2020 (12) TMI 1193 - AT - Income Tax

TP Adjustment - Comparable selection - Geometric Software Solutions Co. Limited, Bodhtree Consulting Limited, Flextronics Software Systems Limited (Seg.) and Tata Elxsi Limited (Seg.) - HELD THAT - All the four companies referred above were considered by co-ordinate bench in the case of Sharp Software Development India P. Ltd. 2017 (1) TMI 1734 - ITAT BANGALORE and they have been held to be not good comparable companies. Accordingly, following the decision rendered by the co-ordinate bench in the case of Sharp Software Development India P. Ltd. (supra), we direct exclusion of four companies cited above Computation of book profit u/s. 115JB - A.O. took the view that the Provision for bonus is a contingent liability and hence, the same is required to be added to the net profit for the purpose of computing book profit u/s. 115JB - HELD THAT - We notice that the nature of liability in respect of provision for bonus was examined by Chennai bench of Tribunal in the case of ACIT Vs. Sun Paper Mills Ltd. 2011 (7) TMI 1372 - ITAT CHENNAI - The above said decision was rendered by Chennai Bench of Tribunal in the context of Section 115JB only. The Ld A.R. also submitted that the assessee that the assessee has actually paid the bonus in the succeeding year. Accordingly, we hold that the provision for bonus created by the assessee is an ascertained liability. Accordingly, we set aside the order passed by Ld. CIT(A) on this issue and direct the A.O. to exclude it from book profit. Disallowance u/s. 14A - A.O. computed the disallowance by applying rule 8D(2)(iii) of I.T. Rules - HELD THAT - Since the provisions of Rule 8D has been held to be prospective in nature, i.e., from AY 2008-09 onwards, the tax authorities are not justified in applying the same to the assessment year under consideration. However, the provisions of sec. 14A shall apply to the exempt income. Hence the disallowance u/s. 14A should be made on a reasonable basis. Hon'ble Bombay High Court, in the case of Godrej Agrovet Ltd. 2014 (8) TMI 457 - BOMBAY HIGH COURT has upheld disallowance of 2% of the dividend income to meet the requirements of sec. 14A prior to insertion of Rule 8D. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and direct the AO to restrict the disallowance u/s. 14A to 2% of the exempt dividend income.

Summary

Issues Involved:
1. Transfer pricing adjustment - Exclusion of 4 comparable companies.
2. Whether provision made for bonus is a contingent liability or ascertained liability for the purpose of section 115JB of the Act.
3. Disallowance u/s. 14A of the Income-tax Act, 1961.

Detailed Analysis:

Transfer Pricing Adjustment - Exclusion of 4 Comparable Companies:
The assessee challenged the inclusion of four companies (Geometric Software Solutions Co. Limited, Bodhtree Consulting Limited, Flextronics Software Systems Limited, and Tata Elxsi Limited) in the transfer pricing adjustment made by the TPO. The Tribunal noted that these companies were previously excluded by the coordinate bench in the case of Sharp Software Development India Pvt. Ltd.

1. Geometric Software Solutions Co. Limited: It was excluded as it engaged in product development, which is not comparable to the assessee's service-based business. The TPO's assumptions and lack of segmental profit data further justified its exclusion.

2. Bodhtree Consulting Limited: Excluded due to high related party transactions (34.68% of total turnover) and functional dissimilarity (providing e-paper solutions and data cleansing software).

3. Flextronics Software Systems Limited: Excluded due to functional dissimilarity and the TPO's improper allocation of expenses between software development services and product activities.

4. Tata Elxsi Limited: Excluded as it operates in specialized embedded software development, which is not comparable to the assessee's software development services. The lack of segmental profit data for comparable services also supported its exclusion.

The Tribunal directed the exclusion of these four companies from the list of comparables, aligning with previous decisions.

Provision for Bonus - Contingent Liability or Ascertained Liability:
The AO added the provision for bonus (?3.49 crores) to the net profit for computing book profit u/s. 115JB, treating it as a contingent liability. The Tribunal, referencing the Chennai bench's decision in ACIT Vs. Sun Paper Mills Ltd., held that the provision for bonus is an ascertained liability as it is a known obligation payable to employees, and the actual payment was made in the succeeding year. Consequently, the Tribunal directed the exclusion of the provision for bonus from the book profit calculation.

Disallowance u/s. 14A of the Income-tax Act, 1961:
The AO disallowed ?7,87,830/- under section 14A, applying rule 8D(2)(iii). The Tribunal noted that rule 8D is prospective from AY 2008-09, and thus not applicable to AY 2005-06. However, disallowance u/s. 14A should still be made on a reasonable basis. Citing the Bombay High Court's decision in Godrej Agrovet Ltd., the Tribunal directed the AO to restrict the disallowance to 2% of the exempt dividend income (?41.02 lakhs), considering it a reasonable estimate.

Conclusion:
The appeal was partly allowed. The Tribunal excluded the four companies from the transfer pricing comparables, treated the provision for bonus as an ascertained liability, and restricted the disallowance u/s. 14A to 2% of the exempt dividend income. The order was pronounced on 17th Dec, 2020.