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2024 (12) TMI 804 - AT - Income TaxTP upward adjustment - international transactions carried out with the associated enterprise - Comparable selection - whether the companies having turnover exceeding ₹ 200 crores should be excluded while calculating the ALP of the assessee? - HELD THAT -We direct the TPO/AO to exclude the companies comparable while calculating the ALP with respect to the international transaction carried out by the assessee if they are having turnover exceeding Rs. 200 crores after necessary verification. Comparable company namely ICRA Techno Analytics Ltd and Kals Information Systems Ltd. are functionally different with the assessee company which engaged in software development services. Therefore, the same cannot be included in comparability analysis. Quintegra Solution Limited is functionally similar to the assessee company, having turnover also similar to assessee company cannot be excluded from comparable merely on the reasoning that the impugned company has shown loss on account of extraordinary deduction. Accordingly, we direct the AO/TPO to include such company namely Quintegra Solution Limited as on of the comparable. Adjustment on account of working capital difference between the assessee being tested party and comparable companies in order to compute appropriate ALP - We note that rule 10B(3) of the IT Rules provides appropriate adjustment to be made on account of differences in tested party and comparable companies which may affect the price and profitability. The Delhi Tribunal in the case of Mentor Graphics (Noida) Pvt Ltd. 2007 (11) TMI 339 - ITAT DELHI-H no ambiguity that the adjustment in the working capital is required to be made in determining the ALP of the tested party. But the onus lies upon the assessee to justify the stand for claiming the adjustment towards working capital based on the documentary evidence. In the present case, the learned DRP has categorically observed that the assessee has failed to furnish the necessary details for claiming the adjustment with respect to the working capital. AR before us contended that the assessee being hundred percent working for the holding company does not require any working capital unlike the comparable companies. AR further assured to furnish the necessary details in support of the working capital adjustment if the matter is set aside to the file of the AO/TPO for necessary verification as per the provisions of law. The ld. DR also raised no objection if the matter is set aside to the file of the AO/TPO for necessary verification as per the provisions of law. Considering the above and in the interest of justice, we set aside the issue to the file of the AO/TPO for necessary verification and fresh adjudication as per the provisions of law. Hence, the ground of appeal of the assessee is allowed for statistical purposes. Nature of expenses - royalty expenses - capital or revenue expenses - HELD THAT - We note that the revenue in the own case of the assessee in the earlier assessment year 2012-13 and in the assessment year 2015-16 held the royalty expenses as revenue in nature. Therefore, we hold that such expenses cannot be treated as capital in nature in the year under consideration. AO granting the short interest u/s 244A and erred in computing interest u/s 234D - AR before us contended that a direction can be issued to the AO for calculating the interest u/s 234D and 244A of the Act as per the provisions of law - DR raised no objection if such direction is issued to the AO for fresh calculation of interest under section 244A and 234D of the Act as per the provisions of law. Accordingly, we direct the AO to calculate the amount of interest under the provisions of section 234D and 244A of the Act as per the provisions of law.
Issues Involved:
1. Upward adjustment of Rs. 8,09,48,991.00 in respect of international transactions with associated enterprises. 2. Exclusion of certain companies as comparables based on turnover filter and functional dissimilarity. 3. Inclusion of Quintegra Solutions Limited in the list of comparables. 4. Adjustment for working capital differences in the calculation of Arm's Length Price (ALP). 5. Treatment of royalty expenses as capital or revenue in nature. 6. Calculation of interest under sections 244A and 234D of the Income Tax Act. Issue-wise Detailed Analysis: 1. Upward Adjustment in International Transactions: - The assessee challenged the upward adjustment of Rs. 8,09,48,991.00 made by the AO/TPO concerning international transactions with its associated enterprises. The adjustment was based on the Transfer Pricing Officer's (TPO) fresh study, which included 11 comparables and calculated an arithmetic mean of 22.71% using the Transactional Net Margin Method (TNMM). The assessee's objections to the comparables were partially accepted by the Dispute Resolution Panel (DRP), which included one additional comparable, leading to a revised upward adjustment. 2. Exclusion of Certain Comparables: - The assessee argued for the exclusion of six companies selected by the TPO as comparables due to their turnover exceeding Rs. 200 crores, whereas the assessee's turnover was Rs. 53.58 crores. The Tribunal upheld the exclusion of these companies, citing the precedent set by the ITAT Bangalore in the case of Autodesk India Private Limited, which emphasized the relevance of turnover as a criterion for comparability. The Tribunal directed the AO/TPO to exclude these companies after necessary verification. 3. Inclusion of Quintegra Solutions Limited: - The assessee contended that Quintegra Solutions Limited should be included as a comparable, arguing that its losses were due to non-operating expenses and exceptional items, not operational inefficiency. The Tribunal agreed with the assessee, noting that the company was functionally similar and had shown profits in the relevant financial year. The AO/TPO was directed to include Quintegra Solutions Limited in the list of comparables. 4. Working Capital Adjustment: - The assessee sought an adjustment for working capital differences under Rule 10B(3) of the Income Tax Rules, arguing that it operated without working capital risk due to funding from its associated enterprise. The Tribunal acknowledged the necessity of working capital adjustments in determining the ALP but noted the assessee's failure to provide adequate documentation. The matter was remanded to the AO/TPO for verification and fresh adjudication, with the assessee given an opportunity to furnish necessary evidence. 5. Treatment of Royalty Expenses: - The assessee claimed a deduction for royalty expenses treated as revenue in nature, which the AO had classified as capital. The Tribunal noted that in previous assessment years, the revenue had accepted these expenses as revenue in nature. The Tribunal set aside the DRP/AO's order, directing them to allow the deduction for royalty expenses as revenue, consistent with past assessments. 6. Interest Calculation under Sections 244A and 234D: - The assessee raised issues regarding the incorrect calculation of interest under sections 244A and 234D. The Tribunal directed the AO to recalculate the interest as per the provisions of law, with both parties agreeing to this course of action. Conclusion: The appeal was partly allowed for statistical purposes, with directions for exclusion and inclusion of certain comparables, reconsideration of working capital adjustments, treatment of royalty expenses as revenue, and recalculation of interest under the relevant sections of the Income Tax Act.
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