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2018 (5) TMI 146 - AT - Income TaxTPA - taking preoperative cost as a basis for arriving at the ALP - Held that - As the depreciation claims of the partnership firm of the assessee as that of companies under Company Law are being different, we do not find any reason to interfere with the decision of the DRP, in taking the operating cost exclusive of depreciation for comparison. Accordingly, the order of the DRP is confirmed and Revenue s grounds on this issue are rejected. Determination of price for purchase of software - Held that - When the product is purchased the rights automatically transferred and asper the agreement placed on record, 10% of the cost is considered towards IP Rights on which necessary withholding taxes were already considered and paid. In view of that we do not agree with the reasoning given by the DRP in restricting the value of the IP Rights at NIL, since the Hon ble Delhi High Court in the case of EKL Appliances Ltd (2012 (4) TMI 346 - DELHI HIGH COURT) has already held that TPO / DRP cannot interfere the business decision therefore determining of value at NIL cannot be upheld. We modify the order of the DRP and direct the AO to accept the purchase price as at Arm s Length. - Decided in favour of assessee
Issues Involved:
1. Arm's Length Price (ALP) adjustment for software development services. 2. ALP adjustment for the purchase of DSP Software and IP rights. 3. Exclusion of depreciation from operating costs in ALP determination. Detailed Analysis: 1. ALP Adjustment for Software Development Services The assessee, a partnership firm, provided software development services to its Associated Enterprises (AEs). The transactions were benchmarked using the Transactional Net Margin Method (TNMM), showing a Profit Level Indicator (PLI) of 65.09% compared to the average PLI of 29.19% for comparable companies. The Transfer Pricing Officer (TPO) initially recommended an ALP adjustment of ?4,63,99,830/- if the ALP adjustment for DSP Software and IP rights was deleted in any appellate stages. The Dispute Resolution Panel (DRP) directed the exclusion of depreciation costs from operating costs to rework the ALP. After verification, the Assessing Officer (AO) found the taxpayer’s margin to be 73.62%, which was higher than the average margin of comparable companies (29.43%), thus no ALP adjustment was required. 2. ALP Adjustment for Purchase of DSP Software and IP Rights The major contention was the purchase of DSP Software for ?69,40,25,750/- from Value Labs Sdn, Bhd, Malaysia. The TPO determined the ALP of the DSP software and IP rights as Nil, based on a statement from an executive suggesting the product was developed in India. The DRP partly accepted the assessee’s submissions, noting that the Malaysian entity had taken over the development of the software and had compensated the Indian entity for its services. The DRP concluded that the Indian entity should have been compensated ?12 crores for its R&D work, reducing the ALP for the DSP software to ?50,17,81,250/-. The DRP also rejected the payment of ?7,22,44,500/- for IP rights, as the assessee could not provide reasonable evidence of IP rights transfer. 3. Exclusion of Depreciation from Operating Costs in ALP Determination The DRP directed the exclusion of depreciation costs from operating costs for both the assessee and comparable companies to provide a level playing field, as the depreciation rates under the Income Tax Act for the assessee (60%) were significantly higher than those under the Companies Act for comparable companies (16.21%). This direction was based on precedents from various ITAT decisions. The tribunal upheld the DRP’s direction, noting that the DRP followed Coordinate Bench decisions and considering the disparity in depreciation costs. Tribunal's Conclusion: The tribunal confirmed the DRP's decision to exclude depreciation from operating costs for ALP determination. It disagreed with the DRP's partial confirmation of the TPO’s adjustment for the DSP software and IP rights, noting that the TPO did not analyze the transaction under any prescribed methods and that the DRP’s additional compensation for past services was unwarranted. The tribunal directed the AO to accept the purchase price of the DSP software and IP rights as at Arm's Length, rejecting the Revenue’s grounds and allowing the assessee's appeal. Final Order: The assessee’s appeal was allowed, and the Revenue’s appeal was dismissed. The tribunal pronounced the order in the open court on 27th April 2018.
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