2016 (3) TMI 215 - AT - Income Tax

Tribunal directs deletion of adjustments and clarifies software charges as revenue expenses. Decision on 29th Feb 2016.

Det Norske Veritas A/S Versus Additional Director of Income Tax - International Taxation, Circle 1 (2), Mumbai

Det Norske Veritas A/S Versus Additional Director of Income Tax - International Taxation, Circle 1 (2), Mumbai - [2016] 157 ITD 1022 Issues Involved:1. Adjustment of payments under service level agreements.2. Adjustment of regional head office expenses.3. Adjustment for delayed realization of trade debts.4. Treatment of software charges as capital or revenue expenditure.Issue-wise Detailed Analysis:1. Adjustment of Payments under Service Level Agreements:The appellant challenged the adjustments made by the Assistant Director of Income Tax (International Taxation) based on the Transfer Pricing Officer's (TPO) recommendation, which amounted to Rs. 95,04,121 under section 92 CA(3). The TPO had made an ad-hoc adjustment of 20% on payments under service level agreements, arguing that the annual accounts were based on forecasts without reconciliation of forecasted and actual figures. The tribunal noted that the TPO did not dispute the use of the Transactional Net Margin Method (TNMM) or the comparables selected by the assessee. The tribunal held that the TPO's ad-hoc adjustments were impermissible under transfer pricing law and directed the deletion of the impugned ALP adjustment of Rs. 95,04,121.2. Adjustment of Regional Head Office Expenses:The appellant contested the adjustment of Rs. 16,31,771 made by the ADIT (IT) on the recommendation of the TPO, which was 20% of the regional head office expenses paid to the head office. The TPO's reasoning was based on the lack of reconciliation between budgeted and actual expenses and the unclear methodology for determining external revenue. The tribunal found that the TPO's adjustments were ad-hoc and not permissible under the transfer pricing scheme. The tribunal directed the deletion of the impugned ALP adjustment of Rs. 16,31,771.3. Adjustment for Delayed Realization of Trade Debts:The appellant challenged the adjustment of Rs. 7,20,110 for interest computed on delayed realization of trade debts. The TPO had recommended this adjustment, arguing that non-recovery of dues from associated enterprises (AEs) blocked business funds, resulting in a loss of revenue. The tribunal noted that the appellant did not charge interest on delayed payments from any party, including non-AEs. It held that the treatment of AEs and non-AEs was the same, and therefore, no ALP adjustment could be made for delays in realization from AEs. The tribunal directed the deletion of the impugned ALP adjustment of Rs. 7,20,110.4. Treatment of Software Charges as Capital or Revenue Expenditure:The appellant contested the addition of Rs. 34,59,517, treating software charges as capital expenditure. The Assessing Officer had disallowed the expense as capital expenditure but allowed depreciation. The tribunal noted that the software expenses represented annual Microsoft license fees, inherently a revenue expense as the benefit did not extend beyond the year. The tribunal held that the expense was clearly revenue in nature and directed the deletion of the impugned disallowance. Consequently, the appellant would not be entitled to any depreciation on the software.Conclusion:The tribunal allowed the appeal, directing the deletion of the adjustments for payments under service level agreements, regional head office expenses, and delayed realization of trade debts. It also held that the software charges were revenue expenses, not capital. The appeal was pronounced in the open court on 29th February 2016.