2019 (6) TMI 1090 - AT - Income Tax

Tribunal grants partial relief in tax appeals, directs deletion of disallowances and reevaluation of arm's length price

The Tribunal allowed the appeals filed by the Appellant for both assessment years 2012-13 and 2013-14 partly for statistical purposes. The Tribunal ... Allowability of software license fee as revenue expenditure - deductibility of advances and bad debts under the Act - transfer pricing: comparability analysis and exclusion of comparables - transfer pricing: arm's length price of intra group services and evidence/benefit/rendition tests - application of TNMM and selection of Most Appropriate Method - remand to Assessing Officer/Transfer Pricing Officer for fresh determination of ALPAllowability of software license fee as revenue expenditure - Deletion of addition made by AO treating software license fees paid to AE as capital expenditure for the years under appeal. - HELD THAT: - The Tribunal found that the factual matrix for the years under consideration is identical to earlier years (A.Y. 2007-08 and 2008-09) in which the Tribunal had held such payments to the parent for licensing the ENTERPRISE suite were obligations of the assessee in the course of making sales and represented cost of goods sold rather than creation of an intangible asset. Revenue had not filed an appeal against those earlier Tribunal decisions. Following those precedents in the assessee's own case and noting lack of contrary new facts, the Tribunal held the disallowance unsustainable and directed deletion of the addition; depreciation already allowed by AO is not a ground to sustain the disallowance. [Paras 8, 21]Addition on account of software license fees deleted for both A.Y. 2012-13 and A.Y. 2013-14.Deductibility of advances and bad debts under the Act - Allowability of written off advances and bad debts claimed by the assessee for A.Y. 2013-14. - HELD THAT: - The Tribunal examined documentary evidence placed on record and found that a portion of the amounts written off related to preceding assessment years and satisfied requirements of section 36(1)(vii). While some advances were small and difficult to verify, invoices and supporting documents for bad debts were on the file. On verification of the material, the Tribunal accepted the claim to the extent supported by invoices and deleted the corresponding addition to that extent. [Paras 10]Addition of Rs. 9,79,877 made by AO allowed in part; claim admitted to extent of Rs. 8,03,982 and addition deleted to that extent for A.Y. 2013-14.Transfer pricing: comparability analysis and exclusion of comparables - application of TNMM and selection of Most Appropriate Method - Exclusion of several comparable companies from the final comparable set for benchmarking the software development/deployment segments (A.Y. 2012-13) and related direction to TPO. - HELD THAT: - The Tribunal undertook FAR analysis for the software deployment and development segments and found multiple comparables to be functionally dissimilar or lacking segmental/financial information (including, inter alia, Mindtree Ltd., E Zest Solutions Ltd., Infosys Ltd., Larsen & Toubro Infotech Ltd., Persistent Systems Ltd., Zylog Systems Ltd., Spry Resources Pvt. Ltd.). Relying on segmental data requirements and prior coordinate bench decisions in the assessee's own case and other authorities, the Tribunal excluded the said comparables from the final set. The Tribunal observed that where audited/segmental data were unavailable or where comparables carried non routine intangibles or extraordinary events, they could not be used for reliable benchmarking. [Paras 28, 29, 30, 31, 32]Directed TPO to exclude the identified functionally dissimilar or non comparable companies from the final comparable set for A.Y. 2012-13 (grounds on comparables allowed).Transfer pricing: arm's length price of intra group services and evidence/benefit/rendition tests - remand to Assessing Officer/Transfer Pricing Officer for fresh determination of ALP - Whether the ALP of intra group services (management/IGS) could be determined at nil by the TPO and whether the payments should be benchmarked separately or apportioned; direction for fresh determination. - HELD THAT: - The Tribunal examined the TPO's approach of determining ALP as nil on the basis that assessee had not proved need/rendition/benefit and that services were duplicative or provided no benefit. The Tribunal rejected the TPO's approach which effectively questions the commercial wisdom of the assessee and held that the assessee must be given the opportunity to satisfy the evidence/rendition/benefit tests envisaged by law. The Tribunal referred to authoritative decisions holding that TPO must conduct a transfer pricing analysis and that the requirement is to assess whether an independent enterprise would pay the same price, not to substitute commercial judgment. Accordingly, the Tribunal set aside the ALP determination at nil and directed AO/TPO to determine ALP afresh under the appropriate method and by applying comparability analysis and Rule 10B/section 92B principles, giving regard to the documentation and allocation keys on record. [Paras 14, 33]Issue remanded to AO/TPO for fresh determination of the ALP of intra group services after applying the evidence/rendition/benefit tests and proper comparability analysis (both A.Ys.; set aside to TPO/AO).Transfer pricing: adjustment in software development segment rendered infructuous by rectification of margins - Effect