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2021 (2) TMI 145 - HC - Income TaxDisallowance u/s 14A - whether assessee has not determined the expenditure incurred in relation to exempt income and Assessing Authority has rightly held that even though there is no dividend income from the investment? - HELD THAT - This Court in BIOCON LIMITED 2021 (2) TMI 112 - KARNATAKA HIGH COURT has held that if no exempt income has accrued to the assessee the provisions of Section 14A do not apply.Since no exempt income has accrued to the assessee, therefore we hold that the provisions of Section 14A of the Act do not apply to the fact situation of the case. In the result, the second substantial question of law is answered against the revenue and in favour of the assessee. TP Adjustment - Disallowance of depreciation claimed on Software Expenses - direction issued by the Tribunal to the Transfer Pricing Officer to exclude depreciation from the cost of tax payer as well as comparables and directing the Assessing Officer / Transfer Pricing Officer to re-work the depreciation - Rule 10B of the Rules Applicability - method in which comparability analysis is to be conducted under the transactional net margin method - HELD THAT - There is a need for making an adjustment to eliminate the differences in the accounting policies of the appellant and the comparable companies, in terms of the above Rules, especially given that in the bench marked international transaction is the sales by a captive service provider to its associated enterprises, on which depreciation would have no bearing and thus can be excluded altogether. The Tribunal, by placing reliance on the Hyderabad Bench of the Tribunal in the case of MARKET RESEARCH TOOLS PVT. LTD. 2014 (2) TMI 312 - ITAT HYDERABAD held that the Dispute Resolution Panel erred in directing to exclude depreciation from the cost of tax payer as well as comparables. The aforesaid finding cannot be said to be perverse warranting interference of the Court in this appeal.
Issues:
1. Disallowance of depreciation claimed on Software Expenses under Section 40(a)(ia) of the Income Tax Act. 2. Disallowance made under Section 14A of the Act. 3. Direction issued by the Tribunal to exclude depreciation from the cost of the taxpayer and comparables. Analysis: Issue 1: Disallowance of Depreciation on Software Expenses The appeal concerned the disallowance of depreciation claimed on Software Expenses under Section 40(a)(ia) of the Income Tax Act for the Assessment year 2010-11. The Transfer Pricing Officer had determined a transfer pricing adjustment, leading to the Assessing Officer making additions to the income disclosed by the assessee. The Dispute Resolution Panel later reduced the transfer price adjustment and confirmed the disallowance under Section 40(a)(ia) of the Act. The Tribunal dismissed the appeal by the revenue and allowed the cross-objection by the assessee. The main contention was whether depreciation should be excluded from the cost of the taxpayer and comparables. The Tribunal's decision was upheld, stating that the exclusion of depreciation was justified based on the differences in accounting policies between the appellant and comparable companies. Issue 2: Disallowance under Section 14A of the Act The second issue revolved around the disallowance made under Section 14A of the Act. The Assessing Officer had made disallowances even though there was no exempt income accrued to the assessee. The Tribunal rightly deleted the disallowance under Section 14A as the assessee had not incurred any exempt income. The Court referred to relevant case laws to support this decision, emphasizing that Section 14A does not apply if no exempt income has accrued to the assessee. Issue 3: Direction to Exclude Depreciation The third issue involved the direction by the Tribunal to exclude depreciation from the cost of the taxpayer and comparables. The Tribunal's decision was based on the need to make adjustments to eliminate differences in accounting policies between the appellant and comparable companies. The Court upheld the Tribunal's decision, stating that the exclusion of depreciation was not unwarranted and did not warrant interference. In conclusion, the Court found no merit in the appeal and dismissed it, upholding the decisions made regarding the disallowance of depreciation on Software Expenses, disallowance under Section 14A of the Act, and the direction to exclude depreciation from the cost of the taxpayer and comparables.
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