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2018 (10) TMI 1816 - AT - Income TaxTP Adjustment - inclusion and exclusion of certain comparables for the purpose of determining the Arm s Length Price (ALP) of international transactions entered into by the assessee with its Associated Enterprise (AE) - HELD THAT - Assessee is engaged in providing software development services, thus companies functionally dissimilar with that of assessee need to be deselected. Use of multiple year data for benchmarking the international transactions of the assessee with its AE to be at arm s length - We find that this issue has already been held against the assessee in its own case by this tribunal for the Asst Year 2010-11 2017 (11) TMI 1360 - ITAT KOLKATA TPO having applied the employee cost filter less than 20% turnover to reject the companies, ought to have rejected. Related party transaction with more than 20% of sales - Comparable to be rejected exceeding the limit. Non-adjustment of net margins by considering the working capital differences and functional and risk differences of the comparables with the assesee company while arriving at the arm s length margins - HELD THAT - The assessee is directed to furnish the relevant working capital adjustments and adjustments due to risk differences to be made in the final list of comparables as determined pursuant to this tribunal s order, before the ld TPO. The ld TPO is directed to verify the same and give suitable adjustments in the net margins of the final comparables while arriving at the arm s length margin. Accordingly, the Ground raised by the assessee are allowed for statistical purposes. Disallowance u/s 14A in the computation of book profits u/s 115JB - HELD THAT - We hold that the disallowance u/s 14A of the Act should be made based on actual amounts incurred for the purpose of earning exempt income and not by placing reliance on the computation mechanism provided in Rule 8D(2) of the Rules. Therefore, the ld AO shall work out disallowance in terms of the clause (f) to Explanation 1 of Sec. 115JB of the Act independently after considering the expenses debited in the profit loss account as mandated under the provisions of law. Accordingly, the Ground raised by the assessee is allowed for statistical purposes. Adding back the disallowance conceived by the ld TPO towards adjustment to ALP in the computation of book profits u/s 115JB - HELD THAT - This issue is now settled in favour of the assessee by the decision of the co-ordinate bench of Delhi Tribunal in the case of M/s Cash Edge India (Pvt) Ltd 2016 (1) TMI 598 - ITAT DELHI - thus adjustment made to ALP of international transaction cannot be added back in the computation of book profits u/s 115JB.
Issues Involved:
1. Non-consideration of revised return of income. 2. Determination of Arm’s Length Price (ALP) for international transactions. 3. Inclusion and exclusion of certain comparables. 4. Use of multiple year data for benchmarking. 5. Computation of working capital adjustments and functional and risk differences. 6. Disallowance under Section 14A of the Income Tax Act. 7. Adjustment to ALP in the computation of book profits under Section 115JB. Issue-wise Detailed Analysis: 1. Non-consideration of Revised Return of Income: The assessee filed its original return of income for AY 2011-12 on 17.11.2011 declaring a total income of ?54,56,160/-. A revised return was filed on 29.11.2012 declaring a total income of ?53,14,323/-, within the time limit prescribed u/s 139(5) of the Act. The AO did not consider this revised return while completing the assessment. The Tribunal directed the AO to consider the revised return and compute the total income accordingly. The assessee's grounds on this issue were allowed. 2. Determination of Arm’s Length Price (ALP): The primary issue was the inclusion and exclusion of certain comparables for determining the ALP of international transactions between the assessee and its Associated Enterprise (AE), Anshin Software Corporation, USA. The assessee used the Transactional Net Margin Method (TNMM) with Operating Profit to Operating Cost (OP/OC) as the Profit Level Indicator (PLI). The assessee identified 16 comparables, resulting in an unadjusted operating margin of 11.16% on operating costs. The AO referred the matter to the Transfer Pricing Officer (TPO), who accepted TNMM as the Most Appropriate Method (MAM) but rejected the use of multiple year data and certain comparables chosen by the assessee. 3. Inclusion and Exclusion of Certain Comparables: The Tribunal addressed the inclusion and exclusion of specific comparables as follows: - Acropetal Technologies Limited: Excluded due to employee cost filter (less than 20% of turnover). - Zylog Systems (India) Ltd: Excluded due to related party transactions exceeding 20% of sales. - E-Infochips Bangalore Limited: Excluded due to related party transactions exceeding 20% of sales. - Sagarsoft (India) Limited: Excluded due to related party transactions exceeding 20% of sales. - Aurum Soft Systems Limited: Excluded due to related party transactions exceeding 20% of sales. - ASM Technologies Limited: Excluded due to different business model and acquisitions during the year. - Thirdware Solutions Private Limited: Excluded due to involvement in software product development. - Axis IT & T Ltd: Excluded due to related party transactions exceeding 20% of sales. - Spry Resources India Private Limited: Included as it was functionally comparable. - Ancent Software International Limited: Included as it was not persistently loss-making. - Goldstone Technologies Limited: Excluded due to absence of segmental data. - CG-VAK Software and Exports Limited: Remanded to TPO for fresh consideration. - Maveric Systems Limited and Thinksoft Global Services Ltd: Included as functionally comparable. - R Systems International Limited: Not included as no arguments were advanced. - Helios and Mathesan Information Technology Limited: Excluded due to different financial year. - Larsen & Toubro Infotech Limited: Not pressed by the assessee. 4. Use of Multiple Year Data for Benchmarking: The Tribunal held against the use of multiple year data for benchmarking, following the precedent set in the assessee's own case for AY 2010-11. The relevant rule mandates the use of data relating to the financial year in which the international transaction was entered into. The assessee's ground on this issue was dismissed. 5. Computation of Working Capital Adjustments and Functional and Risk Differences: The Tribunal directed the TPO to make adjustments on account of working capital and other risks to the profit margins of the assessee and the comparables, following the precedent set in the assessee's case for AY 2010-11. The assessee was directed to furnish relevant computations for verification by the TPO. 6. Disallowance under Section 14A of the Income Tax Act: The Tribunal noted that the Special Bench of Delhi Tribunal in ACIT vs Vireet Investment (P) Ltd held that computation under clause (f) Explanation 1 to Section 115JB(2) should be made without resorting to Section 14A read with Rule 8D. The issue was restored to the AO to calculate book profit u/s 115JB independently, considering actual expenses incurred for earning exempt income. 7. Adjustment to ALP in the Computation of Book Profits under Section 115JB: Following the decision in M/s Cash Edge India (Pvt) Ltd vs ITO, the Tribunal held that transfer pricing adjustments are not contemplated under Explanation 1 Section 115JB(2) and cannot be added back to book profits. The AO was directed to exclude the transfer pricing adjustment from the book profits computed under Section 115JB. Conclusion: The appeal of the assessee was partly allowed for statistical purposes, and the appeal of the revenue was partly allowed. The Tribunal provided detailed directions on the inclusion and exclusion of comparables, adjustments for working capital and risk differences, and the treatment of disallowances under Section 14A and adjustments under Section 115JB.
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