Tribunal adjusts transfer pricing, grants MAT credit per DRP directions

The appeal was partly allowed. The Tribunal directed the Transfer Pricing Officer to recompute the Arm's Length Price excluding four comparable companies and considering the reversal of provision for service tax as part of the operating income. The Assessing Officer was also directed to grant Minimum Alternate Tax credit as per the Disputes Resolution Panel's directions. Other grounds of appeal were either consequential or not argued and thus required no adjudication.

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Issues Involved:
1. Determination of Arm’s Length Price (ALP) for international transactions.
2. Inclusion/exclusion of comparable companies.
3. Treatment of reversal of provision for service tax.
4. Grant of Minimum Alternate Tax (MAT) credit.

Issue-wise Detailed Analysis:

1. Determination of Arm’s Length Price (ALP) for International Transactions:
The primary issue in this appeal is the determination of the ALP in respect of the international transaction of rendering Software Development Services (SWD Services) by the Assessee to its Associated Enterprise (AE). The Assessee used the Transaction Net Margin Method (TNMM) as the Most Appropriate Method (MAM) for determining the ALP, with the profit level indicator being Operating Profit/Total Cost (OP/TC). The Assessee's OP/TC was 12.77%. The Transfer Pricing Officer (TPO) selected 10 comparable companies, resulting in an average mark-up of 22.63%, adjusted to 20.06% after working capital adjustment. Consequently, the TPO computed the ALP and made an adjustment of Rs. 14,27,53,802/- to the total income, which was later reduced by the Disputes Resolution Panel (DRP).

2. Inclusion/Exclusion of Comparable Companies:
The DRP excluded 6 out of the 10 comparable companies chosen by the TPO, retaining only 4. The Assessee challenged the inclusion of 5 out of the remaining 10 comparables. The Tribunal referred to the ITAT Bangalore Bench's decision in the case of CGI Information Systems & Management Consultants Private Ltd., which excluded four companies: Genesys International Corpn. Ltd., Infosys Ltd., Larsen & Toubro Infotech Ltd., and Persistent Systems Ltd., on the grounds of functional dissimilarity and the presence of intangible assets. The Tribunal also excluded ICRA Techno Analytics Ltd. due to functional dissimilarity and related party transactions exceeding 25%.

3. Treatment of Reversal of Provision for Service Tax:
The Assessee argued that the reversal of provision for service tax should be considered as part of the operating income. The Tribunal, referencing the decision in Sony India (P.) Ltd. Vs. DCIT, agreed that provisions written back should be regarded as part of the operating profit. The Tribunal directed the TPO to compute the ALP of the international transaction considering the reversal of provision for service tax as part of the operating income.

4. Grant of Minimum Alternate Tax (MAT) Credit:
The issue of granting appropriate MAT credit was addressed by the DRP, which directed the AO to allow MAT credit according to the provisions of Sec.115JAA of the Act. The Tribunal upheld these directions, instructing the AO to grant MAT credit as per the DRP's directions.

Conclusion:
The appeal was partly allowed. The Tribunal directed the TPO to recompute the ALP excluding the four comparable companies and considering the reversal of the provision for service tax as part of the operating income. The AO was also directed to grant MAT credit as per the DRP's directions. Other grounds of appeal were either consequential or not argued and thus required no adjudication.

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