Tribunal ruling on comparables, operating costs, software expenses, and revenue expenditure

The Tribunal ruled against including Eicher Motors and Force Motors as comparables due to functional dissimilarity with the assessee. It clarified that capacity utilization adjustments should be made to comparables' operating costs, not the assessee's. The Tribunal upheld the capitalization of certain software expenses but allowed depreciation on specific items. It permitted the deduction of deferred revenue expenditure and disallowed an ad hoc disallowance of miscellaneous expenses. The Tribunal partly allowed the Revenue's appeal and dismissed the assessee's cross-objection.

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Issues Involved:
1. Inclusion of Eicher Motors and Force Motors in the list of comparables.
2. Capacity utilization adjustment.
3. Capitalization of software expenses.
4. Deduction of deferred revenue expenditure.
5. Disallowance of miscellaneous expenses.

Issue-wise Detailed Analysis:

1. Inclusion of Eicher Motors and Force Motors in the List of Comparables:
The Revenue challenged the inclusion of Eicher Motors and Force Motors as comparables for the assessee, who is engaged in the manufacture and sale of harvester combines. The Tribunal observed that the functional similarity is a sine qua non for comparability analysis. Since Eicher Motors and Force Motors are primarily engaged in the manufacture and sale of tractors, which are functionally different from harvester combines, they cannot be considered good comparables. The Tribunal overturned the CIT(A)'s decision and restored the TPO's view that excluded these companies from the list of comparables.

2. Capacity Utilization Adjustment:
The second issue involved the allowance of capacity utilization adjustment. The assessee claimed a capacity utilization adjustment due to operating at 29% capacity compared to the comparables' average of 44%. The TPO and CIT(A) allowed partial adjustments. The Tribunal clarified that adjustments should be made to the comparables' operating costs, not the assessee's. The Tribunal set aside the CIT(A)'s order and directed the TPO/AO to recompute the capacity utilization adjustment by adjusting the comparables' operating costs, considering only the fixed and semi-variable costs.

3. Capitalization of Software Expenses:
The AO capitalized certain software expenses and allowed depreciation, leading to an addition of Rs. 61,762/-. The Tribunal upheld the CIT(A)'s deletion of the addition for website charges and anti-virus software subscription but reversed the decision regarding the modem's cost, holding it as capital expenditure eligible for depreciation at 60%.

4. Deduction of Deferred Revenue Expenditure:
The assessee claimed a deduction for deferred revenue expenditure related to the development of a new product, TAF60, capitalizing the costs and claiming 25% deduction. The AO disallowed the deduction, treating it as capital expenditure. The Tribunal upheld the CIT(A)'s decision to allow the deduction, following the precedent set in the assessee's case for AY 2007-08.

5. Disallowance of Miscellaneous Expenses:
The AO made an ad hoc disallowance of Rs. 2 lakh out of Rs. 20.14 lakh debited under miscellaneous expenses due to non-availability of certain details. The Tribunal approved the CIT(A)'s deletion of the ad hoc addition, stating that specific expenses should have been pointed out by the AO rather than making a blanket disallowance.

Conclusion:
The Tribunal partly allowed the Revenue's appeal for statistical purposes and dismissed the assessee's cross-objection. The order was pronounced in the open court on 12.08.2015.

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