2015 (4) TMI 1324 - AT - Income Tax

TP Adjustment - Comparable selection - assessee had sought inclusion of the two companies as comparables before the CIT(A) of Ace Software Exports Ltd.and Cressanda Solutions Ltd. - HELD THAT - The annual report of these two companies were also furnished by the assessee before the CIT(Appeals). A write up giving business description of the above two comparable companies which was filed by the Assessee before CIT(A). In the impugned order of the CIT(Appeals), the above submissions were not considered by the CIT(Appeals) at all. We are therefore of the view that it would be just and appropriate to direct the TPO/AO to consider the comparability of these two companies. Higher rate of depreciation of comparable companies - the limited request of assessee is to allow proper adjustments on account of rates of depreciation adopted by the comparable companies - HELD THAT - In our view, the request of the assessee is proper and deserves to be accepted in the light of the decision of the Pune Bench cited by the ld. counsel for the assessee supra. We accordingly direct the TPO to allow appropriate adjustments while working out the margins of the assessee as well as comparable cases.

Summary

Issues:
Transfer pricing method selection, comparables selection, inclusion of additional comparables, depreciation rates adjustment.

Transfer Pricing Method Selection:
The appellant, a private limited company, engaged in software solutions for the banking industry, entered into an international transaction with its associated enterprise (AE) for software development services. The Transfer Pricing Officer (TPO) rejected the appellant's Cost Plus method, proposing the Transaction Net Margin Method (TNMM) based on 12 comparables. Despite the appellant's objections, the TPO determined the arm's length price (ALP) at a higher value, leading to a suggested adjustment.

Comparables Selection:
The TPO chose 9 comparables for TNMM, with an average net profit margin to cost of 18.27%. The CIT(Appeals) excluded 5 comparables, leaving 4 companies for comparison. The appellant requested the inclusion of two additional companies, Ace Software Exports Ltd. and Cressanda Solutions Ltd., which were not considered by the CIT(Appeals). The Tribunal directed the TPO to evaluate the comparability of these two companies.

Inclusion of Additional Comparables:
The CIT(Appeals) failed to consider the appellant's submissions regarding the inclusion of Ace Software Exports Ltd. and Cressanda Solutions Ltd. The Tribunal directed the TPO to assess the comparability of these companies, acknowledging the appellant's request for their inclusion.

Depreciation Rates Adjustment:
The appellant highlighted a discrepancy in depreciation rates between the appellant and the chosen comparables, with the appellant providing depreciation at a higher rate. Citing a previous Tribunal decision, the appellant requested proper adjustments. The CIT(Appeals) did not consider this aspect, but the Tribunal agreed with the appellant's request and directed the TPO to allow appropriate adjustments for depreciation rates in line with the decision cited by the appellant.

In conclusion, the Tribunal partially allowed the appeal by the appellant, emphasizing the need for proper adjustments in depreciation rates and directing the TPO to reconsider the comparability of the additional companies requested by the appellant. The judgment highlights the importance of accurate transfer pricing methods and appropriate comparables selection in determining the arm's length price in international transactions.