of TPO's rectification under section 154 deleting the proposed adjustment in respect of the software development service segment for A.Y. 2012-13. - HELD THAT: - The Tribunal noted that the TPO, on a rectification application, corrected computational margins and provided benefit of +/-5% leading to deletion of the proposed adjustment in the software development segment. Consequently, the grounds challenging that adjustment became infructuous and required no adjudication by the Tribunal. [Paras 18, 24]Challenge to software development segment adjustment dismissed as infructuous for A.Y. 2012-13 because TPO rectified margins and deleted the proposed adjustment.Final Conclusion: The appeals for A.Y. 2012-13 and A.Y. 2013-14 are partly allowed: additions disallowing software license fees have been deleted; a portion of advances/bad debts for A.Y. 2013-14 has been allowed; multiple disputed comparables for A.Y. 2012-13 have been excluded; and the determinations relating to intra group services are set aside and remitted to the AO/TPO for fresh ALP determination in accordance with the Act and applicable transfer pricing principles. Appeals are disposed of accordingly (partly allowed for statistical purposes). Issues Involved:1. Validity of the impugned order and unjustified adjustments under Chapter X of the Act.2. Disallowance of software license fee and management fees.3. Corporate Tax Matters: Disallowance of capital expenditure and enduring nature of expenses.4. Transfer Pricing Matters: Adjustments to the arm’s length price (ALP) of international transactions.5. Charging of interest under sections 234A and 234B of the Act.6. Initiation of penalty proceedings under section 271(1)(c) of the Act.Detailed Analysis:1. Validity of the Impugned Order and Unjustified Adjustments:The Appellant contended that the impugned orders passed by the AO, following the directions of the DRP, were based on extraneous and irrelevant presumptions, leading to unjustified adjustments under Chapter X of the Act. The Tribunal observed that the issues raised by the Appellant were similar for both assessment years under consideration and decided to address the assessment year 2013-14 first.2. Disallowance of Software License Fee and Management Fees:The Tribunal noted that the disallowance of software license fees was a recurring issue and had been addressed in the Appellant's favor in previous assessment years (2007-08 and 2008-09). The Tribunal found that the Appellant had made payments for software licenses purchased from its parent entity, which were initially disallowed as capital expenditure by the AO. Following the Tribunal's previous decisions, the Tribunal directed the deletion of the addition made by the AO, considering the software license fees as revenue expenditure.Regarding the management fees, the Tribunal observed that the AO disallowed the claim due to the Appellant's failure to provide adequate evidence. However, the Tribunal allowed the Appellant's claim for bad debts written off, as the Appellant had satisfied the requirements specified under section 36(1)(vii) of the Act.3. Corporate Tax Matters:The Tribunal addressed various grounds related to corporate tax matters, including the disallowance of capital expenditure and the enduring nature of expenses. The Tribunal referred to its previous decisions and found that the facts and circumstances were similar. Therefore, it directed the deletion of the disallowance made by the AO, following the Tribunal's earlier rulings.4. Transfer Pricing Matters:The Tribunal extensively analyzed the transfer pricing adjustments made by the TPO. The Tribunal noted that the TPO had rejected the economic analysis undertaken by the Appellant and included certain companies as comparables, which were functionally dissimilar to the Appellant. The Tribunal directed the exclusion of certain comparables, such as Infosys Ltd. and Larsen & Toubro Infotech Ltd., based on functional dissimilarity and unavailability of segmental data.The Tribunal also addressed the issue of intra-group services and management fees. The Tribunal referred to its previous decision for the assessment year 2011-12, where it had held that the management fees apportioned to different segments were accepted by the TPO. The Tribunal directed the AO/TPO to determine the arm's length price of intra-group services based on the documents submitted by the Appellant and to conduct a proper FAR analysis.5. Charging of Interest under Sections 234A and 234B:The Tribunal did not specifically address the issue of charging interest under sections 234A and 234B of the Act in detail. However, it is implied that the Tribunal's directions on the adjustments and disallowances would impact the computation of interest.6. Initiation of Penalty Proceedings under Section 271(1)(c):The Tribunal did not provide a detailed analysis of the initiation of penalty proceedings under section 271(1)(c) of the Act. The outcome of the penalty proceedings would likely depend on the final adjustments and disallowances after the Tribunal's directions.Conclusion:The Tribunal allowed the appeals filed by the Appellant for both assessment years 2012-13 and 2013-14 partly for statistical purposes. The Tribunal directed the deletion of certain disallowances and adjustments, following its previous decisions and based on the functional dissimilarity of comparables. The Tribunal also set aside the issue of intra-group services to the AO/TPO for proper determination of the arm's length price.