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2015 (11) TMI 1719 - AT - Income TaxTPA - comparable selection criteria - Held that - The assessee company is a subsidiary of Moog Inc. USA and provides software development services to its Associated Enterprise (AE) thus companies functionally dissimilar with that of assessee need to be deselected from final list of comparable. Working of adjustment - Held that - AO/TPO is directed to allow the actual adjustment towards the differences in the working capital position between the assessee and the entrepreneurial companies selected as comparable. Disallowance of software expenses - assessee has incurred expenses towards purchase of application software (i.e. obtaining or renewing the licenses for use of certain application software) and has deducted tax at source in respect of such payment towards application software - Held that - The license fee paid represents usage charges of leased licenses. Further the use of license does not give any ownership of the software to the assessee and thereby does not lead to creation of any capital asset. The license used by the assessee is application software designed to perform various business processes. The application software enables the assessee to carry out its business operations efficiently and smoothly and does not provide any enduring benefit. Such software enhances the efficiency of the operations. It is an aid in the manufacturing process. Considering the above facts and the judicial precedents relied upon by the assessee company we hold that the said license fees and maintenance fees is to be allowed as revenue expenditure. Since we have allowed the assessee s claim of software expenditure to be treated as revenue expenditure the alternate ground for non-grant of additional deduction u/s. 10B on account of capitalisation of software expenditure is not considered for adjudication.
Issues Involved:
1. Transfer Pricing Adjustment 2. Rejection of TP Documentation 3. Use of Multiple Year/Prior Year Data 4. Data Used at Time of Assessment Proceedings 5. Rejection and Selection of Comparable Companies 6. Working Capital Adjustment 7. Market Risk Adjustment 8. Software Expenses Disallowance Issue-Wise Detailed Analysis: 1. Transfer Pricing Adjustment: The assessee company, a subsidiary of Moog Inc., USA, provides software development services and engaged in the manufacture and sale of servo control mechanisms. The assessee entered into international transactions with its Associated Enterprises (AEs) and earned an OP/TC of 14.60% for FY 2008-09. The TPO selected different comparable companies and worked out an arm's length price (ALP) leading to a transfer pricing adjustment of Rs. 91,03,983/-. The assessee appealed against this adjustment, arguing that the economic analysis performed justified the arm's length nature of the transactions. 2. Rejection of TP Documentation: The AO, TPO, and CIT(A) rejected the TP documentation provided by the assessee, contending it was defective and not reliable. The assessee argued that the documentation justified the arm's length nature of the international transactions with the AEs. 3. Use of Multiple Year/Prior Year Data: The assessee contended that the AO, TPO, and CIT(A) erred in not considering multiple year/prior year data of comparable companies while determining the ALP. The Tribunal noted that the data relating to the financial year in which the international transaction has been entered into should be used, with data from prior periods considered if it reveals relevant facts. 4. Data Used at Time of Assessment Proceedings: The assessee argued that the authorities erred in using data available at the time of assessment proceedings instead of that available at the time of preparing the TP documentation. The Tribunal emphasized the necessity of using contemporaneous data. 5. Rejection and Selection of Comparable Companies: The Tribunal examined the comparability of companies selected by the TPO and the assessee. It directed the exclusion of companies like Infosys Ltd., Flextronics Software Systems Ltd., iGate Global Solutions Ltd., Mindtree Consulting Ltd., Persistent Systems Ltd., and Sasken Communication Ltd., based on the turnover filter, following the decision in Trilogy E-Business Software India Pvt. Ltd. The Tribunal also excluded KALS Information Systems Ltd. and Bodhtree Consulting Ltd. for being functionally dissimilar to the assessee. 6. Working Capital Adjustment: The assessee contended that the working capital adjustment should not have an upper limit. The Tribunal noted that the TPO's restriction on working capital adjustment was unjustified and directed the AO/TPO to allow the actual adjustment towards differences in the working capital position without any upper cap. 7. Market Risk Adjustment: The Tribunal acknowledged the assessee's argument that it was a captive service provider assuming minimal risk compared to independent, risk-bearing entities. It directed the TPO to verify the risk profiles of the comparable companies and allow risk adjustment based on scientific analysis and data. 8. Software Expenses Disallowance: The assessee incurred expenses towards application software licenses and maintenance, which were disallowed by the AO as capital expenditure. The Tribunal, considering judicial precedents, held that the software expenses were revenue in nature as they did not provide any enduring benefit or ownership to the assessee. Hence, the expenses were allowed as a deduction under section 37(1) of the Act. Conclusion: The appeal by the assessee was partly allowed for statistical purposes, with specific directions provided for the exclusion of certain comparables, allowance of working capital adjustment without an upper limit, and treatment of software expenses as revenue expenditure.
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