2019 (12) TMI 1557 - AT - Income Tax

TP Adjustment - Compabale selection - HELD THAT - Genesys International Corpn.Ltd. Infosys Ltd. Larsen and Toubro Infotech Ltd. and Persistent Systems Ltd. excluded from the final list of comparable companies for the purpose of arriving at the arithmetic mean of comparable companies for the purpose of comparison with the profit margins. Company ICRA Techno Analytics Ltd. - The said company was excluded by the DRP on the ground of functional comparability. Besides the above the related party transaction in the case of the aforesaid company was more than 25% as is evident from page 1129 1130 of Assessee s paper book containing the financial statement of this company from capitaline database which details are extracted at page 863 of Assessee s paper book which is objections filed by the Assessee before the DRP. In the circumstances this company has to be excluded from the list of comparable companies. Request of the Assessee to compute the PLI of the Assessee by considering provision for service tax written back as part of the operating profit of the Assessee - HELD THAT - As in the decision rendered in the case of Sony India (P) Ltd. Vs. DCIT 2008 (9) TMI 420 - ITAT DELHI-H this aspect has been considered and it was held that provisions written back in the P L a/c should be regarded as forming part of the operating profit of the taxpayer. Thus we hold that provision written back should be regarded as part of the revenue of the Assessee while determining PLI. TPO is directed to compute the ALP of the international transaction of rendering of SWD services in the light of the directions contained in this order after affording the Assessee opportunity of being heard. No other grounds relating to Transfer Pricing adjustment were pressed for adjudication. Grant of appropriate MAT credit - HELD THAT - The issue has been dealt with by the DRP by directing the AO to allow MAT credit if available according to the provisions of Sec.115JAA of the Act. We are of the view that the said directions are proper and we direct the AO to allow MAT credit as per the directions of the DRP.

Summary

Issues Involved:
1. Determination of Arm’s Length Price (ALP) for international transactions.
2. Inclusion/exclusion of comparable companies.
3. Treatment of reversal of provision for service tax.
4. Grant of Minimum Alternate Tax (MAT) credit.

Issue-wise Detailed Analysis:

1. Determination of Arm’s Length Price (ALP) for International Transactions:
The primary issue in this appeal is the determination of the ALP in respect of the international transaction of rendering Software Development Services (SWD Services) by the Assessee to its Associated Enterprise (AE). The Assessee used the Transaction Net Margin Method (TNMM) as the Most Appropriate Method (MAM) for determining the ALP, with the profit level indicator being Operating Profit/Total Cost (OP/TC). The Assessee's OP/TC was 12.77%. The Transfer Pricing Officer (TPO) selected 10 comparable companies, resulting in an average mark-up of 22.63%, adjusted to 20.06% after working capital adjustment. Consequently, the TPO computed the ALP and made an adjustment of ?14,27,53,802/- to the total income, which was later reduced by the Disputes Resolution Panel (DRP).

2. Inclusion/Exclusion of Comparable Companies:
The DRP excluded 6 out of the 10 comparable companies chosen by the TPO, retaining only 4. The Assessee challenged the inclusion of 5 out of the remaining 10 comparables. The Tribunal referred to the ITAT Bangalore Bench's decision in the case of CGI Information Systems & Management Consultants Private Ltd., which excluded four companies: Genesys International Corpn. Ltd., Infosys Ltd., Larsen & Toubro Infotech Ltd., and Persistent Systems Ltd., on the grounds of functional dissimilarity and the presence of intangible assets. The Tribunal also excluded ICRA Techno Analytics Ltd. due to functional dissimilarity and related party transactions exceeding 25%.

3. Treatment of Reversal of Provision for Service Tax:
The Assessee argued that the reversal of provision for service tax should be considered as part of the operating income. The Tribunal, referencing the decision in Sony India (P.) Ltd. Vs. DCIT, agreed that provisions written back should be regarded as part of the operating profit. The Tribunal directed the TPO to compute the ALP of the international transaction considering the reversal of provision for service tax as part of the operating income.

4. Grant of Minimum Alternate Tax (MAT) Credit:
The issue of granting appropriate MAT credit was addressed by the DRP, which directed the AO to allow MAT credit according to the provisions of Sec.115JAA of the Act. The Tribunal upheld these directions, instructing the AO to grant MAT credit as per the DRP's directions.

Conclusion:
The appeal was partly allowed. The Tribunal directed the TPO to recompute the ALP excluding the four comparable companies and considering the reversal of the provision for service tax as part of the operating income. The AO was also directed to grant MAT credit as per the DRP's directions. Other grounds of appeal were either consequential or not argued and thus required no adjudication.