2021 (4) TMI 581 - AT - Income Tax

TP Adjustment - assessee included voluntary addition for computing ALP of the transaction - HELD THAT - Under section 92C of the Act, when assessee enters into an international transaction with its associated enterprise, the arms length price of the transaction is to be computed as per section 92C by the Ld.TPO, in the hands of assessee - section provides computation of income from international transaction having regards to the arm s length price. Such income if any, so computed by the Ld.TPO in respect of the international transaction between assessee and the associated enterprise is notional income in the hands of assessee which is as per section 92C(4) of the Act. However in the present case, it is not the Ld.AO/TPO but the assessee who was offered voluntarily additional income for computing ALP of the transaction in the revised return during the transfer pricing proceedings. Therefore, in our view such additional income cannot be ignored for computing the proposed adjustment in respect of the international transaction by the Ld.AO/TPO. Disallowance u/s 10A regarding the voluntary income offered by assessee for computing the transfer pricing adjustment - HELD THAT - As the first proviso to section 92C(4) of the Act is evidently applicable only to situations where adjustment to the ALP is made by the Assessing Officer/TPO/Ld. DRP and not to the voluntary adjustment made by the assessee itself. We note that, various Hon ble High Courts and the coordinate Benches of the Tribunal have allowed revised enhanced deduction u/s 10A of the Act on the additions to the income made during the revised return/course of assessment. Further, we also note that, if the legislature intended to treat the adjustments made by the Assessing Officer at par with the voluntary adjustment made by the assessee, the same would have been expressed, and section 92C(4) would not have referred to computation of income made by the Assessing Officer in terms of the ALP determined u/s 92C(3) based on enhanced income. We therefore find merit in the arguments advanced by the Ld.Counsel in this regards. It is an admitted fact that the voluntary TP adjustment has been made through a disclosure in Form 3CEB and is not an adhoc addition in the revised return of income. The Ld.Counsel submitted that this fact is verifiable, as the amount voluntarily disclosed is supported by invoices issued to the AE, against which money has been received in India. The observations of the DRP that, the voluntary TP adjustment offered by assessee has been allocated as in eligible expenditure to STPI units, eligible for deduction under section 10A of the Act. The relevant computation of deduction u/s.10A has been reproduced by the DRP in para 3.1.1.4 which has been reproduced herein above. We note that submission needs to be verified by Ld.AO. On one hand Ld.Counsel submitted additional income is supported by invoices raised by assessee on AE, on the other hand, assessee has declared the additional income offered as inadmissible expenditure. We accordingly, direct the Ld.AO to verify the claim in the light of supporting documents. AO shall verify the basic requirements that needs to be qualified for the voluntary TP adjustment to be eligible for deduction under section 10 A of the act, even though assessee has located it as inadmissible expenses to the respective STPI units. In the event assessee is able to establish the foreign exchange having received in India to the extent of voluntary TP adjustment made by assessee, the deduction cannot be denied on such voluntary adjustment. In support we rely on the decision of Hon ble Supreme Court in case of CIT vs Yokogawa, 2016 (12) TMI 881 - SUPREME COURT and case of Karle International Pvt.Ltd 2020 (9) TMI 968 - KARNATAKA HIGH COURT and to grant deduction in accordance with law having regard to the ratio laid down by various (High Courts) and coordinate benches of this Tribunal in the decisions relied on hereinabove. Assessee is directed to file all relevant information/details in support of its claim based on which the Ld.AO shall carry out necessary verification. Comparable selection - exclusion of Larsen and Toubro Infotech Ltd. and ICRA Techno Analytics Ltd. - HELD THAT - Assessee is engaged in provision of software development and related services, thus companies functionally dissimilar with that of assessee need to be deselected from final list. High turnover comparable too need to be removed. We direct Ld. AO/TPO to exclude Larsen and Toubro Infotech Ltd., on the issue of application of upper turnover filter from the finalist. ICRA Techno Analytics Ltd. (seg) - As assessee before us is a captive service provider who performs software development services only for its AE under a specified contract the comparable alleged for exclusion is in diversified activities for which segmental details are not available.Under such circumstances we do not find it to be a fit comparable for computing ALP of the international transaction with a captive service provider. Respectfully following the above view, we direct Ld.TPO to exclude this comparable from final list. Negative working capital adjustment granted by Ld. AO - Rule 10B(3) of the Income-tax Rules, 1962, supports the said action of the Ld.TPO in granting working capital adjustment. In the following decisions rendered by coordinate bench of this Tribunal in case of, TNT India (P.) Ltd. 2011 (3) TMI 560 - ITAT BANGALORE AND APIGEE TECHNOLOGIES (INDIA) PVT. LTD 2015 (9) TMI 1547 - ITAT BANGALORE it has been held that positive adjustment towards working capital differences between the assessee and the comparables should be considered and appropriate adjustment granted in arriving at the profit margins of comparable companies for the purpose of comparison. Respectfully following the same, we direct the Ld.AO/TPO to grant positive working capital adjustment in actuals for determined in the profit margin of comparables. Non grant setting off of business loss pertaining to Noida unit against income chargeable to tax under the head profits and gains from business and profession after the claim of deduction under section 10 A for Bangalore and Pune units - HELD THAT - As relying on M/S. KARLE INTERNATIONAL PRIVATE LTD, 2020 (9) TMI 968 - KARNATAKA HIGH COURT we are of the opinion that assessee has to be allowed inter-unit set off of loss. Disallowance deleted made under section 40(a)(ia) of the Act for non-deduction of TDS towards purchase of software - HELD THAT - As decided in own case we are of the considered once the assessee has capitalized the payment in question, then even the assessee has not deducted tax at source on such payment, the provisions of section 40(ia) cannot be invoked for disallowance of the claim of depreciation. Grant of sublease expenses as deduction under section 57 (iii) from the sublease income under the head income from other sources - HELD THAT - We direct the Ld. AO to examine as to whether the sum claimed as deduction has also been claimed as deduction while computing profits of the STPI unit. The AO shall verify this aspect then decide on whether the claim of assessee for deduction can be allowed after affording proper opportunity of being heard in accordance with law. Computation of deduction u/s 10A - Reduction of communication expenses, insurance expenses and expenditure incurred in foreign currency from export turnover - HELD THAT - Respectfully following the view taken in HCL TECHNOLOGIES LTD. 2018 (5) TMI 357 - SUPREME COURT we are of the view that communication expenses, insurance expenses and expenditure incurred in foreign currency are to be excluded both from the export turnover and total turnover.

