ITAT ruling: Appeal partly allowed on transfer pricing adjustments for software services.

The Tribunal partly allowed the appeal, condoning the delay in filing, addressing transfer pricing adjustments for software development services, including depreciation in operating cost for PLI calculation, and directing verification of working capital adjustment in the ALP margin calculation. The decision was issued on 21st July 2022 by the Appellate Tribunal ITAT VISAKHAPATNAM.

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Issues:
1. Delay in filing the appeal before the Tribunal.
2. Transfer pricing adjustments related to software development services.
3. Inclusion of depreciation in operating cost for Profit Level Indicator (PLI) calculation.
4. Working capital adjustment in the ALP margin calculation.

Issue 1: Delay in filing the appeal before the Tribunal
The appeal filed by the assessee against the order of the Ld. Commissioner of Income Tax (Appeals) faced a delay of 12 days. The Ld. Authorized Representative presented an affidavit explaining the absence of the Director responsible for accounting and tax matters during the filing period. The Tribunal, after reviewing the affidavit and submissions, condoned the delay, considering it a fit case for such condonation.

Issue 2: Transfer pricing adjustments related to software development services
The case involved transfer pricing adjustments concerning software development services provided to Associated Enterprises (AEs). The Transfer Pricing Officer (TPO) determined the Arm's Length Price (ALP) resulting in a forward adjustment to the total income of the assessee. The Ld. CIT(A) partly allowed the appeal related to extraordinary depreciation, leading to the appeal before the Tribunal.

Issue 3: Inclusion of depreciation in operating cost for PLI calculation
The assessee argued that depreciation should be excluded from the operating cost for calculating the Profit Level Indicator (PLI). The Ld. CIT(A) considered the extraordinary depreciation and recomputed the PLI, including depreciation as part of the operating cost. The Tribunal upheld the Ld. CIT(A)'s decision, emphasizing the necessity of considering depreciation in the computation of ALP due to assets' use in services provided to AEs.

Issue 4: Working capital adjustment in the ALP margin calculation
The Ld. CIT(A) rejected the working capital adjustment made by the TPO and directed the AO to recomputed the ALP margin without such adjustment. However, the Ld. CIT(A) did not consider the working capital adjustments submitted by the Ld. AR or the positive adjustment proposed by the assessee. The Tribunal directed the AO to verify and give effect to the positive working capital adjustment while determining the ALP margin of the assessee.

In conclusion, the Tribunal partly allowed the appeal, addressing the issues of delay in filing, transfer pricing adjustments, inclusion of depreciation in operating cost, and working capital adjustment in the ALP margin calculation. The decision was pronounced on 21st July 2022 by the Appellate Tribunal ITAT VISAKHAPATNAM.

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