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2019 (3) TMI 1887 - AT - Income TaxTP Adjustment - comparable selection - absence of segmental data - HELD THAT - WIPRO Technology Limited disqualifies to become a comparable uncontrolled transaction for the purposes of inclusion in the final list of comparables under Rule 10B(1)(e)(ii). Persistent Systems Limited - DR stated that more than 80% of the revenue is not from contribution of products and since the significant part of the revenue is from sale of software services, there is no need for any segmental accounts - Even if there is a miniscule element of some revenue from other segments, it would necessitate the segmental data because, in the absence of accuracy, result could be widely off the mark. In our understanding of the law, the transfer pricing exercise in the profit and loss filter to be adopted invariably is premised upon accuracy as opposed to approximation with respect to operating cost and operating profitsthe nature of the transaction and the appropriate filter determines the elements that are to be considered in TNMM. Therefore, the costs, sales and assets employed wherever relevant are to be applied. From this perspective, the revenue s contention that segmental data was available, cannot be accepted. The mere availability of proportion of the turnover allocable for software product sales per se cannot lead to an assumption that segmental data for relevant facts was available to determine the profitability of the concerned comparable. Persistent Systems and Solutions Ltd -For our detailed reasons given in the case of Persistent Systems and Solutions Ltd, this company is also directed to be excluded from the final list of comparables. Zylog Systems Ltd.n the absence of segmental data, we direct for exclusion of this company from the list of comparables. Addition towards Licence expenses - HELD THAT - As the assessee raised invoices on certain customers in India including Idea Cellular Ltd. for upgradation of Aircom Tools. The invoice value has been shown as its income and the amount paid to its AE has been shown as Licence fee in its Annual accounts. We are at loss to appreciate as to how the assessee can be said to have created an Intangible asset' by paying the Licence fee to its AE in respect of sales made. Such payment @ 45% of the invoice value was the obligation of the assessee ab initio without which it could not have procured the licnence of ENTERPRISE suite for sale in India. This amount can be loosely characterized as cost of goods transferred to the customers in India, which has necessarily to be allowed as a revenue expenditure. We, therefore, overturn the impugned order on this score and direct the deletion of addition made by the Assessing Officer.
Issues Involved:
1. Addition of ?6,53,52,184/- as capital expenditure. 2. Transfer Pricing adjustment of ?4,87,99,150/- for international transactions related to software deployment services and intra-group services. Detailed Analysis: 1. Addition of ?6,53,52,184/- as Capital Expenditure: The assessee contested the addition made by the Assessing Officer, who treated the expenditure as capital in nature. The Tribunal referred to the assessee's own case for previous assessment years (2007-08 to 2010-11), where similar additions were made and subsequently overturned. The Tribunal reiterated that the payment made to the parent company for licensing software should be considered a revenue expenditure, not an intangible asset. The Tribunal directed the deletion of the addition, aligning with the previous decisions. 2. Transfer Pricing Adjustment of ?4,87,99,150/-: The main contention was the adjustment made by the Transfer Pricing Officer (TPO) for international transactions involving software deployment services and intra-group services (management service fees). a. Comparables Used by TPO: The Tribunal examined the comparables used by the TPO: - Wipro Technology Limited: The Tribunal excluded this company as a comparable, based on the precedent set in the case of Saxo India Pvt Ltd, where it was excluded due to high related party transactions. - Persistent Systems and Solutions Ltd: Excluded due to the absence of segmental data, which is crucial for accurate transfer pricing analysis. - Persistent Systems Ltd: Similarly excluded for lacking segmental reporting, consistent with the Tribunal’s decision in the assessee's own case for A.Y 2008-09. - Zylog Systems Limited: Excluded due to the lack of specific data and the presence of extraordinary events (acquisition of Brainhunter Inc., Canada). b. Apportionment of Management Fee: The Tribunal noted that the management fee of ?3,57,03,763/- was apportioned among different segments. The TPO accepted the margin of profit in the software segment after absorbing the proportionate management fee. The Tribunal applied the principle from the Delhi High Court decision in Sony Ericsson Mobile Communication India Pvt. Ltd., which states that if the comparables are accepted as a bundled transaction, it would be illogical to treat AMP expenses as a separate international transaction. Conclusion: The Tribunal found that the apportionment of the management fee matched the Arm's Length Price (ALP) in respective segments, and thus, no adjustment was necessary for intra-group services. Consequently, the Tribunal directed the deletion of the adjustment made by the TPO for intra-group services. Judgment: The appeal of the assessee was allowed, and the Tribunal directed the deletion of both the capital expenditure addition and the transfer pricing adjustment. The order was pronounced on 15.03.2019.
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