Case Law Details
Hewlett-Packard (India) Software Operation Pvt. Ltd Vs JCIT (ITAT Bangalore)
Conclusion: The ITAT in the case of Transfer Pricing observed that the exclusion and inclusion of comparable companies could be determined on basis of the Judgments of Yahoo Software Development (India) Pvt. Ltd. (2020) 115 taxmann.com 60 (Bang Trib) and Goldman Sachs Services Pvt. Ltd. (IT(TP)A No. 2355/Bang/2019. Also while dealing with the issue of capitalisation of software expenses it was held that “period of license” cannot be considered but the kind of software “system software or application software” shall be taken into consideration.
Facts: The assessee is a private limited company and engaged in the business of providing software development support services in the field of e-commerce, e-solutions, e-services, internet security and management etc. to its AEs. During the year under consideration the assessee filed return of income on 29.11.2015 declaring total income of Rs.197,11,40,320/- under normal provisions of the Act and book profits u/s.115JB of the Act at Rs.213,86,35,291. The case was selected for limited scrutiny under CASS and notice under Section 143(2) of the Act was duly served on the assessee. Since the assessee had international transactions the case was referred to the Transfer Pricing Officer (TPO) to determine the arm’s length price (ALP) of the international transactions the assessee has entered into with its Associate Enterprises (AE). The TPO made an adjustment of Rs.88,57,09,275/-. The Assessing Officer passed the draft assessment order incorporating the transfer pricing adjustment. The Assessing Officer further made an adjustment under Section 28(iv) of the Act for an amount of Rs.42,06,52,318/- towards the assets received by the assessee free of cost from its AEs. The Assessing Officer further made disallowance towards software expenses though allowed depreciation on the software expenses including those treated as capital asset in earlier years thereby arriving at the assessed income of Rs.256, 82,16,330. Aggrieved assessee raised its objections before the DRP. The DRP partially accepted the plea of the assessing on selection of comparable companies for determination of operating profit margin and directed the assessing officer to verify the nature of expenditure claimed with respect to software packages. Subsequently giving effect to the directions of the DRP and considering the various details furnished by the assessing the TPO recomputed the TP adjustment to ₹ 56,71,72,441 and the assessing officer by passing the final assessment order recomputed the disallowance on software expenses thereby the final assessed income was arrived at Rs.296,20,00,306. Aggrieved assessee is in appeal before the tribunal. The assessee has chosen Transactional Net Marginal Method (TNMM) to be the most appropriate method for determination of ALP. The operating profit and operating rate ratio has been taken as the profit level indictor in the TNMM analysis.
The TPO rejected the filters applied by the assessee and proceeded to apply new filters and selected comparables and then the TPO computed the TP adjustment. The learned A.R., with regard to the exclusion of the 4 comparable companies, submitted that all the four exclusions sought by the assessee is covered by the decision of the coordinate bench of the tribunal in the case of Yahoo Software Development (India) Pvt. Ltd. (2020) 115 taxmann.com 60 (Bang Trib). The ld AR further submitted that the reasons for exclusion of these companies by TPO/DRP is similar to the above case and therefore submitted that the decision of the coordinate bench in Yahoo Software (supra) is applicable in assessee’s case also.
The Hon’ble ITAT observed that the coordinate bench of the tribunal in the case of Yahoo Software Development (India) Pvt. Ltd (supra) has considered exclusion of the four comparable companies contended by the assessee and has held that the four companies shall be excluded. With regard to inclusion of 3 comparable companies as sought by the assessee the learned A.R. submitted that these companies have been held to be included as comparables in the decision of the coordinate bench of the tribunal in the case of Goldman Sachs Services Pvt. Ltd. (IT(TP)A No. 2355/Bang/2019. The Hon’ble ITAT followed the same and remit the matter of inclusion of the above three comparable companies to the file of TPO/A.O for examination.
Please become a Premium member. If you are already a Premium member, login here to access the full content.
Author Bio
