TaxTMI Login
AI Drafter ✕
Generate professional replies, appeals, opinions to Show Cause Notices, assessment orders, audit objections, and other legal communications using TaxTMI's AI Drafter.
Just a moment...
AI Drafter ✕ Generate professional replies, appeals, opinions to Show Cause Notices, assessment orders, audit objections, and other legal communications using TaxTMI's AI Drafter.
Press 'Enter' to add multiple search terms. Rules for Better Search
Use comma for multiple locations.
---------------- For section wise search only -----------------
Accuracy Level ~ 90%
of 
Press 'Enter' after typing page number.
of Press 'Enter' after typing page number.
No Folders have been created
Are you sure you want to delete "My most important" ?
NOTE:
of Press 'Enter' after typing page number.
of Press 'Enter' after typing page number.
All Case Laws
of Press 'Enter' after typing page number.
of Press 'Enter' after typing page number.
All Case Laws
Note
Bookmark
Share
Don't have an account? Register Here
of Press 'Enter' after typing page number.
Issues: (i) whether the Related Party Transaction filter should be applied at 15% of sales for selecting comparables in transfer pricing; (ii) whether Kals Information Systems Ltd. was a comparable company or the matter required verification and reconsideration; (iii) whether no separate transfer pricing adjustment could be made on receivables / extended credit period from the Associated Enterprise; and (iv) whether depreciation on capitalised software expenditure could be disallowed under section 40(a)(ia) for non-deduction of tax at source.
Issue (i): whether the Related Party Transaction filter should be applied at 15% of sales for selecting comparables in transfer pricing.
Analysis: The comparable selection exercise was tested against the threshold for related party transactions. The Tribunal followed the view that where comparable companies have related party transactions up to 15% of total revenue, they may still be included as comparables, and the stricter zero-percent filter applied by the DRP was not sustained.
Conclusion: The RPT filter was directed to be applied at 15% of sales, and the three companies excluded by applying a 0% filter were directed to be included.
Issue (ii): whether Kals Information Systems Ltd. was a comparable company or the matter required verification and reconsideration.
Analysis: The assessee challenged functional comparability on the ground that the company was engaged in software products and not pure software development services. The Tribunal found that the material on record was insufficient to conclude the issue finally and considered it appropriate to obtain further verification, including use of powers to examine the nature of business and segmental results.
Conclusion: The issue was remanded to the Transfer Pricing Officer for fresh examination and verification after giving opportunity to the assessee.
Issue (iii): whether no separate transfer pricing adjustment could be made on receivables / extended credit period from the Associated Enterprise.
Analysis: The Tribunal treated delayed realisation of sale proceeds as incidental to the underlying sale / service transaction and not as an independent international transaction for separate benchmarking of notional interest. The extended credit period was held to be part of the overall international transaction and not a stand-alone loan transaction.
Conclusion: The separate adjustment on receivables was deleted.
Issue (iv): whether depreciation on capitalised software expenditure could be disallowed under section 40(a)(ia) for non-deduction of tax at source.
Analysis: The Tribunal followed coordinate bench authority holding that once the expenditure is capitalised and no deduction is claimed as revenue expenditure, section 40(a)(ia) cannot be used to disallow depreciation. The remedy for alleged TDS default lies elsewhere in the Act.
Conclusion: The disallowance of depreciation was deleted.
Final Conclusion: The appeal succeeded in substantial part: the RPT filter was relaxed, the receivables-based transfer pricing adjustment and the depreciation disallowance were deleted, while one comparability issue was restored for fresh verification.
Ratio Decidendi: In transfer pricing, receivables arising from the sale or service transaction are ordinarily to be treated as part of the closely linked underlying transaction and cannot be separately benchmarked as an independent international transaction; and capitalised expenditure cannot be disallowed as depreciation under section 40(a)(ia) merely for want of tax deduction at source.
TaxTMI 
