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TMI Blog2020 (11) TMI 563X X X X Extracts X X X X X X X X Extracts X X X X ..... ATIONS 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... : Shri Padamchand Khincha, A.R. For the Respondent : Shri Gollapinni Mallikarjuna, D.R. ORDER PER B.R. BASKARAN, ACCOUNTANT MEMBER: The assessee has filed this appeal challenging the assessment order passed by the assessing officer for the assessment year 2013- 14 u/s 143(3) r.w.s. 144C of the Income-tax Act,1961 ['the Act' for short] in pursuance of directions issued by Ld Dispute Resolution Panel (DRP). 2. Ground no.1 is general in nature. Remaining grounds relate to the following issues:- (a) Disallowance of additional depreciation (Ground no.2) (b) Disallowance made u/s 40(a)(i) of the Act (Ground no.3) (c) Transfer pricing adjustment made (Ground no.4 to 15) (d) Disallowance of MAT credit (Ground no.16) (e) Charging of interest u/s 234C of the Act (Ground no.17) 3. The assessee belongs to Maxim group. It undertakes design and development of integrated circuits and software as per business plans of Maxim group. Following are the tasks involved in projects:- Requirement Gathering Market Definition Develop user design specifications of a product based upon market definition Circuit design (involves analog, logic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4 Mindtree Ltd. (seg) 18.19% 16.73% 5 Persistent Systems Ltd. 28.27% 26.09% 6 R.S. Software (India) Ltd. 17.41% 17.69% 7 Tech Mahindra Ltd. (Segmental) 18.72% 17.39% Arithmetic Mean 20.90% 19.20% The average margin of comparable companies worked out to 20.90%. The TPO granted working capital adjustment of 1.70% and accordingly arrived at adjusted margin of 19.20%. Accordingly, he made transfer pricing adjustment of ₹ 2,40,04,279/-. Accordingly, the AO passed the draft assessment order by making addition of transfer pricing adjustment referred above. 7. The assessee challenged the draft assessment order passed by the AO by filing objections before Ld DRP. The net effect of directions so given by Ld DRP are summarized below:- 1. The DRP has excluded ICRA Techno ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r in the case of Tavant Technologies India P Ltd (supra) and the co-ordinate bench has followed the decision rendered by another co-ordinate bench in the case of Autodesk India Pvt Ltd vs. DCIT (IT(TP)A No.540 541/Bang/2013 dated 06-07-2018. The decision rendered by the co-ordinate bench in the case of Tavant Technologies India P Ltd (supra)is extracted below:- 14. As far as ground No.6.5 is concerned, the question boils down on application of turnover filter in choosing comparable companies. As far as excluding the companies on the basis of turnover is concerned, the issue has been settled in several decisions of the Tribunal and has been elaborately discussed by this Tribunal in the case of Autodesk India Pvt. Ltd. v. DCIT in IT(TP)A No.540 541/Bang/2013, order dated 06.07.2018. The Tribunal in this decision after review of entire case laws on the subject, considered the question, whether companies having turnover more than 200 crores upto 500 crores has to be regarded as one category and those companies cannot be regarded as comparables with companies having turnover of less than 200 crores, the Tribunal held as follows:- 17.7. We have considered the rival submiss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the ITAT Mumbai Benches cited by the learned DR before us in the case of Willis Processing Services (supra) and Capegemini India Pvt. Ltd. (supra) are to be regarded as per-incurium as these decisions ignore a binding co- ordinate bench decision. In this regard the decisions referred to by the learned counsel for the Assessee supports the plea of the learned counsel for the Assessee. The decisions rendered in the case of M/S.NTT Data (supra), Societe Generale Global Solutions (supra) and LSI Technologies (supra) were rendered later in point of time. Those decisions follow the ratio laid down in Willis Processing Services (supra) and have to be regarded as per incurium. These three decisions also place reliance on the decision of the Hon'ble Delhi High Court in the case of Chris capital Investment (supra). We have already held that the decision rendered in the case of Chris capital Investment (supra) is obiter dicta and that the ratio decidendi laid down by the Hon'ble Bombay High Court in the case of Pentair (supra) which is favourable to the Assessee has to be followed. Therefore, the decisions cited by the learned DR before us cannot be the basis to hold that high ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd the action was upheld by the DRP. In this regard it was submitted that provision for doubtful debts is a provision which is to be made as a part of the operating activities of business governed by the principles of prudence, and therefore it is not correct to contend that the same is non-operating in nature. Reliance in this regard is placed on the decision of the Delhi Bench of the Tribunal in the case of Rolls-Royce India (P.) Ltd. v. DCIT [2016] 69 taxmann.com 209 (Delhi - Trib.). Therefore it was submitted that the aforesaid items are to be treated as being operating in nature. 