2019 (6) TMI 1407 - AT - Income Tax

TP Adjustment - treatment of royalty paid by assessee to its AE - AR submitted that both authorities below proceeded on the footing that no evidence has been provided by assessee to prove tangible benefit derived from AE for which royalty has been paid by assessee - HELD THAT - As observed that assessee placed substantial evidence which was not before the authorities below for consideration. We are therefore inclined to set aside this issue back to Ld.TPO/AO for determination of this issue in the light of these documents vis-a-vis exclusive license agreement entered into by assessee with its AE as per which royalty has been paid. Ld.TPO is directed to verify details and if necessary called for any further documents in order to establish true nature of transaction regarding payment of royalties by assessee and consider the claim of assessee as per law. Comparable selection - functional similarity - HELD THAT - Assessee is mainly into offshore research and development service provider and these services are akin to software development services. Comparibility is to be carried out on broad object of benchmarking international transaction and according to the law laid down under section 92B of the Act read with rule 10 B (2) Income tax Rules 1963. Comparables must be similar in material aspects and must be compared on the basis of the products/services characteristics functions undertaken assets used and risk assumed. Merely because certain comparables has been upheld for its exclusion/inclusion by various decisions does not ipso facto lead to exclusion/inclusion in a given set of facts. In our considered opinion exclusion/inclusion of any comparables must be strictly analysed on basis of FAR in accordance with rule 10 B (2). We also are of opinion that comparables selected must be for the relevant year which is to be compared and unless contemporaneous data as section 92D read with Rule 10 D (4) is not available for the relevant year multiple year data should not be used. Infosys technologies Ltd - This comparable has a high turnover with the huge margin of 40.3% as compared to 9% earned by assessee. The turnover filter fixed by Ld.TPO does not satisfy for inclusion of this comparable. Further it is observed that this comparable owns huge intangibles as it undertakes research and development activities owns branded/proprietary products. Whereas in case of assessee is contract service provider for its AE s. Further that in the process of software development in the event any intangibles are created the same is exclusively owned by AE. Under such circumstances we do not find appropriate for this comparable to be included to determine arms length price. Accordingly we direct Ld.TPO to exclude this comparable from the final list. KALS Information Systems Ltd - Excellent from the audited accounts and annual reports placed in the paper book in respect of this comparable it is observed that this company is engaged in development of software and software products since its inception. Further it is observed that in the year 2000 this company has been converted into a public limited company is which itself makes it not a fit comparable with assessee who is a captive service provider to its AE is only in respect of technical assistance. Accordingly we direct this company to be excluded from the final list of comparables. Tata Elxi Ltd (Seg.) - This comparable caters basically in providing software development services wherein huge intangibles are generated owned by this comparable. It is also observed that this comparable is a group concern of TATA which makes it to be economically different with that of assessee s who undertakes limited risks and provides technical assistance to its AE s in products developed for AE. We do not find this comparable to be functionally similar in any manner whatsoever with that of assessee. Accordingly we direct this comparable to be excluded from the final list. Accel Transmatic Ltd (Seg.) - TPO used segmental information in respect of products of this comparable. However from various products developed by this comparable it is observed that they are not into contract software development which is the case of assessee developing software for its AE only for which assessee is remunerated on cost 10% markup. Further that in the process of software development in the event any intangibles are created the same is exclusively owned by AE. As we have already analyse the functions and the risks assumed it is observed that assessee do not even undertake the pricing risk as the prices are decided by its AE only. Under such circumstances we do not find it functionally similar even though taking the segmental details of sale of products as there is a huge difference in the products sold by this comparable with that of assessee - direct Ld.TPO to exclude this comparable from the final list. Megasoft Ltd - This comparable should not be used as there exists contradictions in the details available on public domain vis-a-vis the information gathered by Ld.TPO under section 133 (6). Deduction u/s 10A - exclusion of telecommunication expenses while computing deduction - HELD THAT - Hon ble Karnataka High Court in case of CIT vs Tata Elxsi Ltd 2011 (8) TMI 782 - KARNATAKA HIGH COURT on identical issue held that telecommunication expenses is to be included while computing deduction under section 10 A of the act as it is directly linked with earning of income. Ld CIT DR has not brought before us any contradictory/distinguishable facts in respect of present case before us. Respectfully following above we direct Ld.AO to include telecommunication expenses while computing exempt income u/s10A of the Act. Accordingly the grounds raised by assessee stands allowed.

Summary

Issues Involved:
1. Transfer Pricing Adjustment for Payment of License Fee (Royalty)
2. Transfer Pricing Adjustment for Provision of Technical Support Services (Software Development)
3. Exclusion of Telecommunication Expenses in Computing Deduction under Section 10A
4. Charging of Interest under Sections 234B and 234D

Detailed Analysis:

1. Transfer Pricing Adjustment for Payment of License Fee (Royalty):
The assessee contested the addition made by the Assessing Officer (AO) and Transfer Pricing Officer (TPO) regarding the arm's length price (ALP) of royalty payments to its associated enterprises (AE). The AO and TPO determined the ALP of the royalty to be NIL, concluding that the assessee did not receive any tangible economic benefit. The Tribunal noted that the assessee provided substantial evidence, including documents not previously considered by the authorities, to establish the receipt of technical know-how and the necessity of the royalty payments. The Tribunal set aside the issue back to the AO/TPO for a fresh determination in light of the new evidence, directing verification of the details and consideration of the claim as per law.

2. Transfer Pricing Adjustment for Provision of Technical Support Services (Software Development):
The assessee challenged the inclusion of certain comparables by the TPO in determining the ALP for software development services. The Tribunal analyzed the functional, asset, and risk (FAR) profile of the assessee, noting that it is a captive service provider with limited risks and no significant intangible assets. The Tribunal directed the exclusion of several comparables (Infosys Technologies Ltd, KALS Information Systems Ltd, Tata Elxi Ltd, Accel Transmatic Ltd, and Megasoft Ltd) from the final list, as they were functionally dissimilar, engaged in product development, or had significant intangible assets. The Tribunal allowed the assessee's grounds related to these comparables, noting that the exclusion brought the assessee within the acceptable arm's length margin.

3. Exclusion of Telecommunication Expenses in Computing Deduction under Section 10A:
The assessee argued that telecommunication expenses should be included while computing the deduction under Section 10A. The Tribunal referred to the Karnataka High Court decision in CIT vs Tata Elxsi Ltd, which held that telecommunication expenses are directly linked to earning income and should be included in the computation. The Tribunal directed the AO to include telecommunication expenses while computing the exempt income under Section 10A, thereby allowing the assessee's grounds.

4. Charging of Interest under Sections 234B and 234D:
The grounds related to the charging of interest under Sections 234B and 234D were deemed consequential and did not require separate adjudication.

Conclusion:
The Tribunal allowed the appeal filed by the assessee, directing the AO/TPO to reconsider the royalty payment issue with the new evidence, exclude certain comparables for software development services, and include telecommunication expenses in the Section 10A computation. The consequential grounds related to interest were not separately adjudicated. The order was pronounced on June 7, 2019.