2018 (5) TMI 252 - AT - Income Tax

Admission of additional evidence - Held that - We set aside the impugned order of the learned CIT(A) refusing to admit the additional evidence filed by the assessee and restore the matter to the file of the AO to decide the relevant issues afresh after giving proper and sufficient opportunity to the assessee to produce the relevant books of account and other record. We also direct the assessee to produce the books of account and other record as may be required by the AO for the purpose of completing the assessment afresh on the relevant issues and extend full cooperation to him. The relevant grounds of the assessee s appeal are accordingly treated as allowed for statistical purposes. TPA - comparable selection criteria - Held that - Assessee is into providing Chip design / software development services, this companies functionally dissimilar with that of assessee need to be deselected from final list. CIT(A) adopting the arm s length margin at 14.92% as against 18.5% adopted by the TPO - Held that - CIT-A rejected the computation of arm s length margin of 18.5% made by the TPO erroneously on the basis of financial data of earlier two financial years and proceeded to determine the arm s length margin afresh on the basis of second set of comparables selected by the TPO. While disposing of the appeal of the assessee, we have already approved this approach adopted by the learned CIT(A) in principle. Consequently, we find no merit in the appeal of the Revenue and dismiss the same.

Summary

Issues Involved:
1. Corporate tax issues (Grounds 1 to 7 by the assessee).
2. Transfer pricing adjustment (Grounds 8 to 11 by the assessee and Grounds 1 to 3 by the Revenue).

Issue-Wise Detailed Analysis:

Corporate Tax Issues:

1. Arbitrary Additions to Returned Income:
The assessee contended that the CIT(A) erred in upholding arbitrary additions made by the AO. The Tribunal observed that the AO completed the assessment based on available material due to the assessee's failure to produce books of accounts despite multiple opportunities.

2. Ad-Hoc Disallowance of Operating Expenses:
The AO disallowed ?45,88,72,590, being 35% of operating expenses, due to non-production of books of accounts. The assessee argued that the books were maintained in Bangalore and insufficient time was provided. The Tribunal noted that the AO's completion of assessment within 19 days of requesting books was unreasonable and directed the AO to reassess after giving proper opportunity to the assessee.

3. Rejection of Additional Evidence:
The CIT(A) rejected additional evidence submitted by the assessee. The Tribunal found that the CIT(A) overlooked subsequent remand reports where the AO accepted the additional evidence. The Tribunal set aside the CIT(A)’s order and directed the AO to re-examine the issues with the additional evidence.

4. Disallowance of Bad and Doubtful Debts:
The AO disallowed ?9,47,27,677 claimed as bad debts due to lack of evidence. The Tribunal directed the AO to reassess considering the additional evidence.

5. Disallowance of Depreciation:
The AO disallowed ?26,41,893 on account of non-production of evidence. The Tribunal directed reassessment after considering the additional evidence.

6. Disallowance of Warranty Costs:
The AO disallowed ?4,53,34,551 claimed as warranty costs due to non-production of books. The Tribunal directed reassessment after considering the additional evidence.

7. Disallowance of Bad Advances Written Off:
The AO disallowed ?1,19,10,539 claimed as bad advances written off. The Tribunal directed reassessment after considering the additional evidence.

Transfer Pricing Adjustment:

1. Determination of Arm's Length Price (ALP):
The AO made an addition of ?2,66,00,617 on account of transfer pricing adjustment, which the CIT(A) reduced to ?1,97,98,335. The Tribunal examined the comparables used by the TPO and the CIT(A).

2. Selection of Comparables:
The Tribunal upheld the CIT(A)’s exclusion of certain comparables like Rolta India Limited and Infosys Technology Limited due to functional dissimilarities. It directed the inclusion of segmental margins for entities like Infotech Enterprises Limited and upheld the inclusion of entities like Federal Technologies Limited.

3. Re-Determination of ALP:
The Tribunal directed the AO/TPO to re-determine the ALP using the final list of comparables and re-compute the transfer pricing adjustment.

Revenue's Appeal:

1. Adoption of Arm's Length Margin:
The Revenue contested the CIT(A)’s adoption of 14.92% margin instead of 18.5%. The Tribunal upheld the CIT(A)’s decision to use the financial data of the relevant financial year for determining the arm's length margin and dismissed the Revenue’s appeal.

Conclusion:
The Tribunal partly allowed the assessee’s appeal by directing a reassessment on corporate tax issues with proper consideration of additional evidence and re-determination of transfer pricing adjustments. The Revenue’s appeal was dismissed.