2015 (1) TMI 1379 - AT - Income Tax

Determining the arm s length price of the international transaction of software development services rendered to the associated enterprises - Held that - Assessee is providing of software development services, thus companies functionally dissimilar with that of assessee need to be deselected from final list. Disallowance on account of application of section 43B - Held that - Payment of employees contribution to Provident Fund could not be disallowed u/s 43B. See CIT vs. M/s Hindustan Organics Chemicals Ltd. 2014 (7) TMI 477 - BOMBAY HIGH COURT

Issues Involved:

1. Addition of Rs. 8,79,44,950/- in arm's length price determination for international transactions.
2. Disallowance of Rs. 11,37,645/- under section 43B of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Addition of Rs. 8,79,44,950/- in Arm's Length Price Determination:

The primary dispute in this appeal pertains to an addition of Rs. 8,79,44,950/- made by the income-tax authorities while determining the arm's length price of the international transaction of software development services rendered to associated enterprises. The appellant-assessee, a branch office of a US-based company, provides software development services to its associated enterprises. For the assessment year 2007-08, the assessee declared a total income of Rs. 39,37,714/-, which was later revised to Rs. 9,30,21,450/- by the Assessing Officer after scrutiny.

The Transfer Pricing Officer (TPO) determined the arm's length price of the international transactions at a higher amount than stated by the assessee, leading to an adjustment of Rs. 8,79,44,950/-. The TPO accepted the Transactional Net Margin (TNM) Method but differed on other aspects, resulting in a final set of comparables with a mean PLI of 24.23%, while the assessee's PLI was 13.10%.

At the hearing, both parties agreed that the dispute was identical to the one resolved by the Pune Bench of the Tribunal in the assessee's own case for the assessment year 2006-07. The Tribunal had directed the exclusion of three companies-KALS Information Systems Ltd., Transworld Infotech Ltd., and Compucom Software Ltd.-from the final set of comparables, which would bring the arm's length price within the permissible range under section 92C(2) of the Act.

The Tribunal found that KALS Information Systems Ltd. was engaged in software product development, not comparable to the assessee's services. Transworld Infotech Ltd. had a different financial year ending, making it unsuitable for comparison. Compucom Software Ltd. had related party transactions exceeding 25%, warranting its exclusion.

Following these precedents, the Tribunal directed the exclusion of these three companies from the final set of comparables, rendering the other grounds of appeal academic.

2. Disallowance of Rs. 11,37,645/- under Section 43B:

The second issue involves a disallowance of Rs. 11,37,645/- made by the Assessing Officer under section 43B of the Act for the belated deposit of employees' contribution to the Provident Fund. The assessee contended that the contributions were deposited before the due date for filing the return, invoking section 43B. However, the lower authorities disallowed the claim, stating that section 36(1)(va) governed the employees' contribution, not section 43B.

At the hearing, both parties acknowledged the Bombay High Court's ruling in CIT vs. M/s Hindustan Organics Chemicals Ltd., which held that such payments could not be disallowed under section 43B. The Tribunal followed this judgment and directed the deletion of the addition of Rs. 11,37,645/-.

Conclusion:

The appeal was partly allowed, with the Tribunal directing the exclusion of certain comparables for arm's length price determination and the deletion of the disallowance under section 43B. The order was pronounced on 30th January 2015.

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