Tribunal sets aside transfer pricing adjustments, allows higher depreciation, and directs deletion of addition.

The Tribunal set aside the transfer pricing adjustments and remitted the matter for fresh determination. It allowed higher depreciation on computer peripherals and directed the deletion of the addition towards License expenses. The appeal was partly allowed.

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Issues Involved:

1. Addition of Rs. 25,05,480/- related to international transaction of 'Software development services.'
2. Transfer pricing adjustment in relation to intra-group services.
3. Depreciation on Computer peripherals at 15% instead of 60%.
4. Addition of Rs. 67,52,517/- towards Licence expenses.

Issue-wise Detailed Analysis:

1. Addition of Rs. 25,05,480/- related to international transaction of 'Software development services':

The assessee, a subsidiary of Aircom International Ltd., UK, engaged in 'Software solutions' and 'Consultancy services,' reported international transactions using the Transactional Net Margin Method (TNMM) with a Profit Level Indicator (PLI) of Operating Profit to Total Cost (OP/TC). The assessee's PLI was 10.16% against comparables at 12.13%. The Transfer Pricing Officer (TPO) revised the comparables' average OP/TC to 25.92% after adjustments, resulting in a transfer pricing adjustment of Rs. 25,05,480/-. The assessee contested the inclusion of Kals Information Systems Ltd. (Seg.) and Sasken Communication Technologies Ltd. (Seg.) as comparables. The Tribunal found that Kals Information Systems Ltd. was primarily a software product company and included revenues from training, making it non-comparable. Similarly, Sasken Communication Technologies Ltd. had distorted financial results due to acquisitions, rendering it non-comparable. Both companies were excluded from the final list of comparables.

2. Transfer pricing adjustment in relation to intra-group services:

The assessee paid Rs. 67,09,033/- as Management fees to its AEs, claimed on a cost-to-cost basis. The TPO determined a Nil ALP, stating the services were either not received or were duplicate. The assessee presented additional evidence to substantiate the availing of such services. The Tribunal remitted the matter back to the Assessing Officer/TPO for re-evaluation, considering the additional evidence.

3. Depreciation on Computer peripherals at 15% instead of 60%:

The assessee claimed depreciation on computers at 60%, which the Assessing Officer partially allowed, treating items like Printers, Scanners, and NT servers as non-computer peripherals eligible for only 15% depreciation. The Tribunal referenced decisions from the Delhi High Court and the Special Bench of the Tribunal, which classified such items as computer peripherals eligible for 60% depreciation. The Tribunal directed the deletion of the addition, allowing the higher depreciation rate.

4. Addition of Rs. 67,52,517/- towards Licence expenses:

The assessee debited Rs. 90.03 lac as licence expenses, paying 45% of the total sale value of software and support charges to its AE. The Assessing Officer treated this as an intangible asset, allowing only 25% depreciation and adding Rs. 67.52 lac. The Tribunal found the payment to be a revenue expenditure necessary for procuring the licence of ENTERPRISE suite for sale in India. The Tribunal overturned the addition, directing the deletion of Rs. 67.52 lac.

Conclusion:

The Tribunal set aside the impugned order on the issues of transfer pricing adjustments and remitted the matter to the AO/TPO for fresh determination. The Tribunal allowed higher depreciation on computer peripherals and directed the deletion of the addition towards Licence expenses. The appeal was partly allowed.

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