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2016 (6) TMI 1333 - AT - Income TaxTPA - Comparable selection - Held that - Assessee providing software development service to its group companies. Assessee is a captive service provider assisting SAP AG Germany in research design and development of new software products software enhancement and modifying existing software modules. It operates from various units registered with Software Technology Parks (STP) of India. Assessee had international transactions in the nature of software development services rendered to its AE abroad thus companies functionally dissimilar with that of assessee need to be deselected from final list. We direct exclusion of Accel Transmatics Ltd (seg) Avani Cimcon Technologies Ltd Celestial Labs Ltd E-Zest Solutions Ltd Flextronics Software Systems Ltd (seg) Helios 2, 42, 205/-. It might be true that it had claimed such credit in the return of income. In all fairness we feel that this matter requires a fresh look by the AO. If the assessee is eligible for foreign tax credit and if the amount claimed by the assessee is correct AO shall give such credit. Ground. is allowed for statistical purpose.
Issues Involved:
1. Transfer Pricing Adjustments 2. Deduction under Section 80JJAA 3. Allocation of Interest Expenses 4. Deduction under Section 10A 5. Foreign Tax Credit Issue-wise Detailed Analysis: 1. Transfer Pricing Adjustments: The assessee, a subsidiary of SAP AG, Germany, engaged in software development services, had international transactions amounting to ?520,17,36,977/-. For benchmarking, the assessee used the TNMM method and selected 18 comparables. The TPO, however, replaced most of these comparables with 26 others, leading to an addition of ?72,87,76,037/- under Section 92CA. The assessee contested the inclusion of several comparables, arguing they were functionally different. The Tribunal directed the exclusion of Accel Transmatics Ltd (seg), Avani Cimcon Technologies Ltd, Celestial Labs Ltd, E-Zest Solutions Ltd, Flextronics Software Systems Ltd (seg), Helios & Matheson Information Technology Ltd, Infosys Technologies Ltd, Ishir Infotech Ltd, Kals Information Systems Ltd (seg), Lucid Software Ltd, Persistent Systems Ltd, Tata Elxsi Ltd (seg), Thirdware Solutions Ltd, and Wipro Ltd (seg) from the list of comparables. Megasoft Ltd (seg) was to be included only after proper segmentation of its results. The TPO/AO was directed to rework the ALP accordingly and provide a working capital adjustment based on the final set of comparables. 2. Deduction under Section 80JJAA: The assessee claimed a deduction of ?9,26,66,731/- under Section 80JJAA, supported by an audit report in Form 10DA. The AO denied the claim, arguing that software engineers were not "workmen" under the Industrial Disputes Act, 1947, and that the deduction was not allowable due to Section 80A(4). The Tribunal, referencing the decision in Texas Instruments India P. Ltd, held that software engineers could be considered workmen. However, the Tribunal agreed with the AO that the deduction under Section 80JJAA was linked to profits and gains and thus, Section 80A(4) applied. The Tribunal allowed the deduction for Unit-1, where no Section 10A claim was made, and directed the AO to quantify the eligible deduction for Unit-1. 3. Allocation of Interest Expenses: The AO reallocated interest expenses of ?5,97,06,982/- from Unit-1 to Unit-2, arguing that both units were situated in the same campus and shared facilities. The assessee claimed the loan was used solely for Unit-1. The Tribunal upheld the AO's reallocation, noting that the assessee could not prove Unit-2 was entirely independent and did not utilize the campus facilities. 4. Deduction under Section 10A: The assessee claimed a deduction of ?8,39,905/- under Section 10A for its Chandigarh unit, acquired through a slump sale from M/s. Virsa Systems P. Ltd. The AO denied the claim, arguing that the unit was formed by the transfer of used plant and machinery. The Tribunal, referencing the judgment in Sonata Software Ltd, held that a slump sale did not constitute a reconstruction of business and directed the AO to verify the eligibility of the claim within the total period of availability of deduction under Section 10A. 5. Foreign Tax Credit: The assessee claimed a foreign tax credit of ?2,42,205/-, which was not granted by the AO. The Tribunal directed the AO to verify the eligibility and correctness of the claim and grant the credit if appropriate. Conclusion: The appeal was partly allowed for statistical purposes, with directions for reworking the ALP, quantifying eligible deductions, reallocating interest expenses, verifying the eligibility of Section 10A claims, and granting foreign tax credit if eligible.
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