2016 (9) TMI 1483 - AT - Income Tax

TPA - Comparable selection - functinal similarity - Held that - The assessee company is engaged in the business of software development research center and provides software development services of electronic integrated circuits. It also provide support services to Infineon Singapore. The operation of the assessee are organized into 2 business development center (STPI unit) and sales and market support division (non STPI unit) thus companies functionally dissimilar with that of assessee need to be deselected from final list. Disallowance of project specific costs u/s 40(a)(i) - Held that - This issue is covered against the assessee and in favour of Revenue by the decision of the Hon ble High Court of Karnataka in the case of Samsung Electronics Co. Ltd. 2011 (10) TMI 195 - KARNATAKA HIGH COURT . Adjustments made to the Total turnover in computing deduction u/s 10A - Held that - Issue covered by the decision of Tata Elxsi 2011 (8) TMI 782 - KARNATAKA HIGH COURT . Lower deduction u/s 10A - profits of the software (STPI) unit as 297, 319, 880/- instead of 181, 072, 777/- - Held that - We direct the TPO to correct the error which has crept in while computing deduction u/s 10A and take the profit of software unit at 181, 072, 777/- Market risk adjustment - Held that - As decided in INTELLINET TECHNOLOGIES INDIA (P.) LTD. VERSUS INCOME-TAX OFFICER WARD-11(2) BANGALORE 2012 (6) TMI 237 - ITAT BANGALORE in principle risk adjustment must be granted if warranted in the facts of the case for bringing the comparables on par with the assessee company. Following the above decision and of the co-ordinate bench (supra) we also hold that in principle the assessee may be granted risk adjustment if so required in the peculiar facts of the case for bringing the comparable companies on par with the assessee. However the quantum of risk adjustment to be granted if any is remanded back to the file of the TPO. The TPO is directed to examine the details of the quantitative computation of risk adjustment and attendant details submitted by the assessee justifying its claim for risk adjustment and to take into account the same along with all the relevant material before deciding on the percentage of risk adjustment to be allowed. Depreciation adjustment allowance of depreciation adjustment - Held that - As relying on 24/7 CUSTOMER. COM (P.) LTD. VERSUS DEPUTY COMMISSIONER OF INCOME-TAX CIRCLE 11 (2) BANGALORE 2013 (1) TMI 45 - ITAT BANGALORE admit the additional ground raised for grant of depreciation adjustment and remit the matter to the file of the TPO to consider and examine the assessee s claim for adjustment towards depreciation - Appeal is partly allowed for statistical purposes.

Issues Involved:
1. Determination of Arm's Length Price (ALP) for international transactions.
2. Rejection of Transfer Pricing (TP) documentation and choice of appropriate method.
3. Adoption of arm's length mark-up.
4. Reliance on unaudited data.
5. Threshold limit for Related Party Transactions filter.
6. Rejection of upper limit for sales turnover filter.
7. Consistency in applying filters for comparables.
8. Acceptance and rejection of specific comparable companies.
9. Use of multiple year data.
10. Claim of deduction under section 10A.
11. Disallowance of project-specific costs under section 40(a) of the Act.
12. Adjustments made to the total turnover in computing deduction under section 10A.
13. Market risk adjustment.
14. Depreciation adjustment.

Detailed Analysis:

1. Determination of ALP for International Transactions:
The Tribunal directed the Transfer Pricing Officer (TPO) to exclude certain companies from the list of comparables based on functional dissimilarity and other specific reasons, such as abnormal growth rates and fluctuating margins. The companies to be excluded include Accel Transmatics Ltd, Avani Cimcon Technologies Ltd, Celestial Labs Ltd, and others, following the precedent set by Hewlett-Packard (India) Globalsoft Pvt. Ltd.

2. Rejection of TP Documentation and Choice of Appropriate Method:
The TPO's rejection of the Cost Plus Method in favor of the Transactional Net Margin Method (TNMM) was upheld. The Tribunal agreed with the fresh comparability analysis conducted by the TPO.

3. Adoption of Arm's Length Mark-Up:
The Tribunal did not specifically address this issue in detail, implying acceptance of the TPO's mark-up determination.

4. Reliance on Unaudited Data:
The Tribunal did not find fault with the TPO's reliance on unaudited data obtained under section 133(6) of the Income-tax Act.

5. Threshold Limit for Related Party Transactions Filter:
The Tribunal did not explicitly address the 25% threshold limit for related party transactions, suggesting implicit acceptance.

6. Rejection of Upper Limit for Sales Turnover Filter:
The Tribunal did not specifically address this issue, implying acceptance of the TPO's approach.

7. Consistency in Applying Filters for Comparables:
The Tribunal directed the TPO to maintain consistency in applying filters, such as rejecting companies with less than 75% software development revenue.

8. Acceptance and Rejection of Specific Comparable Companies:
The Tribunal provided a detailed list of companies to be excluded and included as comparables. Companies like Infosys Limited and Wipro Limited were rejected due to functional dissimilarity, brand presence, and large economies of scale. Companies like Datamatics Ltd and Geometric Software Limited were accepted as comparables.

9. Use of Multiple Year Data:
The Tribunal upheld the TPO's use of contemporaneous data, rejecting the use of multiple-year data due to non-availability at the time of documentation preparation.

10. Claim of Deduction under Section 10A:
The Tribunal directed the Assessing Officer (AO) to correct errors in computing the deduction under section 10A, ensuring the correct profit figures are used.

11. Disallowance of Project-Specific Costs under Section 40(a) of the Act:
The Tribunal upheld the disallowance of project-specific costs based on the precedent set by the Karnataka High Court in the case of Samsung Electronics Co. Ltd.

12. Adjustments Made to the Total Turnover in Computing Deduction under Section 10A:
The Tribunal directed the AO to follow the decision in Tata Elxsi and other relevant cases, ensuring expenses reduced from export turnover are also reduced from total turnover.

13. Market Risk Adjustment:
The Tribunal remanded the issue of market risk adjustment back to the TPO for detailed examination, following the precedent set by Intellinet Technologies Pvt. Ltd. and Bearing Point Business Consulting Pvt. Ltd.

14. Depreciation Adjustment:
The Tribunal admitted the additional ground for depreciation adjustment and remanded the issue back to the TPO for detailed examination, following the precedent set in the assessee's own case for the assessment year 2008-09.

Conclusion:
The appeal was partly allowed for statistical purposes, with specific directions to the TPO and AO to rework the ALP, correct errors in section 10A deductions, and examine claims for market risk and depreciation adjustments. The Tribunal's order emphasizes consistency, adherence to legal precedents, and detailed examination of specific claims.

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