2015 (11) TMI 1666 - AT - Income Tax

TPA - selection of comparable - Held that - Assessee a company engaged in the business of provision of software development services of electronic integrated circuits and firmware development of integrated circuits to its parent company thus companies functionally dissimilar with that of assessee need to be deselected from final list of comparable. Risk adjustment - Held that - In principle the assessee may be granted risk adjustment if so required in the peculiar facts of the case for bringing the comparable companies on par with the assessee. However the quantum of risk adjustment to be granted if any is remanded back to the file of the TPO. The TPO is directed to examine the details of the quantitative computation of risk adjustment and attendant details submitted by the assessee justifying its claim for risk adjustment and to take into account the same along with all the relevant material before deciding on the percentage of risk adjustment to be allowed if any in accordance with law. TDS u/s 195 - Disallowance of Project Specific Costs under section 40(a)(ia) - Held that - In the course of hearings before us the learned Authorised Representative for the assessee fairly conceded that this issue is covered against the assessee and in favour of Revenue by the decision of the Hon ble High Court of Karnataka in the case of Samsung Electronics Co. Ltd. (2011 (10) TMI 195 - KARNATAKA HIGH COURT) relied on by the A.O./DRP wherein held in view of the provisions of Section 90 of the Act agreements with foreign countries DTAA would override the provisions of the Act. In view of the said finding it is clear that there is obligation on the part of the respondents to deduct tax at source under Section 195 of the Act and also to which case the assessee was also party before the Hon ble High Court. Respectfully following it we uphold the decision of the Assessing Officer. - Decided against assessee Advance Tax Credit - Held that - We find this Ground was raised before the DRP and the DRP had directed the Assessing Officer to examine the claim of the assessee and allow as per the existing system of giving credit for prepaid taxes. In view of the above the Assessing Officer is directed to comply with the directions of the DRP and give credit for the pre-paid taxes paid by the assessee as per law. Depreciation Adjustment - Held that - We admit the additional ground raised for grant of depreciation adjustment and remit the matter to the file of the TPO to consider and examine the assessee s claim for adjustment towards depreciation Wrong computation of margins and wrong computation of working capital adjustment - assessee submitted that these are computational issues that are to be examined by the TPO and decided on merits - Held that - We direct the TPO to examine the issues raised on the computation of margin and computation of working capital adjustment and decide the issues on merits after affording the assessee adequate opportunity of being heard and to make submissions and file details in this regard and to duly consider the same while deciding the issue.

Issues Involved:

1. Transfer Pricing Adjustments
2. Exclusion/Inclusion of Comparable Companies
3. Risk Adjustment
4. Disallowance of Project Specific Costs under Section 40(a)(i)
5. Advance Tax Credit
6. Depreciation Adjustment

Detailed Analysis:

1. Transfer Pricing Adjustments:

The primary issue revolves around the determination of the Arm's Length Price (ALP) for the international transactions reported by the assessee. The Transfer Pricing Officer (TPO) proposed an adjustment of Rs. 26,13,69,735 to the ALP of the assessee's international transactions related to software development services. The assessee contended that the TPO and the Assessing Officer (AO) erred in rejecting the Transfer Pricing (TP) documentation and comparability analysis conducted by the assessee.

2. Exclusion/Inclusion of Comparable Companies:

The assessee objected to the inclusion of several companies in the list of comparables selected by the TPO, arguing they were not functionally comparable. The Tribunal, following the decision in the case of M/s. Sonus Networks India Pvt. Ltd., directed the exclusion of 13 companies, including Avani Cincom Technologies Ltd., Bodhtree Consulting Ltd., Celestial Biolabs Ltd., Infosys Technologies Ltd., and others, from the list of comparables. Additionally, the Tribunal remanded the issue of including Aarman Software Pvt. Ltd. and VMF Softech Ltd. back to the TPO for fresh consideration.

3. Risk Adjustment:

The assessee argued for a risk adjustment, contending it is a low-risk service provider, unlike the risk-bearing comparable companies. The Tribunal held that, in principle, risk adjustment must be granted if warranted by the facts of the case. The matter was remanded back to the TPO to examine the details of the quantitative computation of risk adjustment and decide the percentage of risk adjustment to be allowed.

4. Disallowance of Project Specific Costs under Section 40(a)(i):

The AO disallowed project-specific costs amounting to Rs. 11,25,95,270 under Section 40(a)(i) for non-deduction of taxes on software usage charges, following the decision of the Hon'ble High Court of Karnataka in the case of Samsung Electronics Co. Ltd. The Tribunal upheld the AO's decision, dismissing the assessee's ground on this issue.

5. Advance Tax Credit:

The assessee contended that the AO failed to give credit for advance tax paid amounting to Rs. 1,50,00,000, resulting in excessive interest under Sections 234B and 234C. The Tribunal directed the AO to comply with the directions of the Dispute Resolution Panel (DRP) and give credit for the pre-paid taxes as per law.

6. Depreciation Adjustment:

The assessee raised an additional ground for a depreciation adjustment, arguing the depreciation cost as a percentage of the cost was significantly different from that of the comparable companies. The Tribunal admitted the additional ground, following the decision in the case of 24/7 Customer.com Pvt. Ltd., and remanded the matter to the TPO to consider and examine the claim for adjustment towards depreciation.

Conclusion:

The Tribunal partly allowed the assessee's appeal, directing the exclusion of certain companies from the list of comparables, remanding the issues of risk adjustment, inclusion of certain comparables, and depreciation adjustment back to the TPO for fresh consideration. The disallowance of project-specific costs was upheld, and the AO was directed to give credit for the advance tax paid.

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