2018 (4) TMI 878 - AT - Income Tax

Transfer pricing addition - comparable selection criteria - functional similarity - Held that - The assessee is engaged in the business of development of computer software for its Associated Enterprises (AEs), thus companies functionally dissimilar with that of assessee need to be deselected from final list.

Summary

Issues Involved:

1. Legality of the assessment order for AY 2009-10.
2. Arm's Length Principle (ALP) for international transactions related to software development services.
3. Deduction under section 10A of the Income Tax Act.
4. Penalty proceedings under section 271(1)(c) of the Act.

Detailed Analysis:

1. Legality of the Assessment Order for AY 2009-10:
The assessee contended that the assessment order passed by the CIT(A) for AY 2009-10 was bad-in-law. However, this ground was not pressed during the hearing, and thus, it was dismissed as infructuous.

2. Arm's Length Principle (ALP) for International Transactions:
The main issue revolved around the determination of the ALP for international transactions concerning software development services. The CIT(A) partially confirmed the adjustment of ?35,919,343 computed by the AO. The assessee raised multiple objections, including the use of current year data instead of multiple year data, rejection of certain comparables, and denial of working capital adjustment.

- Use of Current Year Data: The CIT(A) upheld the use of current year data for benchmarking the international transaction.
- Rejection of Comparables: The CIT(A) directed the exclusion of 'Bodhtree Consulting Ltd.' due to extraordinary growth in profit margins and included 'Akshay Software Technologies Ltd.' and 'Quintegra Solutions Ltd.' The Tribunal upheld the exclusion of 'Cat Technologies Ltd.' and 'Thirdware Solutions Ltd.' due to functional dissimilarity and absence of segmental results. However, 'Persistent Systems Ltd.' and 'Mind Tree Ltd.' were retained as comparables.
- Working Capital Adjustment: The Tribunal restored the issue of working capital adjustment to the TPO/AO for re-examination and passing a speaking order after giving the assessee an opportunity to present relevant data.

3. Deduction under Section 10A of the Income Tax Act:
The CIT(A) allowed the deduction under section 10A, which was challenged by the Revenue. The Tribunal noted that the issue was covered in favor of the assessee by the order of the Tribunal for AY 2008-09 and the decision of the Hon'ble Delhi High Court in the assessee's case. Therefore, the grounds raised by the Revenue on this issue were dismissed.

4. Penalty Proceedings under Section 271(1)(c) of the Act:
The issue of penalty proceedings under section 271(1)(c) was not pressed during the hearing and was dismissed as infructuous.

Conclusion:
The Tribunal partly allowed the appeals of both the assessee and the Revenue for statistical purposes. The decision included directions for re-examination of certain comparables and working capital adjustments while upholding the deduction under section 10A based on precedents. The decision was pronounced in the open court on 16th April 2018.