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2018 (4) TMI 79 - AT - Income TaxDetermination of Arms Length Price in respect of an international transaction of rendering software development services - comparability analysis - Held that - The assessee rendered software development services thus companies functionality dissimilar with that of assessee need to be deselected from final list. Working capital adjustment - Held that - Direct the assessee to give computation of working capital adjustment as per the formula for calculating the working capital adjustment. The TPO is directed to examine the working capital adjustment so given in accordance with law. Disallowance of Entrance fees subscription and cost of facilities paid to clubs - addition of aforesaid expenses had no nexus with the business of the assessee - Held that - The tribunal following the decision of the Hon ble Supreme Court in the case of United Glass Manufacturing Co. Ltd. 2012 (9) TMI 914 - SUPREME COURT wherein it was held that club expenses of employees was business expenditure allowable u/s 37 of the Act allowed the claim of the assessee. Respectfully following the decision of the tribunal in assessee s own case we direct the AO to allow the claim of the assessee for deduction. Provision for replacement guarantee allowable. Direct the AO to allow the lease rent paid as deduction. Short credit of tax deducted at source - action of the AO in not granting credit of tax deducted at source - Held that - AO is permitted to waive the claim of the assessee and allow appropriate credit for TDS.
Issues Involved:
1. Determination of Arm's Length Price (ALP) for international transactions. 2. Working capital adjustments. 3. Club membership fees. 4. Provision for replacement guarantee. 5. Lease rental payments. 6. Short credit of tax deducted at source. 7. Charging of interest under sections 234B and 234C. Detailed Analysis: 1. Determination of Arm's Length Price (ALP) for International Transactions: The primary issue was the determination of ALP for software development services rendered by the assessee to its Associated Enterprises (AE). The assessee used the Transaction Net Margin Method (TNMM) and selected 18 comparable companies, with an arithmetic mean profit margin of 9.75%, compared to the assessee's margin of 10.23%. The TPO, however, selected nine comparable companies, arriving at an arithmetic mean of 18.61%, leading to an upward adjustment of ?25.08 crores. The Tribunal admitted additional grounds for excluding two comparable companies, 3i Infotech Ltd. and Aftek Ltd., based on functional dissimilarity and other factors, and remanded the issue back to the TPO for re-examination. 2. Working Capital Adjustments: The assessee argued for working capital adjustments, which the TPO and DRP initially denied, citing lack of specific computation. The Tribunal noted that the assessee had provided necessary data and directed the TPO to compute the working capital adjustment based on the formula usually employed. 3. Club Membership Fees: The Tribunal allowed the deduction of ?6,49,790 paid towards club membership fees, following the precedent set in the assessee's own case for A.Y. 2006-07 and the Supreme Court's decision in United Glass Manufacturing Co. Ltd., which held such expenses as allowable under section 37 of the Act. 4. Provision for Replacement Guarantee: The Tribunal allowed the provision for replacement guarantee amounting to ?1,45,98,000, following the Supreme Court's decision in Rotork Controls India (P) Ltd., which set conditions for such provisions. The Tribunal referred to its earlier decision in the assessee's case for A.Y. 2006-07, where similar provisions were allowed. 5. Lease Rental Payments: The Tribunal allowed the deduction of lease rentals paid for vehicles, amounting to ?36,964,000, treating them as revenue expenditure, in line with the Supreme Court's decision in ICDS Ltd. vs. CIT. The Tribunal also addressed the issue of double disallowance, directing the AO to rectify it. 6. Short Credit of Tax Deducted at Source: The Tribunal directed the AO to grant appropriate credit for tax deducted at source, as claimed by the assessee. 7. Charging of Interest under Sections 234B and 234C: The Tribunal noted that the charging of interest under sections 234B and 234C is consequential and directed the AO to provide consequential relief. Conclusion: The appeals were partly allowed, with significant issues remanded back to the TPO for re-examination, particularly the exclusion of certain comparable companies and the computation of working capital adjustments. The Tribunal provided clear directives on the treatment of club membership fees, provision for replacement guarantee, and lease rental payments, ensuring adherence to judicial precedents and statutory provisions.
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