2014 (2) TMI 312 - AT - Income Tax

Communication and circuit charges - TDS u/s 194J - Held that - Relying upon the decision in ASSTT COMMISSIONER OF INCOME TAX Versus HUGHES SOFTWARE SYSTEMS LTD 2013 (5) TMI 557 - ITAT DELHI - Where payments are made to the service provider for providing space for transmission of data for carriage of voice and for availing service of intercommunication port access which do not require any human intervention it cannot come within the category of fees for technical services - Expenditure incurred towards communication and circuit charges cannot be treated as fees for technical services requiring deduction of tax at source u/s 194J of the Act - Decided in favour of assessee. Selection of certain comparables by the TPO - Held that - Maple E Solutions Ltd. - Various Benches of the ITAT including Hyderabad Benches have held that the aforesaid company cannot be treated as comparable as its financial results are not reliable - The AO/TPO is directed not to consider this company as a comparable. Nucleus Netsoft and GIS India Ltd. - Relying upon the decision in HSBC Electronic Data Processing India Pvt. Ltd 2013 (9) TMI 485 - ITAT HYDERABAD - the company outsourced its work and has held that the company cannot be selected as a comparable on account of its low employee cost - The AO/TPO is directed not to consider this company as a comparable. WIPRO BPO Solutions Ltd - Relying upon the decision in Capital IQ Information Systems India Pvt. Ltd. 2012 (9) TMI 85 - ITAT HYDERABAD - WIPRO BPO is a big company owning intangibles and having substantial brand value - It had generated considerable goodwill reputation and brand value in the market - It earns substantial revenue from products which are sold at a premium unlike the assessee which is only a contract service provider to its AE - The AO/TPO is directed not to consider this company as a comparable. Adjustment in respect of depreciation charged and there level of infrastructural costs incurred - Held that - All factors which impact the financial result of comparable companies should be taken into account and reasonable accurate adjustment should be made for the same - The rates of depreciation adopted by the assessee are significantly different from (straight line as compared with WTP; higher rate than that prescribed in schedule VI) those adopted by the comparable companies suitable adjustment for the different has to be made or the profit before depreciation may be considered - The issue has been restored for fresh adjudication. Pre-operative expenses - Held that - Relying upon the decision in case of DCIT V/s. Convergys Information Management India Pvt. Ltd. 2011 (1) TMI 1245 - ITAT HYDERABAD - In absence of any material to prove that the assessee has recovered the pre-operative expenses from its AE the conclusion arrived at by the departmental authorities is merely on presumption and surmises - The agreement between the assessee and its AE was entered on 1st September 2004 - It cannot be conceived that the AE will bear cost of expenses prior to the date of agreement - When the assessee has denied of having been reimbursed the pre-operative expenses then the onus is on the department to prove the contrary by bringing cogent material on record - Decided in favour of assessee.

Summary

Issues Involved
1. Disallowance of communication and circuit charges under Section 40(a)(ia) of the Income Tax Act.
2. Selection of comparables for Transfer Pricing (TP) analysis.
3. Adjustment for differences in depreciation rates.
4. Inclusion of pre-operative expenses in operating costs.

Detailed Analysis

Disallowance of Communication and Circuit Charges under Section 40(a)(ia)
The assessee challenged the disallowance of Rs.10,77,733/- under Section 40(a)(ia) of the Income Tax Act, arguing that the payments made for communication and circuit charges were not fees for technical services and thus not liable for TDS under Section 194J. The Assessing Officer (AO) and CIT(A) disagreed, treating these charges as fees for technical services. However, the Tribunal, referencing decisions from other cases (e.g., ACIT vs. Hughes Software Systems Ltd., Ushodaya Enterprises P. Ltd.), concluded that the services did not involve human intervention and thus did not qualify as technical services. Consequently, the Tribunal directed the AO to allow the expenditure claimed, treating these grounds as allowed.

Selection of Comparables for Transfer Pricing Analysis
The assessee contested the inclusion of certain companies as comparables by the Transfer Pricing Officer (TPO). The Tribunal examined each contested comparable:

- Vishal Information Technologies Ltd.: Excluded due to functional dissimilarity and significant outsourcing of operations, as established in previous tribunal decisions (e.g., Capital IQ Information Systems India Pvt. Ltd.).
- Maple E Solutions Ltd.: Excluded due to functional dissimilarity and unreliable financial results, supported by previous tribunal decisions and the assessee's own case history.
- Nucleus Netsoft and GIS India Ltd.: Directed the AO/TPO to exclude if substantial differences in employee costs were found, following the precedent set in HSBC Electronic Data Processing India Pvt. Ltd.
- WIPRO BPO Solutions Ltd.: Excluded due to incomparable scale of operations, brand value, and turnover, as supported by decisions in similar cases (e.g., Capital IQ Information Systems India Pvt. Ltd.).

Adjustment for Differences in Depreciation Rates
The assessee argued for adjustments due to differences in depreciation rates between itself and the comparables. The Tribunal, referencing its own decision in the assessee's case for the previous year, directed the AO/TPO to either make suitable adjustments for depreciation differences or consider profit before depreciation while computing the margin. This issue was remitted for fresh consideration.

Inclusion of Pre-Operative Expenses in Operating Costs
The assessee contended that pre-operative expenses of Rs.44,00,457/- should not be included in operating costs for ALP computation. The Tribunal found no material evidence supporting the department's claim that these expenses were recovered from the AE. Citing the decision in DCIT vs. Convergys Information Management India Pvt. Ltd., the Tribunal directed the AO/TPO to exclude pre-operative expenses from operating costs, as the agreement with the AE was entered into post-incorporation.

Conclusion
The Tribunal partly allowed the assessee's appeal, directing the AO/TPO to recompute the ALP in accordance with the Tribunal's directions and make necessary adjustments. The appeal was disposed of with specific instructions to address the issues raised comprehensively.