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2017 (1) TMI 1631 - AT - Income TaxTPA - Comparable selection - Held that:- Companies functionally dissimilar with that of assessee need to be deselected from final list. We find that if the five comparables objected to by the assessee are taken out of the list of comparables and four comparables namely Infosys, Satyam, Sankhay and Geometric are excluded from the list, the margin would be 14. 70%. The margin shown by the assessee is 15. 41% for the year under consideration. Therefore, we hold that the transaction entered into by it was at arm’s length. Accordingly, reversing the order of the FAA, we hold that out of the final list of comparables five comparables, namely ESSL, Thirdware Solutions Ltd. , Foursoft, Flextronics Ltd. and Compulink System Ltd. have to be excluded. We also hold that the FAA had rightly excluded four comparable i. e. Infosys Technologies Ltd. and Satyam Computer Services Ltd. , Sankhya Infotech Ltd. and Geometric Software Solutions from the final list of valid comparables. Accordingly, effective ground of appeal, raised by the assessee with regard to comparables is allowed and ground raised by the AO, against the order of the FAA about excluding four comparables, is dismissed. Disallowance of bad debts - Held that:- We find that incurring of expenditure by the assessee is not in doubt. If it cannot be allowed as bad debts it has to be allowed as business loss. Enhancement on account of change in method of accounting - Held that:- The receipt of income as well as accrual took place as soon as the sale proceeds of software were received and not when the life span of software would come to an end. Therefore, spreading the income over the licence-period of the software, in our opinion, was not justified. The agreement was for up-gradation and improvisation of software - it was not warranty. Even in the matter of warranty, after the case of Rotork Controls India P. Ltd. [2009 (5) TMI 16 - SUPREME COURT OF INDIA] things have become very clear-it talks of historical trend. During the course of hearing before us. the assessee had not given any indication about the expenditure incurred by it for improving and upgrading the software during the remaining period of licence. In short, the argument of matching the revenue v/s. cost is missing. lt our opinion, the method adopted by it would fall in the category which 'tends to distort the picture for the purpose of taxable income of the assessee'- Decided against the assessee. Payment of royalty by the assessee to its AE - Held that:- Merely because the royalty payments, were relating to the product sold by the Appellant to its clients for which payment could not be recovered cannot be the consideration before the TPO for determining the arm's length price of international transaction. bad debts written off cannot be factor to determine the arm's length price of any international transaction. In our opinion, TPO has exceeded his limitation by following the method which is not authorized under the Act or rules. We, therefore, hold that Arms Length Price determined by the TP adopted by the Assessing Officer to the extent of royalty payable to the Ca Inc Management, USA is not as per the procedure prescribed and same cannot be sustained. - decided against revenue.
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