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2019 (3) TMI 1116 - AT - Income TaxTP adjustment - Comparable selection criteria - functional similarity - company as infected by the merge - extraordinary activities - HELD THAT - Sasken Communication Technologies Ltd. is to be rejected as comparable for the same assessment year i.e. assessment year 2007-08 on the basis that it undertook significant merger and acquisition activity. Accordingly, we direct the exclusion of this company. See GLOBAL LOGIC INDIA PVT. LTD. VERSUS ACIT, CIRCLE-12 (1) , NEW DELHI. 2015 (5) TMI 637 - ITAT DELHI Companies functionally dissimilar with that of assessee, a captive software service provider, need to be deselected from final list. Companies showing significant related party transactions equivalent to 27.66% of sales also need to be deselected from final list. Incorrect margin computation - Operating Profit Margin computation - HELD THAT - This issue needs verification at the stage of AO/TPO on the premise whether the royalty paid by the Geometric Software Solutions Ltd. was the routine expenditure or not. In case, it is found to be the routine expenditure of the company, the same shall be considered as an item of operating expenditure. Regarding the provision for doubtful debts, we find that it is an item of operating expenditure as held in the case of Sony India Pvt. Ltd 2008 (9) TMI 420 - ITAT DELHI-H . Regarding provision for advances, we find that the provision for advances cannot be considered in the instant case as an item of operating expenditure, as the assessee could not prove that such advances were not made for purchase of capital asset or for any other non-business purpose. The decisions relied by the assessee do not pertain to the provision for advance. We, therefore, direct the TPO/AO to compute the Operating Profit Margin accordingly. Risk Adjustment - HELD THAT - We reject the claim of the assessee towards risk adjustment due to lack of appropriate data and quantification of risk adjustment. Payment for License of computed software - revenue or capital expenditure - HELD THAT - The above expenses are to be regarded as incurred on revenue field as per the test laid down by the Special Bench of Tribunal in the case of Amway India Enterprises 2008 (2) TMI 454 - ITAT DELHI-C in as much as (i) such computer software does not have utility for long duration and hence do not result in enduring benefit and (ii) such software does not constitute a profit earning apparatus and merely enable the appellant to efficiently conduct its business. The aforesaid decision has been affirmed by the Hon ble Delhi High Court in the case of CIT vs Asahi India Safety Glass Ltd 2011 (11) TMI 2 - DELHI HIGH COURT . Thus as decided in assessee s own case 2011 (6) TMI 682 - ITAT DELHI license fee paid by the appellant is to be treated as revenue in nature. Interest u/s. 234A & 234B of the Act is consequential in nature and the AO is directed to give consequential effect.
Issues Involved:
1. Legality of the assessment order under Section 143(3) read with Section 144C of the Income Tax Act, 1961. 2. Adjustment to the arm’s length price of international transactions for software development services. 3. Treatment of expenditure on software licenses as capital or revenue expenditure. 4. Levying of interest under Section 234A and 234B of the Act. 5. Initiation of penalty proceedings under Section 271(1)(c) of the Act. Detailed Analysis: 1. Legality of the Assessment Order: The assessee challenged the assessment order framed by the assessing officer under Section 143(3) read with Section 144C, claiming it was bad in law, violative of principles of natural justice, and void ab-initio. However, the tribunal deemed these grounds as general in nature and did not require specific adjudication. 2. Adjustment to the Arm’s Length Price: The assessee contested the adjustment of ?24,40,13,533 made to the arm’s length price of international transactions for software development services. The key issues were: - Use of Multiple Year Data: The assessing officer rejected the use of multiple-year data for benchmarking analysis. - Selection of Comparables: The DRP/TPO included Tata Elxsi Limited, Helios & Matheson Information Technology Ltd, Sasken Communications Technologies Ltd, and Lanco Global Systems Ltd as comparables, which the assessee argued were not functionally comparable. a) Helios and Matheson Information Technology Ltd: - Functionally different due to low employee cost and high outsourcing expenses. - Engaged in the sale of software products. - Actively involved in brand development and R&D activities. - Tribunal directed exclusion based on functional dissimilarity and reliance on previous judgments. b) Sasken Communication Technologies Ltd: - Merged with other companies and acquired new entities during the relevant year, affecting its financials. - Owns IPR and branded products. - Tribunal directed exclusion due to merger and acquisition activities and significant intangibles. c) Tata Elxsi Ltd: - Engaged in specialized software products/services and sale of hardware products. - Benefits from the TATA brand. - Tribunal directed exclusion due to functional dissimilarity and brand exploitation. d) Lanco Global Systems Ltd: - The assessee claimed it was engaged in software product development, but the tribunal upheld its inclusion as a comparable. - Rejection of Comparables by the DRP/TPO: The assessee disputed the rejection of PSI Data Systems Ltd., arguing the related party transactions were less than 25% of sales. The tribunal directed the TPO to verify the calculations and include the company if the related party transactions were indeed less than 25%. - Incorrect Margin Computation: The assessee argued that the TPO incorrectly computed the operating margins of Geometric Software Solutions Ltd. and R Systems International Ltd. The tribunal directed the TPO to verify the nature of royalty expenses and consider provisions for doubtful debts as operating expenses. - Risk Adjustment: The tribunal rejected the assessee's claim for risk adjustment due to lack of appropriate data and quantification. 3. Treatment of Software Licenses: The assessee incurred ?2,47,95,422 on software licenses, which the assessing officer treated as capital expenditure. The tribunal, referencing previous judgments and the Special Bench decision in Amway India Enterprises, directed the AO to treat the expenditure as revenue in nature. 4. Levying of Interest: Interest under Sections 234A and 234B was deemed consequential, and the tribunal directed the AO to give consequential effect. 5. Initiation of Penalty Proceedings: The initiation of penalty proceedings under Section 271(1)(c) was considered premature and dismissed by the tribunal. Conclusion: The appeal was partly allowed, with specific directions for the exclusion of certain comparables, verification of related party transactions, and treatment of software license expenditure as revenue. The tribunal also provided directions for the computation of operating margins and rejected the risk adjustment claim.
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