2024 (12) TMI 484 - AT - Income Tax

TP Adjustment - Adjustments concerning Software Development Services (SDS) - calculation of operating cost for the purpose of calculation of PLI - HELD THAT - As submitted by assessee did not performed any business activity w.e.f. 06/12/2009 and finally closed its business on 15/03/2010. For the period from 06/12/2009 till 15/03/ 2010 the assessee had to incurred certain expenses including severance pay of employees. Since the assessee had stopped it business activities w.e.f. 06/12/2009, the expenditure incurred after that date can not be treated as part of operating cost. Hence we are in agreement with the submission of AR. Therefore we set aside the matter to the file of AO with a direction to exclude the amount of expenditure incurred by the assessee for the period from 06/12/2009 till 15/03/2010 from the calculation of operating cost for the purpose of calculation of PLI, if no business activities had been done by the assessee during the period from 06/12/2009 till 15/03/2010. Accordingly the grounds no. 4 of the assessee is allowed for statistical purposes.

Summary

Issues Involved:

1. Condonation of delay in filing the appeal by the Revenue.
2. Transfer pricing adjustments concerning Software Development Services (SDS).
3. Computation of net margin and operating costs.
4. Selection and rejection of comparable companies.
5. Application of filters in comparative analysis.
6. Interest on outstanding receivables from associated enterprises.
7. Arm's length range of 5% as per Section 92C(2).
8. Negative working capital adjustment.
9. Credit for advance tax and interest under Sections 234B and 234D.

Issue-wise Detailed Analysis:

1. Condonation of Delay:
The Tribunal addressed the delay of one day in filing the appeal by the Revenue. After reviewing the condonation petition and hearing the arguments, the delay was condoned, and the appeal was admitted for adjudication.

2. Transfer Pricing Adjustments:
The Assessee challenged the transfer pricing adjustment of Rs. 15,82,39,054 made by the AO/DRP concerning the provision of Software Development Services (SDS) to its Associated Enterprise (AE). The Tribunal examined the Assessee's contention that the AO/DRP erred in rejecting the transfer pricing documentation and undertaking a fresh economic analysis. The Tribunal set aside the matter to the AO to exclude certain extraordinary expenses from the operating cost, thereby allowing the Assessee's core issue.

3. Computation of Net Margin and Operating Costs:
The Assessee argued that the AO/DRP incorrectly considered costs incurred post-termination of the agreement as operating costs. The Tribunal agreed with the Assessee that expenses incurred after business cessation should not be part of the operating cost for Profit Level Indicator (PLI) computation. The Tribunal directed the AO to exclude these costs if no business activities were conducted during the specified period.

4. Selection and Rejection of Comparable Companies:
The Assessee contested the inclusion of certain companies as comparables by the TPO and the rejection of others. The Tribunal, having resolved the primary issue of operating costs, deemed the adjudication of these grounds unnecessary as they became academic.

5. Application of Filters in Comparative Analysis:
The Assessee challenged the use of additional filters by the AO/DRP in the comparative analysis. However, with the resolution of the primary issue, these grounds were not further adjudicated.

6. Interest on Outstanding Receivables:
The Assessee disputed the AO/DRP's treatment of outstanding receivables as an international transaction and the imputation of notional interest. The Tribunal did not specifically address this issue, as the resolution of the primary issue rendered other grounds academic.

7. Arm's Length Range of 5%:
The Assessee sought the application of the arm's length range of 5% as per Section 92C(2). This issue was not separately adjudicated due to the resolution of the primary issue.

8. Negative Working Capital Adjustment:
The Assessee raised an additional ground regarding a negative working capital adjustment. The Tribunal admitted this ground for adjudication, recognizing its legal nature emanating from existing records.

9. Credit for Advance Tax and Interest:
The Assessee claimed discrepancies in the credit for advance tax and interest liabilities under Sections 234B and 234D. These grounds were not specifically adjudicated due to the resolution of the primary issue.

Conclusion:
The Tribunal allowed the Assessee's appeal for statistical purposes, primarily addressing the exclusion of extraordinary expenses from operating costs. Consequently, the Revenue's appeal was dismissed.