets due to non-deduction of tax at source.

Detailed Analysis:

1. Determination of Arm's Length Price (ALP) for International Transactions:
The primary dispute in this appeal revolves around the determination of the ALP for the international transaction of rendering Information Technology Enabled Services (ITES) by the assessee to its Associated Enterprise (AE). The assessee used the Transaction Net Margin Method (TNMM) with Operating Profit/Operating Cost (OP/OC) as the Profit Level Indicator (PLI), arriving at an OP/OC of 19%. The Transfer Pricing Officer (TPO) accepted TNMM as the Most Appropriate Method (MAM) and used the same PLI, selecting comparable companies and computing an average arithmetic mean PLI of 26.86%, leading to an addition of ?1,81,22,863 to the total income of the assessee.

2. Exclusion of Certain Companies from the List of Comparables:
The revenue challenged the exclusion of Acropetal Technologies Ltd. and E-Clerx Services Ltd. from the list of comparables. The CIT(A) excluded Acropetal Technologies Ltd. due to its involvement in engineering design services, which are categorized as Knowledge Process Outsourcing (KPO) requiring higher skill sets than the Business Process Outsourcing (BPO) services provided by the assessee. The Tribunal upheld this exclusion, referencing the Special Bench's decision in Maersk Global Centres (India) (P.) Ltd., which distinguished between high-end KPO and low-end BPO services. Similarly, E-Clerx Services Ltd. was excluded for providing high-end services, following the same judicial precedent.

3. Inclusion of Certain Companies in the List of Comparables:
The revenue contested the inclusion of Microgenetics Systems Ltd. by the CIT(A). The CIT(A) directed the inclusion of this company, noting its involvement in medical transcription services, which falls under ITES. However, the Tribunal identified a contradiction in the CIT(A)'s conclusion and remanded the issue to the TPO/AO for fresh consideration.

4. Disallowance of Depreciation on Capital Assets Due to Non-Deduction of Tax at Source:
The assessee's cross-objection involved the disallowance of depreciation on software capitalized in the books, due to non-deduction of tax at source on payments to non-residents. The AO and CIT(A) disallowed ?3,87,497 claimed as depreciation, treating the payment as royalty. The Tribunal, referencing the Mumbai Tribunal's decision in SKOL Breweries Ltd. and the Punjab & Haryana High Court's decision in Mark Auto Industries Ltd., held that depreciation is a statutory allowance and cannot be disallowed under section 40a(i)/(ia) of the Act. Consequently, the Tribunal allowed the relevant grounds of the assessee's cross-objection.

Conclusion:
The revenue's appeal was partly allowed for statistical purposes, with the Tribunal upholding the exclusion of certain companies from the comparables list and remanding the inclusion of one company for fresh consideration. The assessee's cross-objection was partly allowed, with the Tribunal ruling in favor of the assessee on the disallowance of depreciation.