2017 (8) TMI 1499 - AT - Income Tax

Tribunal Grants Relief: Excludes Comparables, Adjusts Prices, and Recomputes Deductions

The appeal was partly allowed by the Tribunal, granting relief to the assessee by directing the exclusion of certain comparables, allowing appropriate ... TP Adjustment consequent to determination of Arm's Length Price (ALP) on the basis of the set of comparables selected by the TPO - Held that:- The assessee is engaged in providing software development services to its Associated Enterprises (AEs), thus companies functionally dissimilar with that of assessee need to be deselected from final list. 15% of tolerance range of RPT is proper and reasonable in the case of the assessee. Though this is not a standard parameter as we have discussed in the foregoing part of this order and it depends on the facts of the case and availability of the comparable companies to apply the tolerance range from 5% to 25%. Therefore 15% is otherwise the medium of the two extremes of 5% to 25% and hence in normal circumstances it has to be taken as a proper tolerance range. Reducing telecommunication expenses from export turnover as well as total turnover while computing the deduction under Section 10A - Held that:- We find that the issue of expenditure incurred towards telecommunication charges in foreign currency is reduced from export turnover an equal amount should also be reduced from total turnover while computing the deduction under section 10A of the Act, is covered in favour of the assessee by the decision in the case of CIT v. Tata Elxsi Ltd.[2011 (8) TMI 782 - KARNATAKA HIGH COURT] - decided in favour of assessee Setting off of the business losses pertaining to non-STPI against the profits of STPI units prior to allowing the deduction under Section 10A - Held that:- As relying on M/S YOKOGAWA INDIA LTD. case [2016 (12) TMI 881 - SUPREME COURT] we decide this issue in favour of the assessee and direct the Assessing Officer to allow the deduction under Section 10A of the Act prior to setting off of losses pertaining to non-STPI units against the profits of STPI units. Disallowance under Section 14A - Held that:- As regards the claim of the assessee that the assessee has not used any borrowed fund for the purpose of investment of ₹ 103,43,87,000 we find that this aspect of the matter has not been properly examined by the authorities below therefore, in the absence of proper examination of the fact of availability of the non-interest bearing fund with the assessee, no concluding finding can be given at this stage. The second contention that since the assessee has not earned any exempt income during the year under consideration therefore the provisions of Section 14A cannot be applied. Though the language of Section 14A does not contemplate actual earning of income and expenditure incurred for earning of the income but it provides that no deduction can be allowed in respect of the expenditure incurred by the assessee in relation to income which does not form part of total income. On principle, we do agree with the contention of the CIT (DR) that income includes positive as well as negative income and therefore even in case there is loss it will be considered as income for the purpose of IT Act. As relying on case of Cheminvest Ltd. [2015 (9) TMI 238 - DELHI HIGH COURT] we decide this issue in favour of the assessee and delete the disallowance made by the Assessing Officer under Section 14A. Non deduction of tds - provision created for royalty to be paid to ABB Technology Ltd. by applying the provisions of Section 40(a)(ia) - Held that:- AR has submitted that the assessee itself has reversed the provision in the subsequent year and offered the amount of tax for the Assessment Year 2009-10. Accordingly, in the facts and circumstances of the case, we direct the Assessing Officer to verify the matter on the point as to whether this amount has been taxed twice for the year under consideration as well as in the Assessment Year 2009-10. In case this amount has been taxed again for the Assessment Year 2009-10, then necessary remedial action to be taken by the Assessing Officer to avoid double taxation of the same amount. Issues Involved:1. Legality of assessment and reference to Transfer Pricing Officer (TPO).2. Fresh comparable search by AO/TPO.3. Comparability analysis for arm's length price determination.4. Erroneous data used by AO/TPO.5. Non-allowance of appropriate adjustments by AO/TPO.6. Variation of 5% from the arithmetic mean.7. Lower deduction under Section 10A.8. Set-off of inter-unit losses.9. Treatment of computer software expenditure as capital in