2017 (3) TMI 1316 - AT - Income Tax

Appeal allowed for statistical review, directing reassessment on various tax issues

St-Ericsson India Private Limited Versus Addl. CIT, Range 9, New Delhi

St-Ericsson India Private Limited Versus Addl. CIT, Range 9, New Delhi - TMI Issues Involved:1. Validity of the order passed by the TPO/AO/DRP.2. Determination of total income and upward adjustment.3. Selection and rejection of comparable companies for benchmarking.4. Working capital adjustment.5. Treatment of foreign exchange gain/loss.6. Nature of software expenses and training expenses.7. Depreciation on goodwill.8. Levy of interest under sections 234B, 234C, and 234D.9. Initiation of penalty proceedings under section 271(1)(c).Detailed Analysis:1. Validity of the Order:The assessee contended that the order passed by the TPO, AO, and DRP was 'bad in law and void ad-initio.' However, this ground was deemed general and academic, requiring no specific adjudication.2. Determination of Total Income:The AO determined the total income of the assessee at Rs. 213,195,622 against the returned income of Rs. 122,498,921, resulting in an upward adjustment of Rs. 90,696,701. This adjustment was based on the TPO's selection of comparables and the application of filters.3. Selection and Rejection of Comparable Companies:The assessee challenged the TPO/DRP's rejection and inclusion of certain companies for benchmarking international transactions. The Tribunal examined the inclusion of CAT Technologies, Infosys Technologies Ltd., Tata Consultancy Services Ltd., Tata Elxsi Ltd., and Thirdware Solutions Ltd., and the exclusion of SIP Technologies & Exports Ltd. The Tribunal concluded:- CAT Technologies: Issue restored to TPO for re-examination.- Infosys Technologies Ltd.: Excluded due to functional disparity and high risk profile.- Tata Consultancy Services Ltd.: Excluded as it is a giant company with diverse services and high R&D expenditure.- Tata Elxsi Ltd.: Excluded as it is involved in software product development.- Thirdware Solutions Ltd.: Excluded due to substantial revenue from non-comparable segments.- SIP Technologies & Exports Ltd.: Included as it passes the employee cost and export revenue filters.4. Working Capital Adjustment:The Tribunal held that working capital adjustment is necessary to bring comparables and the assessee at par for benchmarking international transactions. The TPO was directed to re-examine this issue after providing an opportunity to the assessee.5. Treatment of Foreign Exchange Gain/Loss:The TPO and DRP treated foreign exchange gain/loss as non-operating based on a CBDT notification dated 18.09.2013. The Tribunal found this inapplicable for the assessment year 2009-10 and directed the TPO to treat foreign exchange gain/loss as operating in nature.6. Nature of Software Expenses and Training Expenses:- Software Expenses: The Tribunal found that time-based software licenses are revenue expenses and directed the AO to re-examine the issue.- Training Expenses: The Tribunal, relying on the Delhi High Court judgment in Munjal Showa Ltd., directed the AO to re-examine the nature of training expenses, considering them as revenue expenses.7. Depreciation on Goodwill:The Tribunal restored the issue to the AO for re-examination in light of the Supreme Court decision in Smifs Securities Ltd., as the DRP's reliance on Goetze (India) Ltd. was found inapplicable.8. Levy of Interest:The Tribunal noted that the ground regarding the levy of interest under sections 234B, 234C, and 234D is consequential and requires no specific adjudication.9. Initiation of Penalty Proceedings:The Tribunal found the ground regarding the initiation of penalty proceedings under section 271(1)(c) premature and needing no adjudication.Conclusion:The appeal was allowed for statistical purposes, with directions to the AO/TPO to re-examine the issues as per the Tribunal's observations and provide the assessee an opportunity of being heard.