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2021 (1) TMI 208 - AT - Income TaxTP Adjustment - adjustment relates to the Software development segment of the assessee - Comparable selection - HELD THAT - M/s Acropetal Technologies Ltd. - Tribunal chose to exclude this M/s Acropetal Technologies Ltd (seg.) applying revenue filter, even though the assessee has advanced arguments both on employee filter and revenue filter. We also notice that the TPO has considered segmental details only. Admittedly, this company fails on revenue filter. Accordingly, we direct exclusion of M/s Acropetal Technologies Ltd. E-Zest Solutions Ltd. - Comparability of this company requires fresh examination as held in the case of Applied Materials India (P) Ltd 2016 (9) TMI 1458 - ITAT BANGALORE . Accordingly, we restore this company to the file of AO/TPO for examining it afresh. E-infochips Ltd - There is no segmental information available as regards the revenue from sale of products and revenue from software development segment. As the assessee is simply engaged in rendering software development services and there is no sale of any software products, this company, in our considered opinion, ceases to be comparable. See SAXO INDIA PVT. LTD VERSUS. ACIT, 2016 (2) TMI 604 - ITAT DELHI ICRA Techno Analytics Ltd - When this company is engaged in diversified activities of software development and consultancy, engineering services, web development hosting and substantially diversified itself into domain of business analysis and business process outsourcing, then the same cannot be regarded as functionally comparable with that of the assessee who is rendering software development services to its AE. M/s Persistent Systems and Solutions Ltd - No separate segment has been given in respect of software services. Accordingly, the composite data of revenue as well as margins of this company pertaining to the sale of software services and products cannot be considered as comparable with the software development services segment of the assessee. In view of the above facts and circumstances, we do not find any error or illegality in the directions of the DRP in excluding this company from the list of comparables. ALP of the transactions relating to Software segment requires to be re- determined. Accordingly, we restore this issue to the file of AO/TPO with the direction to re-compute the ALP of Software development Services segment. Disallowance of interest paid on ECB loans - Interest claimed by the assessee on the ECB loan has been disallowed by the AO on the ground that the loan has been taken for purchase of an immovable property and the interest has to be capitalized till the asset is put to use as per the proviso to section 36(iii) - HELD THAT - We hold that the interest disallowance made by the AO is not justified because the funds were borrowed for continuation / expansion of existing business and not for extension of existing business and therefore, the proviso to section 36(1)(iii) is not applicable in the present case because the amendment in this proviso was made by the Finance Act, 2015 w.e.f. 01.04.2016 as per which the words for extension of were omitted and therefore in our considered opinion, up to Assessment Year 2015-16, the proviso is applicable only in those cases where borrowed funds was used for acquisition of asset for extension of existing business. In the present case, the Assessment Year involved is Assessment Year 2009-10 and therefore, in the facts of present case, in the present year, this proviso is not applicable and hence, we delete this disallowance by respectfully following this Tribunal order rendered in the case of AT T Global Network Services (India) Pvt. Ltd. 2017 (9) TMI 1257 - ITAT DELHI . Re-computation of deduction u/s 10A - HELD THAT - We notice that the addition relating to Transfer pricing adjustment is not eligible for deduction u/s 10A of the Act, in view of the bar provided in the proviso to sec. 92C(4) of the Act. Other disallowances made by the AO would go to increase the Profits derived from the undertaking. Since the prayer of the assessee is supported by Circular no.37/2016 dated 2.11.2016 issued by CBDT, we direct the AO to re-compute the deduction accordingly.
Issues Involved:
1. Addition relating to transfer pricing adjustment. 2. Disallowance of interest paid on ECB loans. 3. Additional depreciation claimed on computers. 4. Deduction u/s 10A of the Income-tax Act, 1961 in respect of disallowance of interest on ECB loans and additional depreciation. Issue-wise Detailed Analysis: 1. Addition relating to Transfer Pricing Adjustment: The first issue concerns the addition made on account of transfer pricing adjustment by the AO for the Software development segment of the assessee. The assessee followed the TNM method, declaring a margin of 10.83%, which was deemed at arm's length. However, the TPO rejected this study and selected 13 comparable companies, arriving at an average margin of 24.82%. After adjustments, the AO proposed an adjustment of ?2,52,81,059/-. The DRP later rejected six companies based on the turnover filter, enhancing the TP adjustment to ?2,76,15,067/-. The assessee sought the exclusion of five additional companies, arguing they were not good comparables based on various Tribunal decisions. The Tribunal agreed to exclude four companies (Acropetal Technologies Ltd., E-Zest Solutions, E-Infochips Ltd., and ICRA Techno Analytics Ltd.) based on past decisions and functional dissimilarities. For E-Zest Solutions, the Tribunal remanded the matter for fresh examination due to diverse opinions in previous cases. Persistent Systems & Solutions Ltd. was also excluded based on its functional dissimilarity and lack of segmental details. The Tribunal directed the AO/TPO to re-compute the ALP of the Software development services segment and allow working capital adjustments on an actual basis. 2. Disallowance of Interest Paid on ECB Loans: The AO disallowed the interest on ECB loans, arguing it should be capitalized as the loan was for purchasing an immovable property. The Tribunal referred to its earlier decision in the assessee's case for AY 2009-10, where it held that the proviso to section 36(iii) was not applicable as the loan was for expansion, not extension, of business. The Tribunal reiterated that purchasing land for a new office does not constitute an extension of business. Thus, the disallowance was deleted. 3. Additional Depreciation Claimed on Computers: The assessee withdrew the ground related to the additional depreciation claimed on computers. Consequently, this issue was dismissed as withdrawn. 4. Deduction u/s 10A of the Income-tax Act, 1961: The assessee argued that any disallowed amount while computing business income should increase the profits derived from the eligible undertaking for deduction u/s 10A. The Tribunal agreed, noting that other disallowances (excluding transfer pricing adjustments) should increase the profits for deduction purposes. The AO was directed to re-compute the deduction u/s 10A as per CBDT Circular No. 37/2016. Conclusion: The appeal was partly allowed for statistical purposes, with directions for re-computation and adjustments as discussed. The Tribunal's decisions were consistent with previous rulings and supported by relevant case laws and CBDT circulars.
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