Tribunal directs Transfer Pricing Officer to recalculate Arm's Length Price & allow deductions under Income-tax Act

The Tribunal partly allowed the appeal by the assessee, directing the Transfer Pricing Officer (TPO) to recompute the Arm's Length Price (ALP) and other adjustments based on the Tribunal's findings. The TPO was instructed to allow the deduction under Section 10A on the enhanced profits resulting from the addition made under Section 28(iv) of the Income-tax Act.

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Issues Involved:
1. Transfer Pricing (TP) Adjustment
2. Inclusion and Exclusion of Comparable Companies
3. Working Capital Adjustment (WCA)
4. Risk Adjustment
5. Mistakes in Computation of Profit Level Indicators (PLI)
6. Taxation of Assets Received Free of Cost under Section 28(iv) and Section 69 of the Income-tax Act
7. Deduction under Section 10A of the Income-tax Act

Detailed Analysis:

1. Transfer Pricing (TP) Adjustment:
The primary issue involves the TP adjustment of Rs. 17,69,47,938/- made by the TPO towards the international transaction of provision of software development (SWD) services to the assessee’s Associated Enterprises (AE), which was later reduced to Rs. 15,48,94,050/- by the Dispute Resolution Panel (DRP). The assessee used the Transaction Net Margin Method (TNMM) with Operating Profit to Operating Cost (OP/OC) as the Profit Level Indicator (PLI). The TPO accepted only 4 out of 17 comparable companies selected by the assessee and added 4 more, resulting in a higher arithmetic mean mark-up of 29.40% compared to the assessee’s 16.72%.

2. Inclusion and Exclusion of Comparable Companies:
The Tribunal directed the exclusion of Infosys Ltd., Persistent Systems Ltd., Larsen & Toubro Infotech Ltd., and Thirdware Solutions Ltd. from the list of comparables, as these companies were excluded in similar cases due to functional dissimilarities, ownership of intangibles, and lack of segmental data. The Tribunal also remanded the comparability of Akshay Software Technologies Ltd., Sasken Communication Technologies Ltd., Maveric Systems Ltd., Sankhya Infotech Ltd., and 8K Miles Software Ltd. to the TPO for fresh consideration, emphasizing the need to afford the assessee an opportunity of being heard.

3. Working Capital Adjustment (WCA):
The Tribunal held that necessary adjustments should be made to the margins of comparables to reflect differences in working capital positions. The TPO was directed to allow the WCA after verification of the assessee’s computation and providing an opportunity for hearing.

4. Risk Adjustment:
The Tribunal directed the TPO to reconsider the question of allowing risk adjustment in light of the submissions and after examining the computation of risk adjustment. The Tribunal noted that Rule 10B(2) and Rule 10B(3) of the Income-tax Rules provide for adjustments towards differences in risk assumed by the parties.

5. Mistakes in Computation of Profit Level Indicators (PLI):
The Tribunal directed the reworking of PLI by considering the provision for doubtful debts as operating expenditure, in line with the decision of the Delhi Bench of the Tribunal in Rolls-Royce India (P.) Ltd. v. DCIT.

6. Taxation of Assets Received Free of Cost under Section 28(iv) and Section 69 of the Income-tax Act:
The Tribunal found that the provisions of Section 69 were not applicable as there was no evidence that the assessee owned the assets. The entire value of assets worth Rs. 15,07,90,003/- was treated as an addition under Section 28(iv) of the Act. The Tribunal did not adjudicate on whether the value of assets could be taxed as a benefit/perquisite under Section 28(iv), considering the assessee's claim for deduction under Section 10A.

7. Deduction under Section 10A of the Income-tax Act:
The Tribunal upheld the assessee’s claim for deduction under Section 10A on the enhanced profits due to the addition made under Section 28(iv), supported by the decision of the Karnataka High Court in CIT v. Mpact Technology Services Pvt. Ltd. and CBDT Circular No.37/2016. The AO was directed to allow the deduction on the enhanced profits.

Conclusion:
The appeal by the assessee was partly allowed, with directions to the TPO to recompute the ALP and other adjustments as per the Tribunal's findings, and to allow the deduction under Section 10A on the enhanced profits.

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