TaxTMI 
TaxTMI 
2020 (11) TMI 563
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....ng of interest u/s 234C of the Act (Ground no.17) 3. The assessee belongs to Maxim group. It undertakes design and development of integrated circuits and software as per business plans of Maxim group. Following are the tasks involved in projects:- * Requirement Gathering & Market Definition * Develop user & design specifications of a product based upon market definition * Circuit design (involves analog, logic, RTL, architecture level design, DFT etc.) * Verification of circuit design * Design Layout and its verification * Testing and characterization of IC product samples * Customer support - Macro models of IC products, reference design boards for application development * Software development & testing * Project Management * Project documentation * Product support (for better production 4. We shall first take up the transfer pricing adjustment issue. The assessee has two segments, viz., Design/development of software and ITES services. Besides the above, the assessee has also entered into some other international transactions, viz., interest paid on borrowings, purchase of....
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.... not be given (Pg 51 of Appeal Papers) 3. The DRP has held that Foreign exchange gain or loss is operating in nature (Pg 46-47 of Appeal Papers) 4. The DRP has held that provision for Doubtful debts is non-operating in nature (pg 46 of Appeal papers) 5. Accordingly, TP additions were enhanced to Rs. 3,23,60,679/-. The effect of directions so given by Ld DRP resulted in enhancement of transfer pricing adjustment to Rs. 3,23,60,679/-. The assessing officer, accordingly, passed final assessment order making transfer pricing adjustment of Rs. 3,23,60,679/-. The AO also made certain additions in the assessment order, besides the addition relating to Transfer pricing adjustment. 8. The Ld A.R submitted that the assessee seeks exclusion of following four comparable companies selected by the TPO:- Name of company Turnover (a) Larsen & Toubro Infotech Ltd - 3630.15 crores (b) Mindtree Limited (seg.) - 1640.81 crores (c) Persistent systems Ltd - 996.75 crores (d) Tech Mahindra Ltd (seg.) - 5595.70 crores He submitted that the turnover of the assessee company during the year was Rs. 40.28 crores and henc....
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....efore as rightly submitted by the learned counsel for the Assessee the observations of the Hon'ble High Court, in so far as it refers to turnover, were in the nature of obiter dictum. Judicial discipline requires that the Tribunal should follow the decision of a non-jurisdiction High Court, even though the said decision is of a non-jurisdictional High Court. We however find that the Hon'ble Bombay High Court in the case of CIT Vs. Pentair Water India Pvt. Ltd. Tax Appeal No.18 of 2015 judgment dated 16.9.2015 has taken the view that turnover is a relevant criterion for choosing companies as comparable companies in determination of ALP in transfer pricing cases. There is no decision of the jurisdictional High Court on this issue. In the circumstances, following the principle that where two views are available on an issue, the view favourable to the Assessee has to be adopted, we respectfully follow the view of the Hon'ble Bombay High Court on the issue. Respectfully following the aforesaid decision, we uphold the order of the DRP excluding 5 companies from the list of comparable companies chosen by the TPO on the basis that the 5 companies turnover was much higher compar....
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...." 15. In the light of the aforesaid decision of the Tribunal, ground No.6.5 raised by the assessee is allowed. 16. Since the 3 companies referred to in ground 5.4 are excluded on the application of turnover filter, the assessee's plea for exclusion on the basis of other filers set out in ground 5.4 is not taken up for consideration." 11. Admittedly, the above cited four companies fail under Turnover filter. Accordingly, following the above said decision of co-ordinate bench, we direct exclusion of above said four companies applying Turnover filter. 12. Though the assessee has sought inclusion of certain companies as comparable companies, yet the Ld A.R did not press the same at the time of hearing. Hence the grounds relating to inclusion of companies do not require adjudication. 13. The next contention of the assessee is that the TPO has not considered Provision for bad and doubtful debts as an operating expenditure. The Ld A.R submitted that the co-ordinate bench has held this expenditure as operational in nature in the case of Brocade Communications Systems (P) Ltd vs. DCIT (2020)(117 taxmann.com 439)(Bang.). On the contrary, the Ld D.R submitted th....
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....ng Standard-l defines accrual as the assumption that revenues and costs are accrued, i.e., recognized as they are earned or incurred and recorded in the financial statements of the period to which they relate. 52. Thus, going with the abovementioned facts and statutory provisions, when the making of provisions is very much in the interest of business to show the true and fair view and statutorily required, it cannot be said that such provisions are of non-operating nature. Such provisions are made to comply with the requirements of statute. 53. The learned TPO treated provision for doubtful debts as non-operating referring to the Safe Harbour Rules notified by CBDT, which are not applicable for the year under consideration as mentioned above. 54. Ld. CIT(DR) relied on the order of TPO. 55. As regards the treatment of provision of doubtful debts also, we find that the reasoning given by ld. TPO cannot be accepted because he has primarily relied on safe harbor rule for treating this as non-operating expenditure. We find considerable force in the submission of ld. counsel for the assessee, considered earlier, that provision for doubtful debts is a p....