Summary

Issues Involved:
1. Exclusion of certain comparables in Transfer Pricing (TP) analysis.
2. Adjustment to the Arm's Length Price (ALP) of international transactions.
3. Set-off and carry forward of business losses.
4. Deduction under Section 10A of the Income Tax Act.
5. Disallowance under Section 40(a)(ia) for non-deduction of TDS.
6. Computation of working capital adjustment.
7. Treatment of sub-lease rental income and related expenses.
8. Exclusion of expenses from export turnover for Section 10A deduction.

Detailed Analysis:

1. Exclusion of Certain Comparables in Transfer Pricing (TP) Analysis:
The Tribunal addressed the exclusion of certain companies as comparables due to differences in size, turnover, and functional dissimilarities. The Tribunal upheld the exclusion of Infosys Ltd., Kals Information Systems Ltd., Persistent Systems Ltd., Tata Elxsi Ltd., and Sasken Communications Ltd. due to their high turnover and functional differences. The Tribunal also directed the exclusion of Larsen and Toubro Infotech Ltd. and ICRA Techno Analytics Ltd. for similar reasons.

2. Adjustment to the Arm's Length Price (ALP) of International Transactions:
The Tribunal noted that the assessee had voluntarily offered an additional income of ?1,20,30,165/- to align the ALP of its international transactions. The Tribunal held that this voluntary adjustment should be considered in computing the ALP and that the Ld. TPO erred in not considering this adjustment. The Tribunal directed the AO to verify the assessee's claim regarding the receipt of foreign exchange and to grant the deduction under Section 10A if the claim is substantiated.

3. Set-off and Carry Forward of Business Losses:
The Tribunal allowed the set-off of business losses of the Noida unit against the income chargeable to tax under the head 'Profits and Gains from Business' after the deduction under Section 10A for the Bangalore and Pune units. This decision was based on the Supreme Court's ruling in CIT vs. Yokogawa India Ltd., which allows inter-unit set-off of losses.

4. Deduction under Section 10A of the Income Tax Act:
The Tribunal held that the voluntary TP adjustment made by the assessee qualifies for deduction under Section 10A. The Tribunal directed the AO to verify the basic requirements for the voluntary TP adjustment to be eligible for the deduction and to grant the deduction if the requirements are met.

5. Disallowance under Section 40(a)(ia) for Non-Deduction of TDS:
The Tribunal upheld the deletion of disallowance made under Section 40(a)(ia) for non-deduction of TDS on payments for the purchase of software. The Tribunal followed its earlier decision in the assessee's case for the assessment year 2009-10, where it was held that depreciation is a statutory deduction and cannot be disallowed under Section 40(a)(ia).

6. Computation of Working Capital Adjustment:
The Tribunal directed the AO/TPO to grant a positive working capital adjustment to the comparables to align them with the assessee, which does not bear any working capital risk as it is fully funded by its AE.

7. Treatment of Sub-Lease Rental Income and Related Expenses:
The Tribunal directed the AO to allow the deduction of sub-lease expenses under Section 57(iii) from the sub-lease income under the head 'Income from Other Sources.' The Tribunal noted that the expenses were directly related to the income derived from the sub-leased property.

8. Exclusion of Expenses from Export Turnover for Section 10A Deduction:
The Tribunal held that communication expenses, insurance expenses, and expenses incurred in foreign currency should be excluded both from the export turnover and the total turnover for the purpose of computing the deduction under Section 10A. This decision was based on the Supreme Court's ruling in CIT vs. HCL Technologies Ltd.

Conclusion:
The Tribunal's judgment addressed various issues related to transfer pricing adjustments, set-off and carry forward of business losses, deductions under Section 10A, and disallowances under Section 40(a)(ia). The Tribunal provided detailed directions for the AO to verify claims and compute deductions in accordance with the law. The appeal filed by the assessee was allowed, and the appeal filed by the revenue was partly allowed.