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2019 (9) TMI 1664 - AT - Income TaxTP Adjustment - comparable Companies selection - HELD THAT - In facts of present case assessee is doing part of software development cycle and therefore has been categorised as a captive software development service provider catering to needs of the group. Assessee in TP study held to be comprise of Software Engineers who develop project based on inputs received from AE. Engineers employed by assessee designs functional specifications for the project identification of interfaces components coding and bug fixing. Ultimate approval and owner of project developed is the AE. In our view by involving itself in process of Software development for AE assessee cannot be held to be fulfledged Software Development Company. One has to look into transaction in regards to services rendered and FAR which catagorises it to be a captive service provider working on business model of cost plus margin. It is observed that comparables sought to be excluded are 100 % Software Development Companies having high turnover and therefore respectfully following aforestated view in case of Genesis Integrating Systems India Pvt. Ltd. 2011 (8) TMI 952 - ITAT BANGALORE these comparables are to be excluded on both the counts of functionally not being similar with that of assessee and also because they have a high turnover of more than 200 crore. For assessment year 2009-10 excluded these companies following Genesis Integrating systems Indi Pvt. Ltd vs. DCIT 2011 (8) TMI 952 - ITAT BANGALORE Reliance has been placed on decision of this Tribunal in case of Autodesk India Pvt.Ltd. 2018 (7) TMI 1862 - ITAT BANGALORE followed similar view to exclude identical comparables by applying turnover filter wherein all the decisions relied upon by Ld. CIT DR has been considered and dealt with. Therefore respectfully following above decisions we uphold exclusion of Infosys Ltd Larsen Toubro Infotech Ltd. and Persistent Systems Ltd. by Ld. CIT (A) from final list. Now coming to Zylog Systems Ltd. Mindtree Ltd. held that turnover is a relevant criteria for choosing companies as comparables for determining ALP of international transaction. Even otherwise all above referred comparables are functionally not similar with that of assessee which is only a captive software development service provider which does not design/develop/sell software products and does not own any IP. We therefore uphold exclusion of this comparable is by Ld. CIT (A). Disallowing depreciation as an adjustment in comparables - For assessment year 2005-06 in assessee s own case when this issue was remanded by this Tribunal is Ld.TPO/AO had inter alia granted the adjustment on depreciation after taking into consideration the detailed working submitted by assessee and held that instead of allowing any adjustment on this account the AO is directed to compute the margin in respect of the comparables after excluding the depreciation from the cost and also in the case of the appellant the depreciation to be excluded from the cost for computing the arm s length difference. The appeal on the above issue is disposed accordingly. TDS u/s 194J - disallowance under section 40 (a) (ia) - not deducting tax at source at the time of purchase of software - HELD THAT - This issue stands settled against assessee is by decision of this Tribunal in case of DCIT vs WS Atkins India Pvt.Ltd. 2015 (11) TMI 917 - ITAT BANGALORE and Kawasaki Microelectronics Inc 2015 (9) TMI 9 - ITAT BANGALORE Disallowance u/s 14 A read with Rule 8D - HELD THAT - As submitted that there is no exempt income earned by assessee during year under consideration. Both parties admittedly submitted that issue stands squarely covered by decision of Hon able Delhi High Court in case of Cheminvest Ltd vs CIT 2015 (9) TMI 238 - DELHI HIGH COURT
Issues Involved:
1. Exclusion of comparables based on size and turnover. 2. Depreciation adjustment. 3. Disallowance under section 40(a)(ia) for non-deduction of tax at source. 4. Disallowance under section 14A read with Rule 8D. Detailed Analysis: 1. Exclusion of Comparables Based on Size and Turnover: The primary issue was whether certain companies should be excluded as comparables based on their size and turnover. The CIT(A) excluded Persistent Systems Ltd., Zylog Systems Ltd., Mindtree Ltd., L&T Infotech Ltd., and Infosys Ltd. from the list of comparables, applying a turnover filter. The Tribunal upheld this exclusion, referencing previous cases such as Genesis Integrating Systems India Pvt. Ltd. vs. DCIT, which emphasized the importance of turnover filters in transfer pricing. The Tribunal noted that the assessee was a captive software development service provider and not a full-fledged software development company, thus justifying the exclusion of high-turnover companies. 2. Depreciation Adjustment: The issue revolved around whether depreciation should be adjusted to align with the accounting policies of comparable companies. The CIT(A) directed the TPO to exclude depreciation from the operating costs of both the assessee and the comparables, following the precedent set in the assessee’s own case for the assessment year 2005-06. The Tribunal upheld this direction, emphasizing the need for consistency in accounting policies to ensure accurate transfer pricing comparisons. 3. Disallowance Under Section 40(a)(ia) for Non-Deduction of Tax at Source: The CIT(A) deleted the disallowance made by the AO under section 40(a)(ia) for non-deduction of tax at source on software purchases. However, the Tribunal acknowledged that this issue had been settled against the assessee in previous cases such as DCIT vs. WS Atkins India Pvt. Ltd. and Kawasaki Microelectronics Inc. vs. DDIT. Consequently, the Tribunal allowed the revenue’s ground, upholding the disallowance under section 40(a)(ia). 4. Disallowance Under Section 14A Read with Rule 8D: The CIT(A) deleted the disallowance made under section 14A read with Rule 8D, as the assessee had not earned any exempt income during the year under consideration. Both parties agreed that this issue was covered by the decision of the Hon’ble Delhi High Court in Cheminvest Ltd. vs. CIT, which held that no disallowance under section 14A could be made if no exempt income was earned. The Tribunal upheld the CIT(A)’s view, dismissing the revenue’s ground. Conclusion: The Tribunal dismissed the revenue’s appeal and the assessee’s cross-objections, upholding the CIT(A)’s decisions on all counts. The Tribunal emphasized the importance of consistency in applying filters and adjustments in transfer pricing cases and adhered to established judicial precedents in its rulings.
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