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2012 (6) TMI 388 - AT - Income TaxTransfer Pricing - adjustment to ALP - dispute regarding selection of comparables - assessee engaged in the business of marketing products and technical support services and software development related services in India - Held that - Analysis of comparable show that TPO has rightly included this comparable on reasons enumerated as follows R Systems International Ltd (Segment) - TPO rightly excluded provision for doubtful debts and provision for doubtful advances to work out the operating profit of the comparable party since the same cannot be considered as normal expenses - Celestial Labs Ltd - rightly selected by TPO since 95% of the revenue is from services even though it is also engaged in development of products in the field of bio-technology, pharmaceutical - Flextronics Software Systems Ltd - though company is also involved in the development of the software product and is also involved in BPO services, however revenue sales from services constitutes almost 90% and the product sales is only 10%. Following company cannot be taken as comparable on grounds - Lucid Software Limited - this company cannot be treated as having same function and profitability ratio, since company has employed heavy capital in product development expenditure - Infosys Technologies Ltd & Wipro Ltd.-IT Services Segment - cannot be taken as comparable due to size of the company in terms of the sales revenue, stage of business cycle and company s growth cycle - Tata Elxsi Limited - since it is engaged in development of niche product and development services, which is entirely different from the assessee company - Avani CincomTechnologies Ltd.( Avani Cincom ) - segmental details of operating income of IT services and sale of software products have not been provided so as to see whether the profit ratio of this company can be taken into consideration for comparison. Assessing Officer is directed to determine the profit ratio after taking the arithmetic mean of all the final tested parties (i.e. after excluding five entities as discussed above) and determine the ALP of the assessee company for international transactions. Depreciation on UPS - 15% or 60% - Held that - Since computer system can function independently without the UPS and even the UPS generally can be used to ensure uninterrupted power supply to other equipments besides computer. It is, thus, not the integral part of the computer system, hence depreciation to be provided @15% - Decided against the assessee. Interest u/s 234C - Held that - It is amply clear that there is no shortfall in any of the quarters and, therefore, no interest liability under Section 234C can be fastened upon the assessee.
Issues Involved:
1. Adjustment of international transactions of Fees for Software Development and Related Services at Rs. 88,49,974/-. 2. Application of depreciation @60% on UPS instead of 15%. 3. Computation of interest liability for sum of Rs. 46,825/- under Section 234C. Issue-wise Detailed Analysis: Adjustment of International Transactions of Fees for Software Development and Related Services at Rs. 88,49,974/- 1. Factual Matrix: - The assessee, a subsidiary of 'Telcordia Technologies Inc. USA,' engaged in software and services for various communication networks, earned a compensation equaling its total operating cost plus a 15% mark-up. - The international transactions included fees for marketing, technical support, software development, and related services. 2. Transfer Pricing Study: - The assessee used the 'Transaction Net Margin Method' (TNMM) to establish the arm's length price (ALP) and identified 18 comparable companies. - The TPO rejected the comparables and conducted a fresh analysis, selecting 28 companies, resulting in an arithmetic mean of 27.96%, leading to an adjustment of Rs. 1,18,00,978/-. 3. Dispute Resolution Panel (DRP): - The DRP directed the TPO to verify three entities but confirmed the other companies and their profit margins. - The final arithmetic mean of 27 comparables was 24.72%, leading to an adjustment of Rs. 88,49,974/- added to the assessee's income. 4. Assessee's Objections: - The assessee contested 8 out of 27 comparable companies, arguing that certain companies should not be considered due to different business operations or incorrect profit calculations. 5. Tribunal's Analysis: - R Systems International Ltd (Segment): The tribunal upheld the TPO's exclusion of doubtful debts and advances from operating expenses. - Lucid Software Limited: Excluded due to significant product development expenditure. - Celestial Labs Ltd.: Included as more than 95% of revenue was from services. - Infosys Technologies Ltd.: Excluded due to significant intangible assets and different business scale. - Wipro Ltd.: Excluded due to its global operations and product sales. - Flextronics Software Systems Ltd.: Included as 90% of revenue was from services. - Tata Elxsi Limited: Excluded due to different nature of services. - Avani Cincom Technologies Ltd.: Excluded due to lack of segmental details. 6. Final Directions: - The tribunal directed the Assessing Officer to determine the profit ratio after excluding the five disputed entities and apply the +/- 5% range as per Section 92C(2). Application of Depreciation @60% on UPS Instead of 15% 1. Factual Matrix: - The assessee claimed depreciation at 15% on UPS used for various office and IT equipment. - The DRP directed depreciation at 60%, enhancing the total claim. 2. Assessee's Argument: - The assessee relied on the ITAT Delhi Bench decision in Nestle India Ltd., arguing that UPS should be depreciated at 15%. 3. Tribunal's Decision: - The tribunal agreed with the assessee, holding that UPS, used for office equipment and plant machinery, should be depreciated at 15%, subject to verification by the Assessing Officer. Computation of Interest Liability for Sum of Rs. 46,825/- Under Section 234C 1. Factual Matrix: - The assessee's return of income resulted in a tax liability fully covered by advance tax and TDS. - The Assessing Officer computed interest under Section 234C for shortfall in advance tax payments. 2. Tribunal's Analysis: - The tribunal examined the advance tax payments and found no shortfall in any quarter. 3. Tribunal's Decision: - The interest liability of Rs. 46,825/- under Section 234C was deleted. Conclusion: The appeal was partly allowed with directions to the Assessing Officer to re-evaluate the comparables for determining the arm's length price, apply the appropriate depreciation rate for UPS, and delete the interest liability under Section 234C.
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