48. The ld. DR relied on the order of the DRP. 49. We are of the view that in the light of the decision of the Tribunal in the case of Rolls-Royce India (P.) Ltd. ( supra ), the PLI should directed to be reworked by considering the provision for doubtful debts as operating expenditure. We hold and direct accordingly. In the case of Rolls-Royce India (P) Ltd (supra), the nature of Provision for doubtful debts was discussed as under:- 51. As regards provision for doubtful debts, ld. counsel submitted that provision for doubtful debts are a part of the operating activities of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n has been rendered by the Mumbai bench of Tribunal in a different context. In the case of Telcordia Technologies India P Ltd, the Tribunal has made following observations in respect of Provision for doubtful debts, while considering the company named M/s R Systems International Ltd:- While working out the operating profit, only items of receipts and expenditure, which have direct relation for determining the profit has to be taken into account. Operating profit has to be seen in a comparable transaction under comparable circumstances. The profit level indicators are derived from uncontrolled party engaged in similar business activity under similar circumstances which is the measure of arm's length result. If the assessee's business transactions do not have accretion of doubtful debts and doubtful advances, such an adjustment has to be made in the comparability analysis of the comparable party to determine the arms length price. Thus, both these expenses have been rightly excluded by the TPO to work out the operating profit of the comparable party and accordingly the operating profit ratio of the said entity has been rightly taken by the TPO. Thus, we notice that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions of the Act in so far as comparability of international transaction with a transaction of similar nature entered into between unrelated parties, provides as follows: Determination of arm's length price under section 92C. 10B. (1) For the purposes of sub-section (2) of section 92C, the arm's length price in relation to an international transaction [or a specified domestic transaction] shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely ;- ( a ) to ( b )** ** ** ( e ) transactional net margin method, by which,- ( i ) the net profit margin realised by the enterprise from an international transaction [or a specified domestic transaction] entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base; ( ii ) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base; ( iii ) the net profit margin referred to in sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rences. 11. A reading of Rule 10B(l)(e)(iii) of the Rules read with Sec.92CA of the Act, would clearly shows that the net profit margin arising in comparable uncontrolled transactions has to be adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, which could materially affect the amount of net profit margin in the open market. 12. Chapters I and III of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (hereafter the TPG ) contain extensive guidance on comparability analyses for transfer pricing purposes. Guidance on comparability adjustments is found in paragraphs 3.47-3.54 and in the Annex to Chapter III of the TPG. A revised version of this guidance was approved by the Council of the OECD on 22 July 2010. In paragraph 2 of these guidelines it has been explained as to what is comparability adjustment. The guideline explains that when applying the arm's length principle, the conditions of a controlled transaction (i.e. a transaction between a taxpayer and an associated enterprise) are generally compared to the conditions of comparable uncontr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he time it invests money (i.e. pays money to supplier) and the time it collects the investment (i.e. collects money from customers) This time gap is calculated as: the period needed to sell inventories to customers + (plus) the period needed to collect money from customers - (less) the period granted to pay debts to suppliers. 14. Examples of how to work out adjustment on account of working capital adjustment is also given in the said guidelines. The guideline also expresses the difficulty in making working capital adjustment by concluding that the following factors have to be kept in mind (i) The point in time at which the Receivables, Inventory and Payables should be compared between the tested party and the comparables, whether it should be the figures of receivables, inventory and payable at the year end or beginning of the year or average of these figures, (ii) the selection of the appropriate interest rate (or rates) to use. The rate (or rates) should generally be determined by reference to the rate(s) of interest applicable to a commercial enterprise operating in the same market as the tested party. The guidelines conclude by observing that the purpose of working ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... about the comparable companies. The Revenue has on the other hand powers to compel production of the required details from the comparable companies. If that power is not exercised to find out the truth then it is no defence to say that the Assessee has not furnished the required details and on that score deny adjustment on account of working capital differences. Regarding applying the daily balances of inventory, receivables and payables for computing working capital adjustment, the Delhi Bench of ITAT in the case of ITO v. E Value Serve.com [2016] 75 taxmann.com 195 (Delhi - Trib.). has 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 deployed. The Bench has also observed that that in Transfer Pricing Analysis there is always an element of estimation because it is not an exact science. One has to see that reasonable adjustment is being made so as to bring both comparable and test party on same footing. Therefore there is little merit in CIT (A)'s objection ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eing compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged to paid in, or the profit arising from, such transactions in the open market; or ( ii ) reasonably accurate adjustments can be made to eliminate the material effects of such differences. 