2015 (9) TMI 496 - AT - Income Tax

Appeal partially allowed: exclusions in comparables, reimbursement costs, remittance of forex loss. Dismissed grounds on leave encashment, software purchase, interest.

ADP Pvt. Ltd., Hyderabad Versus Dy. Commissioner of Income-tax, Circle – 1 (1), Hyderabad.

The Tribunal partially allowed the appeal by directing the exclusion of certain comparables in the software development and ITES segments, excluding ... Transfer pricing adjustment - selection of comparable - Held that:- The issue relating to comparability of companies objected by assessee are covered by various decisions of different benches of the Tribunal for the very same AY. In case of Ness Innovative Business Pvt. Ltd. Vs. DCIT [2014 (7) TMI 303 - ITAT HYDERABAD] the coordinate bench rejected Bodh tree consulting ltd. Exensys Software Solutions Ltd., Sankhya Infotech Ltd., Foursoft Ltd., Thirdware solutions Ltd. Tata Elxsi Ltd. and Infosys Technologies Ltd. In view of the aforesaid, accepting the submissions of ld. AR, we direct A.O./TPO to exclude aforesaid companies from the list of comparables. - Decided in favour of assessee. Mapple E Solutions, Nucleus Net Soft and GIS India Ltd., Vishal Information Technologies Ltd. and Wipro BPO Solutions Ltd. for various reasons are not comparable to a captive ITES provider. See M/s HSBC Electronic Data Process India Ltd. Vs. DCIT [2013 (9) TMI 485 - ITAT HYDERABAD ] Inclusion of reimbursement cost in the operating cost for the purpose of determining ALP of software development services segment - Held that:- reimbursement cost should be excluded from the OC for determining ALP. As far as the contention of ld. DR that TPO may be directed to determine the ALP of the reimbursement cost on stand alone basis, we are unable to accept the same as the same does not arise out either from the order of TPO or ld. CIT(A). Since, while considering assessee’s appeal we have to restrict ourselves to the grounds raised by assessee, this issue raised by ld. DR is left open to be decided in an appropriate case. See M/s HSBC Electronic Data Process India Ltd. Vs. DCIT [2013 (9) TMI 485 - ITAT HYDERABAD ] Disallowance of foreign exchange fluctuation loss - Held that:- As could be seen from the discussions made by A.O., he has disallowed assessee’s claim of loss on foreign exchange by treating it as notional. He has not said that loss is not connected with assessee’s business. Therefore, if assessee can prove that loss on account of foreign exchange fluctuation was not notional but actually incurred same cannot be disallowed. We, therefore, remit this issue to the AO for deciding afresh after due opportunity of being heard to assessee. Decided in favour of assessee for statistical purposes. Disallowance of leave encashment expenses - Held that:- We failed to locate any disallowance on account of leave encashment made by AO. As observed by ld. CIT(A), there is absolutely no mention of this issue in the assessment order. That being the case, we fail to understand how and why this ground was raised by assessee. When this factual position was pointed out to the ld. AR, he also agreed that no specific disallowance has been made by AO. In the aforesaid view of the matter, we find no reason to interfere with the decision of ld. CIT(A) on this issue. - Decided against assessee. Disallowance of expenditure incurred on purchase of software - Held that:- No infirmity either in the order of A.O. or in the order of ld. CIT(A). As could be seen, assessee itself, before A.O. had agreed for allowance of depreciation on the expenditure claimed on software. That being the case, we do not see any reason to interfere with the order of ld. CIT(A) on this issue. - Decided against assessee. Issues Involved:1. Rejection/Selection of Comparables in Software Development Services Segment.2. Selection of Comparables in ITES Segment.3. Inclusion of Reimbursement Cost in Operating Cost for Determining ALP.4. Disallowance of Foreign Exchange Fluctuation Loss.5. Disallowance of Leave Encashment Expenses.6. Disallowance of Expenditure on Purchase of Software.7. Levy of Interest u/s 234B.Detailed Analysis:1. Rejection/Selection of Comparables in Software Development Services Segment:The primary issue was the selection of comparables for determining the arm's length price (ALP) of international transactions. The assessee objected to eight comparables selected by the Transfer Pricing Officer (TPO), which were affirmed by the Commissioner of Income Tax (Appeals) [CIT(A)]. The Tribunal considered the objections and found that the inclusion of these companies was not justified based on the functional dissimilarity and other factors such as extraordinary events affecting financial results. The Tribunal directed the exclusion of Bodhtree Consulting Ltd., Exensys Software Solutions Ltd., Sankhya Infotech Ltd., Foursoft Ltd., Thirdware Solutions Ltd., Tata Elxsi Ltd., Infosys Technologies Ltd., and Flexitronics Ltd. from the list of comparables.2. Selection of Comparables in ITES Segment:The assessee objected to four comparables selected by the TPO in the ITES segment. The Tribunal, referencing previous decisions, excluded Mapple E Solutions, Nucleus Net Soft and GIS India Ltd., Vishal Information Technologies Ltd., and Wipro BPO Solutions Ltd. from the list of comparables due to issues such as involvement in fraud, failing employee cost filters, and functional dissimilarity.3. Inclusion of Reimbursement Cost in Operating Cost for Determining ALP:The TPO included the reimbursement cost of Rs. 6,55,57,576 in the operating cost (OC) for determining the ALP of the software development services segment. The Tribunal, following its previous decisions, held that reimbursement costs should be excluded from the OC as they do not involve any functions to be performed and therefore, should not affect profitability. The Tribunal directed the AO/TPO to exclude the reimbursement costs while working out the operating costs.4. Disallowance of Foreign Exchange Fluctuation Loss:The AO disallowed the foreign exchange fluctuation loss of Rs. 52,14,198, treating it as notional. The Tribunal remitted the issue to the AO for fresh consideration, directing that if the loss is proven to be actually incurred and not notional, it should be allowed as a deduction.5. Disallowance of Leave Encashment Expenses:The assessee claimed that the AO disallowed leave encashment expenses of Rs. 94,03,525. However, the Tribunal found no specific disallowance made by the AO in the assessment order. Consequently, the Tribunal dismissed this ground.6. Disallowance of Expenditure on Purchase of Software:The AO disallowed Rs. 58,07,421 debited to the P&L A/c on account of software purchase, treating it as capital expenditure but allowed depreciation at 60%. The Tribunal upheld the decision, noting that the assessee had agreed to the allowance of depreciation before the AO.7. Levy of Interest u/s 234B:The Tribunal noted that the levy of interest u/s 234B is consequential and mandatory. Therefore, this ground was not entertained.Conclusion:The Tribunal allowed the appeal partly, directing the exclusion of certain comparables from the ALP determination, the exclusion of reimbursement costs from operating costs, and remitting the issue of foreign exchange fluctuation loss to the AO for fresh consideration. The Tribunal dismissed the grounds related to leave encashment expenses, software purchase expenditure, and levy of interest u/s 234B.