Tribunal directs fresh examination on transfer pricing, asset ownership rights, and MAT credit eligibility.

The Tribunal allowed the appeal for statistical purposes, directing a fresh examination and redetermination of certain issues by the AO. The order was pronounced on 12th July 2021. Key issues involved transfer pricing adjustments for software development services, addition under section 28(iv) for assets received free of cost, non-granting of MAT credit, and charging of interest under sections 234B and 234C. The Tribunal directed exclusion and inclusion of comparables for transfer pricing adjustments and remanded the section 28(iv) issue for further examination regarding ownership rights of the assets.

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Issues Involved:

1. Transfer pricing adjustment made in respect of provision of software development services.
2. Addition made u/s. 28(iv) of the Act treating the assets received free of cost as benefit received by the assessee.
3. Non-granting of MAT credit.
4. Charging of interest u/s. 234B and 234C (consequential in nature).

Issue-wise Detailed Analysis:

1. Transfer Pricing Adjustment:

The assessee, a subsidiary of M/s. ARM Ltd., UK, contested the transfer pricing adjustments made for software development services. The revenue from these services was Rs. 131.22 crores, and the TPO made a TP adjustment of Rs. 4.93 crores, later enhanced to Rs. 5.42 crores by the DRP. The assessee used the TNM method and declared a profit margin of 14.91%, selecting 9 comparables with an average margin of 10.28%. The TPO rejected this study, selecting 7 comparables with an average margin of 20.90%, adjusted to 19.21% after working capital adjustments.

The DRP directed the exclusion of three companies (ICRA Techno Analytics Ltd., Persistent Systems Ltd., and Tech Mahindra Ltd.), confirming the selection of the remaining four. The assessee sought the exclusion of CG-VAK Software Exports Ltd. and Larsen & Toubro Infotech Ltd., and the inclusion of Akshay Software Technologies Ltd. and R. Systems International Ltd., citing precedents from the NXP India Pvt. Ltd. case.

The Tribunal, referencing the NXP India Pvt. Ltd. case, directed the exclusion of Larsen & Toubro Infotech Ltd. and CG-VAK Software Exports Ltd., and the inclusion of R. Systems International Ltd. and Akshay Software Technologies Ltd. The AO/TPO was instructed to redetermine the ALP of the transactions accordingly.

2. Addition u/s. 28(iv):

The AO assessed Rs. 12,65,000/- as income u/s. 28(iv) of the Act, for tangible assets received free of cost from the holding company, ARM Ltd., UK. The assessee argued that these assets were for testing and validation purposes and were either returned or disposed of post-testing, thus not constituting a benefit. The AO, supported by the DRP, disagreed, citing capitalization in the books and the decision in CIT vs. Ramaniyam Home Private Limited.

The Tribunal noted that the assets were not included in the fixed assets schedule, contradicting the DRP's observation. It emphasized that the applicability of section 28(iv) depends on whether the right of ownership of the assets was transferred to the assessee. The issue was remanded to the AO for fresh examination, instructing the assessee to provide relevant details and clarify ownership rights.

3. Non-granting of MAT Credit:

The Tribunal acknowledged that this issue required factual verification and restored it to the AO for resolution.

4. Charging of Interest u/s. 234B and 234C:

This issue was noted as consequential in nature and did not require separate adjudication.

Conclusion:

The appeal was treated as allowed for statistical purposes, with directions for fresh examination and redetermination of certain issues by the AO. The order was pronounced in the open court on 12th July 2021.

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