2017 (11) TMI 1360 - AT - Income Tax

Tax Appeal Outcome: Inclusions, Exclusions, and Adjustments by Tribunal

D.C.I.T., Circle-2 (2), Kolkata Versus M/s. Nomura Research Institute & Financial Technologies Pvt. Ltd. And Vice-Versa

The appeal by the assessee was partly allowed, and the appeal by the revenue was dismissed. The Tribunal directed the inclusion of Akshay Software ... TPA - Rejection and inclusion of comparable companies - good comparable company for the purpose of determining ALP - Held that:- Assessee is engaged in the business of rendering software development services, thus companies functionally dissimilar with that of assessee need to be deselected from final list of comparability. Disallowance under section 14A of the Act read with Rule 8D(2)(iii) - computation of disallowance u/s 14A of the Act was done by the assessee by attributing 10% of the salary and allowances of the finance and administrative staff. This disallowance was made having regard to the books of accounts of the assessee - Held that:- This disallowance made by the assessee has taken care of the activities of the assessee and the probable time that needs to be spent for managing the investments which are likely to be tax free income. Neither the AO nor the DRP have found fault with this calculation made by the assessee. The provision of Rule 8D(1) as also the provision of section 14A(2) of the Act mandate disallowance in accordance with Rule 8D(2) of the Rules, only where having regard to the accounts of the assessee, the AO is not satisfied with the correctness of the claim of the assessee regarding expenditure incurred to earn tax free income. In the absence of any reason in given for rejecting the claim of the assessee, we hold that disallowance u/s 14A of the Act should be restricted only to the sum of ₹ 1,12,895/- as disallowed by the assessee in its computation. - Decided in favour of assessee. MAT computation - adding back depreciation as per the Appellant’s books of account and in granting deduction of depreciation as per Rules - Held that:- While computing the book profits u/s 115JB of the Act, the AO is not empowered to make any adjustment which is not permitted by the explanation below section 115JB of the Act. The depreciation to be allowed while working the book profits is always as per the Companies Act and the depreciation should not be reduced as is done in the normal assessments by substituting the depreciation claimed under the Companies Act by the depreciation allowable under the Act. The action of the AO is per se unsustainable and the AO is directed to deduct depreciation only as per the Companies Act as done by the Assessee in its computation of book profits for the purpose of Sec.115JB of the Act. Issues Involved:1. Non-inclusion of Akshay Software Technologies Ltd. in the final set of comparables.2. Inclusion of interest income in the cases of Kuliza Technologies Pvt. Ltd. and Inteq Software Ltd.3. Rejection of transfer pricing documentation and adjustment to international transactions.4. Rejection and inclusion of comparable companies.5. Economic adjustments including working capital and risk differences.6. Disallowance under section 14A of the Income Tax Act.7. Computation of book profits under section 115JB.Issue-wise Detailed Analysis:1. Non-inclusion of Akshay Software Technologies Ltd. in the final set of comparables:The assessee contended that Akshay Software Technologies Ltd. should be included in the final list of comparables. The DRP had directed the TPO to include this company, but the AO did not comply due to a typographical error in the DRP's order, which mentioned 'Akash Software Technologies Ltd.' instead of 'Akshay Software Technologies Ltd.' The Tribunal directed the AO to consider Akshay Software Technologies Ltd. as a comparable company.2. Inclusion of interest income in the cases of Kuliza Technologies Pvt. Ltd. and Inteq Software Ltd.:The assessee argued that interest income should not be considered as part of operating income. The DRP had contradictory language in its order but agreed with the assessee's contention. The Tribunal, referencing the Delhi High Court's decision in Marubeni India Pvt. Ltd., held that interest income from surplus funds not required for business should not be part of operating income. The Tribunal directed the exclusion of interest income for these comparables.3. Rejection of transfer pricing documentation and adjustment to international transactions:The authorities rejected the assessee's transfer pricing documentation and made adjustments to the international transactions. The Tribunal upheld the use of single-year data as per Rule 10B(4) and rejected the use of multiple-year data for comparability analysis.4. Rejection and inclusion of comparable companies:- E-Infochips Bangalore Ltd. and Inteq Software Ltd.: The Tribunal excluded these companies from the list of comparables due to functional dissimilarities and lack of reliable data.- Infinite Data Systems Pvt. Ltd.: The Tribunal excluded this company due to its different business model and supernormal profits.- Thirdware Solutions Ltd. and Comp-U-Learn Tech India Ltd.: The Tribunal excluded these companies due to functional differences and lack of segmental data.- Kuliza Technologies Pvt. Ltd.: The Tribunal directed the AO to recompute the operating profit by including bad debts as part of operating expenses.- CG-VAK Software Exports Ltd.: The Tribunal remanded the issue to the AO to reconsider the comparability after proper adjustments.- Goldstone Technologies Ltd.: The Tribunal included this company as a comparable due to its predominant software service export activities.- R.S. Software (India) Ltd. and Zylog Systems Ltd.: The Tribunal remanded the issue to the AO to ascertain the quantum of AMP expenses after excluding sales expenses.- Helios and Matheson Information Technology Ltd.: The Tribunal remanded the issue to the AO to consider comparability after culling out data for the financial year of the assessee.- Mindtree Ltd. and Quintegra Solutions Ltd.: The Tribunal confirmed the exclusion due to exceptional circumstances affecting their financial results.5. Economic adjustments including working capital and risk differences:- Working Capital Adjustment: The Tribunal directed the TPO to make adjustments on account of working capital to the profit margin of the assessee and the comparables.- Risk Adjustment: The Tribunal remanded the issue to the AO for fresh consideration, highlighting the need for appropriate adjustments for various risks.6. Disallowance under section 14A of the Income Tax Act:The AO disallowed Rs. 2,99,979 under section 14A read with Rule 8D(2)(iii). The Tribunal held that the AO did not provide reasons for rejecting the assessee's computation and restricted the disallowance to Rs. 1,12,895 as claimed by the assessee.7. Computation of book profits under section 115JB:- Depreciation: The Tribunal directed the AO to deduct depreciation as per the Companies Act while computing book profits.- Disallowance under section 14A: The Tribunal held that disallowance under section 14A should not be added back while computing book profits.Conclusion:The appeal by the assessee was partly allowed, and the appeal by the revenue was dismissed. The Tribunal provided specific directions for the AO and TPO to follow, ensuring proper comparability and adjustments in line with legal precedents and the facts of the case.