2015 (7) TMI 1049 - AT - Income Tax

Transfer pricing adjustment - selection of comparable - Held that - Bodhtree Ltd. Tata Elxsi Ltd. and Infosys Technologies Ltd. as not comparable with a software development service provider such as the Assessee as dissimilar as compared to software development services provider. Working capital adjustment - Held that - On going through the TPO s order as well as annexure D referred to in the transfer pricing order on working capital adjustment we find that the TPO has computed it at 5.97% but has not given any basis for restricting the adjustment to 1.71%. In various cases relating to transfer pricing adjustment this Tribunal has been directing to give working capital adjustment on actual basis and the TPO having arrived at 5.97% ought to have adopted the same instead of restricting it to 1.71%. In view of the same we deem it proper to remand this issue to the file of the AO/TPO for working out the ALP after giving adjustment of working capital as per the calculation of the AO in annexure D annexed to the transfer pricing order. Income tax of employee - whether treated as business expenditure or personal liability of the employee and is not the liability in the hands of the assessee-company ? - Held that - Remuneration and the income-tax thereon paid on behalf of the employee therein is an allowable expenditure u/s 37 of the Act. See Tata Yadogawa Ltd. vs. CIT 2010 (9) TMI 715 - Jharkhand High Court and ABN Amro Bank vs. JCIT (2005 (6) TMI 218 - ITAT CALCUTTA-E) - Decided against revenue Disallowance of reimbursement of software expenses - Held that - Since the issue is covered in favour of the revenue by the decision of the jurisdictional High Court in the case of Samsung Electronic Co. Ltd. (2011 (10) TMI 195 - KARNATAKA HIGH COURT ) we see no reason to interfere with the order of the CIT(A) in making disallowance. - Decided against revenue Deduction u/s 10A - Held that - The direction of the CIT(A) to reduce the expenditure incurred in travel telecommunication etc. both from export turnover as well as total turnover for the purpose of computation of deduction u/s 10A of the Act as confirmed in the case of CIT vs. Tata Elxsi (2011 (8) TMI 782 - KARNATAKA HIGH COURT ) - Decided against revenue Rate of depreciation at 60% on circuit test boards - Held that - The assessee had submitted before CIT (Appeals) that the Circuit Test Boards are used as a specialized functional accessory to the computer systems . The CIT (Appeals) has accepted this contention of the assessee and following the decisions in the case of BSES Rajadhani Powers Ltd. 2010 (8) TMI 58 - DELHI HIGH COURT held the circuit test boards to be accessories and peripherals of computers and further held that the customs duty paid for purchase of such circuit test boards also qualifies for depreciation at the rate of 60%. We find that the CIT(A) has followed the precedents to allow depreciation at the rate of 60% and the learned Departmental Representative has not been able to rebut this finding with any evidence to the contrary. Therefore we see no reason to interfere with the same.- Decided against revenue

Issues Involved:
1. Adoption and exclusion of certain companies as comparables for transfer pricing.
2. Disallowance of expatriate employee's salary tax payment.
3. Disallowance of reimbursement of software expenses.
4. Computation of working capital adjustment.
5. Deduction u/s 10A of the Income-tax Act.
6. Depreciation rate on Circuit Test Boards.
7. Levy of interest u/s 234B of the Act.

Detailed Analysis:

1. Adoption and Exclusion of Certain Companies as Comparables for Transfer Pricing:
The assessee challenged the inclusion of Bodhtree Consulting Ltd., Tata Elxsi Ltd., and Infosys Technologies Ltd. as comparables. The Tribunal agreed with the assessee, referencing previous decisions that established these companies as functionally dissimilar to the assessee's software development services. The Tribunal directed the exclusion of these companies from the final list of comparables. The inclusion of Sasken Communications Technologies and Persistent Systems Ltd. was remanded to the AO/TPO for reconsideration as per CIT(A)'s directions.

2. Disallowance of Expatriate Employee's Salary Tax Payment:
The AO disallowed the tax payment on behalf of an expatriate employee, considering it a personal liability. The CIT(A) upheld this disallowance. However, the Tribunal allowed the assessee's appeal, referencing decisions that considered such payments as business expenditures under Section 37 of the Act, as they were contractually agreed upon and wholly for business purposes.

3. Disallowance of Reimbursement of Software Expenses:
The AO disallowed &8377; 9,37,988/- paid for Oracle licenses, treating it as fees for technical services without TDS deduction. The CIT(A) upheld this, classifying it as royalty. The Tribunal, agreeing with the jurisdictional High Court's decision in Samsung Electronics Co. Ltd., upheld the CIT(A)'s decision, rejecting the assessee's appeal.

4. Computation of Working Capital Adjustment:
The Tribunal found that the TPO had computed the working capital adjustment at 5.97% but restricted it to 1.71% without explanation. It directed the AO/TPO to recompute the ALP, giving the actual working capital adjustment as per the TPO's calculation.

5. Deduction u/s 10A of the Income-tax Act:
The revenue's appeal against the CIT(A)'s direction to reduce travel, telecommunication, and other expenses from both export and total turnover for Section 10A deduction was dismissed. The Tribunal followed the jurisdictional High Court's decision in CIT vs. Tata Elxsi, which was in favor of the assessee.

6. Depreciation Rate on Circuit Test Boards:
The AO allowed only 25% depreciation on Circuit Test Boards, treating them as Plant & Machinery. The CIT(A) allowed 60% depreciation, treating them as computer accessories. The Tribunal upheld the CIT(A)'s decision, referencing precedents that classified such accessories as integral parts of computers eligible for higher depreciation.

7. Levy of Interest u/s 234B of the Act:
The Tribunal noted that the levy of interest under Section 234B is consequential and directed the AO to provide consequential relief to the assessee.

Conclusion:
The Tribunal's decision provided relief to the assessee on several counts, including the exclusion of certain comparables, allowing business expenditure claims, and higher depreciation rates, while upholding disallowances related to software expenses in line with jurisdictional precedents. The revenue's appeal was dismissed, and the assessee's appeal was partly allowed.

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