2017 (4) TMI 960 - AT - Income Tax

Transfer pricing adjustment - selection of comparable - Held that - Assessee is rendering software development research and other related services to its parent company, thus companies functionally different from the assessee need to de-selected from the final list of comparable. MAT adjustment - provision for gratuity and leave encashment - Held that - The assessee has filed a revised computation of book profit as per the provision of Sec.115JB during the course of assessment proceedings, claiming that provision for gratuity and leave encashment forming part of the audited financial statements, was ascertained liabilities as it was recognised on the basis of actuarial valuation and is not in the nature of unascertained liabilities as referred in Explanation to Sec 115 JB of the Act. The AO has declined to delete the said adjustment and did not accept the assessee s revised computation on the ground that the assessee has not filed the revised return of income. Even though the A.O. could not have entertained the said claim but it does not impinge upon the appellate authorities to entertain such a claim if all the facts are there on record. This has been so clarified by the Hon ble Supreme Court itself in the case of Goetz India Ltd. (2006 (3) TMI 75 - SUPREME Court). Thus, we remit this matter back to the file of the AO to consider the assessee s claim and if the claim is found admissible under the provisions of the law, then he shall allow the same after giving assessee opportunity to explain its case.

Issues Involved:
1. Transfer pricing adjustment on the provision of software development research and related services.
2. Exclusion of specific comparable companies for transfer pricing analysis.
3. Non-acceptance of revised computation of book profits under Section 115JB of the Income Tax Act.

Detailed Analysis:

1. Transfer Pricing Adjustment:
The primary issue in the appeal was the transfer pricing adjustment of ?3,59,52,769/- made on the provision of software development research and related services by the assessee to its parent company. The assessee, a captive service provider, was compensated at cost plus 15% mark-up. The initial transfer pricing study by the assessee, which selected 14 comparables, was rejected by the Transfer Pricing Officer (TPO). The TPO conducted a fresh analysis, selecting 21 comparables with an arithmetic mean of 27.44%, resulting in an adjustment of ?5,49,05,106/-. After the Dispute Resolution Panel (DRP) intervention, the adjustment was revised to ?3,59,57,769/-.

2. Exclusion of Specific Comparable Companies:
The assessee challenged the inclusion of four comparables selected by the TPO:

i. Infosys Ltd.:
The assessee argued that Infosys Ltd. is functionally different due to its diversified activities, significant intangibles, and high-risk profile. The Tribunal agreed, noting that Infosys Ltd.'s functions, assets, and risks (FAR) analysis showed significant differences from the assessee. The Tribunal directed the TPO/AO to exclude Infosys Ltd. from the final list of comparables, citing the Delhi High Court's judgment in CIT vs. Agnity India Technologies Pvt. Ltd.

ii. Wipro Technology Services Ltd.:
The assessee contended that Wipro Technology Services Ltd. had an extraordinary event during the year, as it was acquired by Wipro Ltd. and had a pre-arranged agreement with Citi Group, making its transactions deemed international transactions under Section 92B(2). The Tribunal agreed, noting that the entire revenue of this company was on account of related party transactions, failing the 25% RPT filter. The Tribunal directed the exclusion of this company from the comparables.

iii. Persistent Systems Ltd.:
The assessee argued that Persistent Systems Ltd. was functionally dissimilar due to its involvement in software products and lack of segmental details. The Tribunal agreed, noting the absence of segmental information and the presence of product sales, which made it difficult to include this company in the comparables. The Tribunal directed the exclusion of Persistent Systems Ltd.

iv. Thirdware Solutions Ltd.:
The assessee contended that Thirdware Solutions Ltd. was engaged in various activities, including sale of licenses and subscriptions, with no segmental data available. The Tribunal agreed, noting the lack of clear segmental information and the presence of different business models. The Tribunal directed the exclusion of Thirdware Solutions Ltd. from the comparables.

3. Non-Acceptance of Revised Computation of Book Profits:
The assessee raised grounds against the non-acceptance of the revised computation of book profits under Section 115JB, arguing that the provision for gratuity and leave encashment were ascertained liabilities based on actuarial valuation. The AO and DRP rejected the claim, citing the absence of a revised return of income. The Tribunal noted that while the AO could not entertain the claim without a revised return, appellate authorities could consider it if all facts were on record. The Tribunal remitted the matter back to the AO to consider the claim and allow it if found admissible under the law.

Conclusion:
The appeal was partly allowed, with directions to exclude certain comparables from the transfer pricing analysis and to reconsider the revised computation of book profits under Section 115JB. The Tribunal emphasized the importance of functional comparability and proper segmental information in transfer pricing cases.

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