Tribunal Partially Allows Appeal, Directs Recalculation of Disallowance

The Tribunal partially allowed the appeal, deleting the transfer pricing adjustment of Rs. 1,45,89,355/- due to the incorrect method used by the Transfer Pricing Officer. The Tribunal directed the Assessing Officer to recalculate the disallowance under Section 14A based on investments yielding tax-free income and to verify the inclusion of unbilled revenue in the books of accounts. The order was pronounced on 25.10.2018.

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Issues Involved:
1. Transfer Pricing Adjustment
2. Disallowance under Section 14A
3. Additions related to Unbilled Revenue

Detailed Analysis:

1. Transfer Pricing Adjustment:

The primary issue in this case pertains to the upward adjustment on arm’s length price (ALP) amounting to Rs. 1,45,89,355/-. The assessee challenged the method adopted by the Commissioner, arguing it was not in sync with reality. The assessee, a software company, had engaged in international transactions with its subsidiaries in the US and Singapore. The Transfer Pricing Officer (TPO) noted that the assessee had selected the Cost Plus Method (CPM) in its Transfer Pricing Study Report (TPSR) but had actually used the Transactional Net Margin Method (TNMM) for benchmarking. The TPO found discrepancies in the profit ratio used by the assessee, leading to the adjustment in ALP.

The TPO computed the arm’s length price of purchase and sale of services, resulting in an adjustment of Rs. 1,45,89,355/-. The Dispute Resolution Panel (DRP) upheld the TPO's findings, confirming the selection of comparable companies and the use of TNMM. The assessee argued that the CPM was the appropriate method and that the TPO had misunderstood the use of profit before interest and tax (PBIT) instead of gross profit (GP). The Tribunal concluded that the CPM was indeed the appropriate method, noting that the difference between PBIT and GP was marginal. The Tribunal applied a tolerance limit of +/- 5%, resulting in no transfer pricing adjustment, and deleted the adjustment of Rs. 1,45,89,355/-.

2. Disallowance under Section 14A:

The second issue involved the disallowance under Section 14A of the Income Tax Act, which pertains to the expenditure incurred in relation to income not includible in total income. The Assessing Officer (AO) had recalculated the disallowance, excluding investments with taxable yields, resulting in an additional disallowance of Rs. 13.934 lakh. The assessee argued that the disallowance should be computed based on the books of accounts, considering only investments that yield tax-free income.

The Tribunal referred to the decision in REI Agro Ltd. Vs. DCIT, which held that only investments yielding dividend during the previous year should be considered for disallowance under Rule 8D. The Tribunal directed the AO to recompute the disallowance, taking into account only dividend-bearing securities/investments, and allowed this ground of appeal for statistical purposes.

3. Additions related to Unbilled Revenue:

The third issue concerned the addition of Rs. 17,44,27,000/- related to unbilled revenue, which the assessee claimed was already included in the revenue/income of the company. The DRP had directed the AO to verify whether the unbilled revenue was included in the books of accounts. The AO made the disallowance without proper verification.

The Tribunal noted that the AO did not follow the DRP's directions correctly and failed to examine whether the unbilled revenue was included in the turnover and offered for taxation. The Tribunal directed the AO to examine the books of accounts to verify if the unbilled revenue was included in the assessment year under consideration or in subsequent years. The Tribunal allowed this ground for statistical purposes, directing the AO to make the necessary verification.

Conclusion:

The Tribunal partly allowed the appeal, deleting the transfer pricing adjustment of Rs. 1,45,89,355/-, directing the AO to recompute the disallowance under Section 14A, and to verify the inclusion of unbilled revenue in the books of accounts. The order was pronounced on 25.10.2018.

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