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2016 (12) TMI 1755 - AT - Income TaxTPA - Comparable selection - Held that - Assessee is engaged in the business of rendering software development services to its Associated Enterprises ( AE ). Capco IT is remunerated on a cost plus basis for the services rendered thus companies functionally dissimilar with that of assessee need to be deselected from final list. Negative Working capital adjustment - Held that - There is no need for making any negative working capital adjustment when assessee dos not carry any capital risk. In fact, TPO should have done necessary working capital adjustment to the profits of the selected comparables so as to make them comparable. We direct the TPO not make negative working capital adjustment. See Adaptec (India) (P.) Ltd. v. Asstt. CIT 2015 (6) TMI 288 - ITAT HYDERABAD . Deductions u/s 10A computation - Held that - Direct the A.O. to re-work deduction u/s 10(A) on the principle that what is excluded form Export Turnover must necessarily be excluded from total turnover.
Issues Involved:
1. Transfer Pricing Adjustments 2. Computation of Deduction under Section 10A of the Act 3. Levy of Interest under Sections 234B & 234D of the Act Issue-wise Detailed Analysis: 1. Transfer Pricing Adjustments: The appellant contested the Transfer Pricing Officer's (TPO) determination of the Arm's Length Price (ALP) for software services provided to its Associated Enterprises (AEs), which resulted in a transfer pricing adjustment of ?18,601,980. The appellant argued that the TPO erred in rejecting their Transfer Pricing documentation and conducting a fresh comparability analysis. Specific grievances included: a. Rejection of the appellant's comparability analysis and adoption of a 26.29% arm's length mark-up. b. Reliance on unaudited data under Section 133(6) of the Income-tax Act, 1961. c. Arbitrary threshold for Related Party Transactions filter and rejection of the upper limit for sales turnover filter without empirical analysis. d. Inconsistent application of filters for software development revenue and financial statement year-end. e. Rejection of Akshay Software Technologies Limited and VJIL Consulting Limited based on the onsite filter. f. Acceptance of companies like Infosys Limited and Wipro Limited, despite their brand-driven sales and functional dissimilarity. g. Acceptance of Tata Elxi Limited and other companies engaged in software product development, despite functional dissimilarity. h. Rejection of Thinksoft Global Services Limited and Maars Software International Limited without proper consideration. The Tribunal agreed with the appellant's request for rejection and acceptance of comparables, relying on the decision in Infineon Technologies India Pvt. Ltd. The Tribunal directed the TPO to include Akshay Software Technologies Ltd., Maars Software International Ltd., and VJIL Consulting Ltd. in the comparables. Risk Adjustment: The appellant argued that as a captive service provider, it bore minimal business risks, unlike the comparable uncontrolled companies. The Tribunal, referencing several judgments, mandated appropriate risk adjustments to account for differences between the tested party and comparables. Working Capital Adjustment: The appellant contended that as a captive service provider, it did not bear working capital risks and thus should not face negative working capital adjustments. The Tribunal, citing the Adaptec (India) Pvt. Ltd. case, directed the TPO not to make negative working capital adjustments. 2. Computation of Deduction under Section 10A of the Act: The appellant argued that the Assessing Officer (AO) and Dispute Resolution Panel (DRP) erred in recomputing the deduction under Section 10A at ?16,565,364 instead of ?17,476,014. The Tribunal, relying on the decision in Dell International Service India Pvt. Ltd., directed the AO to recompute the deduction based on the principle that what is excluded from 'Export Turnover' must also be excluded from 'Total Turnover.' 3. Levy of Interest under Sections 234B & 234D of the Act: The Tribunal directed that the interest levied under Sections 234B & 234D is consequential in nature and should be recalculated accordingly. Conclusion: The appeal was allowed for statistical purposes, with directions to the TPO and AO to rework the PLI and deductions based on the Tribunal's findings.
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