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2020 (11) TMI 563 - AT - Income TaxTP Adjustment - Comparable selection - application of turnover filter - HELD THAT - We notice that the co-ordinate bench has considered the issue of application of turnover filter in the case of Tavant Technologies India P Ltd 2020 (8) TMI 712 - ITAT BANGALORE as relying on AUTODESK INDIA PRIVATE LTD 2018 (7) TMI 1862 - ITAT BANGALORE , thus comparables Larsen Toubro Infotech Ltd,Mindtree Limited (seg.), Persistent systems Ltd and Tech Mahindra Ltd (seg.) whose turnover is more than 200 crores and hence they cannot be considered as good comparable companies and need to be excluded. Provision for bad and doubtful debts as an operating expenditure - HELD THAT - No dispute that if the provision for doubtful debts is taken as operating expenses in the hands of the assessee, then the said expenditure has to be taken so in the case of comparable companies also.The Tribunal accepted the submission of the assessee and accordingly it has held that it is a non-operating in nature - As relying on BROCADE COMMUNICATIONS SYSTEMS PRIVATE LIMITED case 2020 (6) TMI 584 - ITAT BANGALORE and ROLLS-ROYCE INDIA PVT. LTD. VERSUS DCIT, NEW DELHI 2015 (12) TMI 516 - ITAT DELHI we direct the AO/TPO to consider Provision for doubtful debts as an operating expense. Transfer pricing adjustment relates to the claim of working capital adjustment and risk adjustment - TPO has granted working capital adjustment of 1.70% by making his own calculations - HELD THAT - In E VALUE SERVE. COM AND VICA-VERSA 2016 (9) TMI 1363 - ITAT DELHI held that insisting on daily balances of working capital requirements to compute working capital adjustment is not proper as it will be impossible to carry out such exercise and that working capital adjustment has to be based on the opening and closing working capital employed. Hence the reasoning given by Ld DRP to reject the working capital adjustment is liable to be set aside. Accordingly we direct AO/TPO to allow working capital adjustment Claim of risk adjustment - we notice that the assessee did not raise any objection before Ld DRP regarding denial of the same. Hence we decline to adjudicate this ground. Additional depreciation on computers claimed u/s 32(1)(iia) - assessee claimed additional depreciation @ 20% on the new computers purchased - AO took the view that the assessee is developing computer software and it cannot be taken as an article or thing. He took the view that the computers are office equipment and separate rate of depreciation is allowed under the depreciation schedule - HELD THAT - Additional depreciation prescribed u/s 32(1)(iia) is admissible to an assessee engaged in the business of manufacture or production of any article or thing etc. Hence, in order to claim this additional depreciation, an assessee should first satisfy the condition that he is engaged in the business of manufacture or production of any article or thing. The conditions for allowing additional depreciation u/s 32(1)(iia) was different at that point of time, when the case of Startronics Enterprises (P) Ltd 1994 (10) TMI 325 - ITAT AHMEDABAD was decided by the Tribunal and High Court. Under the old provisions, the condition of manufacture or production of article was not available. However, the additional depreciation was not available to a machinery or plant installed in any office premises. Hence the Hon'ble High Court was required to consider the question as to whether the computers used for development of software would fall under the category of office equipment or not. Under the current provisions of sec.32(1)(iia), the first condition that should be satisfied is that an assessee should be engaged in the business of manufacture or production of an article or thing. We have agreed with the view expressed by Ld DRP that the development of computer software would not fall under that category, for the reasons discussed above - we hold that the assessee would not be entitled to Additional Depreciation prescribed u/s 32(1)(iia) of the Act. Accordingly, we confirm the order passed by Ld DRP. Disallowance u/s 40(a)(i) - lease line charges and payroll processing fee paid by the assessee for non-deduction of tax at source - HELD THAT - AO has not made addition of above said payments in the final assessment order. Hence this addition does not arise out of the impugned final assessment order. Accordingly, we decline to admit this ground.
Issues Involved:
1. Disallowance of additional depreciation. 2. Disallowance made under Section 40(a)(i) of the Income-tax Act. 3. Transfer pricing adjustment. 4. Disallowance of MAT credit. 5. Charging of interest under Section 234C of the Income-tax Act. Issue-Wise Detailed Analysis: 1. Disallowance of Additional Depreciation: The assessee claimed additional depreciation on new computers under Section 32(1)(iia) of the Income-tax Act. The AO rejected the claim, reasoning that the assessee is involved in software development, which does not qualify as "manufacture or production of an article or thing." The AO viewed computers as office equipment, not plant and machinery. The DRP upheld this disallowance, emphasizing that the benefit of Section 32(1)(iia) is for entities engaged in manufacturing or production, not software development. The Tribunal referred to the definition of "manufacture" under Section 2(29BA) and the Supreme Court's interpretation in N C Budharaj & Co., concluding that software development does not equate to manufacturing or production of an article or thing. Hence, the assessee is not entitled to additional depreciation under Section 32(1)(iia). 2. Disallowance Made Under Section 40(a)(i): The assessee made payments for lease line charges and payroll processing fees to its AE without deducting tax at source, claiming these as reimbursements. The DRP classified these payments as royalties under Explanation 5 and 6 of Section 9(1)(vi), directing disallowance under Section 40(a)(i) for non-deduction of tax. Although the AO did not initially disallow these payments in the final assessment order, a subsequent rectification order under Section 154 included the disallowance. The Tribunal declined to admit this ground as it did not arise from the impugned final assessment order. 3. Transfer Pricing Adjustment: The TPO made a transfer pricing adjustment for the assessee's software development services segment, rejecting the assessee's TP study and selecting seven comparable companies. The DRP excluded ICRA Techno Analytics Ltd. and disallowed working capital adjustments, enhancing the TP adjustment. The Tribunal directed the exclusion of four comparable companies (Larsen & Toubro Infotech Ltd, Mindtree Limited, Persistent Systems Ltd, and Tech Mahindra Ltd) based on the turnover filter, referencing decisions in Tavant Technologies India P Ltd and Autodesk India Pvt Ltd. The Tribunal also directed the AO/TPO to consider provision for doubtful debts as an operating expense, following Brocade Communications Systems (P) Ltd and Rolls-Royce India (P) Ltd. Regarding working capital adjustment, the Tribunal instructed to allow it, citing the decision in Nagravision India P Ltd and Huawei Technologies (India) Pvt Ltd. The Tribunal did not adjudicate the risk adjustment claim as it was not raised before the DRP. 4. Disallowance of MAT Credit: The Tribunal restored the issue of MAT credit disallowance to the AO for examination in accordance with the law. 5. Charging of Interest Under Section 234C: The issue of charging interest under Section 234C was also restored to the AO for examination in accordance with the law. Conclusion: The appeal of the assessee was partly allowed, with directions to exclude certain comparables based on the turnover filter, consider provision for doubtful debts as operating expenses, and allow working capital adjustments. The issues of MAT credit and interest under Section 234C were remanded to the AO for further examination.
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