2013 (9) TMI 189 - AT - Income Tax

Transfer pricing adjustments - ALP - selection of comparables - Turnover filter to be used as a guidelines for selection of companies as comparables in Transfer Pricing Reliance has been placed upon the judgment in the case of Genisys Integrating Systems (India) (P.) Ltd. 2011 (8) TMI 952 - ITAT BANGALORE , wherein it has been held that, for the purpose of classification of companies on the basis of net sales or turnover and also taking into consideration the Indian scenario, the classification made by Dun & Bradstreet is more suitable and reasonable. - Held that - As per the ratio laid down by the Tribunal, comparables of companies having turnover of less than Rs.2000 crores and above Rs.200 crores only need to be considered In the instant case, decided accordingly. Depreciation adjustment in computation of Arm s length price in the Transfer Pricing Transactions Held that - Relying upon the judgment in the case of 24/7 Customer.Com Pvt. Ltd., in 2013 (1) TMI 45 - ITAT BANGALORE , it has been held in the instant case that benefit of depreciation adjustment be given to the assessee as per the chart filed by the assessee which works out to around 3.39% - Thus, after the depreciation adjustment of 3.39%, from 16.56% (105% of 15.77% the ALP will come to 13.17%. Apart from this, the Assessing Officer shall give effect to the proviso to sub-section (2) of Section 92C, as per the latest amended Act, as regards 5% range Decided in favor of Assessee. Computation of deduction u/s 10A of the Income Tax Act Held that - If what is excluded in computing the export turnover is included while arriving at the total turnover is included while arriving at the total turnover, when the export turnover is a component of total turnover, such an interpretation would run counter to the legislative intent and impermissible. If that were the intention of the legislature, they would have expressly stated so. If they have not chosen to expressly define what the total turnover means, then, when the total turnover includes export turnover, the meaning assigned by the legislature to the export turnover is to be respected and given effect to, while interpreting the total turnover which is inclusive of the export turnover In the instant case, the issue has been decided in favor of assessee. Purchase of software, a capital or revenue expenditure - AO has capitalized software expenses debited to the P&L account amounting to Rs 3.8 crores incurred towards purchase of software (out of the total of Rs 7.7 crores), on the basis that since the depreciation table specifies computer software as a separate category, expenses incurred on purchase of software would need to be capitalized and depreciation be claimed Held that - Restored the issue back to the file of the Assessing Officer to reappraise the expenditure in respect of Rs.10 lakhs and above and decide the issue in accordance with the decisions of the Delhi Special Bench in Amway India Enterprises 2008 (2) TMI 454 - ITAT DELHI-C .

Issues Involved:
1. Transfer Pricing Adjustments
2. Computation of Deduction under Section 10A
3. Capitalization of Software Expenses
4. Deduction under Section 80JJAA
5. Correction of Arithmetical Mistakes
6. Levy of Interest under Section 234D
7. Initiation of Penalty Proceedings under Section 271(1)(c)

Issue-wise Detailed Analysis:

1. Transfer Pricing Adjustments:
The Tribunal examined the transfer pricing study conducted by the assessee, which used the TNMM method and selected 17 comparables. The TPO, however, conducted a fresh analysis and selected 26 comparables, applying various filters. The Tribunal found that the turnover filter used by the TPO was inconsistent with the Tribunal's earlier decisions and reduced the list to six comparables. Further, it eliminated two companies, Tata Elxsi Ltd. and Flextronics Software Systems Ltd., due to functional differences. The Tribunal directed the TPO to provide depreciation adjustments and apply the 5% range as per Section 92C(2).

2. Computation of Deduction under Section 10A:
The Tribunal addressed the reduction of telecommunication and foreign currency expenses from export turnover. Following the Karnataka High Court's decision in the assessee's own case, the Tribunal ruled that if such expenses are reduced from export turnover, they should also be reduced from total turnover to maintain parity. This decision rendered the specific grounds on telecommunication and foreign currency expenses infructuous.

3. Capitalization of Software Expenses:
The assessee argued that software expenses should be treated as revenue expenditure due to the rapid obsolescence of software. The Tribunal, referencing the Delhi Special Bench decision in Amway India Enterprises and the Karnataka High Court's decision in Toyota Kirloskar Motors, remitted the issue back to the Assessing Officer to reappraise the expenditure for amounts above Rs.10 lakhs.

4. Deduction under Section 80JJAA:
The Tribunal considered whether software engineers qualify as 'workmen' under the Industrial Disputes Act for the purpose of Section 80JJAA. The Tribunal referenced the Texas Instruments (India) (P.) Ltd. case, which recognized software engineers as workmen, and remitted the issue back to the Assessing Officer to pass a detailed order after considering the assessee's submissions and providing an opportunity for a hearing.

5. Correction of Arithmetical Mistakes:
The Tribunal acknowledged the assessee's claim of arithmetical mistakes in the TPO's computation of TP adjustments. It restored the issue to the Assessing Officer for verification and necessary adjustments.

6. Levy of Interest under Section 234D:
The Tribunal noted that the issue of interest under Section 234D is consequential. It directed the Assessing Officer to provide consequential relief based on the final assessment.

7. Initiation of Penalty Proceedings under Section 271(1)(c):
The Tribunal found the issue of initiation of penalty proceedings to be premature, as it only pertained to the initiation and not the levy of penalty. The assessee can appeal only after the penalty is levied.

Conclusion:
The Tribunal partly allowed the appeal for statistical purposes, providing directions for reappraisal and adjustments on several issues while maintaining consistency with previous judicial decisions.

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