2021 (11) TMI 1138 - AT - Income Tax

TP Adjustment - Comparable selection - Turnover filter - HELD THAT - Companies listed whose turnover in the current year is more than ₹ 200 Crores should be excluded from the list of comparable companies. Also companies dissimilar with assessee captive service provider providing services only to its associated enterprise need to be deselected. Negative working capital adjustment - HELD THAT - We find that in the case of Software AG Bangalore Technologies (P.) Ltd. 2016 (3) TMI 1384 - ITAT BANGALORE passed by this Tribunal, it has been held that negative working capital adjustment shall not be made in case of a captive service provider as there is no risk and it is compensated on a total cost plus basis. Since the issue has not been dealt with by the TPO in proper perspective and since the issue has not been raised before the DRP, we deem it fit and proper to remand this issue to the TPO/AO for fresh consideration in the light of the law on the issue as laid down in judicial decision. Levy of education cess - HELD THAT - education cess and secondary and higher education cess is not in the nature of tax which is not deductible expenditure. Following the decisions APTEAN INDIA PVT. LTD. 2020 (11) TMI 958 - ITAT BANGALORE , SESA GOA LIMITED, 2020 (3) TMI 347 - BOMBAY HIGH COURT , RECKITT BENCKISER (I) PVT. LTD. 2020 (6) TMI 474 - ITAT KOLKATA we allow the additional ground of appeal.

Issues Involved:

1. Determination of Arm’s Length Price (ALP) for Software Development Services (SWD).
2. Exclusion of certain comparable companies based on turnover filter.
3. Exclusion of Akshay Software Technologies Ltd. as a comparable.
4. Exclusion of CG Vak Software Exports Ltd. as a comparable.
5. Inclusion of ICRA Techno Analytics Ltd. as a comparable.
6. Negative working capital adjustment.
7. Deduction of education cess and secondary and higher education cess under section 37(1) of the Income Tax Act, 1961.

Detailed Analysis:

1. Determination of Arm’s Length Price (ALP) for Software Development Services (SWD):

The Assessee, engaged in providing SWD services to its wholly owned holding company (an Associated Enterprise under Sec.92-A of the Act), filed a Transfer Pricing Study (TP Study) using the Transaction Net Margin Method (TNMM) and selected Operating Profit/Operating Cost (OP/OC) as the Profit Level Indicator (PLI). The Assessee's OP/OC was 15%, with operating income of ?29,13,01,402 and operating cost of ?24,55,95,246. The Transfer Pricing Officer (TPO) accepted TNMM as the Most Appropriate Method (MAM) but reworked the PLI at 20.90% using a set of 7 comparable companies, resulting in an addition to total income of ?3,49,43,550 due to adjustment to ALP.

2. Exclusion of Certain Comparable Companies Based on Turnover Filter:

The Assessee sought exclusion of 5 companies with turnovers exceeding ?200 crores, arguing that high turnover companies are not comparable to the Assessee with a turnover of ?29.13 crores. The Tribunal noted that high turnover can materially affect profit margins and upheld the exclusion of these companies, referencing decisions such as Dell International Services India (P) Ltd. vs. DCIT and Autodesk India Pvt. Ltd. vs. DCIT, which support the exclusion of high turnover companies from the list of comparables.

3. Exclusion of Akshay Software Technologies Ltd. as a Comparable:

The Assessee argued for the exclusion of Akshay Software Technologies Ltd., citing functional differences and lack of segmental data. The Tribunal referenced a similar case, Aptean India Pvt. Ltd. vs. DCIT, and remanded the issue to the TPO for fresh consideration, directing the TPO to analyze the functions performed by Akshay Software Technologies Ltd. and compare them with the Assessee.

4. Exclusion of CG Vak Software Exports Ltd. as a Comparable:

The Assessee sought exclusion of CG Vak Software Exports Ltd. due to functional differences and lack of segmental data. The Tribunal referenced the decision in Tavant Technologies India Pvt. Ltd. vs. DCIT, where CG Vak Software Exports Ltd. was excluded for similar reasons. The Tribunal directed the exclusion of CG Vak Software Exports Ltd. from the list of comparable companies.

5. Inclusion of ICRA Techno Analytics Ltd. as a Comparable:

The Tribunal remanded the issue of including ICRA Techno Analytics Ltd. to the TPO for fresh consideration, referencing the Assessee’s own case in Assessment Year 2010-11. The Tribunal noted that ICRA Techno Analytics Ltd. had diversified activities and lacked segmental results, which warranted re-examination of its comparability.

6. Negative Working Capital Adjustment:

The Assessee contested the TPO's negative working capital adjustment, arguing that it did not bear any working capital risk as a captive service provider. The Tribunal noted that the TPO did not provide reasons for adopting a negative working capital adjustment and remanded the issue for re-examination, referencing decisions such as Lam Research India (P.) Ltd. vs. DCIT and Software AG Bangalore Technologies (P.) Ltd. vs. DCIT, which held that negative working capital adjustment should not be made for captive service providers.

7. Deduction of Education Cess and Secondary and Higher Education Cess under Section 37(1):

The Assessee argued that education cess and secondary and higher education cess should be deductible as business expenditure under section 37(1). The Tribunal admitted this additional ground, referencing decisions such as Sesa Goa Ltd. vs. Joint Commissioner of Income-tax and ITC Limited vs. Assistant Commissioner of Income-tax, which held that these cesses are deductible. The Tribunal allowed the additional ground of appeal.

Conclusion:

The appeal by the Assessee was partly allowed, with directions for re-examination on specific issues and exclusions/inclusions of certain comparable companies based on turnover and functional differences. The Tribunal also allowed the deduction of education cess and secondary and higher education cess as business expenditure under section 37(1).

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