2013 (5) TMI 844 - AT - Income Tax

Determination of arm s length price of the international transactions representing Software Services provided to the associated enterprise - comaparability - Addition of fringe benefit tax paid for computing the book profit u/s 115JB - Held that - No reason to interfere with the order of ld. DRP because as per sec. 115WA Fringe Benefit Tax is an additional income tax and therefore it is to be treated at par with Income-tax for computing book profits.

Issues Involved:

1. Determination of arm's length price (ALP) for international transactions.
2. Rejection of the assessee's ALP determination.
3. Use of multiple year data versus current year data.
4. Application of various filters for selecting comparables.
5. Inclusion of FCS Software Solutions Ltd. as a comparable.
6. Exclusion of companies based on turnover and employee cost filters.
7. Exclusion of companies with diminishing revenues/persistent losses.
8. Risk adjustments and working capital adjustments.
9. Addition of Fringe Benefit Tax (FBT) for computing book profit under Section 115JB.
10. Charging of interest under Sections 234A and 234B.
11. Initiation of penalty under Section 271(1)(c).

Detailed Analysis:

1. Determination of Arm's Length Price (ALP):
The main issue revolves around the determination of the ALP for international transactions involving software services provided by the assessee to its associated enterprise (AE). The transactional net margin method (TNMM) was used, with the operating profit to total cost (OP/OC) ratio as the profit level indicator (PLI). The TPO found the assessee's markup of 9.51% inadequate and, after detailed analysis, selected 36 comparables, arriving at an average PLI of 38.13%, resulting in an addition of Rs. 5,43,25,482. After considering the assessee's reply, the TPO revised the comparables to 25, leading to an adjustment of Rs. 3,40,26,578, which was further reduced by the DRP to Rs. 2,30,41,663.

2. Rejection of Assessee's ALP Determination:
The TPO rejected the ALP determined by the assessee in its TP documentation, citing detailed reasoning for the rejection. The Tribunal found no substance in the assessee's ground challenging this rejection, as the TPO's order was assailed on various counts in subsequent grounds.

3. Use of Multiple Year Data:
The assessee argued for the use of multiple year data, citing unavailability of current year data at the time of TP study preparation. The Tribunal upheld the TPO's decision to use current year data, as per Rule 10B(4), which stipulates the use of data relating to the financial year in which the international transaction occurred. The assessee failed to demonstrate how earlier year conditions influenced the profit of the relevant financial year.

4. Application of Various Filters:
The TPO applied several filters for selecting comparables, including exclusion of companies with turnover less than Rs. 1 crore and companies with employee cost less than 25% of total cost. The Tribunal upheld these filters, noting that companies with low turnover or low employee cost may not be functionally comparable to the assessee.

5. Inclusion of FCS Software Solutions Ltd.:
The assessee challenged the inclusion of FCS Software Solutions Ltd., citing functional dissimilarity, supernormal profits, and lack of segmental information. The Tribunal found that FCS Software Solutions was primarily an IT service provider and rejected the assessee's plea for exclusion based on functional dissimilarity and high margins. The Tribunal emphasized that high margins alone do not warrant exclusion unless caused by exceptional economic factors.

6. Exclusion of Companies Based on Turnover and Employee Cost Filters:
The Tribunal upheld the TPO's exclusion of companies with turnover less than Rs. 1 crore and those with employee cost less than 25% of total cost, as these filters ensure functional comparability and economic significance.

7. Exclusion of Companies with Diminishing Revenues/Persistent Losses:
The Tribunal supported the TPO's exclusion of companies with diminishing revenues or persistent losses, as these do not reflect normal operational results in the software industry and may indicate company-specific issues.

8. Risk Adjustments and Working Capital Adjustments:
The assessee's claim for risk adjustment was dismissed due to lack of quantification. However, the Tribunal restored the issue of working capital adjustment to the TPO for fresh consideration, emphasizing the need for adjustment based on opening and closing working capital deployed.

9. Addition of Fringe Benefit Tax (FBT) for Computing Book Profit:
The Tribunal upheld the addition of FBT for computing book profit under Section 115JB, aligning with the definition of tax under Section 2(43) of the Act, which includes FBT.

10. Charging of Interest Under Sections 234A and 234B:
The Tribunal did not specifically address this issue, implying no change to the AO's decision to charge interest under Sections 234A and 234B.

11. Initiation of Penalty Under Section 271(1)(c):
The Tribunal noted that the AO initiated the penalty proceedings mechanically without recording satisfaction, but did not provide a detailed ruling on this ground.

Conclusion:
The appeal was partly allowed for statistical purposes, with specific issues remanded to the TPO for reconsideration, particularly regarding working capital adjustments and the inclusion/exclusion of certain comparables based on detailed functional analysis. The Tribunal upheld the TPO's application of filters and the inclusion of FCS Software Solutions Ltd. as a comparable, while dismissing the assessee's claims regarding multiple year data and risk adjustments.

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