2018 (5) TMI 2031 - AT - Income Tax

TP Adjustment - exclusion of E-Infochips Ltd as a comparable while determining the Arm s Length Price of the assessee with regard to software development services (international transaction ) of the assessee - HELD THAT - E-Infochips Ltd is not functionally comparable to the assessee and accordingly we direct the ld TPO to exclude the same from the final list of comparables. Determination of Arm s Length Price (ALP) of Royalty payments at Rs Nil by the ld TPO - HELD THAT - No finding whatsoever had been given by the lower authorities on the argument of the assessee that payment of 40% is made to AE pursuant to revenue sharing arrangement, though nomenclatured as royalty. In other words, the lower authorities had completely proceeded on the point that the payment made is only towards royalty. The ld AR also pointed out that the assessee to be on the safer side, had also subjected the payment of 40% to AE to withholding tax treating the same as royalty to avoid possible disallowance of the same u/s 40(a)(i) read with section 195 of the Act. We find that this has got no bearing on the determination of ALP of the subject mentioned payment in the scheme of transfer pricing. Since the ld AR before us had stated that what is paid is only share of AE pursuant to revenue sharing arrangement and not royalty, this aspect deserves to be remanded back to the file of the ld TPO for denovo adjudication. Accordingly, we hold that this issue of disallowance of payment of royalty is remanded to the file of ld TPO / ld AO for denovo adjudication with a direction to ld TPO to benchmark the subject mentioned payment vis a vis the comparables afresh, in order to determine the ALP of the said international transaction. Initiation of penalty proceedings u/s 271(1)(c ) of the Act which does not survive in view of the aforesaid decisions rendered for the quantum additions with a liberty granted to the revenue to initiate fresh penalty proceedings u/s 271(1)(c ) of the Act on completion of the set aside assessment, if they so desire

Summary

Issues Involved:
1. Exclusion of E-Infochips Ltd as a comparable for determining the Arm's Length Price (ALP) of software development services.
2. Treatment of foreign exchange gain as non-operating income in ALP determination.
3. Determination of ALP of Royalty payments.
4. Initiation of penalty proceedings under section 271(1)(c) of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Exclusion of E-Infochips Ltd as a Comparable:
The first issue pertains to the exclusion of E-Infochips Ltd as a comparable while determining the ALP of the assessee's software development services. The Tribunal noted that E-Infochips Ltd had amalgamated with its wholly-owned subsidiary, E-Infochips Bangalore Ltd, and was engaged in diversified services including IT, ITES, and product sales, without segmental information. The Tribunal referenced the Delhi Tribunal's decision in Alcatel Lucent India Ltd vs DCIT and its approval by the Delhi High Court, which rejected E-Infochips Ltd due to its diversified services and lack of segmental data. Consequently, the Tribunal directed the exclusion of E-Infochips Ltd from the final list of comparables, allowing the assessee's ground.

2. Treatment of Foreign Exchange Gain as Non-Operating Income:
The second issue involved whether the foreign exchange gain should be treated as non-operating income while calculating the Profit Level Indicator (PLI). The Tribunal found that the assessee bore the foreign exchange risk as part of its trading transactions with its Associated Enterprise (AE) and that such risk was factored into the FAR analysis. Citing the Supreme Court decision in CIT vs Woodward Governor India (P) Ltd and the Delhi High Court decision in PCIT vs M/s Rampgreen Solutions Pvt Ltd, the Tribunal held that foreign exchange gain should be treated as operating income while computing PLI. The Tribunal directed the TPO to compute the PLI accordingly, allowing the assessee's ground.

3. Determination of ALP of Royalty Payments:
The third issue concerned the determination of the ALP of Royalty payments. The Tribunal noted that the TPO had accepted the benefit derived by the assessee from the royalty transaction but disputed the amount paid. The assessee argued that the royalty payment was integral to its operations and should be aggregated with software development services and benchmarked using TNMM. The Tribunal found merit in the assessee's argument that the royalty payment was part of a revenue-sharing arrangement with its AE. The Tribunal remanded the issue back to the TPO for fresh adjudication to benchmark the payment against appropriate comparables, allowing the assessee's grounds for statistical purposes.

4. Initiation of Penalty Proceedings under Section 271(1)(c):
The final issue related to the initiation of penalty proceedings under section 271(1)(c). The Tribunal held that the penalty proceedings did not survive in view of the decisions rendered for the quantum additions. However, it granted liberty to the revenue to initiate fresh penalty proceedings upon completion of the set-aside assessment if they so desired. Consequently, the Tribunal allowed the assessee's ground.

Conclusion:
The appeals for the assessment years 2012-13 and 2013-14 were partly allowed for statistical purposes. The Tribunal directed the exclusion of E-Infochips Ltd from the comparables, treated foreign exchange gain as operating income, remanded the issue of royalty payment for fresh adjudication, and held that penalty proceedings under section 271(1)(c) did not survive.