2014 (12) TMI 759 - AT - Income Tax

Selection of comparables - Infosys Technologies Limited Diverse nature of services provided by comparable - Held that - The Annual report/website of Infosys provides information on the diverse nature of services provided by it as Infosys is the largest publicly held software development company in India - It service profile includes consulting application design development re-engineering and maintenance systems integration package evaluation and implementation business process management - The company has diverse domain expertise in areas such as engineering enterprises financial services healthcare technology manufacturing retail and distribution telecom transportation utilities and energy - unlike the assessee Infosys is extremely diversified and undertakes a wide range of services apart from software development- . Since the revenue and profitability for software development cannot be ascertained from the data in the annual report Infosys cannot be included as comparable also CIT v. Agnity India Technologies (P) Ltd 2013 (7) TMI 696 - DELHI HIGH COURT Infosys Technologies Limited is directed to exclude from the list of comparable on account of its giant-ness which was decided on cumulative factors including risk profile nature of service turnover ownership of brand onsite versus offshore service expenditure on R & D and advertisement etc. - Infosys Technologies Ltd cannot be held to be a comparable company to that of the assessee. Nucleus Netsoft & Gis India Limited Functionally dissimilar - Software development services Held that - company is functionally dissimilar to that of the assessee on account of diversified operation - during the relevant financial year Nucleus Netsoft&Gis India Ltd underwent restructuring exercise on account of amalgamation which impacted the financial statement of the company - since the assessee had neither raised any objection of Nucleus Netsoft&Gis India Ltd being included as comparable company before the TPO nor the DRP considered the assessee s objection thus the matter is remitted back to the TPO. Grant of working capital adjustment Held that - The TPO had rejected the assessee s claim for working capital adjustment primarily for the reason that there was no accurate or sufficient data/working given by the assessee to make reliable working capital adjustment - assessee contended that it had worked out the computation for working capital adjustment with accurate and sufficient data and also in accordance with the settled economic principle - DRP had not elaborately considered the assessee s objection and since the assessee has contested the TPO s finding that no accurate and sufficient data was available to make reliable working capital adjustment the matter is to be remitted back to the TPO for fresh consideration. Restriction of depreciation claim to 15% instead of 60% on computer peripheral/accessories Held that - As decided in assessee s own case for the earlier assessment year it has been held that depreciation on computers peripheral namely UPS & Printers would be admissible @ 60% - Decided in favour of assessee.

Summary

Issues Involved:
1. Adjustment in arm's length price of international transactions.
2. Rejection of Transfer Pricing (TP) documentation.
3. Non-provision of adjustment on account of risk differential.
4. Use of multiple year/prior year data for comparable companies.
5. Inclusion/exclusion of comparable companies.
6. Denial of working capital adjustment.
7. Depreciation rate on computer accessories.
8. Deduction under section 10A on disallowed depreciation.
9. Charging of interest under sections 234B and 234C.
10. Initiation of penalty proceedings under section 271(1)(c).

Detailed Analysis:

1. Adjustment in Arm's Length Price:
The TPO made an upward adjustment of Rs. 30,71,50,845/- for the software segment and Rs. 16,25,98,555/- for IT enabled services. This was based on the average arm's length mark-up on cost of comparable companies. The DRP confirmed the TPO's findings, rejecting the assessee's objections.

2. Rejection of TP Documentation:
The TPO rejected the assessee's TP study, which used the Transactional Net Margin Method (TNMM) for benchmarking. The DRP upheld this rejection, agreeing with the TPO's selection of comparables and denial of working capital adjustment.

3. Non-provision of Risk Adjustment:
The TPO and DRP did not provide adjustments for the limited risk nature of the assessee's services compared to entrepreneurial comparables. The DRP found no substantial force in the assessee's arguments.

4. Use of Multiple Year/Prior Year Data:
The TPO used data available at the time of assessment proceedings instead of the financial year 2005-06 data. The assessee's objection to this was upheld by the DRP.

5. Inclusion/Exclusion of Comparable Companies:
- Infosys Technologies Ltd: The TPO included Infosys as a comparable, but the Tribunal found it functionally dissimilar due to its diversified operations, brand value, and substantial R&D expenditure. The Tribunal directed its exclusion.
- Nucleus Netsoft & Gis India Ltd: Initially included by the assessee, objections were raised later. The Tribunal restored this issue to the TPO for reconsideration due to functional dissimilarities and restructuring impacts.

6. Denial of Working Capital Adjustment:
The TPO denied the working capital adjustment due to insufficient data. The Tribunal restored this issue to the TPO for de novo consideration, as the assessee contested the TPO's findings and claimed to have provided accurate data.

7. Depreciation Rate on Computer Accessories:
The AO allowed depreciation at 15% instead of the claimed 60%. The Tribunal, referencing its earlier decision and the jurisdictional High Court's ruling, directed that depreciation be granted at 60% for computer accessories/peripherals.

8. Deduction under Section 10A:
The Tribunal did not specifically address this issue in the detailed analysis, focusing instead on the depreciation rate and its impact.

9. Charging of Interest under Sections 234B and 234C:
The Tribunal did not provide a detailed analysis on this issue, as the primary arguments focused on TP adjustments and depreciation rates.

10. Initiation of Penalty Proceedings under Section 271(1)(c):
The Tribunal did not address this issue in detail, as the appeal primarily concerned TP adjustments and depreciation claims.

Conclusion:
The appeal was partly allowed. The Tribunal directed the exclusion of Infosys Technologies Ltd from comparables, restored the issue of Nucleus Netsoft & Gis India Ltd and working capital adjustment to the TPO, and granted a 60% depreciation rate on computer accessories. Other grounds were either not addressed in detail or upheld as per the DRP's and TPO's findings.