2015 (10) TMI 942 - AT - Income Tax

Transfer Pricing adjustment - adjustment made on account of accelerated depreciation - whether while computing margins of the comparable companies, in the facts of the present case, any adjustment could be made on account of such assets, which are not owned by the assessee - CIT(A) directed the Assessing Officer not to make the depreciation adjustment on account of un-common assets between the assessee and comparable companies Held that - Merely because, one company does not have the said assets, it cannot be said that it had not incurred certain expenditure relatable to the same. We find that similar proposition on account of depreciation arose before the Delhi Bench of the Tribunal in EXL Service.Com (India) Pvt. Ltd. Vs. ACIT 2014 (12) TMI 894 - ITAT DELHI wherein it was held that no adjustment is to be made on account of uncommon assets. In view thereof, we uphold the order of CIT(A) in holding that no adjustment is to be made in the hands of the comparable companies on account of assets not owned by the assessee. The learned Authorized Representative for the assessee has furnished on record an order giving appeal effect to the order of CIT(A) by Assessing Officer, vide order dated 28.02.2013, in which the margin of set of comparable companies was adopted at 15.75% as against the PLI of the assessee at 10.52% and the same has been found to be at arm s length i.e. /- 5% range prescribed under the proviso to section 92C(2) of the Act. It may be clarified here that initially, the TPO had adopted the PLI of the assessee at 10.33%, but while computing adjustment on account of international transaction, the PLI was taken at 10.52% which is to be adopted in the hands of the assessee. In view thereof, we dismiss the grounds of appeal raised by the Revenue. In view of the concession of the learned Authorized Representative for the assessee that after giving effect to the order of CIT(A), no further adjustment is to be made in the hands of the assessee on account of an international transactions. Consequently, we dismiss the appeal filed by the assessee being academic. In view thereof, both the appeals of the assessee and the Revenue are dismissed.

Summary

Issues Involved:
1. Rejection of comparable companies by CIT(A).
2. Adjustment for material differences in the risk profile.
3. Non-allowance of standard deduction of +/-5%.
4. Depreciation adjustment on uncommon assets between the assessee and comparable companies.

Detailed Analysis:

1. Rejection of Comparable Companies by CIT(A):
The assessee contended that the CIT(A) erred in upholding the rejection of four companies (Birla Technologies Limited, CG-VAK Software & Exports Limited, Indium Software (India) Limited, and Melstar Information Technologies Limited) from the set of 11 comparables selected for determining the arm's length price (ALP). The CIT(A) justified the rejection based on functional dissimilarity, which was contested by the assessee as these companies were deemed functionally comparable.

2. Adjustment for Material Differences in the Risk Profile:
The assessee argued that the CIT(A) incorrectly upheld the TPO/AO's decision of not granting adjustments for material differences in the risk profile between the assessee and the comparables. The assessee, being a captive software service provider, claimed a lower risk profile compared to the entrepreneur software service providers selected as comparables. The Act and Rules (10B(1)(e)(iii) and 10B(3)) provide for such comparability adjustments, which were not considered by the TPO/AO.

3. Non-Allowance of Standard Deduction of +/-5%:
The assessee contested the CIT(A)'s decision to uphold the TPO/AO's action of not allowing the standard deduction of +/-5% as per the proviso to Section 92C(2) of the Income-tax Act. The assessee's claim was that the margin shown in respect of its international transactions was within the permissible range, thus no adjustment was required.

4. Depreciation Adjustment on Uncommon Assets:
The Revenue appealed against the CIT(A)'s direction to the AO not to make depreciation adjustments on uncommon assets between the assessee and comparable companies. The TPO had made adjustments considering the depreciation on fixed assets at rates higher than those provided in the Companies Act, 1956. The CIT(A) observed that such adjustments were not justified as they were based on hypothetical submissions and lacked a solid ground. The CIT(A) emphasized that parity should be maintained for effective comparability and directed the AO to refrain from making such adjustments.

Conclusion:
The Tribunal upheld the CIT(A)'s decision on all counts. It was affirmed that no adjustment should be made in the net profit margins of the tested party (assessee) under Rule 10B(1)(e). Adjustments, if any, should be made to the comparable companies' margins. The Tribunal referenced a similar case (EXL Service.Com (India) Pvt. Ltd. Vs. ACIT) to support its decision that no adjustment is required on account of uncommon assets. Consequently, both the appeals of the assessee and the Revenue were dismissed as the issues raised were either academic or already addressed by the CIT(A) effectively.