HC allowed transfer pricing adjustment by excluding Depreciation from calculation

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HC allowed transfer pricing adjustment by excluding Depreciation from calculation

 

 

 

Pr. CIT v Novell Software Development India (P.) Ltd. [2021] 126 taxmann 29 (Karnataka)

Short Overview of the case: 

1. Taxpayer, a captive software development and support service provider, is subsidiary of Novell Inc US. The taxpayer provided software development and support services to its US Associated Enterprise and adopted Transactional Net Margin Method.
2. The taxpayer was providing depreciation as per Straight Line Method (SLM) at the rates based on management’s estimate of useful life of assets which were higher than corresponding rates prescribed in Schedule XIV of the Companies Act 1956. DRP granted depreciation adjustment as claimed by the taxpayer.

Revenue’s Contentions before High Court:

Depreciation cannot be excluded from the cost of taxpayer as well as comparables. Rule 10B(1)(e)(iii) of the Income Tax Rules nowhere provides to exclude the depreciation as it will materially affect the adjustments and therefore, the same cannot be excluded.

The Hon Karnataka HC held as below:

1. In line with Rule 10B(I)(iii) of the IT Rules, an uncontrolled transaction shall be considered comparable if none of the differences between the comparable companies and the controlled transaction are likely to materially affect the profit arising from such transactions in the open market or reasonably accurate adjustments can be made to eliminate the material effect of such differences.
2. Since the assessee has a policy of charging a higher rate of depreciation as compared to the comparable companies, there is a definite impact on the net margins of the assessee as compared to the comparable companies.
3. Thus, there is a need for making an adjustment to eliminate the differences in the accounting policies of the assessee and the comparable companies.

Conclusions :

HC allowed transfer pricing adjustment by excluding Depreciation from calculation

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