nature.10. Disallowance under Section 14A.11. Disallowance of provision created for payment of royalty.12. Interest under Section 234B.13. Interest under Section 234D.14. Directions by the Dispute Resolution Panel (DRP).15. Penalty under Section 271(1)(c).16. Relief sought by the appellant.Issue-wise Analysis:1. Legality of Assessment and Reference to TPO:The assessee challenged the assessment order on the grounds that it was bad in law and violated natural justice principles, particularly due to the lack of a show cause notice as per Section 92C(3). The Tribunal acknowledged these concerns but did not provide a detailed ruling on this issue.2. Fresh Comparable Search by AO/TPO:The assessee contested the fresh benchmarking analysis by the AO/TPO using non-contemporaneous data. The Tribunal noted that the AO/TPO did not demonstrate that the motive of the assessee was to shift profits outside India by manipulating prices in international transactions.3. Comparability Analysis for Arm's Length Price Determination:The Tribunal examined the functional comparability of 20 companies selected by the TPO. It directed the exclusion of 12 companies (Avani Cimcon Technologies Ltd, Celestial Biolabs Ltd, E-Zest Solutions Ltd, Infosys Technologies Ltd, KALS Information Systems Ltd, Lucid Software Ltd, Persistent Systems Ltd, Quintegra Solutions Ltd, Softsol India Ltd, Tata Elxsi Ltd, Thirdware Solutions Ltd, and Wipro Ltd) based on previous Tribunal decisions and functional dissimilarities. The Tribunal instructed the TPO to recompute the ALP using the remaining 8 companies.4. Erroneous Data Used by AO/TPO:The Tribunal found that the AO/TPO used non-contemporaneous data not available in the public domain, which was unjustified. The Tribunal directed the AO/TPO to use appropriate, contemporaneous data.5. Non-allowance of Appropriate Adjustments by AO/TPO:The Tribunal noted that the AO/TPO did not allow appropriate adjustments under Rule 10B for differences in accounting practices, marketing expenditure, R&D expenditure, risk profile, capacity, and depreciation. The Tribunal instructed the AO/TPO to consider these adjustments.6. Variation of 5% from the Arithmetic Mean:The Tribunal directed the AO/TPO to grant the benefits of the proviso to Section 92C(2) of the Act, which allows a variation of 5% from the arithmetic mean.7. Lower Deduction under Section 10A:The Tribunal ruled in favor of the assessee, directing the AO to recompute the deduction under Section 10A by reducing telecommunication expenses from both export turnover and total turnover, following the Karnataka High Court's decision in Tata Elxsi Ltd.8. Set-off of Inter-Unit Losses:The Tribunal directed the AO to allow the deduction under Section 10A before setting off losses pertaining to non-STPI units against the profits of STPI units, following the Supreme Court's decision in Yokogawa India Ltd.9. Treatment of Computer Software Expenditure as Capital in Nature:The assessee did not press this ground, and the Tribunal dismissed it as not pressed.10. Disallowance under Section 14A:The Tribunal deleted the disallowance under Section 14A, following the Delhi High Court's decision in Cheminvest Ltd., which held that Section 14A would not apply if no exempt income was received or receivable during the relevant year.11. Disallowance of Provision Created for Payment of Royalty:The Tribunal directed the AO to verify if the provision for royalty was taxed twice (in the current and subsequent assessment years) and to take necessary remedial action to avoid double taxation.12. Interest under Section 234B:The Tribunal noted that the levy of interest under Section 234B was consequential in nature.13. Interest under Section 234D:The Tribunal noted that the levy of interest under Section 234D was consequential in nature.14. Directions by the Dispute Resolution Panel (DRP):The Tribunal admitted the additional grounds raised by the assessee regarding the comparability of companies selected by the TPO, following the Bombay High Court's decision in Tata Power Solar Systems Ltd.15. Penalty under Section 271(1)(c):The Tribunal did not specifically address the penalty proceedings under Section 271(1)(c).16. Relief Sought by the Appellant:The Tribunal granted partial relief to the assessee by directing the exclusion of certain comparables, allowing appropriate adjustments, and recomputing the ALP and deductions as per its directions.Conclusion:The appeal was partly allowed, with the Tribunal providing detailed directions on various issues, particularly concerning the comparability analysis and the computation of deductions under Section 10A.