2018 (7) TMI 1877 - ITAT MUMBAI

TPA - comparable selection - Functional similarity - Held that:- The assessee is basically providing Software Development Services (SDS), Information Technology Enabled Services (ITES) and Consultancy Services (CS) to its group entities worldwide, thus companies functionally dissimilar with that of assessee need to be deselected from final list.

Exclusion of comparable if it fails the employee cost filter of less than 25% applied by the Transfer Pricing Officer himself.

Addition on account of shortfall in price charged to the A.E. towards services rendered under the Intellectual Property Services Agreement (IPSA) - Held that:- Content development or animation and website services are coming within the ambit of I.T. enabled products or services. Thus, keeping in view the aforesaid fact, it has to be concluded that the services rendered under IPSA are to be treated as ITES. As could be seen from the order of the Transfer Pricing Officer, though, he has treated the revenue earned of ₹ 8.47 crores as ITES, however, he has benchmarked it separately without aggregating it with all services rendered ITES segment. The DRP has also failed to rectify the error committed by the Transfer Pricing Officer by benchmarking it separately. Since, the Transfer Pricing Officer has not benchmarked this particular transaction by aggregating it with other ITES, we are inclined to restore the issue to the Assessing Officer for undertaking the necessary exercise of benchmarking the transaction by aggregating with other ITES and determine the arm's length price by applying the average margin of the comparables selected under the ITES segment, subject to our direction contained in this order with regard to the comparables under ITES segment.

Mode of computation of deduction under section 10A and section 10AA of the Act after reducing / setting-off of losses in some other STP / SEZ unit - Held that:- The issue now stands settled by the decision of the Hon'ble Supreme Court in Yokogawa India Ltd. [2016 (12) TMI 881 - SUPREME COURT] wherein, held that even after amendment made to section 10A of the Act by making it a deduction provision instead of exemption provision, there is no material change in the nature of deduction claimed by the assessee which has to be allowed from the gross total income before set-off of loss. Therefore, in view of the ratio laid down by the Hon'ble Supreme Court as discussed above, assessee's claim of deduction under section 10A of the Act unit-wise is allowable. The Assessing Officer is directed to compute the deduction accordingly.

Disallowance of deduction under section 10A in respect of income / profit derived under the intellectual property services agreement - Held that:- When the Transfer Pricing Officer has classified the income received under IPSA agreement to be of the nature of ITES and has also benchmarked it as such, the AO cannot take a contrary view by stating that it is not in the nature of ITES only for disallowing assessee's claim of deduction under section 10A of the Act. The Department cannot be permitted to take contrary view with regard to the nature of a particular item of income for its own advantage. Once, the income under the IPSA has been classified to be in the nature of ITES, assessee's claim of deduction under section 10A of the Act have to be allowed. In view of the above, we direct the Assessing Officer to allow assessees claim of deduction under section 10A of the Act in respect of income earned from IPSA. However, we make it clear such deduction has to be computed on the amount of ₹ 90,41,87,522 as claimed in the return of income and as per grounds raised before us.

Disallowance u/s 40(a)(ia) - Held that:- If the expenditure claimed by the assessee pertains to STPI / SEZ unit, on disallowance of such deduction the profit of STPI / SEZ unit will get enhanced, hence, the assessee will be eligible to avail deduction under section 10A of the Act to that extent. We direct the Assessing Officer to examine the aforesaid claim of the assessee having regard to the facts and material brought on record and allow the same after factual verification. Further, the assessee has submitted that the provision made has been reversed on 1st April 2008, in the books of account of the assessee. In this context, a certificate dated 20th April 2018, issued by the Chartered Accountant was submitted before us. Obviously, this is a fresh claim made by the assessee before us. Therefore, in all fairness, this claim of the assessee is also required to be examined by the Assessing Officer.