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....rendered by the co-ordinate bench in the case of Brocade Systems (P) Ltd (supra) and Rolls Royce India (P) Ltd (supra), we direct the AO/TPO to consider Provision for doubtful debts as an operating expense. 17. The next issue in respect of Transfer pricing adjustment relates to the claim of working capital adjustment and risk adjustment. We have noticed that TPO has granted working capital adjustment of 1.70% by making his own calculations. However, the Ld DRP directed the TPO to disallow the working capital adjustment allowed by him, mainly on the reasoning that the average working capital will not show actual working capital employed during the year. 18. The Ld A.R submitted that the working capital adjustment was rightly allowed by TPO. He submitted that the co-ordinate bench has held in the case of Nagravision India P Ltd vs. ACIT (IT(TP)A No.1536/Bang/2017dated 03-07-2020 that working capital adjustment is permissible. On the contrary, the Ld D.R submitted that the relevant data was not furnished by the assessee and the data furnished by the assessee related to the figures as on the Balance Sheet date. He submitted that, based on balance sheet date figures, working ca....
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....which could materially affect the amount of net profit margin in the open market; (iv) the net profit margin realised by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii); (v) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction [or the specified domestic transaction); (f) ** ** ** (2) For the purposes of sub-rule (1), the comparability of an international transaction [or a specified domestic transaction] with an uncontrolled transaction shall be judged with reference to the following, namely:-- (a) the specific characteristics of the property transferred or services provided in either transaction; (b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions; (c) the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be d....
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.... or ♦ Reasonably accurate adjustments can be made to eliminate the effect of any such differences. These are called "comparability adjustments. 13. In Paragraphs 13 to 16 of the aforesaid OECD guidelines, need for working capital adjustment has been explained as follows: "13. In a competitive environment, money has a time value. If a company provided, say, 60 days trade terms for payment of accounts, the price of the goods should equate to the price for immediate payment plus 60 days of interest on the immediate payment price. By carrying high accounts receivable a company is allowing its customers a relatively long period to pay their accounts. It would need to borrow money to fund the credit terms and/or suffer a reduction in the amount of cash surplus which it would otherwise have available to invest. In a competitive environment, the price should therefore include an element to reflect these payment terms and compensate for the timing effect. 14. The opposite applies to higher levels of accounts payable. By carrying high accounts payable, a company is benefitting from a relatively long period to pay its suppliers. It would need to borro....
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....on given by the Assessee. The CIT (A) in exercise of his powers of enhancement held that no adjustment should be made to the profit margins on account of working capital differences between the tested party and the comparable companies for the following reasons: (i) The daily working capital levels of the tested party and the comparables was the only reliable basis of determining adjustment to be made on account of working capital because that would be on the basis of working capital deployed throughout the year. (ii) Segmental working capital is not disclosed in the annual reports of companies engaged in different segments and therefore proper comparison cannot be made. (iii) Disclose in the balance sheet does not contain break up of trade and non-trade debtors and creditors and therefore working capital adjustment done without such break up would result in computation being skewed. (iv) Cost of capital would be different for different companies and therefore working capital adjustment made disregarding this different based on broad approximations, estimations and assumptions may not lead to reliable results. 16. The CIT (A) also placed....
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....ence of segmental details available of working capital requirements of comparable companies chosen and absence of details of trade and non-trade debtors of comparable companies as these details are beyond the power of the Assessee to obtain, unless these details are available in public domain. Regarding absence of cost of working capital funds, the OECD guidelines clearly advocates adopting rate(s) of interest applicable to a commercial enterprise operating in the same market as the tested party. Therefore this objection of the CIT (A) is also not sustainable. 17. In the light of the above discussion we are of the view that the CIT (A) was not justified in denying adjustment on account of working capital adjustment. Since, the CIT (A) has not found any error in the TPO's working of working capital adjustment, the working capital adjustment as worked out by the TPO has to be allowed. We may also add that the complete working capital adjustment working has been given by the Assessee and a copy of the same is at pages 173 & 192 of the Assessee's paper book. No defect whatsoever has been pointed out in these working by the CIT (A). We may also further add that in terms....
