Tribunal Allows Appeal in Part: Excludes Comparables Over Rs. 200 Crores, Denies Negative Working Capital Adjustments.

Lam Research (India) Pvt. Ltd. Versus The Dy. Commissioner of Income-tax, Circle-4 (1) (1), Bengaluru.

Lam Research (India) Pvt. Ltd. Versus The Dy. Commissioner of Income-tax, Circle-4 (1) (1), Bengaluru. - TMI Issues Involved:
1. Addition to total income due to adjustment to the arm's length price (ALP) of software development services.
2. Non-acceptance of the economic analysis undertaken by the appellant.
3. Use of information obtained under section 133(6) of the Act for comparability purposes.
4. Use of data pertaining only to FY 2012-13 for determining ALP.
5. Rejection of certain comparable companies based on different quantitative and qualitative filters.
6. Acceptance/rejection of companies based on unreasonable comparability criteria.
7. Adverse working capital adjustment.
8. Lack of adjustments for differences in risk profiles.
9. Non-consideration of self-assessment tax paid.
10. Imposition of interest under sections 234B and 234C.
11. Initiation of penalty proceedings under section 271(1)(c).

Detailed Analysis:

1. Addition to Total Income Due to Adjustment to ALP:
The learned AO/TPO and the DRP made an addition of Rs. 1,36,50,206 to the total income of the appellant due to an adjustment to the arm's length price (ALP) of the software development services transaction with its associated enterprise.

2. Non-Acceptance of Economic Analysis:
The AO/TPO and DRP did not accept the economic analysis conducted by the appellant according to the provisions of the Act and the Income Tax Rules, 1962. They conducted a fresh economic analysis and concluded that the appellant’s international transaction was not at arm's length.

3. Use of Information Obtained Under Section 133(6):
The AO/TPO exercised their powers under section 133(6) of the Act to obtain information not available in the public domain and relied on it for comparability purposes, which the appellant contested.

4. Use of Data Pertaining Only to FY 2012-13:
The AO/TPO and DRP used data pertaining only to FY 2012-13, which was not available to the appellant at the time of complying with the transfer pricing documentation requirement.

5. Rejection of Comparable Companies:
The AO/TPO and DRP rejected certain comparable companies identified by the appellant using different quantitative and qualitative filters:
- Companies with different accounting years.
- Companies with employee costs greater than 25% of total revenues.
- Companies with export earnings greater than 75% of sales.
- Applying only the lower cap on the turnover filter of Rs. 1 crore without an upper cap.

6. Acceptance/Rejection Based on Unreasonable Comparability Criteria:
The AO/TPO and DRP accepted/rejected companies based on unreasonable comparability criteria. The Tribunal, however, allowed the exclusion of comparables with turnovers exceeding Rs. 200 crores, following the precedent set by the Tribunal in similar cases.

7. Adverse Working Capital Adjustment:
The AO/TPO and DRP provided an adverse working capital adjustment without considering that the appellant is a captive service provider. The Tribunal directed that negative working capital adjustments should not be made for captive service providers, referencing prior decisions where such adjustments were deemed inappropriate.

8. Lack of Adjustments for Differences in Risk Profiles:
The appellant argued that suitable adjustments were not made to account for differences in the risk profile between the appellant and the comparable companies.

9. Non-Consideration of Self-Assessment Tax Paid:
The AO did not consider the self-assessment tax amounting to Rs. 4,78,111 paid by the appellant.

10. Imposition of Interest Under Sections 234B and 234C:
The AO imposed interest under sections 234B and 234C of the Act, which the appellant contested as erroneous.

11. Initiation of Penalty Proceedings Under Section 271(1)(c):
The AO initiated penalty proceedings under section 271(1)(c) of the Act, which the appellant argued was unjustified.

Conclusion:
The Tribunal allowed the appeal partly. The grounds related to the exclusion of comparables with turnovers exceeding Rs. 200 crores and the negative working capital adjustment were decided in favor of the appellant. Other grounds were either not pressed or dismissed. The Tribunal directed the AO/TPO to recompute the ALP in accordance with the directions provided and after affording the appellant an opportunity of being heard. The appeal was thus partly allowed as indicated.