2015 (11) TMI 1674 - AT - Income Tax

TPA - selection of comparable - Held that - Assessee is engaged in the business of provision of software development services of electronic integrated circuits and firmware development of integrated circuits to its parent company and also provides marketing support services 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 - Risk adjustment must be granted, if warranted in the facts of the case, for bringing the comparables on par with the assessee company. In principle, the assessee must 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 and to decide the percentage of risk adjustment in accordance with law. Interest under Section 234B - Held that - The charging of interest is consequential and mandatory and the Assessing Officer has no discretion in the matter. This proposition has been upheld by the Hon ble Apex Court in the case of Anjum H Ghaswala (2001 (10) TMI 4 - SUPREME Court) and we, therefore, uphold the action of the Assessing Officer in charging the said interest. Additional Ground on Depreciation Adjustment - Held that - 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 as relying on case of 24/7 Customer.com Pvt. Ltd. 2013 (1) TMI 45 - ITAT BANGALORE

Summary

Issues Involved:
1. Transfer Pricing Adjustments
2. Comparability of Selected Companies
3. Risk Adjustment
4. Depreciation Adjustment
5. Interest under Section 234B

Detailed Analysis:

1. Transfer Pricing Adjustments:
The appeal is against the order of assessment for AY 2008-09, where the DCIT, Circle 11(4), Bangalore, proposed a Transfer Pricing (T.P.) Adjustment of Rs. 24,15,96,448. The assessee, engaged in software development services, reported several international transactions. The TPO determined the Arm's Length Price (ALP) using the TNMM method and selected 11 comparables, resulting in the proposed adjustment. The DRP confirmed these additions.

2. Comparability of Selected Companies:
The assessee contested the inclusion of certain companies as comparables, arguing functional dissimilarity and high turnover. The Tribunal examined the comparability of each company:

a. KALS Information Systems Ltd.:
The Tribunal held that KALS, being in product development, is not comparable to a software development service provider. This decision was based on previous rulings where KALS was excluded for similar reasons.

b. Bodhtree Consulting Ltd.:
The Tribunal excluded Bodhtree, noting it provides software products and end-to-end web solutions, making it functionally different from the assessee.

c. Turnover Filter:
The Tribunal excluded seven companies (Tata Elxsi Ltd., Sasken Communication Technologies Ltd., Persistent Systems Ltd., Zylog Systems Ltd., Larsen & Toubro Infotech Ltd., Infosys Technologies Ltd., and Mindtree Ltd.) due to their turnovers exceeding Rs. 200 Crores, which is not comparable to the assessee's turnover of approximately Rs. 150 Crores.

3. Risk Adjustment:
The Tribunal acknowledged the assessee's claim for risk adjustment, as it is a low-risk service provider compared to the risk-bearing comparables. The Tribunal directed the TPO to examine the quantitative computation of risk adjustment and decide the percentage accordingly.

4. Depreciation Adjustment:
The assessee argued for an adjustment due to significant differences in depreciation costs. The Tribunal admitted this additional ground and remitted the issue to the TPO to examine and consider the adjustment, following the principles laid down in the case of 24/7 Customer.com Pvt. Ltd.

5. Interest under Section 234B:
The Tribunal upheld the charging of interest under Section 234B, stating it is consequential and mandatory. The AO was directed to recompute the interest chargeable while giving effect to this order.

Conclusion:
The Tribunal partly allowed the assessee's appeal, directing the exclusion of certain comparables, granting risk adjustment, and remitting the issue of depreciation adjustment to the TPO. The interest under Section 234B was upheld as consequential. The specific grounds not pressed by the assessee were dismissed as infructuous.