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2024 (7) TMI 211 - AT - Income TaxTP Adjustment - comparable Selection under EDS Segment - HELD THAT - Acropetal Technologies Ltd. be excluded from comparable matrix on the ground that financials of this entity are based on fraud committed as per clear-cut finding of SEBI adjudicator. Vama Industries (Segment) - software development and EDS services are two distinct segments and the margins in these two segments could not be held to be comparable with each other. Therefore, we direct Ld. TPO to exclude the same in final comparable matrix. Comparable selection under IT Segment - Larsen and Toubro Infotech Ltd. be excluded as segment turnover of this entity is more than 36 times as that of the assessee. Thirdware Solutions Ltd. entity was into acquisition / purchase of hardware and software including software as a service. This entity was also engaged in software development, implementation and support services. Therefore, it earned income from products and services. On the other hand, the assessee was solely into software services. Comparable selection under ITeS Segment - Infosys BPO Ltd. be rejected on the ground that turnover of this entity was quite high i.e., approx. Rs. 1356 crores. There was wide gap between the size and turnover of the company Hartron Communications Ltd. to be excluded on the ground that this entity had diversified operations which could not be compared with ITeS segment. Further, during this year, there were extraordinary operations and therefore, it could not be taken as comparable entity. Disallowance of notional loss - a ssessee claimed deduction which represent foreign currency loss - AO held the same to be notional loss and observed that the same would accrue only at the time of repayment of loan, therefore, the deduction was denied - HELD THAT - We find that Ld. DRP has rendered a finding that the loans have been utilized towards fixed assets and therefore, the loss is capital in nature. From the facts, it is not clear as to how the loan has been utilized by the assessee. In our opinion, if the loan is utilized towards purchase of fixed assts, it would be in the nature of capital expenditure. However, if it has been utilized for day-to-day business operations, the same would be revenue in nature. Apparently, the assessee is following consistent method of accounting to claim the same. It is also not clear as to what treatment has been given by the assessee to claimed profit / loss in the year of liquidation. All these facts would have material bearing on determination of issue. Therefore, we restore this matter back to the file of Ld. AO for fresh adjudication by bringing on record correct factual matrix. Disallowance of Provision for Obsolescence - assessee claimed loss under this head in the computation of income without claiming the same in Profit Loss Account - The same represent provision for obsolete inventory - AO disallowed the same which was confirmed by Ld. DRP - HELD THAT - We are of the considered opinion that mere provision of old stock could not be allowed to the assessee by way of deduction in the computation of income. The assessee would be following a definite accounting policy to value the book stocks and the profit or loss arising therefrom would accrue only at the time of sale thereof. Therefore, this claim has rightly been denied by lower authorities. Nature of expenditure - Disallowance of Repair and Maintenance Expenditure - HELD THAT - We find that the aforesaid expenditure has enabled the assessee to add more work space which would mean that there is enlargement of profit-making apparatus for the assessee. The mere fact that the same was carried out on a leased space would not materially affect this fact. The assessee has added more floors to the existing office space which is nothing but capital in nature. The expenditure would bring enduring benefit to the assessee in future. Therefore, the directions of Ld. DRP could not be faulted with. Disallowance of Stamp Duty Charges - stamp duty towards registration of rental agreement for office premises - DRP held that the expense was towards acquisition of lease and therefore, it was capital in nature. Accordingly, the same was disallowed - HELD THAT - We find that the liability to pay stamp duty has crystallized only during this year. The lease agreement may be for more than on year, however, the expenditure is mere a revenue expenditure and unless the assessee chooses to treat the same as deferred revenue expenditure, full deduction thereof shall be allowable to the assessee in the year of incurrence i.e., in this year. We direct Ld. AO to allow this deduction. Disallowance of Depreciation on Printes etc. - assessee claimed higher depreciation on printers @60% as applicable to computers - AO allowed depreciation of 25% and made disallowance - HELD THAT - It is apparent that the printers and scanners