18. In such a scenario there would remain no comparable uncontrolled transactions for the purpose of comparison. The transfer pricing exercise would therefore fail. Therefore in keeping with the OECD guidelines, endeavor should be made to bring in comparable companies for the purpose of broad comparison. Therefore the working capital adjustment as claimed by the Assessee should be allowed. We hold and direct accordingly. 20. We notice that the Delhi bench of Tribunal has held in the case of ITO vs. E value serve.com (supra) has 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 worki ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dation. This further strengthens the interpretation of this section that it is not meant for those in the business of computer software as assessee is operating from an office premises and not from a factory, which is meant for production or manufacture of article or thing. So the objection of the assessee is not accepted. 25. The Ld A.R submitted that the computers fall under the category of Plant Machinery as per the Depreciation Schedule prescribed under the I T Rules. He submitted that the Rules have prescribed higher rate of depreciation. Merely for the reason that a higher rate of depreciation is prescribed for computers, it cannot be left out of Plant and Machinery. Accordingly he submitted that the Computers would fall under the category of Plant and machinery and hence the assessee is eligible for additional depreciation u/s 32(1)(iia) of the Act. 26. The Ld D.R submitted that the additional depreciation is admissible 32(1)(iia) of the Act only to an assessee engaged in the business of manufacture or production of any article or thing or in the business of generation or generation and distribution of power . He submitted that the assessee does not fall under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, machinery, plant or furniture owned by the assessee and used for the purposes of the business or profession, the following deductions shall, subject to the provisions of Section 34, be allowed- (i) xxxxxx (ii) xxxxxx (iia) in the case of any new machinery or plant (other than ships and aircraft) which has been installed after the 31st day of March, 1980, but before the 1st day of April, 1985, a further sum equal to one-half of the amount admissible under Clause (ii) (exclusive of extra allowance for double or multiple shift working of the machinery or plant and the extra allowance in respect of machinery or plant installed in any premises used as a hotel) in respect of the previous year in which such machinery or plant is installed or, if the machinery or plant is first put to use in the immediately succeeding previous year, then, in respect of that previous year: Provided that no deduction shall be allowed under this clause in respect of- (a) any machinery or plant installed in any office premises or any residential accommodation; x x x x x x x 7. It is submitted that even if the computers and data processing machines are taken to be plant and machinery and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er cent of the actual cost of such machinery or plant shall be allowed as deduction under clause ( ii ) : Provided that no deduction shall be allowed in respect of- ( A ) any machinery or plant which, before its installation by the assessee, was used either within or outside India by any other person; or ( B ) any machinery or plant installed in any office premises or any residential accommodation, including accommodation in the nature of a guest-house; or ( C ) any office appliances or road transport vehicles; or ( D ) any machinery or plant, the whole of the actual cost of which is allowed as a deduction (whether by way of depreciation or otherwise) in computing the income chargeable under the head Profits and gains of business or profession of any one previous year; A careful perusal of the above said provision would show that the 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 an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... may not amount to manufacture. It also takes in all the by-products, intermediate products and residual products which emerge in the course of manufacture of goods. The next word to be considered is 'articles', occurring in the said clause. What does it mean? The word is not defined in the Act or the Rules. It must, therefore, be understood in its normal connotation - the sense in which it is understood in commercial world. It is equally well to keep in mind the context since a word takes its colour from the context. The word 'articles' is preceded by words 'it has begun or begins to manufacture or produce'. Can we say that the word 'articles' in the said clause comprehends and takes within its ambit a dam - a bridge, a building, a road, a canal and so on? We find it difficult to say so. 30. The assessee herein is engaged in software development services. The question here is whether the said activity will fall under the definition of manufacture or production given above? The Ld DRP has expressed the view that the assessee is engaged in the business of development of computer software and it cannot be equated with the manufacture or produ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to be included in the expression manufacture or production of an article or thing . 33. 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 (supra) 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. 34. However, 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. Accordingly, we hold that the assessee would not be entitled to Additional Depreciation prescribed u/s 32(1)(iia) ..... X X X X Extracts X X X X X X X X Extracts X X X X
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