Tribunal directs re-examination of costs, comparables, and losses for appeal

The Tribunal allowed the appeal for statistical purposes, directing a re-examination of operating costs, exclusion of inappropriate comparables, and re-computation of the arithmetic mean of remaining comparables. The AO was instructed to verify and adjust carried forward losses. The decision was pronounced on 28.05.2014.

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Issues Involved:

1. Determination of operating costs.
2. Selection of comparables for Transfer Pricing (T.P.) analysis.
3. Negative working capital adjustment.
4. Setting off carried forward losses.

Detailed Analysis:

1. Determination of Operating Costs:

The primary issue here revolves around the proper calculation of operating costs. The assessee reported a total expenditure of Rs. 10,72,46,059/- against total receipts of Rs. 2,77,97,662/-. The TPO excluded R&D expenditure written off (Rs. 2,74,97,491/-) and an extraordinary item (Rs. 42,00,357/-) from the operating cost, which was not disputed. However, the contention arose over an additional Rs. 5.66 crores claimed by the assessee as R&D expenditure for developing new products, which the TPO included in the operating cost. The Tribunal noted that neither the TPO nor the DRP examined this expenditure's nature. Therefore, the Tribunal remanded the issue back to the TPO/AO for fresh examination to determine whether this amount should be excluded from the operating cost.

2. Selection of Comparables for T.P. Analysis:

The assessee objected to the inclusion of certain comparables selected by the TPO. The Tribunal agreed with the assessee's objections based on precedents and directed the exclusion of the following 14 comparables:

- Accel Transmatic Ltd.
- Avani Cimcon Technologies Ltd.
- KALS Information Systems Ltd.
- Lucid Software Ltd.
- Ishir Infotech Ltd.
- Flextronics Software Systems Ltd.
- Infosys Technologies Ltd.
- Tata Elxsi Ltd.
- Wipro Ltd.
- iGate Global Solutions Ltd.
- Mindtree Ltd.
- Persistent Systems Ltd.
- Sasken Communication Technologies Ltd.
- Helios and Matheson Information Technology Ltd.

The Tribunal noted that these companies were either functionally dissimilar, failed the employee cost filter, or had high turnovers, making them unsuitable for comparison with the assessee.

3. Negative Working Capital Adjustment:

The Tribunal acknowledged the issue of negative working capital adjustment but noted that the assessee had not raised specific objections before them, though a ground was raised. The Tribunal directed the AO/TPO to re-examine this aspect in light of the revised T.P. computation after determining the operating cost and excluding the inappropriate comparables.

4. Setting Off Carried Forward Losses:

The assessee raised an issue regarding the non-adjustment of carried forward losses against the assessed income. The Tribunal directed the AO to verify the earlier orders and records to ensure the proper setting off of these losses as per the facts and law.

Conclusion:

The appeal was allowed for statistical purposes. The Tribunal directed the AO/TPO to re-examine the operating costs, exclude the inappropriate comparables, and re-compute the arithmetic mean of the remaining comparables. Additionally, the AO was instructed to verify and adjust the carried forward losses appropriately. The order was pronounced in the open court on 28.05.2014.

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