2015 (12) TMI 1824 - AT - Income Tax

Tribunal directs re-examination on Transfer Pricing issues, stresses functional comparability 'sLengthPrice

M/s. ARM Embedded Technologies Pvt. Ltd. Versus The Deputy Commissioner of Income Tax, Circle 11 (1), Bangalore.

The Tribunal partly allowed the appeals for both assessment years, directing re-examination and re-computation by the AO/TPO on various issues related to ... TP Adjustment - comparable selection - admission of additional grounds - HELD THAT:- By virtue of Special Bench decision in the case of M/s Quark Systems Pvt. Ltd [2009 (10) TMI 591 - ITAT, CHANDIGARH] , assessee can raise additional grounds seeking exclusion of comparables selected by it or not objected by it before the lower authorities. However, the Hon’ble Punjab & Haryana High Court [2011 (5) TMI 508 - PUNJAB AND HARYANA HIGH COURT] had upheld the Special Bench decision in the case of M/s Quark Systems Pvt. Ltd. ( Supra) specifically noting that the Special Bench had remitted the issue of comparability of such companies to the AO/TPO for verification afresh. Hence, we are admitting the additional grounds. Hence the additional grounds are set aside to the file of the Assessing Officer. Comparables selecton - Companies functionally dissimilar with that of assessee as engaged in providing software design, development and maintenance services and marketing support services to its associated enterprises (AEs) as a captive service provider need to be deselected from final list. Companies having turnover exceeding ₹ 200 crores is to be excluded from the final list of comparables selected by the TPO in the light of decision of the coordinate Bench of this Tribunal in the case of Cypress Semiconductor India P. Ltd [2015 (4) TMI 373 - ITAT BANGALORE] Companies with related party transactions exceeding 15% be excluded from the list of comparables chosen by the TPO. Inclusion of reimbursement of expenses in the operating cost as well as operating revenue of the assessee company - HELD THAT:- We find that the assessee company has received reimbursement of these expenses as cost from its AE and consequently the amount received/receivable is deemed to be at arm’s length price. Hence this ground of appeal is allowed. Working capital adjustment - HELD THAT:- Advances received from AEs should be considered as a part of trade payables in the computation of working capital adjustment. Hence, the TPO/AO is directed to consider advances from ARM Ltd. UK and ARM Inc., USA in the computation of working capital adjustment and rework the same. This ground is allowed for statistical purposes. Recomputation of deduction u/s. 10A - HELD THAT:- Whatever is excluded from the export turnover, has also to be excluded from the total turnover. Accordingly, we direct the AO to recompute the deduction u/s. 10A in respect of travel expenses and telecommunication charges by reducing the same from total turnover also. See TATA ELXSI LTD. [2011 (8) TMI 782 - KARNATAKA HIGH COURT] Non-grant of refund and corresponding interest u/s. 234D - assessee submitted that according to the AO, refund of ₹ 7,04,700 has been issued to the assessee, but the assessee has not received the refund. Consequently, the AO has erred in charged u/s. 234D of the Act of ₹ 81,041 on the said refund of ₹ 7,04,700 - HELD THAT:- We set aside this issue to the file of Assessing Officer to verify the claim of assessee and decide the issue afresh. Issues Involved:1. Determination of Arm's Length Price (ALP) for international transactions.2. Selection and rejection of comparable companies for Transfer Pricing analysis.3. Inclusion of reimbursement of expenses in operating cost and revenue.4. Computation of working capital adjustment.5. Re-computation of deduction under Section 10A of the Income-tax Act.6. Non-grant of refund and corresponding interest under Section 234D.Detailed Analysis:1. Determination of Arm's Length Price (ALP) for International Transactions:The assessee company, engaged in software design, development, and maintenance services, filed returns for assessment years 2006-07 and 2007-08. The Assessing Officer (AO) made additions to the income based on the ALP of international transactions with Associated Enterprises (AEs). For A.Y. 2006-07, an addition of Rs. 1,08,39,448 was made, and for A.Y. 2007-08, an addition of Rs. 5,78,84,564 was made. The Transactional Net Margin Method (TNMM) was adopted as the most appropriate method for determining the ALP.2. Selection and Rejection of Comparable Companies for Transfer Pricing Analysis:The Tribunal analyzed the selection and rejection of comparable companies by the Transfer Pricing Officer (TPO) and the assessee. For A.Y. 2006-07:- The TPO accepted 3 out of 44 comparables selected by the assessee.- The Tribunal directed the exclusion of 4 companies (Infosys Ltd., KALS Infosystems Ltd., Tata Elxsi (Seg.), and Accel Transmatics Ltd.) as functionally dissimilar.- The issue of comparability of Lucid Software Ltd. was set aside to the AO for further examination.- The Tribunal directed the AO to exclude companies with turnover exceeding Rs. 200 crores and those with Related Party Transactions (RPT) exceeding 15%.For A.Y. 2007-08:- The Tribunal directed the exclusion of companies such as Avani Cincom Technologies Ltd., Celestial Labs, and others for being functionally dissimilar.- The Tribunal set aside the issue of comparability of Accel Transmatics Ltd. to the AO for verification.- The Tribunal directed the AO to exclude companies with turnover exceeding Rs. 200 crores and those with RPT exceeding 15%.3. Inclusion of Reimbursement of Expenses in Operating Cost and Revenue:The TPO included reimbursement of expenses received by the assessee in the operating cost base for applying the adjusted operating cost plus markup. The Tribunal found that the reimbursement received from AEs was at arm's length price and allowed the assessee's appeal on this ground.4. Computation of Working Capital Adjustment:The Tribunal observed that the TPO erred in not considering advances received from customers as part of trade payables in the determination of working capital adjustment. The Tribunal directed the TPO/AO to include advances received from AEs in the computation of working capital adjustment and rework the same.5. Re-computation of Deduction under Section 10A of the Income-tax Act:The AO recomputed the deduction under Section 10A by reducing travel expenses and telecommunication charges from export turnover but not from total turnover. The Tribunal directed the AO to recompute the deduction by reducing these expenses from total turnover as well, in line with the decision of the Karnataka High Court in CIT v. Tata Elxsi Ltd.6. Non-grant of Refund and Corresponding Interest under Section 234D:The assessee claimed that a refund of Rs. 7,04,700 was not received, but the AO charged interest under Section 234D on this amount. The Tribunal set aside this issue to the AO for verification and fresh decision.Conclusion:The appeals for both assessment years were partly allowed for statistical purposes, with directions for re-examination and re-computation on various issues by the AO/TPO. The Tribunal emphasized the need for functional comparability and adherence to established filters in Transfer Pricing analysis.