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2022 (3) TMI 1507 - AT - Income TaxTP Adjustment - comparable selection - HELD THAT - Companies functionally dissimilar with that of assessee, a captive service provider, rendering Software Development Services to its parent company need to be deselected. Admittedly the turnover of Infosys Ltd., R S Software India Ltd., and Sasken Communication Technologies Ltd are more than 200 crores. Considering the assessee being a captive service provider, aforesaid three companies should be excluded from the list of comparable companies. Working Capital Adjustment - It is settled principle that working capital adjustment cannot be restricted or can be negative. The assessee placed reliance on the decision in the case of Huawei Technologies India 2018 (10) TMI 1796 - ITAT BANGALORE wherein coordinate bench of this Tribunal held that working capital should be allowed as per actuals. Respectfully following the view taken by coordinate bench of this Tribunal, we direct the Ld.AO/TPO to grant the WCA on actuals Depreciation on Software cannot be disallowed due to non-deduction of TDS - HELD THAT - We note that the Ld.CIT(A) given direction to the Ld.AO to verify the TDS payments and allow the payments, which has not been implemented, till date. We direct the Ld.AO to follow the directions of the CIT(A) in light of the principles laid down by decisions referred to herein above and to consider the claim of assessee in accordance with law.
Issues Involved:
1. Transfer Pricing Adjustments 2. Rejection of Comparable Companies 3. Working Capital Adjustment 4. Depreciation on Software Detailed Analysis: 1. Transfer Pricing Adjustments: The primary issue in both appeals (A.Y. 2011-12 and A.Y. 2012-13) is the adjustment of the transfer price by the Assessing Officer (AO), Transfer Pricing Officer (TPO), and Commissioner of Income Tax (Appeals) [CIT(A)]. The assessee contested the adjustment of INR 25,156,574 for A.Y. 2011-12 and INR 2,37,82,190 for A.Y. 2012-13 under section 92CA of the Income-tax Act, 1961. The AO/TPO/CIT(A) rejected the Transfer Pricing (TP) documentation maintained by the assessee, conducted a fresh comparability analysis using various filters, and did not consider the previous two years' financial data of comparable companies. The Tribunal noted that the TPO had selected a set of comparables with an average margin of 24.82% for A.Y. 2011-12 and 22.63% for A.Y. 2012-13, which led to the proposed adjustments. 2. Rejection of Comparable Companies: The Tribunal examined the exclusion of certain comparable companies. For A.Y. 2011-12, the Tribunal directed the exclusion of Persistent Systems & Solutions Ltd., and Sasken Communications Technologies Ltd. from the final list, following the decision in M/s. Fiber Link Software Pvt. Ltd. vs. ACIT. Additionally, the Tribunal excluded Acropetal Technologies Ltd., E-Infochips Ltd., ICRA Techno Analytics Ltd., and Persistent Systems & Solutions Ltd., following the decision in LG Soft India Pvt. Ltd vs. DCIT. For A.Y. 2012-13, the Tribunal excluded Infosys Ltd., Larsen & Toubro Infotech Ltd., Mindtree Ltd., Persistent Systems Ltd., R S Software India Ltd., and Sasken Communication Technologies Ltd. based on their functional dissimilarity and high turnover, following the decision in Evolving Systems Network (I) Pvt.Ltd Vs.ACIT and other precedents. 3. Working Capital Adjustment: The Tribunal addressed the issue of working capital adjustment (WCA). For A.Y. 2011-12, the TPO restricted the WCA to 1.63% but took it as -1.48% in the computation. The Tribunal held that WCA cannot be restricted or negative and directed the AO/TPO to grant WCA on actuals, following the decision in Huawei Technologies India. For A.Y. 2012-13, the TPO restricted the WCA to 0.36%. The Tribunal reiterated that WCA should be allowed as per actuals. 4. Depreciation on Software: For A.Y. 2012-13, the AO disallowed depreciation on software on the premise that TDS was not deducted on the purchase of software. The Tribunal noted that the CIT(A) had directed the AO to verify the TDS payments and allow the payments, which had not been implemented. The Tribunal directed the AO to follow the CIT(A)'s directions in light of the principles laid down in decisions such as M/s. UKN Properties Pvt. Ltd. vs. DCIT and others, and to consider the claim of the assessee in accordance with the law. Conclusion: The Tribunal allowed the appeals filed by the assessee, directing the exclusion of certain comparables, granting working capital adjustments as per actuals, and remanding the issue of depreciation on software to the AO for verification and consideration in accordance with the law. The order was pronounced on 25th March 2022.
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