2021 (8) TMI 911 - AT - Income Tax

Transfer Pricing Appeals: Excluded Comparables, Depreciation Disallowed, Working Capital Adjustment Granted

Addl. CIT, Special Range-8, New Delhi. Versus ST Micro Electronics Pvt. Ltd. And (Vice-Versa)

Addl. CIT, Special Range-8, New Delhi. Versus ST Micro Electronics Pvt. Ltd. And (Vice-Versa) - TMI Issues Involved:1. Exclusion of comparables in Transfer Pricing.2. Depreciation on software.3. Retention of Bodhtree Consulting Ltd. as a comparable.4. Risk adjustment in Transfer Pricing.5. Working capital adjustment in Transfer Pricing.6. Taxability of liabilities written back under Section 41(1).Issue-wise Detailed Analysis:1. Exclusion of Comparables in Transfer Pricing:The Revenue challenged the exclusion of Exensys Software Solutions Ltd., Thirdware Solutions Ltd., Visualsoft Technologies (Seg.), and Sankhya Infotech Ltd. as comparables by the CIT(A). The CIT(A) relied on the decision in the case of Colt Technology Services India Pvt. Ltd. The Tribunal found that the CIT(A) had made a factual determination regarding the functional comparability of the excluded companies and upheld the CIT(A)'s decision, dismissing the Revenue's ground.2. Depreciation on Software:The Revenue contested the CIT(A)'s decision to allow depreciation on software amounting to Rs. 7,69,371/-. The CIT(A) had allowed the depreciation based on the assessee's claim that the software was downloaded and used in FY 2004-05, despite the invoices being received later. The Tribunal, however, found that the invoices were raised 15 months later and that without proper sale documentation, the assessee could not be considered the owner of the software before 31.03.2005. The Tribunal set aside the CIT(A)'s finding and restored the Assessing Officer's decision to disallow the depreciation.3. Retention of Bodhtree Consulting Ltd. as a Comparable:The assessee's cross-objection challenged the retention of Bodhtree Consulting Ltd. as a comparable. The CIT(A) retained Bodhtree Consulting Ltd. because it was initially selected by the assessee in its Transfer Pricing documentation. The Tribunal upheld the CIT(A)'s decision, noting that the assessee did not provide sufficient evidence to demonstrate that the initial selection was erroneous.4. Risk Adjustment in Transfer Pricing:The assessee did not press this ground, and it was dismissed as not pressed.5. Working Capital Adjustment in Transfer Pricing:The assessee argued that the TPO did not allow the working capital adjustment as directed by the CIT(A). The Tribunal directed the TPO to grant the working capital adjustment, as the CIT(A) had instructed, noting that the CIT DR could not rebut the assessee's contentions.6. Taxability of Liabilities Written Back under Section 41(1):The assessee contested the addition of Rs. 15,87,816/- on account of liabilities written back related to fixed assets. The CIT(A) had upheld the addition, reasoning that the liability pertained to fixed assets on which depreciation had been claimed. The Tribunal, however, found merit in the assessee's argument that depreciation is neither a loss, expenditure, nor a trading liability under Section 41(1). Citing the Supreme Court's decisions in Mahindra & Mahindra Ltd. and Nectar Beverages Pvt. Ltd., the Tribunal concluded that the written-back liability related to capital assets is not taxable under Section 41(1) and directed the Assessing Officer to delete the addition.Conclusion:The Tribunal partly allowed the appeals of both the Revenue and the assessee, affirming some findings of the CIT(A) and reversing others based on the legal and factual analysis presented.