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2016 (10) TMI 1135 - AT - Income TaxValidity of reassessment proceedings - reopening on the basis of TPO s order - Held that - The reassessment proceedings initiated based on the ld TPO s order dated 29.1.2013 suggesting an adjustment of 2, 43, 53, 752/-to ALP was based on illegal reference by the ld AO and is accordingly void ab initio and bad in law. Hence the entire reassessment proceedings initiated based on such illegal reference and illegal order of ld TPO cannot be construed as information which would have live link to the formation of belief to have reason to believe on the part of the ld AO that income had escaped assessment within the meaning of section 147 of the Act. Hence we hold that no addition in the sum of 2, 43, 53, 752/-towards adjustment to ALP could be made in the reassessment. Once this addition goes then the very root of the reassessment proceedings also vanishes and no other addition could be made thereon. Accordingly the entire reassessment proceedings deserve to be quashed in the facts and circumstances of the case. In view of our above conclusion we allow the ground no. 1 raised by the assessee by declaring that the reassessment order of the ld AO is bad in law and void ab initio. Adjustment to ALP - TPA - comparable selection - Held that - The assessee vis a vis the group is involved in the execution of the software development and coding of software service ( software services ) outsourced to it by LVS US thus companies functionally dissimlar with that of assessee need to be deselected from final list of comparable. ALP of Royalty payments - Held that - TPO had erred in determining the ALP of Royalty payments at Rs Nil and accordingly direct the ld TPO to allow the deduction for payment of Royalty as the same is also duly benchmarked by the assessee which were not disputed by the revenue and we hold that royalty @ 40% paid by the assessee is at ALP. Accordingly the grounds raised by the assessee in this regard are allowed.
Issues Involved:
1. Validity of reassessment proceedings. 2. Adjustment to Arm's Length Price (ALP) for software development services. 3. Disallowance of royalty payments. 4. Inclusion and exclusion of comparables for Transfer Pricing analysis. 5. Low tax effect on the revenue's appeal. Detailed Analysis: 1. Validity of Reassessment Proceedings: The primary issue was whether the reassessment proceedings were validly initiated. The assessee filed its return of income on 29.09.2009 and received an intimation under section 143(1) on 13.10.2010. No notice under section 143(2) was issued for scrutiny, but the Assessing Officer (AO) made a reference to the Transfer Pricing Officer (TPO) for determining the ALP, which resulted in an adjustment of ?2,43,53,752. The AO reopened the assessment by issuing a notice under section 148 to give effect to the TPO's order. The reassessment was completed by making the same addition towards ALP and a disallowance under section 40(a)(ia) of ?27,575. The Dispute Resolution Panel (DRP) stated that the assessee was not an eligible assessee under section 144C(15)(b), and the jurisdiction of the DRP could not be invoked. The Tribunal held that the reassessment proceedings initiated based on the TPO's order were void ab initio and bad in law, as no valid assessment proceedings were pending when the reference to the TPO was made. The reassessment proceedings were quashed, and the appeal of the assessee for the Asst Year 2009-10 was allowed. 2. Adjustment to ALP for Software Development Services: The assessee used the Transactional Net Margin Method (TNMM) with a Profit Level Indicator (PLI) of Net Cost Plus Margin (NCP) and selected 15 comparables with an average NCP margin of 14.79%. The TPO revised the NCP margin to 30.94% and selected 9 comparables with an average NCP margin of 40.34%, resulting in a TP adjustment of ?1,57,27,755. The DRP allowed adjustments for working capital and recalculated the ALP at 39.25%, making an upward adjustment of ?74,92,375. The Tribunal directed the exclusion of three comparables (E-Infochips Bangalore Ltd, Infinite Data Systems Pvt Ltd, and Spry Resources India Pvt Ltd) and the inclusion of one comparable (Akshay Software Technologies Ltd). The Tribunal instructed the TPO to redetermine the ALP and decide on any necessary adjustments. 3. Disallowance of Royalty Payments: The assessee paid royalty of ?72,84,012 to its AE for license sales and maintenance revenue from third-party customers. The TPO determined the ALP for royalty at ?Nil, which the Tribunal found erroneous. The Tribunal held that the payment of royalty was integral to the assessee's operations and justified by increased revenues and profitability. The Tribunal relied on the decisions of the Delhi High Court in CIT vs EKL Appliances Ltd and CIT vs Cushman and Wakefield (India) (P) Ltd, which held that the TPO cannot determine the ALP of payments at Nil without considering the benefits derived by the assessee. The Tribunal directed the TPO to allow the deduction for royalty payment, stating that the royalty rate of 40% was at arm's length. 4. Inclusion and Exclusion of Comparables: The Tribunal addressed the inclusion and exclusion of certain comparables for Transfer Pricing analysis: - Exclusion of E-Infochips Bangalore Ltd: The Tribunal found that this company was engaged in both IT and IT-enabled services without segmental income break-up, making it functionally not comparable. - Exclusion of Infinite Data Systems Pvt Ltd: The Tribunal noted that this company had a different business model and provided services primarily to a single customer under a Build, Operate, and Transfer (BOT) model, leading to abnormal profit margins. - Exclusion of Spry Resources India Pvt Ltd: The Tribunal found that this company was engaged in software consultancy services, not similar to the assessee's software development services. - Inclusion of Akshay Software Technologies Ltd: The Tribunal found that this company was engaged in software development activities, making it functionally comparable to the assessee. 5. Low Tax Effect on Revenue's Appeal: The revenue's appeal for the Asst Year 2010-11 was dismissed due to low tax effect, as the disputed addition was less than ?10 lakhs. The Tribunal relied on CBDT Circular No. 21/2015, which states that appeals should not be filed where the tax effect does not exceed the specified monetary limits. Conclusion: - The appeal of the assessee for the Asst Year 2009-10 was allowed. - The appeal of the assessee for the Asst Year 2010-11 was partly allowed for statistical purposes. - The appeal of the revenue for the Asst Year 2010-11 was dismissed due to low tax effect. Order Pronounced: The order was pronounced in the open court on 19.10.2016.
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