2015 (8) TMI 703 - AT - Income Tax

Transfer Pricing adjustment - software development services segment - selection of comparable - Held that - We direct Infosys Technologies Ltd. be excluded from the final list of comparable companies chosen by the TPO the reason being that the latter is giant in the area of development of software and it assumes all risks, leading to higher profit. See Agnity India Technologies Pvt. Ltd. v. ITO 2010 (11) TMI 852 - ITAT DELHI confirmed by HC 2013 (7) TMI 696 - DELHI HIGH COURT Satyam Computer Services Ltd. to exclude from the final list of comparables. Margins of Visualsoft Technologies Ltd., which is at Sl.No.15 of the list of comparables chosen by the TPO - the basis on which the DRP came to the conclusion that the segmental details are not available in the public domain is erroneous, as the data taken by the assessee are based on the annual report of this company, a copy of which is placed at page 456 of the assessee s paperbook. We are therefore of the view that it would be just and appropriate to set aside the directions of the DRP in this regard and direct the TPO/AO to verify the claim of the assessee and if found correct, to take only the segmental margins of this company as pleaded by the assessee. Working capital adjustments - Held that - The annual reports of the comparable companies chosen for the purpose of calculating working capital adjustment are accepted as additional evidence. The issue, however, requires verification by the TPO/AO and therefore the order of the DRP in this regard is set aside and the issue is remanded to the TPO/AO for fresh consideration in light of the material now made available by the assessee. Allsec Technologies Ltd. should be excluded from the list of comparable companies. Club expenses disallowed as a deduction u/s. 37(1) - as per revenue the same were personal in nature and cannot be regarded as expended wholly and exclusively for the purpose of business - Held that - As relying on CIT v. United Glass Mfg. Co. Ltd. 2012 (9) TMI 914 - SUPREME COURT wherein taken the view that club membership fees of employees incurred by the assessee is business expenses u/s. 37 of the Act. In view of the aforesaid decision the claim of assessee in this regard has to be allowed. - Decided in favour of assessee. Disallowance of employee provident fund liability u/s. 36(1)(va) - Held that - It is not disputed that the aforesaid employees contribution to provident fund was paid by the assessee on or before the due date for filing return of income for AY 2006-07. In such circumstances, no disallowance can be made u/s. 36(1)(va). See CIT v. Sabari Enterprises & Ors. (2007 (7) TMI 169 - KARNATAKA HIGH COURT) wherein it was held that employees contributions to provident fund are allowable deductions, even though made beyond the due date of furnishing return of income as per section 139(1). Thus the disallowance made by the revenue authorities has to be deleted. Accordingly, the same is directed to be deleted. - Decided in favour of assessee.

Summary

Issues Involved:
1. Transfer Pricing (TP) adjustments in the software development services segment.
2. Transfer Pricing adjustments in the ITES segment.
3. Non-TP related issues including disallowance of club expenses and employee provident fund liability.

Detailed Analysis:

Transfer Pricing Adjustments in Software Development Services Segment:
The Assessee, engaged in providing IT enabled services and software development, reported various international transactions with associated enterprises (AEs). The TPO did not agree with the Assessee's Transfer Pricing Analysis and chose 33 comparable companies. The Assessee's request for working capital adjustment was denied by the TPO due to lack of supporting documents. The TPO determined the ALP of the international transaction on rendering software development services, resulting in an adjustment of Rs. 1,81,05,618, which was confirmed by the CIT(Appeals).

The Assessee argued for the exclusion of Infosys Technologies Ltd. and Satyam Computer Services Ltd. from the list of comparables, citing decisions from ITAT Delhi Bench and Hon'ble Delhi High Court. The Tribunal directed the exclusion of these companies from the final list of comparables.

Regarding Visualsoft Technologies Ltd., the Assessee contended that the TPO incorrectly computed the OP/TC margin. The Tribunal directed the TPO/AO to verify the Assessee's claim and consider the segmental margins if found correct.

The Tribunal also accepted the Assessee's additional evidence for working capital adjustment and remanded the issue to the TPO/AO for fresh consideration.

Transfer Pricing Adjustments in ITES Segment:
In the ITES segment, the Assessee reported an OP/TC margin of 12.62%. The TPO chose 6 comparable companies and determined the ALP, resulting in an adjustment of Rs. 1,21,45,823, which was confirmed by the DRP. The Assessee sought the exclusion of Allsec Technologies Ltd. due to business restructuring and super-normal profits. The Tribunal, referencing ITAT Hyderabad Bench's decision, directed the exclusion of Allsec Technologies Ltd. from the list of comparables.

The Tribunal also directed the TPO/AO to allow working capital adjustment in the ITES segment after verifying the details filed by the Assessee.

Non-TP Related Issues:
1. Club Expenses: The Assessee's claim for club expenses of Rs. 89,746 was disallowed by the Revenue authorities as personal in nature. The Tribunal, referencing the Hon'ble Supreme Court decision in CIT v. United Glass Mfg. Co. Ltd., allowed the claim as business expenses under Section 37 of the Act.

2. Employee Provident Fund Liability: The Assessee's contribution to the provident fund amounting to Rs. 34,965 was disallowed under Section 36(1)(va). The Tribunal, referencing the Hon'ble Karnataka High Court decision in CIT v. Sabari Enterprises & Ors., allowed the deduction as the contribution was paid before the due date for filing the return of income.

Conclusion:
The appeal of the Assessee was partly allowed, with directions for exclusion of certain comparables, acceptance of additional evidence for working capital adjustments, and allowance of non-TP related claims.