2015 (11) TMI 1279 - AT - Income Tax

Transfer pricing adjustment - selection of comprables - Held that - In acceptance of the 7 comparables selected by the assessee, arithmetic mean of 10.37% would place the assessee in a situation where the TP adjustment would become NIL. Since we find that the comparables worked out by the assessee are acceptable and the rejection of comparables made by the assessee from out of comparables selected by the TPO are justified, we direct the TPO to pass an order accordingly taking arithmetic mean of the assessee at 10.37%. The issue on TP adjustment with respect to software development services is set aside for statistical purposes. TP adjustment in respect of marketing support services - Held that - We accept the comparables selected by the assessee inasmuch as only one comparable selected by the TPO viz., ICC International Agencies Ltd. was pointed out by the assessee as functionally dissimilar. The arithmetic mean of other three comparables viz., Access Global Solutions Ltd., Priya International Ltd. and Empire Industries Ltd. is at 14.54%. The assessee s NCP margin being 10%, would be within the /- 5% range. Hence, we are of the opinion that the claim of the assessee has to be allowed. We therefore direct the TPO/AO to redo the assessment accordingly. Disallowance of deduction claimed on advances written off - Held that - We find that the premises has been taken on lease by the assessee and interior design works were carried out for the purpose of business to create ambience. The very fact that the premises was taken on lease for 9 years with a renewal clause would not itself make it a capital expenditure, when the fact remains that the assessee had prematurely stopped the designing work of the premises and terminated the contract with M/s. Space Matrix Design Consultants P. Ltd. It was brought to our notice that the premises was sealed by the Court pursuant to the order of the Delhi High Court as the premises was not in conformity with the applicable land use laws. It is a fact that the advances were written off as the assessee was not able to operate out of the premises and hence the same is allowable as a deduction u/s. 37 of the Act. The expenditure has been incurred for the purpose of the business and in the course of business and is clearly a revenue expenditure - Decided in favour of assessee.

Summary

Issues Involved:
1. Transfer Pricing (TP) adjustment for software development services.
2. TP adjustment for marketing support services.
3. Disallowance of deduction claimed on advances written off.

Detailed Analysis:

1. Transfer Pricing Adjustment for Software Development Services:

The assessee, a subsidiary of Autodesk US, provided software development and marketing support services to its associated enterprises (AEs). For the financial year 2006-07, the Transfer Pricing Officer (TPO) made an adjustment of Rs. 6,53,62,861/- towards these international transactions. The TPO accepted 10 out of 55 comparables selected by the assessee, resulting in an arithmetic mean of 23.59% compared to the assessee's 14.64%. The assessee raised additional grounds for rejecting certain comparables based on related party transactions exceeding 15%, functional dissimilarity, and turnover limits.

The Tribunal found that the comparables selected by the assessee were justified and directed the TPO to pass an order taking the arithmetic mean of 10.37%, making the TP adjustment NIL. The issue on TP adjustment for software development services was set aside for statistical purposes.

2. TP Adjustment for Marketing Support Services:

The assessee reported an operating income of Rs. 33,50,29,288/- with an operating profit margin of 10%. The TPO's arithmetic mean was 30.57%, significantly higher than the assessee's 8.39%. The assessee argued for the exclusion of ICC International Agencies Ltd. due to functional dissimilarity. The Tribunal accepted the comparables selected by the assessee, resulting in an arithmetic mean of 14.54%, which, within the +/- 5% range, justified the assessee's NCP margin of 10%. Consequently, the Tribunal directed the TPO/AO to redo the assessment accordingly.

3. Disallowance of Deduction Claimed on Advances Written Off:

The assessee entered into a lease and an agreement with Space Matrix Design Consultants for office design services. Due to the premises being sealed by the Government, the contract was terminated, and the advances paid were written off. The AO disallowed the deduction, treating it as capital expenditure. The assessee contended that the expenditure was revenue in nature, incurred wholly and exclusively for business purposes, and not for acquiring a capital asset.

The Tribunal found that the premises were taken on lease for business purposes and the expenditure incurred was clearly revenue in nature. The Tribunal allowed the deduction under Section 37 of the Act, emphasizing that the expenditure facilitated the assessee's trading operations without creating a capital asset.

The Tribunal cited the Supreme Court's decision in Empire Jute Co. Ltd. v. CIT, emphasizing that not all expenditures yielding enduring benefits are capital in nature. The nature of the advantage in a commercial sense is crucial, and if it facilitates business operations or management without affecting fixed capital, it is considered revenue expenditure.

Conclusion:

The appeal was partly allowed for statistical purposes, with the Tribunal directing the TPO/AO to adjust the TP calculations and allowing the deduction for advances written off as revenue expenditure.