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2020 (5) TMI 407 - AT - Income TaxTP Adjustment - subcontracting charges paid to 3rd - whether considered in the operating profit while computing assessee s margin? - contention of assessee that subcontracting charges should be excluded for computing margin of software development services in the hands of assessee - HELD THAT - As decided in own case 2020 (2) TMI 259 - ITAT BANGALORE cost of software development services cannot be treated in this fashion as claimed by the assessee. Hence we do not find any merit or substance in the contention raised by the assessee on this issue. Comparability analysis - Assessee provides software development and support services to Applied Inc. In this regard assessee employed services of 3rd party service providers for sub contracting specific part of their work. Core activities of software development cycle are conducted in house by assessee and a part of non-core activities are subcontracted to third-party service provider thus companies functionally dissimilar with that of assessee need to be deselected. Disallowance of depreciation @ 60% on racks Xerox machine and accessories batteries and stabiliser - AO disallowed the claim and granted 15% depreciation for the reason that they are not integral part of computers which has been upheld by DRP - HELD THAT - Undoubtedly machines like racks batteries stabilisers can function without a computer and is attachable to any other electrical appliances. Therefore these machines do not form part of computer peripherals. Insofar as the Xerox machine is concerned it is an ascertained able at this stage whether these machines could be exclusively and independently used without being attached to a computer as such kinds of Xerox machines do exist. Assessee has also not been able to establish details of accessories that has been categorised to be forming part of computer peripherals. We set aside this issue back to Ld.AO/TPO for verifying the actual use and nature of Xerox machines and the accessories that has been considered as computer peripherals. In the event it is ascertained able that these accessories and Xerox machines could not be independently used but could only be used on being attached to computer 60% depreciation should be allowed. Insofar as racks batteries and stabilisers are concerned these do not fall within the category of computer peripherals and we uphold the depreciation being allowed only at 15%. Not granting MAT credit - HELD THAT - It is observed that Ld.AO has not verified the claim and has denied it to assessee. We direct Ld.AO to verify the claim of assessee and if found eligible the same should be granted to assessee in accordance with law.
Issues Involved:
1. Validity of the assessment order and compliance with natural justice principles. 2. Justification of profit shifting motive. 3. Determination of arm's length price for international transactions. 4. Inclusion of subcontracting charges in operating costs. 5. Comparability analysis for determining arm's length price. 6. Adjustments for differences in accounting practices and risk profiles. 7. Variation from the arithmetic mean. 8. Depreciation rate on computer peripherals. 9. Non-grant of Minimum Alternate Tax (MAT) credit. 10. Computation of interest under section 234B. 11. Initiation of penalty proceedings. Detailed Analysis: 1. Validity of the assessment order and compliance with natural justice principles: The appellant contended that the assessment order by the Deputy Commissioner of Income Tax (DCIT) was bad in law and violated principles of natural justice, particularly due to the lack of a show cause notice under section 92C(3) and the improper reference to the Transfer Pricing Officer (TPO). The Tribunal found these grounds general in nature and dismissed them without detailed adjudication. 2. Justification of profit shifting motive: The appellant argued that the authorities failed to demonstrate the motive of shifting profits outside India by manipulating prices in international transactions. This issue was not pressed by the appellant during the hearing, and thus, it was dismissed. 3. Determination of arm's length price for international transactions: The appellant contested the rejection of its value for software development services, the use of non-contemporaneous data, and the non-application of multiple-year data. These grounds were not pressed by the appellant during the hearing and were dismissed. 4. Inclusion of subcontracting charges in operating costs: The appellant argued that subcontracting charges should not be included in the operating costs while computing its margin. The Tribunal referred to its previous decisions in the appellant's own case for earlier assessment years, which held that subcontracting charges are part of the operating costs. Therefore, this ground was dismissed. 5. Comparability analysis for determining arm's length price: The appellant raised several issues regarding the inclusion and exclusion of comparables: - Akshay Software Technologies Ltd.: Excluded due to lack of segmental information and functional dissimilarities. - Helio and Matheson Information Technology Ltd. & R Systems International Ltd.: Set aside to the TPO for verification and consideration of quarterly results. - CG Vak Software Exports Ltd.: Set aside to the TPO for verification of discrepancies in revenue reporting. - Mindtree Ltd.: Excluded due to functional dissimilarities and ownership of intangibles. - Persistent Systems Ltd.: Excluded due to involvement in product development and ownership of intangibles. - Larsen and Toubro Infotech Ltd.: Excluded due to functional dissimilarities and ownership of intangibles. 6. Adjustments for differences in accounting practices and risk profiles: The appellant argued for adjustments under Rule 10B for differences in accounting practices, marketing expenditure, research and development expenditure, working capital, and risk profile. These grounds were not pressed by the appellant during the hearing and were dismissed. 7. Variation from the arithmetic mean: The appellant contended that it should be granted the benefit of the proviso to Section 92C(2). This ground was not pressed by the appellant during the hearing and was dismissed. 8. Depreciation rate on computer peripherals: The appellant argued that computer peripherals should be depreciated at 60% instead of 15%. The Tribunal held that racks, batteries, and stabilizers do not qualify as computer peripherals and upheld the 15% depreciation. The issue of Xerox machines and accessories was set aside to the AO/TPO for verification. 9. Non-grant of Minimum Alternate Tax (MAT) credit: The appellant claimed that the AO failed to grant MAT credit as directed by the Dispute Resolution Panel (DRP). The Tribunal directed the AO to verify the claim and grant the credit if found eligible. 10. Computation of interest under section 234B: The appellant contested the computation of interest under section 234B. This ground was not pressed by the appellant during the hearing and was dismissed. 11. Initiation of penalty proceedings: The appellant argued that there was no basis for initiating penalty proceedings under Section 274 read with Section 271(1)(c). This ground was not pressed by the appellant during the hearing and was dismissed. Conclusion: The appeal was partly allowed, with specific directions given for the inclusion/exclusion of certain comparables and the verification of MAT credit and depreciation claims. The Tribunal upheld the inclusion of subcontracting charges in operating costs and dismissed several grounds that were not pressed by the appellant.
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