Tribunal revises transfer pricing adjustments, allows interest on ECB loans, withdraws depreciation claim

The Tribunal partly allowed the appeal, directing re-computation and adjustments. The addition related to transfer pricing adjustment was revised after exclusion of certain companies. The disallowance of interest on ECB loans was overturned as the loan was for business expansion. The additional depreciation claim on computers was withdrawn. The Tribunal held that disallowed amounts, excluding transfer pricing adjustments, should increase profits for deduction u/s 10A. The AO was instructed to re-compute the deduction following CBDT Circular No. 37/2016.

---

---

Issues Involved:
1. Addition relating to transfer pricing adjustment.
2. Disallowance of interest paid on ECB loans.
3. Additional depreciation claimed on computers.
4. Deduction u/s 10A of the Income-tax Act, 1961 in respect of disallowance of interest on ECB loans and additional depreciation.

Issue-wise Detailed Analysis:

1. Addition relating to Transfer Pricing Adjustment:
The first issue concerns the addition made on account of transfer pricing adjustment by the AO for the Software development segment of the assessee. The assessee followed the TNM method, declaring a margin of 10.83%, which was deemed at arm's length. However, the TPO rejected this study and selected 13 comparable companies, arriving at an average margin of 24.82%. After adjustments, the AO proposed an adjustment of Rs. 2,52,81,059/-. The DRP later rejected six companies based on the turnover filter, enhancing the TP adjustment to Rs. 2,76,15,067/-.

The assessee sought the exclusion of five additional companies, arguing they were not good comparables based on various Tribunal decisions. The Tribunal agreed to exclude four companies (Acropetal Technologies Ltd., E-Zest Solutions, E-Infochips Ltd., and ICRA Techno Analytics Ltd.) based on past decisions and functional dissimilarities. For E-Zest Solutions, the Tribunal remanded the matter for fresh examination due to diverse opinions in previous cases. Persistent Systems & Solutions Ltd. was also excluded based on its functional dissimilarity and lack of segmental details.

The Tribunal directed the AO/TPO to re-compute the ALP of the Software development services segment and allow working capital adjustments on an actual basis.

2. Disallowance of Interest Paid on ECB Loans:
The AO disallowed the interest on ECB loans, arguing it should be capitalized as the loan was for purchasing an immovable property. The Tribunal referred to its earlier decision in the assessee's case for AY 2009-10, where it held that the proviso to section 36(iii) was not applicable as the loan was for expansion, not extension, of business. The Tribunal reiterated that purchasing land for a new office does not constitute an extension of business. Thus, the disallowance was deleted.

3. Additional Depreciation Claimed on Computers:
The assessee withdrew the ground related to the additional depreciation claimed on computers. Consequently, this issue was dismissed as withdrawn.

4. Deduction u/s 10A of the Income-tax Act, 1961:
The assessee argued that any disallowed amount while computing business income should increase the profits derived from the eligible undertaking for deduction u/s 10A. The Tribunal agreed, noting that other disallowances (excluding transfer pricing adjustments) should increase the profits for deduction purposes. The AO was directed to re-compute the deduction u/s 10A as per CBDT Circular No. 37/2016.

Conclusion:
The appeal was partly allowed for statistical purposes, with directions for re-computation and adjustments as discussed. The Tribunal's decisions were consistent with previous rulings and supported by relevant case laws and CBDT circulars.

---