2018 (8) TMI 2070 - AT - Income Tax

TP Adjustment - comparable selection - Functional differences - HELD THAT - Companies functionally dissimilar with that of assessment need to be deselected from final list. We do not agree with the submissions of Ld. Counsel for the assessee that this Company ought to be removed from the list of comparables only on account of disclosure of 'Amalgamation' in the Annual Report being undertaken during this relevant period Benefit of capacity adjustment - Assessee is entitled to the benefit of capacity adjustment whilst benchmarking the international transaction of SIM Card Assembly. Computation of capacity adjustment - The methodology adopted by TPO/DRP in computing 'capacity adjustment' whilst only considering the depreciation, is erroneous. Recently, the issue of computation of capacity adjustment has been considered by the coordinate Bench of the Delhi Tribunal in DCIT vs. Claas India (P) Ltd 2015 (8) TMI 755 - ITAT DELHI - the issue of computation of capacity adjustment requires reconsideration and is thus, restored to file of AO/TPO for re-computation in light of our observations in the preceding paragraph, after granting sufficient opportunity of hearing to the assessee. Allowability of working capacity adjustment - We are of the opinion that once the TPO/Ld. DRP has principally allowed the claim of working capital adjustment with respect to Software Development Segment than there is no occasion to disallow similar claim for SIM Card Assembly Segment. Now there are various guidelines and factors that have been laid down to work out the working capital adjustment and accordingly, we direct the assessee to provide the detailed working of the working capital adjustment to the TPO and he is directed to verify the correctness of the amount and the working capital adjustment as given by the assessee and allow the same in accordance with settled principles. Thus, with this direction, this issue is treated as allowed for statistical purposes. Levy of interest under section 234B - We direct the AO to verify and allow the claim of the Assessee regarding granting full credit of advance tax of ₹ 20,698,500/- paid by the Assessee and also short credit of tax deducted at source.

Issues Involved:
1. Transfer Pricing adjustments for Software Development Segment.
2. Transfer Pricing adjustments for SIM Card Assembly Segment.
3. Allowability of Capacity Adjustment.
4. Allowability of Working Capital Adjustment.
5. Restricting Transfer Pricing adjustment to the value of international transactions.
6. Inclusion and exclusion of specific comparables.
7. Computation of capacity utilization adjustment.
8. Levy of interest under section 234B.
9. Granting full credit of advance tax and tax deducted at source.

Issue-wise Detailed Analysis:

1. Transfer Pricing Adjustments for Software Development Segment:
The Tribunal addressed the exclusion and inclusion of specific comparables for the Software Development Segment. The Assessee contested the inclusion of 16 comparables and sought the inclusion of 2 comparables. The Tribunal evaluated each comparable based on functional dissimilarity, segmental details, and other relevant factors, ultimately deciding to exclude certain comparables like Avani Cincom Technologies, Bodhtree Consulting Limited, Celestial Labs, E-Zest Solutions Limited, Igate Global Solutions Ltd., Infosys Technologies Ltd., Kals Systems Limited, LGS Global Ltd., Mindtree Limited, Persistent Systems Pvt. Ltd., Quintegra Solutions Limited, R System International Limited, Tata Elxsi Limited, Thirdware Solution Limited, and Wipro Limited. The Tribunal directed the inclusion of SIP Technologies and Exports Limited and PSI Data System Ltd. due to their functional comparability and acceptance by the TPO.

2. Transfer Pricing Adjustments for SIM Card Assembly Segment:
The Tribunal discussed the necessity of restricting the Transfer Pricing adjustment to the value of international transactions, excluding domestic transactions with unrelated parties. The Tribunal cited the judgments of the Hon'ble Bombay High Court and the Hon'ble Delhi High Court, emphasizing that only international transactions between related parties should be considered for benchmarking. The Tribunal restored the issue to the file of AO/TPO for recomputation, ensuring the exercise of benchmarking is restricted to the value of international transactions.

3. Allowability of Capacity Adjustment:
The Tribunal acknowledged the Assessee's claim for capacity adjustment due to under-utilization of production capacity. The Tribunal cited various judicial precedents, including the recent decision of the Hon'ble Bombay High Court in CIT vs. Petro Araldite Pvt. Ltd., affirming that capacity adjustment is allowable in terms of Rule 10B (1)(e)(iii) read with Rule 10B(2)/(3) of the Rules. The Tribunal restored the issue to the file of AO/TPO for reconsideration and recomputation in light of the established legal principles.

4. Allowability of Working Capital Adjustment:
The Tribunal addressed the Assessee's claim for working capital adjustment, which was allowed for the Software Development Segment but not for the SIM Card Assembly Segment. The Tribunal directed the AO/TPO to verify the detailed working of the working capital adjustment provided by the Assessee and allow the same in accordance with settled principles, ensuring consistency across segments.

5. Restricting Transfer Pricing Adjustment to the Value of International Transactions:
The Tribunal emphasized that the mandate of Chapter X of the Act is to consider only international transactions between related parties for benchmarking. The Tribunal cited the judgments of the Hon'ble Bombay High Court and the Hon'ble Delhi High Court, directing the AO/TPO to recompute and benchmark the transaction, restricting the exercise to the value of international transactions.

6. Inclusion and Exclusion of Specific Comparables:
The Tribunal meticulously evaluated the inclusion and exclusion of specific comparables for the Software Development Segment. The Tribunal excluded comparables that were functionally dissimilar, lacked segmental details, or had other relevant discrepancies. The Tribunal included comparables that were functionally comparable and accepted by the TPO.

7. Computation of Capacity Utilization Adjustment:
The Tribunal discussed the methodology for computing capacity utilization adjustment under TNMM. The Tribunal emphasized that the adjustment should be made to the profit margins of comparables, not the Assessee. The Tribunal provided a detailed methodology for computing the adjustment, considering fixed and variable costs, and restored the issue to the file of AO/TPO for recomputation.

8. Levy of Interest under Section 234B:
The Tribunal disposed of the ground relating to the levy of interest under section 234B as being mandatory and consequential.

9. Granting Full Credit of Advance Tax and Tax Deducted at Source:
The Tribunal directed the AO to verify and allow the Assessee's claim regarding the full credit of advance tax paid and short credit of tax deducted at source, ensuring accurate computation and credit.

Conclusion:
The Tribunal partly allowed the appeal for statistical purposes, directing the AO/TPO to reconsider and recompute various adjustments and claims in light of the Tribunal's observations and established legal principles. The Tribunal emphasized the importance of accurate benchmarking, capacity utilization adjustment, and working capital adjustment, ensuring consistency and adherence to legal standards.

← Previous Next →