2013 (6) TMI 499 - AT - Income Tax

Appeal partly allowed: exclusion of TSR Darashaw Limited, higher depreciation on peripherals, favorable decision on donations.

The Tribunal partly allowed the appeal, directing the exclusion of TSR Darashaw Limited from comparables and permitting a higher depreciation rate on ... Transfer Pricing Adjustment - TPO considered only the current financial year data while determining the arm's length price - Held that:- On the issue of the use of current year's data is concerned, TPO's decision is to be accepted & hold that the use of the current year data is as per law. The provisions of Rule 10B(4) of the Income-tax Act, 1961 are unambiguous and it mandates for use of the current year data. The provisions of Rule 10B(4) permit use of preceding year data along with the current year's data only when it is shown that the same has influence on the determination of transfer pricing. Unless it is shown that the earlier years' data has influence on the determination of the transfer price, proviso to Rule 10B(4) cannot be invoked. See cases of Mentor Graphics Noida Pvt Ltd [2007 (11) TMI 339 - ITAT DELHI-H] & Honeywell Ltd [2009 (2) TMI 736 - ITAT PUNE]. Against assessee. TPO ignoring the comparables viz., Capital Trust Limited and Crisil Limited while determining the arm's length price - Held that:- Capital Trust Limited was engaged in the business of automobile sales and service and from this segment, the revenue was of about 80%. The other major segment is hire purchase from which it derives revenue of 18.39% of the revenue. The foreign consultancy segment contributes only 1.7% and total consideration in the segment of foreign consultancy was only ₹ 25 lacs. This company was engaged mainly in the other business activities, hence it cannot be taken as a comparable with assessee company. The company is having a very small turnover in the foreign consultancy segment, therefore, cannot be accepted as comparable. Therefore, companies with a small turnover of ₹ 25 lacs cannot be held to be comparable in this case. In the case of Crisil Limited, DRP held that there is a difference in the financial year. There were also related party transactions of more than 25%. Wherever the related party transactions exceed 25% then also such companies cannot be taken as comparable. Against assessee. Not allowing adjustment on account of the risks and working capital - Held that:- No merits in the taxpayer's claim for risk adjustment as it cannot be allowed as a general rule. It can only be considered when it is demonstrated that comparables had actually undertaken such risk and these are materially affected their margins. Unless it is shown that risk adjustment had changed, the result of each comparable and there are adequate reasons for such adjustment, no adjustment is justified. In absence of any such situation, no adjustment can be allowed. As assessee has not been able to show how this risk, if any, is translated into charging a higher margin in comparable companies. Similarly, the assessee's claim that it has no market risk is also not acceptable. Credit risk was existed in assessee's case as there was no clause in agreement that advance payment shall be made for services. Therefore, this ground of the assessee has no merits. Benefit of ± 5% denied - Held that:- Amendment to Proviso to section 92C by Finance Act, 2009 has made it clear that benefit of ± 5% as provided in section 92C (2) is not a standard deduction. It cannot be made applicable when the price was outside ± 5%. In such situations, only the arithmetical mean shall be taken as the ALP. Against assessee. Inclusion of comparable of TSR Darashaw Limited - Held that:- When the profile of that company for the current year was not comparable to the assessee company then such company cannot be made comparable only on the basis that it has been selected by the assessee itself in its TP study. The change in profile of the company in comparison to the two preceding years makes it non-comparable. Therefore, we find merits in the argument of the assessee and we direct to exclude this company from the comparables. In favour of assessee. Disallowance of entertainment expense - Held that:- There is no scope for disallowing out of club/entertainment expenses debited in the books of account of the company for personal nature, therefore, directed to delete this disallowance. In favour of assessee. Restricting depreciation on computer peripherals - AO's action for allowing depreciation @ 25% only - Held that:- As decided in BSES Rajdhani Powers Ltd [2010 (8) TMI 58 - DELHI HIGH COURT] computer accessories and peripherals are the part of the computer system, they are entitled to depreciation at the higher rate of 60%. In favour of assessee. Issues Involved:1. Validity of the assessment order under Section 143(3) read with Section 144C.2. Addition of Rs. 1,79,05,415/- as difference in arm's length price determined by the Transfer Pricing Officer (TPO).3. Inclusion and exclusion of certain comparables while determining the arm's length price.4. Disallowance of Rs. 2,73,339/- on account of charitable donations.5. Disallowance of Rs. 1,70,785/- on account of entertainment expenses.6. Restriction of depreciation on computer peripherals to 25% instead of 60%.Detailed Analysis:1. Validity of the Assessment Order:The assessment was finalized at an income of Rs. 4,38,76,245/- against a declared income of Rs. 2,54,66,337/-. The assessee challenged the validity of the order under Section 143(3) read with Section 144C, but this ground was dismissed as it was general in nature and did not require adjudication.2. Addition of Rs. 1,79,05,415/- as Difference in Arm's Length Price:The TPO made an adjustment of Rs. 1,79,05,415/- by taking the Transactional Net Margin Method (TNMM) mean of 5 comparables at 14.83% against the assessee's 7.90%. The major issue was the inclusion of TSR Darashaw Limited as a comparable, which the assessee argued was inappropriate due to changes in its business profile during the relevant year. The Tribunal agreed with the assessee, noting that TSR Darashaw Limited's functions were not comparable for the year under consideration and directed its exclusion from the comparables.3. Inclusion and Exclusion of Certain Comparables:- Capital Trust Limited and Crisil Limited: The assessee argued for their inclusion, but the DRP rejected this, noting that Capital Trust Limited's primary business was automobile sales and hire purchase, with only 1.7% revenue from foreign consultancy. Crisil Limited had significant related party transactions and a different financial year. The Tribunal upheld the DRP's decision, agreeing that these companies were not comparable.- TSR Darashaw Limited: The Tribunal found that this company had developed software for payroll processing and its revenues were earned through such software, making it non-comparable.4. Disallowance of Rs. 2,73,339/- on Account of Charitable Donations:The assessee did not press this ground during the hearing, and it was dismissed for non-prosecution.5. Disallowance of Rs. 1,70,785/- on Account of Entertainment Expenses:The assessee contended that as a company, no disallowances for personal use should be made. The Tribunal agreed, citing various case laws, and directed the deletion of this disallowance.6. Restriction of Depreciation on Computer Peripherals:The DRP restricted depreciation on computer peripherals to 25% instead of 60%. The Tribunal found that this issue was covered in favor of the assessee by various decisions of the Hon'ble jurisdictional High Court and allowed the higher depreciation rate of 60%.Conclusion:The appeal was partly allowed. The Tribunal directed the exclusion of TSR Darashaw Limited from the comparables and allowed the higher depreciation rate on computer peripherals. Other grounds, including the disallowance of charitable donations and entertainment expenses, were decided in favor of the assessee.