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2018 (1) TMI 885 - AT - Income TaxTransfer pricing addition in respect of Software development segment - comparability analysis - Held that - Assessee is engaged in development, testing and maintenance of internal company software in respect of testing infrastructure capability and of specified data to be used by its A.E., thus companies functionally dissimilar with that of assessee need to be deselected from final list. Penalty u/s 271(1)(c) - whether the assessee s application of the TNMM in the given circumstances, can be considered as done in good faith and with due diligence? - Held that - Coming back to the Explanation 7 to section 271(1), we find that no doubt the addition of ₹ 53.27 lac has been made on account of transfer pricing adjustment in respect of the international transaction of provision of Software development services , but, the same cannot be deemed to represent the income in respect of which particulars have been concealed or furnished wrongly by the assessee. The raison d etre is that the ALP of this transaction was determined by the assessee in accordance with the provisions of section 92C and in the manner prescribed under the TNMM in good faith and with due diligence. The Hon ble Delhi High Court in Principal CIT vs. Mitsui Prime Advanced Composites India (P) Ltd. (2017 (4) TMI 186 - DELHI HIGH COURT) has confirmed the deletion of penalty u/s 271(1)(c) which was imposed pursuant to the transfer pricing addition in somewhat similar circumstances. - Decided in favour of assessee.
Issues Involved:
1. Transfer Pricing Addition in Software Development Segment. 2. Penalty Imposed under Section 271(1)(c) of the Income-tax Act, 1961. Detailed Analysis: 1. Transfer Pricing Addition in Software Development Segment: Quantum Appeal (ITA No.5200/Del/2011): - Facts: The assessee, engaged in software development services, healthcare claim adjudication, and biopharmaceutical services, reported five international transactions, including provision of IT services valued at ?10,24,95,795/-. The assessee used the Transactional Net Margin Method (TNMM) to demonstrate that the Software development services segment was at arm's length price (ALP). The Transfer Pricing Officer (TPO) proposed adjustments amounting to ?2.68 crore, which was recalculated to ?53,27,302/- for the Software development segment after rectification orders. - Contention: The assessee contested the inclusion of three companies in the comparables list: Kals Information Systems Ltd., Sasken Communications Technologies Ltd., and Tata Elxsi Ltd., claiming they were functionally different. - Findings: - Kals Information Systems Ltd.: The assessee argued this company was engaged in software products and training, unlike the assessee. The Tribunal agreed, noting the company’s activities were not comparable and directed its exclusion. - Sasken Communications Technologies Ltd.: The assessee pointed out acquisitions and mergers during the year distorted financial results. The Tribunal found the financial results influenced by extraordinary events, making them incomparable, and directed exclusion. - Tata Elxsi Ltd.: The assessee claimed the company was involved in R&D activities and creation of intellectual property, unlike the assessee. The Tribunal found the nature of activities distinct from the assessee’s and directed exclusion. - Conclusion: The Tribunal set aside the order on transfer pricing addition and remitted the matter to the AO/TPO for fresh determination of ALP, allowing the assessee a reasonable opportunity to be heard. 2. Penalty Imposed under Section 271(1)(c) of the Income-tax Act, 1961: Penalty Appeal (ITA No.1144/Del/2017): - Facts: The penalty of ?17,93,169/- was sustained by the CIT(A) under Section 271(1)(c) based on the transfer pricing adjustment in the Software development segment amounting to ?53,27,302/-. - Contention: The assessee argued that if the three contested companies were excluded, the mean PLI of comparables would be within the permissible range, negating the addition and thus the penalty. - Explanation 7 to Section 271: The Tribunal noted that any transfer pricing adjustment addition is deemed to represent income in respect of which particulars have been concealed unless the assessee proves the price was computed in accordance with Section 92C, in good faith, and with due diligence. - Findings: The Tribunal observed that the assessee applied TNMM in accordance with Section 92C and in good faith. The difference in opinion on comparables did not indicate a lack of good faith or due diligence. The Tribunal referenced the Hon'ble Delhi High Court's decision in Principal CIT vs. Mitsui Prime Advanced Composites India (P) Ltd., which confirmed the deletion of penalty under similar circumstances. - Conclusion: The Tribunal directed the deletion of the penalty imposed under Section 271(1)(c), as the addition did not represent concealed income or inaccurate particulars. Summary: The Tribunal addressed two main issues: the transfer pricing addition in the Software development segment and the penalty imposed under Section 271(1)(c). It directed the exclusion of three companies from the comparables list due to functional dissimilarities and extraordinary financial events, remitting the matter for fresh ALP determination. It also deleted the penalty, finding the assessee acted in good faith and with due diligence in applying the TNMM.
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