2017 (7) TMI 768 - AT - Income Tax

TPO - ALP determination - selection of comparable - Held that - As the assessee company is engaged in development of software in various stages like engineering, research, development, debugging, coding, quality control checks, testing application, designing and programming and is exporting its services to M/s Adobe Systems Inc., USA and to M/s Adobe Systems Software, Ireland, thus companies functionally dissimilar with that of assessee need to be deselected from final set of comparable. Reimbursement charges disallowed by the A.O. having treated it to be the payment on account of royalty - assessee contended that he has claimed deduction u/s 10A and if any disallowance is made u/s 40(a)(ia) it would increase the deductions claimed by the assessee - Held that - A.O. has disallowed the payment having treated the same as payment on account of royalty on non deduction of TDS. While adjudicating the issue the AO has not examined the aspect of increase in deduction claimed u./s 10A of the Act on disallowance of payment u/s 40(a)(ia) of the Act and therefore there would be no tax implication. Accordingly we set aside the order of A.O. in this regard and restore the matter to the A.O./T.P.O. to readjudicate the issue in terms indicated above. Accordingly the appeal is disposed of.

Issues Involved:
1. Adjustment in the arm's length price (ALP) of international transactions.
2. Rejection of economic analysis undertaken by the appellant.
3. Adjustment under Section 92CA(3) without finding specified circumstances.
4. Rejection of comparable companies based on different accounting years.
5. Use of single year data instead of multiple year data.
6. Rejection of comparables based on employee cost criteria.
7. Selection of companies with supernormal profits as comparables.
8. Rejection of comparables based on turnover criteria.
9. Rejection of comparables showing diminishing revenue trends.
10. Rejection of comparables based on export earnings criteria.
11. Addition of functionally dissimilar companies to the comparables list.
12. Lack of suitable adjustments for working capital differences.
13. Lack of adjustments for risk profile differences.
14. Disallowance of payment made to Adobe USA under Section 40(a)(i).

Detailed Analysis:

1. Adjustment in the ALP of International Transactions:
The appellant contested an addition of INR 334,238,459 to their income due to adjustments in the ALP of international transactions related to software development services. The Tribunal examined the comparables used by the TPO and found that certain companies like E-Infochips Bangalore Ltd., Infinite Data Systems Pvt. Ltd., and Thirdware Solution Ltd. were functionally different and should be excluded from the list of comparables. The Tribunal directed the AO/TPO to exclude these companies from the final list of comparables.

2. Rejection of Economic Analysis by the Appellant:
The Tribunal noted that the TPO had not accepted the economic analysis undertaken by the appellant. The appellant's analysis was in accordance with the provisions of the Act and the Income Tax Rules, 1962. The Tribunal preferred to adjudicate the issue in light of the chart furnished by the appellant and referred to judgments/orders of Tribunals.

3. Adjustment Under Section 92CA(3) Without Finding Specified Circumstances:
The Tribunal found that the TPO made adjustments without returning a finding about the existence of any circumstances specified in clauses (a) to (d) of sub-section (3) of Section 92C of the Act. The Tribunal directed the AO/TPO to reexamine the comparables and make adjustments accordingly.

4. Rejection of Comparables Based on Different Accounting Years:
The Tribunal held that rejecting comparables solely based on different accounting years was inappropriate. The Tribunal directed the AO/TPO to include companies like R Systems International Ltd. and Silverline Technologies Ltd. in the final list of comparables if their data could be reasonably extrapolated.

5. Use of Single Year Data Instead of Multiple Year Data:
The Tribunal did not specifically address the issue of using single year data instead of multiple year data. However, the Tribunal's direction to reexamine the comparables implies that the AO/TPO should consider multiple year data if relevant.

6. Rejection of Comparables Based on Employee Cost Criteria:
The Tribunal noted that the TPO rejected certain comparables identified by the appellant using employee cost greater than 25 percent of the total cost as a comparability criterion. The Tribunal directed the AO/TPO to reexamine these comparables.

7. Selection of Companies with Supernormal Profits as Comparables:
The Tribunal found that companies like Wipro Technology Services Ltd., which earned supernormal profits, were not good comparables. The Tribunal directed the AO/TPO to exclude such companies from the list of comparables.

8. Rejection of Comparables Based on Turnover Criteria:
The Tribunal held that turnover is not a decisive factor for determining inclusion or exclusion of any case as a comparable. The Tribunal directed the AO/TPO to include companies like CG-VAK Software & Exports Ltd. in the final list of comparables.

9. Rejection of Comparables Showing Diminishing Revenue Trends:
The Tribunal did not specifically address the issue of rejecting comparables showing diminishing revenue trends. However, the Tribunal's direction to reexamine the comparables implies that the AO/TPO should consider such trends if relevant.

10. Rejection of Comparables Based on Export Earnings Criteria:
The Tribunal noted that the TPO rejected certain comparables identified by the appellant using "Export earnings less than 75 percent of operating revenues" as a comparability criterion. The Tribunal directed the AO/TPO to reexamine these comparables.

11. Addition of Functionally Dissimilar Companies to the Comparables List:
The Tribunal found that certain companies were functionally dissimilar to the appellant and should be excluded from the list of comparables. The Tribunal directed the AO/TPO to exclude such companies from the final list of comparables.

12. Lack of Suitable Adjustments for Working Capital Differences:
The Tribunal held that suitable adjustments for working capital differences should be allowed. The Tribunal directed the AO/TPO to allow adjustments for working capital employed by the appellant.

13. Lack of Adjustments for Risk Profile Differences:
The Tribunal did not specifically address the issue of adjustments for risk profile differences. However, the Tribunal's direction to reexamine the comparables implies that the AO/TPO should consider risk profile differences if relevant.

14. Disallowance of Payment Made to Adobe USA Under Section 40(a)(i):
The Tribunal noted that the AO disallowed the payment made by the appellant to Adobe USA on account of connectivity charges for delivery of computer software outside India. The Tribunal directed the AO/TPO to reexamine the issue, considering that any disallowance would increase the deductions claimed by the appellant under Section 10A of the Income Tax Act, 1961, and there would be no tax implication.

Conclusion:
The Tribunal allowed the appeal for statistical purposes, directing the AO/TPO to reexamine the issues in light of the Tribunal's observations and judgments/orders referred to during the hearing. The Tribunal emphasized the need for a reasonable approach while selecting/rejecting comparables and directed the AO/TPO to redetermine the ALP accordingly.

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