are being used along with computers and do not carry separate existence as such. Therefore, we direct Ld. AO to allow higher depreciation on the same. Disallowance of Depreciation on Softwares - assessee claimed higher depreciation on software @60% as applicable to computers - AO proposed allowance of 25% - DRP held that the same could not be allowed for want of TDS - HELD THAT - We find that this issue is covered in assessee s favor by the decision of Age Management Services ( 2019 (7) TMI 1153 - MADRAS HIGH COURT ) wherein it has been held that where software license acquired by assessee was in nature of software application, the assessee would be eligible to claim depreciation at 60%. Respectfully following the same, we allow this claim of the assessee. TDS u/s 192 - Disallowance u/s 40(a)(i) on Secondment Payment to Employees - assessee made payments to its AE on account of Salary expenses of seconded employees and the amounts were stated to be in the nature of reimbursements - DRP proposed to treat the same as Fees for Technical Services - HELD THAT - Upon perusal of agreement, it emerges that the assessee has availed services of employees of its group entities. The same was to facilitate business operations of the assessee. These seconded employees have worked under the control and supervision of the assessee which is evident from the fact that the assessee, as an employer, has deducted due TDS u/s 192. Therefore, these payments have already suffered TDS. The assessee has merely reimbursed actual salary to its AE. The same were merely in the nature of reimbursements only and do not include any element of income. The risk and reward of the work performed by the deputed employees was with assessee. Therefore, Ld. DRP, in our opinion, is not correct to treat the same as Fees for Technical Services which would require separate TDS. Accordingly, impugned disallowance as made u/s 40(a)(i) stand deleted.
Issues Involved:
1. Transfer Pricing Adjustments in three segments. 2. Disallowance of forex loss. 3. Disallowance of provision for obsolescence. 4. Disallowance of repairs and maintenance to buildings. 5. Disallowance of stamp duty charges. 6. Disallowance of depreciation on printers and scanners. 7. Disallowance of depreciation on licensed software. 8. Non-grant of additional depreciation. 9. Disallowance of secondment payments. Detailed Analysis: Transfer Pricing Adjustments in Three Segments: 1. EDS Segment: - Acropetal Technologies Ltd.: The entity was excluded as its financial results were based on fraud, as per SEBI findings. - Vama Industries (Segment): Excluded due to functional dissimilarity; it was primarily a software provider, not comparable to EDS services. 2. IT Segment: - Larsen and Toubro Infotech Ltd.: Excluded due to diversified businesses and high segment turnover, as per Bangalore Tribunal's decision. - Thirdware Solutions Ltd.: Excluded as it was primarily into ITeS services and lacked segmental information, as per Mumbai Tribunal's decision. 3. ITeS Segment: - Infosys BPO Ltd.: Excluded due to high turnover, as per Chennai Tribunal's decision. - Hartron Communications Ltd.: Excluded due to diversified operations and extraordinary operations during the year, as per Chennai Tribunal's decision. Disallowance of Forex Loss: The assessee's claim of Rs. 2020 Lacs as forex loss was denied by Ld. AO and Ld. DRP, considering it as a notional and capital loss. The matter was restored back to Ld. AO for fresh adjudication to determine the utilization of the loan. Disallowance of Provision for Obsolescence: The claim of Rs. 1280 Lacs for obsolete inventory was disallowed as it was a mere provision and not an actual loss. Disallowance of Repairs and Maintenance to Buildings: The claim of Rs. 152.72 Lacs was disallowed as it was considered capital expenditure, adding more workspace and bringing enduring benefit to the assessee. Disallowance of Stamp Duty Charges: The claim of Rs. 27.27 Lacs was allowed as it was crystallized during the year and considered revenue expenditure. Disallowance of Depreciation on Printers and Scanners: Higher depreciation @60% was allowed, considering printers and scanners as part of computers. Disallowance of Depreciation on Licensed Software: Higher depreciation @60% was allowed, following the decision of the Hon'ble High Court of Madras in the case of Computer Age Management Services. Non-Grant of Additional Depreciation: The issue was restored back to Ld. AO for factual finding and adjudication. Disallowance of Secondment Payments: The payment of Rs. 7797.40 Lacs to AE for seconded employees was not treated as Fees for Technical Services. The disallowance u/s 40(a)(i) was deleted as the payments were reimbursements and already subjected to TDS u/s 192. Conclusion: The appeal was partly allowed, and the cross-objection of the revenue was dismissed as infructuous.
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