2019 (1) TMI 1467 - AT - Income Tax

TPA - aggregation/segregation of two segments - purchase of software segment was not merged with the software development segment - Held that - This is the first time that the TPO has taken a different view from the earlier Assessment Years as well as subsequent Assessment Years by aggregating Software Trading Segment with Software Development Segment, but while doing so, there was no finding as to why these two segments has been aggregated/merged/clubbed by the TPO. Therefore, it will be appropriate to remand back this issue to the file of TPO/A.O. to decide the same afresh by taking into account FAR analysis given by the assessee in TP Study as well as principle of consistency. Therefore, Ground is partly allowed for statistical purpose. Since this issue is remanded back, the subsequent grounds which were raised by the assessee in respect of Transfer Pricing Adjustment will also be decided by the TPO/A.O. according to the decision of aggregation/segregation of these two segments. Therefore, Ground Nos. 1 to 13 are partly allowed for statistical purpose. Adjustment on account of advance billing to be allowed in favour of the assessee by the decision of the Co-ordinate Bench in asessee s own case for Assessment Years 2008-09 & 2007-08. Adjustment on account of business promotion and conference - Held that - These business promotion expenses were incurred wholly and exclusively for the purpose of business and were necessitated in view of commercial exigency and are earned year on year. Hence, the Ld. AR prayed that the same may be allowed as business expenses u/s 37 - issue is covered in favour of the assessee in assessee s own case for Assessment Year 2009-10.

Summary

Issues Involved:
1. Transfer Pricing Adjustment
2. Adjustment on account of Advance Billing
3. Adjustment on account of Business Promotion Expenses
4. Initiation of Penalty Proceedings

Detailed Analysis:

1. Transfer Pricing Adjustment:
The primary issue revolved around the addition of ?238,365,237 to the appellant's income due to transfer pricing adjustments related to international transactions. The appellant contested the merging of the software trading segment with the software development segment, arguing that these segments have entirely different functional, asset, and risk profiles. The Tribunal noted that the TPO had deviated from the previous years' consistent approach without providing a rationale for merging the segments. The Tribunal remanded the issue back to the TPO/A.O. to reconsider the segmentation based on the FAR analysis and principles of consistency. Consequently, all related grounds (Ground Nos. 1 to 13) were partly allowed for statistical purposes.

2. Adjustment on account of Advance Billing:
The appellant challenged the addition of ?37,119,144 on account of advance billing, arguing that no income had accrued for the year under consideration and citing previous Tribunal decisions in its favor. The Tribunal acknowledged that this issue was covered by earlier decisions in the appellant’s favor for Assessment Years 2001-02 to 2003-04 and 2007-08 to 2008-09. Thus, Ground Nos. 14 and 15 were allowed.

3. Adjustment on account of Business Promotion Expenses:
The appellant disputed the disallowance of ?4,197,074 as business promotion expenses, which the A.O. treated as capital expenditure. The appellant argued that these were revenue expenses incurred wholly and exclusively for business purposes and cited the Tribunal’s decision in its favor for Assessment Year 2009-10. The Tribunal accepted the appellant's argument, noting that the issue was covered in the appellant’s favor in the previous year. Therefore, Ground Nos. 16 and 17 were allowed.

4. Initiation of Penalty Proceedings:
The appellant also raised an issue regarding the initiation of penalty proceedings under Section 271(1)(c) of the Act. However, this issue was not elaborated upon in the detailed analysis of the judgment.

Conclusion:
The appeal was partly allowed for statistical purposes, with significant issues remanded back to the TPO/A.O. for reconsideration. The Tribunal's decision emphasized the importance of consistency in the treatment of different segments and acknowledged the appellant's arguments based on previous favorable rulings.