Tribunal rules in favor of assessee, overturns capital expenditure addition and transfer pricing adjustment

The Tribunal allowed the appeal of the assessee, directing the deletion of both the capital expenditure addition and the transfer pricing adjustment. The Tribunal found that the payment made for licensing software should be considered a revenue expenditure, not an intangible asset. Additionally, the Tribunal concluded that the apportionment of the management fee aligned with the Arm's Length Price in respective segments, leading to no adjustment needed for intra-group services.

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Issues Involved:
1. Addition of Rs. 6,53,52,184/- as capital expenditure.
2. Transfer Pricing adjustment of Rs. 4,87,99,150/- for international transactions related to software deployment services and intra-group services.

Detailed Analysis:

1. Addition of Rs. 6,53,52,184/- as Capital Expenditure:
The assessee contested the addition made by the Assessing Officer, who treated the expenditure as capital in nature. The Tribunal referred to the assessee's own case for previous assessment years (2007-08 to 2010-11), where similar additions were made and subsequently overturned. The Tribunal reiterated that the payment made to the parent company for licensing software should be considered a revenue expenditure, not an intangible asset. The Tribunal directed the deletion of the addition, aligning with the previous decisions.

2. Transfer Pricing Adjustment of Rs. 4,87,99,150/-:
The main contention was the adjustment made by the Transfer Pricing Officer (TPO) for international transactions involving software deployment services and intra-group services (management service fees).

a. Comparables Used by TPO:
The Tribunal examined the comparables used by the TPO:
- Wipro Technology Limited: The Tribunal excluded this company as a comparable, based on the precedent set in the case of Saxo India Pvt Ltd, where it was excluded due to high related party transactions.
- Persistent Systems and Solutions Ltd: Excluded due to the absence of segmental data, which is crucial for accurate transfer pricing analysis.
- Persistent Systems Ltd: Similarly excluded for lacking segmental reporting, consistent with the Tribunal’s decision in the assessee's own case for A.Y 2008-09.
- Zylog Systems Limited: Excluded due to the lack of specific data and the presence of extraordinary events (acquisition of Brainhunter Inc., Canada).

b. Apportionment of Management Fee:
The Tribunal noted that the management fee of Rs. 3,57,03,763/- was apportioned among different segments. The TPO accepted the margin of profit in the software segment after absorbing the proportionate management fee. The Tribunal applied the principle from the Delhi High Court decision in Sony Ericsson Mobile Communication India Pvt. Ltd., which states that if the comparables are accepted as a bundled transaction, it would be illogical to treat AMP expenses as a separate international transaction.

Conclusion:
The Tribunal found that the apportionment of the management fee matched the Arm's Length Price (ALP) in respective segments, and thus, no adjustment was necessary for intra-group services. Consequently, the Tribunal directed the deletion of the adjustment made by the TPO for intra-group services.

Judgment:
The appeal of the assessee was allowed, and the Tribunal directed the deletion of both the capital expenditure addition and the transfer pricing adjustment. The order was pronounced on 15.03.2019.

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