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....rd to claim of risk adjustment, we notice that the assessee did not raise any objection before Ld DRP regarding denial of the same. Hence we decline to adjudicate this ground. 22. We shall now take up the corporate grounds urged by the assessee. In ground no.2, the assessee is contesting denial of additional depreciation on computers amounting to Rs. 12,47,351/- claimed u/s 32(1)(iia) of the Act. 23. The assessee claimed additional depreciation @ 20% on the new computers purchased by it in terms of sec.32(1)(iia) of the Act. The AO noticed that, as per sec.32(1)(iia) of the Act, the additional depreciation is allowable on the cost of Plant & Machinery, when the assessee is engaged in the business of manufacture or production of any article or thing or in the business of generation or generation and distribution of power. The AO took the view that the assessee is developing computer software and it cannot be taken as an article or thing. He took the view that the computers are office equipment and separate rate of depreciation is allowed under the depreciation schedule. Accordingly he took the view that the computers cannot be classified as "Plant & Machinery". According....
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....ed that a deduction by name "investment allowance" was allowed earlier for new machinery or plant installed upto 31.3.1990 in an industrial undertaking for the purpose of construction, manufacture or production of any article or thing not being an article or thing specified in the list in Eleventh Schedule. In that context, a question arose as to whether computers installed for the purpose of data processing would be eligible for Investment allowance or not. The Ahmedabad bench of Tribunal has held in the case of Startronics & Enterprises (P) Ltd (1995)(82 Taxman 87) that data processing and print-out was production or an article or thing as contemplated u/s 32A(2) of the Act. Accordingly it was held by the Tribunal that the assessee would be eligible for investment allowance in respect of computers installed for such purposes. The above said decision of the Tribunal was challenged by the revenue by filing appeal before the Hon'ble High Court of Gujarat. The Hon'ble High Court held in the very same case reported in (2007)(165 Taxman 153)(Guj) that the assessee company engaged in the business of data processing, system designing and software development and supply would be e....
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....ocation in the office, additional depreciation would not be allowable. Thrust of the argument is on the words "office premises". 8. The submission is that the computers and the data processing machines are always kept in the office and in this case, when the computers and the data processing machines are used in the office, then, the additional depreciation would not be allowable. 9. It is to be noted that the words "office premises" have not been defined in the IT Act. The word "office" would partake its character with the activities carried on in the said premises. In a given case, a doctor's clinic would be his office, but, would also be his clinic and if he installs a computer or some machine for the purposes of pathology, then, his office would be taken to be an industrial premises for the purposes of depreciation and investment allowance. In a given case, a computer kept in the office of a manager for his personal use or for some other purpose, then, such computer would not be entitled to investment allowance and/or additional depreciation. In the present case, the words "office premises" though would be covering office but, industrial premises would not....
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....r thing. 29. The term "manufacture" is defined in sec. 2(29BA) of the Act as under:- (29BA) "manufacture", with its grammatical variations, means a change in a non-living physical object or article or thing,- (a) resulting in transformation of the object or article or thing into a new and distinct object or article or thing having a different name, character and use; or (b) bringing into existence of a new and distinct object or article or thing with a different chemical composition or integral structure. The expression "manufacture or production of an article or thing" was examined by Hon'ble Supreme Court in the context of sec.80HH of the Act in the case of N C Budharaj & Co.(1993)(204 ITR 412) and the relevant discussions made in the above said decision are extracted below:- The word 'production' has a wider connotation than the word 'manufacture'. While every manufacture can be characterised as production, every production need not amount to manufacture. The meaning of the expression 'manufacture' was considered by this Court in Dy. CST v. Pio Food Packers [1980] 46 STC 63 among other decisions. In the said d....
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....ture or production of article or thing. Ld DRP further observed that the words "computer software" have been used in different sections of the Act in addition to the words "articles or things", whenever benefit was intended to be extended to such business also. He submitted that the legislature has not intended to include development of software under the category of manufacture or production of article or thing. We also notice that sec.10A uses the expression 'profits and gains are derived by an undertaking from the export of articles or things or computer software". Sec. 10AA uses the expression "profits derived from the export of articles or things or services (including computer software). Similar expression has been used in sec.10B also. The newly inserted provision, viz., sec.115BAB allows concessional rate of tax to a domestic company engaged in the manufacture or production of an article or thing. This section specifically excludes "software development" activity from its ambit. 31. The Ld A.R placed his reliance on the decision rendered by Ahmedabad bench of Tribunal and Hon'ble Gujarat High Court in the case of Startronics & Enterprises (P) Ltd (supra). We notice t....