2014 (11) TMI 551 - AT - Income Tax

Transfer pricing adjustment Selection of comparables - Accel Transmatic Limited (Software Services segment) - Determination of ALP on international transaction - Design and development support services for online courseware to its parent company provided Held that - Assessee is a wholly owned subsidiary of Element K Corporation, USA - It provides content design and development support services for online coursesware under a service agreement with its parent company - Assessee is remunerated on cost plus 15% markup for the services rendered - assessee is a low risk captive service provided following the decision in Toluna India Pvt. Ltd. Versus ACIT, Circle 12(1), New Delhi 2014 (10) TMI 424 - ITAT DELHI - the assessee itself considered this company as functionally comparable by including it in the accept/reject matrix, but, rejected it on the ground that advertisement expenses were more than 3% - the TPO has taken the figures of this company's Software services segment alone, which is akin to that of the assessee and that the Advertisement, marketing and distribution spend in this segment is less than 3%, being the filter applied by the assessee - the inclusion of the Software service segment of Accel Transmatic Limited in the list of comparables is upheld. Celestial Labs limited Functionally different company - Held that - From the annual accounts it has been found that it is engaged mainly in the developing the software products in the shape of tools etc., which are protected using the patent. -This company developed a tool, CELSUITE to drug discovery in finding the lead molecules for drug discovery - As this company is engaged in developing software tools after enough research and development activity and the tools so produced by it are its intellectual property, it cannot be considered as comparable to the assessee which is, also albeit in software development, but is doing it on contract basis without having any I.P. rights in the software developed by it the DRP is directed to exclude the company from the list of comparables. E-Zest Solutions Limited - Held that - The comparability of a company is tested on various parameters and a view is taken as to its comparability or otherwise by considering the entirety of the facts and circumstances - Simply because the nature of software development services provided by a company is different from those provided by the assessee, the same does not become incomparable - this company is also providing software development services as is done by the assessee on contract basis for others without having any intellectual property rights in them - A small variation in the nature of services does not make a company incomparable - Merely because the nature of service rendered by this company within the overall software development services, is not identical, will not make it incomparable, when it is otherwise similar to that of the assessee on all other scores - the company was rightly included by the TPO in the list of comparables. Ishir Infotech Limited Held that - This company to be comparable to that of the assessee - the company has included Professional fees along with Director s salary, etc., under the head Administrative expenses - When the objection was taken by the assessee before the TPO that the employee cost was only 4% viewing only the Establishment expenses in isolation without considering the employee cost included under the head Administrative expenses , the TPO corrected the position by observing that the employee cost was more than 25% by impliedly including the personnel cost included under the head Administrative expenses - The assessee did not challenge the TPO s calculation before the DRP on this issue - filter of 25% of RPT is good enough to make a controlled transaction and thus expunging it from the list of comparables, which can only be uncontrolled transactions - the view taken by the TPO is upheld in including this case in the list of comparables. KALS Information Systems Limited Held that - The company was engaged in Software development and training - the TPO adopted Software development segment of this company by noticing that this segment also included revenues from software products and training - the assessee is not engaged in imparting any training on commercial basis or selling its software products, the financials of the company under this segment cannot be compared with the assessee - The contribution by the sale of software products or training to the overall revenue of this segment cannot be precisely ascertained to determine the question of its comparability Decided partly in favour of assessee. Disallowance u/s 40(a)(ia) TDS not deducted as per rates applicable Held that - As decided in COMMISSIONER OF INCOME TAX, KOLKATA-XI Versus M/s SK. TEKRIWAL 2012 (12) TMI 873 - CALCUTTA HIGH COURT - short deduction of TDS cannot be the basis for disallowance u/s 40(a)(ia) of the Act the disallowance is to be deleted Decided in favour of assessee.

Summary

Issues Involved:
1. Validity of the assessment order.
2. Transfer Pricing adjustment.
3. Deduction under Section 10A.
4. Disallowance under Section 40(a)(ia).
5. Capital vs. revenue expenditure for computer consumables and repairs.
6. Disallowance of advances written off.
7. General grounds including interest and penalty.

Detailed Analysis:

1. Validity of the Assessment Order:
The assessee challenged the assessment order passed by the Assessing Officer (AO) pursuant to the directions of the Dispute Resolution Panel (DRP), claiming it was bad in law and void ab-initio. However, this ground was considered general in nature and did not require separate adjudication.

2. Transfer Pricing Adjustment:
The primary issue was the addition of Rs. 1,18,59,033/- made by the AO based on the Transfer Pricing Officer's (TPO) report. The TPO selected 26 comparable companies with an average mean profit of 25%. The assessee argued that the TPO erred in the selection and rejection of comparables, disregarding the arm's length price (ALP) determined by the assessee, and not considering multiple-year data.

The Tribunal referred to the case of Toluna India Pvt. Ltd., where similar comparables were discussed, and directed the TPO/AO to follow the Tribunal's decision in Toluna's case for determining the ALP. Specific companies like Accel Transmatic Limited, Avani Cimcon Technologies Limited, and others were discussed in detail, with some being accepted as comparables and others excluded based on their functional dissimilarity or exceptional financial results.

3. Deduction under Section 10A:
The AO disallowed the deduction of Rs. 2,98,09,829/- under Section 10A, citing reconstruction of old business. The assessee contended that this issue was decided in their favor by the Bombay High Court for the Assessment Year (AY) 2005-06. The Tribunal noted that the DRP did not dispute this and directed that the deduction under Section 10A be allowed to the assessee.

4. Disallowance under Section 40(a)(ia):
The AO disallowed Rs. 8,09,447/- under Section 40(a)(ia) for short deduction of TDS. The Tribunal, relying on the Kolkata High Court's decision in CIT vs. S.K. Tekriwal, held that short deduction of TDS cannot be the basis for disallowance under Section 40(a)(ia) and deleted the disallowance.

5. Capital vs. Revenue Expenditure for Computer Consumables and Repairs:
The AO treated Rs. 1,14,030/- for computer consumables and Rs. 24,469/- for repairs and maintenance as capital expenditure. The Tribunal upheld the AO's decision, noting that the assessee failed to demonstrate how these expenses were revenue in nature.

6. Disallowance of Advances Written Off:
The AO disallowed Rs. 9,25,768/- on account of advances written off, treating it as excess TDS claimed as a write-off. The Tribunal dismissed the assessee's appeal, as the assessee could not provide evidence regarding the nature of the advance and the circumstances of its write-off.

7. General Grounds:
Grounds related to interest under Sections 234A, 234B, and 234C, and the initiation of penalty under Section 271(1)(c) were considered general and did not require separate adjudication.

Conclusion:
The appeal was partly allowed. The Tribunal directed the AO/TPO to re-determine the ALP following the decision in Toluna India Pvt. Ltd., allowed the deduction under Section 10A, and deleted the disallowance under Section 40(a)(ia). Other disallowances were upheld.