2020 (11) TMI 1097 - AT - Income Tax

TP Adjustment - comparable selection - HELD THAT - M/s. Infosys Technologies Ltd is not functionally comparable since it owns significant intangible and has huge revenues from software products. Also breakup of revenue from software services and software product is not available. Persistent Systems Limited company has acquired certain intellectual property products and generate revenue from licensing and support of such products. It is also observed that this company is involved in the entire life-cycle of software development which is not similar to what assessee caters to its associated enterprises. Assessee carries out only such functions which are required by associated enterprise under its supervision and guidance. Mindtree Limited company carries out research and development activities and has created large intangibles. Under such circumstances we do not find this company to be comparable with that of a captive service provider like assessee. Thirdware Solutions Limited to be included as a comparable in the list of comparables. I2T2 India Limited - We find force in the argument of Ld. D.R. as seen from the direct report of the I2T2 India Ltd. for the year ending on 31.3.2014 which is placed on record in page no.1837 that assessee is engaged in IT enabled services industry and it cannot be compared with assessee s case which is engaged in Software development services marketing support services and data centre services and accordingly exclusion is justified. We confirm the findings of the loer authorities on this comparable. Daffodil Software Limited - submissions of the Ld. A.R. is that this comparable passes all filters adopted by TPO and the software development services revenue is more than 75% and hence in the interest of justice we remit this issue to the file of TPO to see whether this comparable passes all filters adopted by TPO. Accordingly this issue remitted back to AO/TPO for fresh consideration. Companies functionally dissimilar with that of assessee software development services need to be deselected. Disallowance of depreciation claimed in respect of additions made during the previous year - HELD THAT - As rightly pointed out by the Ld. D.R. the DRP has already given a direction to A.O. to consider the additional information given by the assessee on this issue. However assessee has not furnished all the bills vouchers with regard to the acquisition of various fixed assets. Once again we direct the assessee to furnish necessary information before A.O. and the A.O./TPO shall examine the same in the light of the bills vouchers produced by the assessee. Disallowance of travelling expenses and legal professional expenses - HELD THAT - On this issue also assessee has not produced all the bills vouchers. Once again we direct the assessee to produce the same before A.O. On production of these evidences A.O. shall re-examine the issue.

Summary

Issues Involved:
1. Timeliness and validity of the assessment order.
2. Transfer Pricing adjustments related to software development services.
3. Imputation of notional interest on outstanding receivables.
4. Disallowance of depreciation on fixed assets.
5. Disallowance of travelling and legal/professional expenses.
6. Computation of interest under Section 234B and 234C.
7. Initiation of penalty proceedings under Section 271(1)(c).

Analysis of the Judgment:

1. Timeliness and Validity of the Assessment Order:
The appellant contended that the assessment order was issued beyond the time limit specified under Section 144C(13) of the Income-tax Act, 1961, making it invalid. However, this ground was not pressed before the Tribunal and was dismissed as not pressed.

2. Transfer Pricing Adjustments:
a. Software Development Services:
The appellant challenged the upward adjustment made by the AO/TPO to the transfer price of software development services. The Tribunal analyzed various aspects, including the rejection of the appellant's TP documentation, the use of non-contemporaneous data, and the inclusion/exclusion of certain comparables.

- Infosys Limited: The Tribunal found Infosys Limited not functionally comparable due to its significant intangible assets, R&D activities, and diversified operations. The Tribunal directed its exclusion.
- Persistent Systems Limited: The Tribunal noted that Persistent Systems Limited was involved in significant product development and had high turnover and intangible assets. It directed the exclusion of this company.
- Mindtree Limited: The Tribunal excluded Mindtree Limited, noting its involvement in end-to-end digital transformation services and product development, which made it not functionally comparable.
- Thirdware Solutions Limited: The Tribunal upheld the inclusion of Thirdware Solutions Limited, noting that it was functionally comparable and had segmental information available.
- Larsen & Toubro Infotech Limited: The Tribunal remitted the issue back to the AO/TPO for fresh consideration, following the precedent set in a similar case.

b. Imputation of Notional Interest on Outstanding Receivables:
The Tribunal remitted the issue to the AO/TPO for fresh consideration, aligning with the decision in the case of CGI Information Management Consultation Pvt. Ltd. The Tribunal emphasized the need for a detailed analysis of factors affecting the working capital and the pattern of receivables.

3. Disallowance of Depreciation on Fixed Assets:
The Tribunal directed the AO to reconsider the disallowance of depreciation on fixed assets, instructing the appellant to furnish necessary bills and vouchers. The AO was to re-examine the issue based on the provided documentation.

4. Disallowance of Travelling and Legal/Professional Expenses:
The Tribunal noted that the appellant had not produced all the necessary bills and vouchers. It directed the appellant to provide these documents to the AO, who would then re-examine the issue.

5. Computation of Interest under Section 234B and 234C:
The Tribunal stated that the computation of interest under Sections 234B and 234C is consequential and does not require separate adjudication.

6. Initiation of Penalty Proceedings under Section 271(1)(c):
The Tribunal found the initiation of penalty proceedings under Section 271(1)(c) to be premature and did not require adjudication at this stage.

Conclusion:
The appeal was partly allowed for statistical purposes, with several issues remitted back to the AO/TPO for fresh consideration. The Tribunal provided detailed directions on the reconsideration of comparables, documentation requirements for depreciation and expenses, and the analysis of notional interest on receivables. The consequential reliefs and penalty proceedings were deemed not to require immediate adjudication.