2021 (7) TMI 723 - AT - Income Tax

TP Adjustment in respect of provision of software development services - Comparable selection - HELD THAT - We direct exclusion of Larsen Toubro Infotech Ltd. and CG VAK Software Exports Ltd. We also direct inclusion of M/s. R. systems International Ltd. and M/s. Akshay Software Technologies Ltd. Accordingly, we direct the AO/TPO to redetermine the ALP of the transactions. Addition made u/s. 28(iv) - AO noticed from the notes given under Fixed Asset Schedule of the Annual Report that the assessee has received tangible assets free of cost from its holding company (AE), i.e., ARM Limited, UK - AO proposed to assess the above said amount as income of the assessee u/s. 28(iv) of the Act as it was a benefit received in exercise of profession - HELD THAT - We notice that the Ld. DRP has observed that the assets received free of cost has been capitalized in the books of account. Accordingly, the Ld. DRP has held that the same is liable to be taxed u/s. 28(iv) of the Act. In fact, the assessee has shown the assets received free of cost as note under Fixed Assets Schedule, meaning thereby, they have not been included as assessee's own fixed assets. Hence the above said observation of Ld. DRP is against the facts. Benefit liable to be taxed u/s. 28(iv) of the Act need not always be revenue in nature. Suppose a businessman receives a Car on achieving the sales target, the value of Car is liable to be assessed u/s. 28(iv) of the Act, even though it constitutes capital asset in the hands of that businessman. If the right of ownership of the products/assets have been transferred to the assessee, then their value is liable to be assessed as benefit u/s. 28(iv) of the Act. On the other hand, if the right of ownership has been retained by the AE and they have been sent to the assessee for utilizing them in the work executed by the assessee for AE, then the value of assets cannot be assessed as benefit u/s. 28(iv) of the Act. We notice that these factual aspects have not been brought on record either by the assessee or by the AO, without which it would not be possible to determine about applicability of provisions of sec. 28(iv) - this issue requires fresh examination at the end of AO in the light of principles discussed supra. Accordingly, we restore this issue to the file of the AO. We also direct the assessee to furnish relevant details to the AO and also clarify to the satisfaction of the AO as to whether the right of ownership of the assets/products received free of cost has been transferred to it or not. Non-granting of MAT credit - As this issue requires factual verification, we restore this issue to the file of the AO.Appeal of assessee is treated as allowed for statistical purposes.

Summary

Issues Involved:

1. Transfer pricing adjustment made in respect of provision of software development services.
2. Addition made u/s. 28(iv) of the Act treating the assets received free of cost as benefit received by the assessee.
3. Non-granting of MAT credit.
4. Charging of interest u/s. 234B and 234C (consequential in nature).

Issue-wise Detailed Analysis:

1. Transfer Pricing Adjustment:

The assessee, a subsidiary of M/s. ARM Ltd., UK, contested the transfer pricing adjustments made for software development services. The revenue from these services was ?131.22 crores, and the TPO made a TP adjustment of ?4.93 crores, later enhanced to ?5.42 crores by the DRP. The assessee used the TNM method and declared a profit margin of 14.91%, selecting 9 comparables with an average margin of 10.28%. The TPO rejected this study, selecting 7 comparables with an average margin of 20.90%, adjusted to 19.21% after working capital adjustments.

The DRP directed the exclusion of three companies (ICRA Techno Analytics Ltd., Persistent Systems Ltd., and Tech Mahindra Ltd.), confirming the selection of the remaining four. The assessee sought the exclusion of CG-VAK Software Exports Ltd. and Larsen & Toubro Infotech Ltd., and the inclusion of Akshay Software Technologies Ltd. and R. Systems International Ltd., citing precedents from the NXP India Pvt. Ltd. case.

The Tribunal, referencing the NXP India Pvt. Ltd. case, directed the exclusion of Larsen & Toubro Infotech Ltd. and CG-VAK Software Exports Ltd., and the inclusion of R. Systems International Ltd. and Akshay Software Technologies Ltd. The AO/TPO was instructed to redetermine the ALP of the transactions accordingly.

2. Addition u/s. 28(iv):

The AO assessed ?12,65,000/- as income u/s. 28(iv) of the Act, for tangible assets received free of cost from the holding company, ARM Ltd., UK. The assessee argued that these assets were for testing and validation purposes and were either returned or disposed of post-testing, thus not constituting a benefit. The AO, supported by the DRP, disagreed, citing capitalization in the books and the decision in CIT vs. Ramaniyam Home Private Limited.

The Tribunal noted that the assets were not included in the fixed assets schedule, contradicting the DRP's observation. It emphasized that the applicability of section 28(iv) depends on whether the right of ownership of the assets was transferred to the assessee. The issue was remanded to the AO for fresh examination, instructing the assessee to provide relevant details and clarify ownership rights.

3. Non-granting of MAT Credit:

The Tribunal acknowledged that this issue required factual verification and restored it to the AO for resolution.

4. Charging of Interest u/s. 234B and 234C:

This issue was noted as consequential in nature and did not require separate adjudication.

Conclusion:

The appeal was treated as allowed for statistical purposes, with directions for fresh examination and redetermination of certain issues by the AO. The order was pronounced in the open court on 12th July 2021.