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2020 (6) TMI 712 - AT - Income TaxTP Adjustment - comparable selection - Addition in relation to international transaction of provision of software development services rendered by the assessee to its Associated Enterprises - HELD THAT - Considering the functional profile and extraordinary event of acquisitions Larsen Toubro Infotech Ltd. cannot be held to be a valid comparable and thus has to be excluded from the final set of comparable. M/s. Tata Elxsi Ltd. be rejected on functional dissimilarity. Exclusion of the concern Cybercom Datamatics Information Solutions Ltd. - The assessee before us is solely engaged in the provision of software development concern hence, where the concern was also a product company, margin of the said concern cannot be included for benchmarking the ALP of the international transaction undertaken by the assessee. Accordingly, we direct its exclusion from the final set of comparable. Once the above said concerns are excluded then no upward adjustment needs to be made in the hands of the assessee while determining the ALP of the international transaction of provision of software development services by the assessee to its AE - Decided in favour of assessee.
Issues Involved:
1. Transfer Pricing Adjustment for Software Development Services 2. Delay in Receipt of Payment from Associated Enterprises (AE) Detailed Analysis: 1. Transfer Pricing Adjustment for Software Development Services The first issue raised by the assessee was against the adjustment of ?9.24 crores to the Arm's Length Price (ALP) of international transactions related to software development services provided to its AE. The assessee had applied the Transactional Net Margin Method (TNMM) with the Profit Level Indicator (PLI) of Operating Profit/Operating Cost (OP/OC). The Transfer Pricing Officer (TPO) selected 10 comparable companies and proposed a TP adjustment of ?25,73,69,131/-. The Dispute Resolution Panel (DRP) directed re-computation of margins, leading to an adjustment of ?9,24,50,771/-. The assessee contested the inclusion of certain comparables: - Larsen & Toubro Infotech Ltd.: Excluded due to functional dissimilarity and distorted segmental accounts. The company was engaged in multiple business segments, making it not functionally comparable to the assessee, which only provided software development services. - Tata Elxsi Ltd.: Excluded as it was engaged in system integration and support, product design, and graphics animation, which are not comparable to the assessee's software development services. - Cybercom Datamatics Information Solutions Ltd.: Excluded due to functional dissimilarity, as it was engaged in both software development and product sales. The Tribunal directed the exclusion of these companies from the final set of comparables, resulting in no upward adjustment for the assessee. Consequently, the grounds of appeal Nos. 1.1 & 1.2 were allowed. 2. Delay in Receipt of Payment from Associated Enterprises (AE) The second issue concerned the adjustment of ?6,01,18,689/- for delay in receipt of payments from AE. The TPO considered the delay as an international transaction requiring benchmarking. The DRP upheld this view, but the assessee argued that similar delays occurred with unrelated parties and that working capital adjustments should be more appropriate. The Tribunal found that the issue was covered in favor of the assessee by previous decisions, including the Hon'ble Delhi High Court's ruling in Kusum Health Care Pvt. Ltd. and Bechtel India Pvt. Ltd., which held that no adjustment is required for notional interest on receivables when the taxpayer is debt-free. Additionally, the assessee had not incurred any interest cost and had similar delays with unrelated parties without charging interest. Thus, the Tribunal found no merit in making any adjustment on account of interest due on receivables from its AE, allowing grounds of appeal Nos. 2 to 2.6. Grounds of appeal Nos. 2.7 & 2.8 were dismissed as they were on a without-prejudice basis. Conclusion The appeal of the assessee was allowed, with the Tribunal directing the exclusion of certain comparables and finding no merit in the adjustment for delay in receipt of payments from AE. The order was pronounced in the open court on 29th June 2020.
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