2019 (10) TMI 1243 - AT - Income Tax

Tribunal Upholds CIT(A)'s Decisions on Transfer Pricing and Expenses

DCIT, Circle-2 (1), Kolkata Versus ITC Infotech India Ltd.

The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decisions on arm's length price adjustments for account management charges and ... TP Adjustment - arm's length price adjustment in respect of assessee's payments of account management charges made to overseas associated enterprises - HELD THAT:- We are of the view taking into cognizance the business model of the assessee along with the functions undertaken and risks assumed by the assessee and its subsidiaries, the facts and written submission made during the course of the proceedings for both the AYs 2005-06 & 2006-07, that the TPO totally erred in making transfer pricing adjustments in the case of assessee in both the AYs. In view of facts and circumstances, we are of the view that the TPO just on the basis of conjunctures and surmises made this transfer pricing adjustments. Hence, we dismiss this common issue of revenue's appeals in both the AYs Transfer Pricing Officer's action making arm's length price adjustment in respect of assessee's management fee - Transfer Pricing Officer excluded the loss making comparable entities - HELD THAT:- We see no reason to express our concurrence with the Revenue's instant grievance. It emerges that the assessee has succeeded from the very issue of inclusion of loss making entities in preceding as well as succeeding assessment years. We find that this Revenue has failed to justify exclusion of the loss making entities in question in the light of the functions, assets and risk 'FAR' analysis and therefore, the mere fact of assessee's PLI determined at a lesser rate after inclusion of the loss making entities forms no reason to exclude the same from the array of comparables. We therefore affirm the CIT(A)'s action deleting the impugned arm's length price adjustment in respect of assessee's management fee in issue. Software purchases Expenses - revenue or capital expenditure - HELD THAT:- CIT(A) has examined the assessee's application software purchase expenditure claim is the light of the tribunal's Special Bench's [2008 (2) TMI 454 - ITAT DELHI-C] that as no enduring benefit has accrued from the same. He further recorded the finding of fact that the assessee's impugned revenue expenditure of ₹ 1,41,36,670/- mainly relates to day to day functions in the field of application software for office as well as technology tools like antivirus, firewalls etc requiring periodic updation. Learned CIT-DR fails to indicate any illegality or irregularity in the CIT(A)'s findings based on correct appreciation of the detailed factual evidence on the foregoing issue. 1535 days' delay in filing appeal - Section 40(a)(ii) education cess disallowance of ₹ 8,60,379/- as a business expenditure allowable u/s. 37(1) - HELD THAT: - Hon'ble apex court's landmark decision in Collector, Land Acquisition vs. Mst. Katiji & Others [1987 (2) TMI 61 - SUPREME COURT] settled the law long back that the cause of substantial justice prevails over all technical aspects. Their lordships' latter decision in National Thermal Power Co. Ltd. vs. CIT [1996 (12) TMI 7 - SUPREME COURT] also held that the tribunal can very well entertain an additional ground/issue in order to determine correct tax liability of an assessee provided all the relevant facts are already on record. We hold in view of the foregoing pleadings and settled legal proposition that the impugned delay of 1535 days in filing deserves to be condoned. We order accordingly. Educational cess disallowance made in both the lower proceedings u/s. 40(a)(ii) - CHAMBAL FERTILISERS AND CHEMICALS LTD., PR. COMMISSIONER OF INCOME TAX, KOTA. VERSUS JCIT, RANGE-2, KOTA., M/S. CHAMBAL FERTILIZERS AND CHEMICALS LTD., GADEPAN, DISTT. KOTA. [2018 (10) TMI 589 - RAJASTHAN HIGH COURT] have already held the same to be not sustainable. Learned CIT-DR took pains to refer to the tribunal's latter decision in ACIT vs. Srei Infrastructure Finance Ltd. [2019 (2) TMI 1721 - ITAT KOLKATA] that the issue stands adjudicated in the Revenue's favour. We are informed that the hon'ble jurisdictional high court has restored the very issue back to the tribunal for fresh adjudication. We therefore follow hon'ble Rajasthan high court's decision (supra) to conclude that the both lower authorities have erred in disallowing educational cess u/s. 40(a)(ii) - Decided in favour of assessee. Issues Involved:1. Arm's Length Price Adjustment for Account Management Charges2. Arm's Length Price Adjustment for Management Fee3. Disallowance of Software Purchases as Revenue Expenditure4. Condonation of Delay and Disallowance of Educational CessDetailed Analysis:1. Arm's Length Price Adjustment for Account Management ChargesThe Revenue's first substantive ground contends that the CIT(A) erred in reversing the Transfer Pricing Officer's (TPO) adjustment of Rs. 5,54,88,960/- for account management charges paid to overseas associated enterprises. The Tribunal noted that this issue had been previously adjudicated in favor of the assessee for the assessment years 2005-06 and 2006-07, and the High Court upheld this decision. The Tribunal reiterated that the functional and risk profiles of the assessee and its AEs were consistent across different business models, and the TPO's adjustments were based on conjectures and surmises. Consequently, the Tribunal dismissed the Revenue's appeal, citing judicial consistency.2. Arm's Length Price Adjustment for Management FeeThe Revenue's second substantive ground sought to revive the TPO's adjustment of Rs. 22,20,039/- for management fees. The CIT(A) had deleted this adjustment, arguing that the TPO arbitrarily rejected loss-making comparables without justification. The Tribunal upheld the CIT(A)'s decision, noting that the inclusion of loss-making entities was consistent with previous and subsequent assessment years. The Tribunal found no basis for the TPO's exclusion of these entities and affirmed the CIT(A)'s action, thereby dismissing the Revenue's appeal on this ground.3. Disallowance of Software Purchases as Revenue ExpenditureThe Revenue's third substantive ground challenged the CIT(A)'s decision to treat software purchases amounting to Rs. 1,41,36,670/- as revenue expenditure. The CIT(A) had differentiated between software purchases that provided enduring benefits and those that did not. The Tribunal agreed with the CIT(A)'s detailed analysis, which categorized certain software purchases as revenue expenditure due to their role in day-to-day functions and lack of enduring benefit. The Tribunal found no irregularity in the CIT(A)'s findings and dismissed the Revenue's appeal on this ground.4. Condonation of Delay and Disallowance of Educational CessThe assessee's cross-appeal suffered a delay of 1535 days, which the Tribunal condoned, citing the principles of substantial justice. The sole substantive grievance in the cross-appeal was the disallowance of educational cess amounting to Rs. 8,60,379/- under Section 40(a)(ii) of the Income Tax Act. The Tribunal referred to the Rajasthan High Court's decision in Chambal Fertilizers and Chemicals Ltd. and its own decision in M/s. ITC Limited, which held that such disallowance was not sustainable. Despite the Revenue's reference to a contrary Tribunal decision, the Tribunal followed the Rajasthan High Court's ruling and allowed the assessee's appeal, deleting the disallowance of educational cess.Conclusion:The Tribunal dismissed the Revenue's appeal and allowed the assessee's cross-appeal. The decisions were based on judicial consistency, proper functional and risk analysis, and adherence to established legal principles.