2023 (5) TMI 1352 - AT - Income Tax

TP Adjustment - comparable selection - Adjustment towards the royalty for use of technology - non determining the comparable transaction in the public domain as prescribed under the Act and Rules - HELD THAT - We are of the opinion that similar issue came for consideration before this Tribunal in assessee s own case in assessment year 2017-18 2023 (3) TMI 1507 - ITAT BANGALORE TPO repeated what he has done on earlier occasion without considering the direction of the Tribunal where the Tribunal given a direction that in case comparable is not found in respect of payment of royalty by the assessee, then the TPO/AO may consider the royalty payment on part of the international transaction under trading segment and determine the ALP by considering the royalty as part of operating cost for the purpose of computing the margin in the trading segment. Before us, A.R. submitted that if it is considered as operating cost, then the margin of the assessee is higher than the margin of comparable i.e. M/s. Advance Micronic Devices Ltd. In our opinion, the AO has to consider this royalty payment as an operating cost and has to verify whether the margin of assessee is higher than the margin declared by the comparable company i.e. M/s. Advance Micronic Devices Ltd. and decide accordingly. In view of this, the issue in dispute is set aside to the file of AO/TPO for the limited purpose for comparison of margins with the comparable company and decide accordingly. Deselection of companies as functionally dissimilar. Companies having turnover less than Rs. 200 crores and more than Rs. 2000 crores should be eliminated from the list of comparables as the assessee s turnover is Rs. 937.19 crores. Working capital adjustment to be allowed on actual basis. TP Adjustment in SWD segment - As assessee s margin for the SWD segment is 10.72% and the margins of the comparable companies i.e, 11.37% (before working capital adjustment) which is within the tolerance range of 3% and in view of the above submissions, the transaction is at arm s length and therefore we direct the ld. DRP to delete the TP adjustment made in the interest of justice. Interest on delayed receivables - As we are of the opinion that similar issue came for consideration before this Tribunal in the case of ISG Novasoft Technologies Ltd 2021 (3) TMI 828 - ITAT BANGALORE we remit this issue to the file of AO/TPO for fresh consideration and interest should be charged on net amount of receivables/payables only. Disallowance of lease payments on financial lease u/s 37 - assessee has followed the Accounting standard -19-Leases issued by the ICAI - HELD THAT - As we are of the opinion that this expenditure has been disallowed since the assessee has not produced the details of the expenditure inspite of giving sufficient opportunity to the assessee. Before us, the assessee prayed for remitting the issue to the file of AO to examine the issue in the light of earlier decision in assessment year 2017-18 in assessee s own case. 2023 (3) TMI 1507 - ITAT BANGALORE thus we remit the issue in dispute to the file of AO/TPO on similar directions. Disallowance u/s 37 under the head Any other amount allowable as deduction - HELD THAT - The assessee has not produced entire documentary evidence in support of claim of expenditure. In view of this, we remit the entire issue to the file of AO/TPO for fresh consideration after giving opportunity of hearing to the assessee. Denial of TDS credit - HELD THAT - We remit the issue to the file of AO/TPO to give TDS credit in accordance with law after verifying the records.

Summary

Issues Involved:
1. Royalty Adjustment
2. Distribution Segment Adjustment
3. Software Development Segment Adjustment
4. Interest on Delayed Receivables
5. Disallowance of Lease Payments on Financial Lease
6. Disallowance under Section 37
7. Non-Giving of TDS Credit

Detailed Analysis:

1. Royalty Adjustment:
The assessee paid a royalty of Rs. 9,41,83,707/- for the use of technology. The Tribunal noted that the TPO did not follow the ITAT's previous directions to either find a comparable transaction or consider the royalty as part of the international transaction in the trading segment. The ITAT had previously directed that if no comparable is found, the royalty should be considered as part of the operating cost for computing the margin in the trading segment. The Tribunal found that the TPO failed to adhere to these directions and made the adjustment without proper benchmarking. The Tribunal allowed the ground raised by the assessee, following its consistent view in earlier years.

2. Distribution Segment Adjustment:
The TPO made an adjustment of Rs. 124,42,65,469/- in the distribution segment. The Tribunal observed that the TPO did not follow the ITAT's earlier directions to restrict the adjustment to the international transaction (AE purchases) and not on the entire transaction in the trading segment. The Tribunal reiterated that the adjustment should be confined to the AE purchases and directed the TPO to apply the Resale Price Method (RPM) as the Most Appropriate Method (MAM), as held in the assessee's own case for earlier years. The Tribunal remitted the issue to the TPO for fresh consideration in line with earlier decisions.

3. Software Development Segment Adjustment:
The TPO made an adjustment of Rs. 85,35,47,785/- in the software development segment. The Tribunal noted that the TPO did not consider the working capital adjustment and included certain comparables that were not functionally similar or had extraordinary high margins. The Tribunal directed the exclusion of such comparables and allowed the working capital adjustment. The Tribunal concluded that the assessee's margin was within the tolerance range and directed the deletion of the TP adjustment in the software development segment.

4. Interest on Delayed Receivables:
The TPO proposed to charge interest on delayed receivables at SBI PLR or LIBOR rate. The Tribunal observed that the TPO did not consider the net amount of receivables and payables and did not identify a comparable transaction. The Tribunal directed the TPO to benchmark the interest rate considering the period of credit enjoyed by the comparables and the applicable LIBOR rate. The issue was remitted to the TPO for fresh consideration.

5. Disallowance of Lease Payments on Financial Lease:
The AO disallowed Rs. 10,08,65,471/- towards lease payments on financial lease, treating it as capital expenditure. The Tribunal noted that the assessee consistently followed the method of allowing lease rentals as revenue expenditure and that the AO did not provide sufficient opportunity to the assessee to substantiate its claim. The Tribunal remitted the issue to the AO for fresh consideration, following its earlier decisions in the assessee's own case and similar cases.

6. Disallowance under Section 37:
The AO disallowed Rs. 36,52,52,459/- under Section 37, treating it as not wholly and exclusively for the purpose of business. The Tribunal observed that the assessee was not given adequate opportunity to furnish details due to the pandemic. The Tribunal directed the AO to verify the details and documentary evidence provided by the assessee and decide the issue afresh.

7. Non-Giving of TDS Credit:
The Tribunal directed the AO to verify the records and give TDS credit in accordance with law.

Conclusion:
The Tribunal allowed the appeal partly for statistical purposes, remitting several issues to the AO/TPO for fresh consideration and directing adherence to earlier decisions and proper benchmarking.