2019 (9) TMI 727 - AT - Income Tax

Appeal partially allowed, relief granted on disallowance issues under tax sections. Tribunal directs deductions, rejects disallowance, adjusts Transfer Pricing.

The appeal was partly allowed with significant relief provided on the primary issues of disallowance under section 10AA and section 40(a)(i). The Tribunal ... Disallowance of excess deduction claimed u/s 10AA r.w.s 80IA(10) - AO observed that the Appellant earned more than 'ordinary profits' to its associated enterprise ('AE') - HELD THAT:- AO was of the view that the assessee by showing such high OP/OC had earned super normal profits when compared with the margins of comparable companies. We find no merit in the observations of AO in this regard as the concept of PLI i.e. OP/OC which has been adopted by AO was relevant for comparability for transfer pricing analysis. The same cannot be used for holding the assessee to have earned super normal profits in carrying on its business for that. He has to look at net profits shown by assessee, which in the present year is 63% only. The learned Authorized Representative for the assessee pointed out that similar net profit range has been shown both in preceding and succeeding years. Coming to the issue at hand as to whether any disallowance is merited under section 10AA of the Act. The basic condition for application of the said provisions of the Act are an arrangement between the parties, which is so arranged as to enable the assessee to earn super normal profits. The TPO/Assessing Officer/DRP has not pointed out any such arrangement whatsoever between the assessee and the comparable companies selected. In the absence of the same, provisions of section 10AA(9) r.w.s. 80IA(10) of the Act are not attracted. This issue has been elaborated upon by us in various decisions, as also in the case of sister concern i.e. Eaton Industries Pvt. Ltd [2017 (10) TMI 1384 - ITAT PUNE] There is no merit in invoking provisions of section 10AA(9) r.w.s. 80IA(10)of the Act in the case of assessee. The TPO having accepted the transactions to be at arm's length and where the assessee was raising invoices on man hour basis, in line with the third party agreement and where net profit was shown by the assessee at 63%, there is no merit in applying the concept of OP/OC, which cannot be the basis for benchmarking the profits of any business. Hence, we direct the Assessing Officer to allow the deduction claimed under section 10AA of the Act in entirety Disallowance u/s 40(a)(i) - payment of software on the ground that the assessee had purchased copyright in the said software - HELD THAT:- We hold that the payment made by assessee for purchase of off-the-shelf software is not in the realm of royalty and in any case as the definition of royalty has not been amended under DTAA, provisions of DTAA being beneficial are to be applied and there was no requirement to deduct tax at source out of such payment. See JOHN DEERE INDIA PVT. LTD., (JOHN DEERE EQUIPMENT MERGED WITH JOHN DEERE INDIA PVT. LTD.) [2019 (3) TMI 458 - ITAT PUNE] TP Adjustment - benchmarking of ITES segment - comparable selection - HELD THAT:- The assessee before us has filed tabulated details in respect of preceding and succeeding years. In all the years under consideration, the OP/OC on segmental level is positive and it is not loss making concern. The Assessing Officer / TPO in such circumstances, directed to include the segmental results of Microgenetics Systems Ltd. for benchmarking the transactions of assessee in ITES segment. Universal Print Systems Ltd., wherein the plea of assessee before us is that it is functionally not comparable. The learned Authorized Representative for the assessee has pointed out that the segment which was held to be comparable to the assessee’s ITES segment was pre-pressed services. So, he explained that pre-pressed services include procedure between creation of content and final printing, whereas the assessee under ITES segment undertakes back office accounting in HR services, which in no manner can be equated with pre-pressed services. Just because, it was an outsourced business source, we find merit in the plea of assessee in this regard and accordingly, hold that the said concern Universal Print Systems Ltd. was not functionally comparable to the assessee and hence, could not be included in the final set of comparables. AO/TPO is thus, directed to exclude the same. Incorrect computation of margins of comparables - HELD THAT:- DRP had given certain directions to the Assessing Officer/TPO, but have failed to carry out the same. The assessee has also moved rectification application which is pending adjudication. Assessing Officer/TPO is directed to correctly compute the margins of comparables after verifying stand of assessee in this regard and after allowing reasonable opportunity of hearing to the assessee. The ground of appeal allowed. Issues Involved:1. Disallowance under section 10AA of the Act.2. Disallowance under section 40(a)(i) of the Act.3. Transfer Pricing Adjustments.4. Levy of interest under sections 234B and 234C of the Act.Detailed Analysis:1. Disallowance under section 10AA of the Act:The primary issue was the reduction of the deduction claimed under section 10AA by INR 2,64,12,11,474. The Assessing Officer (AO) compared the Operating Profit/Operating Cost (OP/OC) margins of the assessee at 150.55% with comparable companies at 27.72%, concluding that the assessee earned super normal profits. The Tribunal found no merit in this comparison, emphasizing that OP/OC is relevant only for transfer pricing analysis, not for determining super normal profits. The Tribunal noted that the net profit of the assessee was 63%, consistent with previous and subsequent years. The Tribunal held that the provisions of section 10AA(9) read with section 80IA(10) could not be invoked without evidence of an arrangement to generate more than ordinary profits. Citing precedents, the Tribunal directed the AO to allow the entire deduction claimed under section 10AA.2. Disallowance under section 40(a)(i) of the Act:The AO disallowed payments of INR 7,67,38,079 to non-residents for the purchase of software, treating it as 'royalty' and invoking section 40(a)(i) for failure to deduct tax at source. The Tribunal referred to the decision in John Deere India Pvt. Ltd., concluding that the payment for off-the-shelf software is not 'royalty' under section 9(1)(vi) of the Act or the DTAA. Thus, there was no requirement to deduct tax at source, and the disallowance was reversed.3. Transfer Pricing Adjustments:The Tribunal addressed multiple grounds related to the Transfer Pricing adjustments:- Inclusion/Exclusion of Comparables: The Tribunal directed the inclusion of Microgenetics Systems Ltd. at the segmental level, as it was not a consistent loss-making concern. Conversely, Universal Print Systems Ltd. was excluded as it was functionally not comparable to the assessee’s ITES segment.- Incorrect Computation of Margins: The Tribunal directed the AO/TPO to correctly compute the margins of comparables after verifying the assessee’s computations and allowing a reasonable opportunity for hearing.- Other Grounds: Several grounds became academic or were not pressed by the assessee and were dismissed accordingly.4. Levy of interest under sections 234B and 234C of the Act:The Tribunal noted that the levy of interest under sections 234B and 234C is consequential and dismissed the ground.Conclusion:The appeal was partly allowed, with significant relief provided on the primary issues of disallowance under section 10AA and section 40(a)(i), along with directions for appropriate adjustments in the Transfer Pricing analysis.