2022 (5) TMI 1407 - AT - Income Tax

TP Adjustment - benchmarking the above international transactions u/s 92CA(1) - Safe Harbour Rules - appellant had adopted TNM Method as most appropriate method in respect of Item No.1, 2, 7 and 9 and CUP Method as the most appropriate method in respect of Item No.3 8 - HELD THAT - We find that the lower authorities had included this four companies merely because these companies fall under the characterization of software companies as well as KPO companies as defined under Rule 10TA(g) of the Safe Harbour Rules. At the outset, we find that Safe Harbour Rules are applicable from 18.09.2013, we have serious doubt as to how the definitions given in Safe Harbour Rules can be applied for characterization of a particular company for the purpose of identification of set of comparable entities. Therefore, we are of the considered opinion that the lower authorities fell into serious error in holding these comparables are KPO companies placing reliance on the definition given in Safe Harbour Rules. Therefore, we remand issue back to the file of the Assessing Officer/TPO to examine the comparability of these comparables afresh without placing reliance on the definition given under Safe Harbour Rules. Thus, this issue raised in the respective grounds of appeal stands partly allowed for statistical purposes. Comparability - As regard to the exclusion of two comparables, namely, Onward Technologies Limited and Cades Digitech Pvt. Ltd., we find from reading of the orders of lower authorities that the company Onward Technologies Limited came to be rejected by the TPO as well as by the ld. DRP on the ground that the said company fails to meet 75% export to total turnover filter. It is settled law that the filter of 75% of the export to total turnover is most appropriate filter. In these circumstances, we confirm the action of the lower authorities from excluding this company from the list of the comparables. Similarly, the company Cades Digitech Pvt. Ltd. had been excluded the TPO/ld. DRP from the list of comparables by recording a finding that this company is engaged in off shore operations. These findings remain uncontroverted. A company engaged in on-site operations is incomparable with assessee which is engaged in off shore operations as the business model is totally different. Therefore, we uphold the orders of the lower authorities in excluding this company from the list of the comparables. Disallowance of expenditure incurred on in-house R D facility - HELD THAT - As in assessee s own case for the earlier assessment year 2021 (9) TMI 139 - ITAT PUNE we uphold the action of the lower authorities in disallowing the expenditure incurred on in-house R D facility. Accordingly, this issue stands dismissed. Nature of expenditure - expenditure incurred on product development expenses - revenue or capital expenditure - HELD THAT - Respectfully following the decision of the Tribunal in assessee s own case for the assessment year 2011-12 2021 (9) TMI 139 - ITAT PUNE we hold that the expenditure incurred on product development expenses is revenue expenditure . Accordingly, this issue raised in ground of appeal no.4 stands allowed.

Summary

Issues Involved:
1. Delay in filing the appeal.
2. Transfer Pricing (TP) issues.
3. Non-Transfer Pricing (Non-TP) issues.

Detailed Analysis:

1. Delay in Filing the Appeal:
The appeal was filed with a delay of 11 days. The delay was attributed to the illness of the only female employee handling taxation matters and the CFO's urgent travel to Germany. The Tribunal found the reasons provided to be just and sufficient, condoned the delay, and admitted the appeal for adjudication.

2. Transfer Pricing (TP) Issues:
- Upward Adjustment to Export Prices:
The appellant contested the upward adjustment of Rs. 2,86,90,000/- made by the AO in respect of international transactions for IT-enabled design engineering services. The Tribunal noted that the lower authorities had included eClerx Services Ltd., Pentamedia Graphics Ltd., Tata Elxi Ltd., and Genesys International Corporation Ltd. as comparables based on the Safe Harbour Rules, which were applicable from 18.09.2013. The Tribunal remanded the issue back to the AO/TPO to re-examine the comparability without relying on the Safe Harbour Rules.

- Exclusion of Comparables:
The appellant objected to the exclusion of Onward Technologies Ltd. and Cades Digitech Pvt. Ltd. The Tribunal upheld the exclusion of Onward Technologies Ltd. based on the 75% export to total turnover filter, which is considered appropriate. Similarly, the exclusion of Cades Digitech Pvt. Ltd. was upheld as it was engaged in on-site operations, which are not comparable to the appellant's off-shore operations.

3. Non-Transfer Pricing (Non-TP) Issues:
- Disallowance of Weighted Deduction under Section 35(2AB):
The appellant contested the disallowance of Rs. 3,38,82,341/- claimed under Section 35(2AB) for in-house R&D activities. The Tribunal referred to its decision in the appellant's case for AY 2011-12, where it was held that expenses incurred outside India for R&D facilities not approved by the prescribed authority are not eligible for weighted deduction. The Tribunal upheld the disallowance.

- Disallowance of Product Development Expenses:
The appellant argued that the expenses of Rs. 1,46,47,500/- incurred on product quality testing and validation should be treated as revenue expenditure. The Tribunal referred to its decision in the appellant's case for AY 2011-12, where it was held that such expenses incurred for upgrading existing products should be allowed as revenue expenditure. The Tribunal directed the AO to allow the expenditure as revenue in nature.

- Disallowance of Provision for Software Costs:
The appellant objected to the disallowance of Rs. 14,28,021/- on the grounds that the amount represented an excess provision and had been reversed and offered to tax in the subsequent year. The Tribunal did not provide a specific ruling on this issue in the summary provided.

Conclusion:
The appeal was partly allowed. The Tribunal remanded the TP issues back to the AO/TPO for re-examination and upheld the disallowance of the weighted deduction under Section 35(2AB). However, it allowed the product development expenses to be treated as revenue expenditure.