Transfer Pricing Appeal Outcome: ALP Determination, Exclusions, Methodology, & Depreciation Ruling

The Tribunal partly allowed the appeal by the assessee in a transfer pricing case involving determination of Arm's Length Price (ALP) in the SWD services and Trading segments. The Tribunal upheld exclusions of certain comparables due to functional dissimilarity and lack of segmental data, remanded others for fresh consideration, and directed a working capital adjustment. In the Trading segment, the Tribunal directed the adoption of Resale Price Method as the Most Appropriate Method. Additionally, the Tribunal directed the Revenue to grant depreciation at 60% for computer software and deleted the disallowance of the warranty provision.

---

---

Issues Involved:

1. Determination of Arm's Length Price (ALP) in the Software Development (SWD) services segment.
2. Determination of ALP in the Trading segment.
3. Restriction of depreciation claimed on computer software.
4. Disallowance of provision for warranty.

Issue-wise Detailed Analysis:

1. Determination of Arm's Length Price (ALP) in the SWD Services Segment:

The assessee, engaged in rendering SWD services to its Associate Enterprises (AEs), reported a net cost-plus mark-up of 19.64%. The Transfer Pricing Officer (TPO) identified a TP adjustment of Rs. 8,34,81,655/-. The Dispute Resolution Panel (DRP) directed the exclusion of Cigniti Technologies Ltd. and SQS India Ltd. from the list of comparables. The Tribunal upheld the exclusion of Infosys Ltd., Larsen and Toubro Infotech Ltd., Persistent Systems Ltd., and Thirdware Solutions Ltd. from the final list of comparables, citing functional dissimilarity and lack of segmental data. The Tribunal also remanded the inclusion of Akshay Software Technologies Ltd. and Maveric Systems Ltd. to the TPO for fresh consideration. Additionally, the Tribunal directed the TPO/AO to grant a working capital adjustment as per law.

2. Determination of ALP in the Trading Segment:

The assessee, engaged in trading infotainment systems, chose the Resale Price Method (RPM) as the Most Appropriate Method (MAM), while the TPO chose the Transaction Net Margin Method (TNMM). The Tribunal found that the assessee performs routine distributor functions and that RPM is the MAM for a routine distributor without value addition. The Tribunal directed the TPO/AO to adopt RPM as the MAM and remanded the determination of ALP for fresh consideration.

3. Restriction of Depreciation Claimed on Computer Software:

The Revenue restricted the depreciation on computer software to 25% instead of 60%, holding that 'computer software' is a license eligible for 25% depreciation. The Tribunal found that the definition of 'computer software' in Appendix-1 to the Income-tax Rules, 1962, includes any computer program recorded on any disc, tape, perforated media, or other information storage device, and does not distinguish between embedded software or otherwise. The Tribunal directed the Revenue to grant depreciation at 60%.

4. Disallowance of Provision for Warranty:

The assessee created a provision for warranty based on historical trends and empirical evidence. The Revenue disallowed the provision created in excess of utilization, stating that it was not based on a scientific method as per the Supreme Court's decision in Rotork Controls India (P.) Ltd. The Tribunal found that the provision was created on a scientific basis and satisfied the tests laid down by the Supreme Court. The Tribunal directed the deletion of the disallowance of the warranty provision.

Conclusion:

The appeal by the assessee was partly allowed, with directions for fresh consideration on certain aspects and specific instructions for granting depreciation and deleting the disallowance of the warranty provision.

---