2022 (6) TMI 1357 - AT - Income Tax

Tribunal affirms Arm's Length Price, adjusts interest rate, remits depreciation issues to AO for verification

Applied Materials India Pvt. Ltd. Versus The Income Tax Officer, Ward 1 (1) (1), Bangalore.

Applied Materials India Pvt. Ltd. Versus The Income Tax Officer, Ward 1 (1) (1), Bangalore. - TMI Issues Involved:1. Determination of Arm's Length Price (ALP) for Software Development (SWD) Services.2. Transfer Pricing (TP) Adjustment for Outstanding Receivables.3. Disallowance of Depreciation on Computer Peripherals.4. Disallowance of Depreciation on Leasehold Improvements.Detailed Analysis:1. Determination of Arm's Length Price (ALP) for Software Development (SWD) Services:The Assessee, a wholly owned subsidiary of Applied Materials Inc., USA, engaged in providing SWD services to its AE, filed a Transfer Pricing (TP) Study using the Transaction Net Margin Method (TNMM) with Operating Profit/Operating Cost (OP/OC) as the Profit Level Indicator (PLI). The Assessee identified seven comparables with an average arithmetic mean of 13.37%. The TPO accepted only one comparable and selected new comparables with an average mark-up of 29.40%. The Assessee contended that subcontracting charges should be considered as pass-through costs and excluded from the cost base. The TPO and DRP rejected this, leading to a TP adjustment. The Tribunal upheld the lower authorities' decision, following its own earlier ruling, stating that subcontracting costs are part of the operating costs and cannot be excluded.2. Transfer Pricing (TP) Adjustment for Outstanding Receivables:The TPO computed TP adjustment for interest on outstanding trade receivables at LIBOR + 400 basis points, which was modified by the DRP to the short-term deposit rate of the State Bank of India. The Tribunal held that deferred receivables constitute an independent international transaction and must be benchmarked separately. It directed the AO to recompute interest on receivables allowing a 90-day credit period and using LIBOR + 2% as the interest rate.3. Disallowance of Depreciation on Computer Peripherals:The AO restricted depreciation on computer peripherals to 15% instead of 60%. The Tribunal, following its own previous decision, remitted the issue back to the AO for verification of the nature of the assets and allowed depreciation based on whether the peripherals are integral parts of the computer system.4. Disallowance of Depreciation on Leasehold Improvements:The AO disallowed depreciation on leasehold improvements due to lack of evidence for the assets being put to use. The Tribunal remitted the issue back to the AO for verification of the additions made during the year and directed the AO to restrict the disallowance to current year additions, not the opening WDV.Conclusion:The Tribunal provided a detailed analysis and directions on each issue, emphasizing the need for proper verification and adherence to legal principles, while partially allowing the Assessee's appeal.