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2018 (10) TMI 70 - AT - Income TaxTPA - ALP determination - MAM Selection - comparable selection - Functional profile of company - Held that - Functional profile of the assessee has remained unchanged from past year and the assessee continues to be a development centre undertaking contract R&D activities with insignificant risk as per Circular 6/2013. The above discussion brings us to an irresistible conclusion that the assessee is a contract R&D service provider thus removal of companies from final list as functionally different and failed the service income filter along with diversified operations and non-availability of segmental data. Working capital adjustment - Held that - We direct the A.O./TPO to allow working capital adjustment after due verification of the claim whether it goes for or against it and also recompute the assessee s PLI from this international transaction by reducing operating expenses in relation to the earning of rental income from the overall operating expenses to be bifurcated amongst all the sources of the revenues of the assessee from operations including the instant international transaction.
Issues Involved:
1. Transfer pricing adjustment for software development services. 2. Transfer pricing adjustment for IT enabled services. 3. Working capital adjustment. 4. Computation of the assessee's own PLI. 5. Corporate tax grounds including foreign exchange fluctuation gain/loss, deduction under section 10A, taxability of rental income, and MAT credit. Detailed Analysis: 1. Transfer Pricing Adjustment for Software Development Services: The first issue raised by the assessee concerns the addition of ?197,23,68,765/- on account of transfer pricing adjustment in the international transaction of 'Provision of Software Development services'. The assessee, a subsidiary of Microsoft Ireland Research Ltd., employed the Transactional Net Margin Method (TNMM) with the Profit Level Indicator (PLI) of Operating profit to Operating cost (OP/OC) for demonstrating that the international transaction was at Arm's Length Price (ALP). The TPO disputed the comparability of companies selected by the assessee and made adjustments, leading to the proposed transfer pricing adjustment. The Tribunal found that the assessee was involved in high-end software development services and not just routine software development. Consequently, the Tribunal ordered the exclusion of certain companies like E-Infochips Bangalore Ltd., Infosys Technologies Ltd., Persistent Systems Ltd., and Wipro Technology Services Ltd. from the list of comparables due to functional dissimilarity. 2. Transfer Pricing Adjustment for IT Enabled Services: The next international transaction under challenge is 'Provision of IT enabled services' with a transacted value of ?323,46,26,948/-. The TPO made certain exclusions and inclusions from/to the list of comparables drawn by the assessee, leading to a revised transfer pricing adjustment of ?28,73,66,004/-. The Tribunal noted that the assessee was engaged in providing IT enabled services such as resolving technical problems of customers and providing technical assistance. The Tribunal excluded certain companies like Accentia Technologies Ltd., ICRA Techno Analytics (Seg), and TCS E-Serve Ltd. from the list of comparables due to functional dissimilarity. The Tribunal also directed the inclusion of companies like Informed Technology and CG-Vak Software and Exports Ltd. (Seg.) which were excluded by the TPO based on turnover filter. 3. Working Capital Adjustment: The assessee argued that the authorities erred in not granting working capital adjustment. The Tribunal agreed in principle with the grant of working capital adjustment, noting that it is essential to neutralize differences on account of carrying high or low inventory, trade payables, and trade receivables. The Tribunal set aside the impugned order on this issue and remitted the matter back to the AO/TPO for fresh determination of the working capital adjustment. 4. Computation of the Assessee's Own PLI: The assessee contended that rental income earned was considered as non-operating income, but the corresponding expenses relating to such rental income were not excluded from the total operating expenses. The Tribunal directed the TPO/AO to examine the amount of expenses incurred in relation to earning of rental income and reduce such amount from the total amount of operating expenses. 5. Corporate Tax Grounds: The corporate tax grounds raised by the assessee include issues related to realized foreign exchange fluctuation gain/loss, adjustment against the opening written down value of computers, denial of deduction under section 10A, and taxability of rental income under the head 'Income from house property'. The Tribunal noted that similar issues were restored to the AO for a fresh decision in the immediately preceding year. Consequently, the Tribunal set aside the impugned order on these issues and remitted the matter to the AO for fresh consideration. Conclusion: The Tribunal set aside the impugned order on the issues of transfer pricing adjustments and remitted the matter to the AO/TPO for fresh determination in accordance with the Tribunal's observations. The Tribunal also restored the corporate tax issues to the AO for fresh decision in line with the view taken in the immediately preceding year. The appeal of the Revenue was dismissed, and the appeal of the assessee was partly allowed for statistical purposes.
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