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2020 (5) TMI 380 - AT - Income TaxDeduction u/s 10A - telecommunication expenses and other expenses incurred in foreign currency need to be excluded from export turnover as per clause (iv) of Explanation 2 - HELD THAT - Expenses and other expenses incurred in foreign currency need to be excluded from export turnover as per clause (iv) of Explanation 2 to section 10A however, they are also required to be excluded from the total turnover . CIT(A) held that the same are to be excluded in turn relying on the decision of case of CIT vs Tata Elxsi Ltd. and others 2011 (8) TMI 782 - KARNATAKA HIGH COURT Comparable selection - substantial transaction to the tune of more than 25 % with related parties were excluded - HELD THAT - If the related party transactions do not have material effect on the overall profit margins then still that company can be considered as a comparable. The Act does not provide directly as to what percentage of related party transactions can have material effect on the overall margins. Guidance can be taken from definition of the Associated Enterprise from Section 92A(2)(e) where in it is prescribed that one enterprise holding 26% shares in the other enterprise can be considered as an associate enterprise. Similarly in the provisions of Section 40A(2)( b) the persons having substantial interest is described as a person carrying not less than 20% of voting power in that company. 20 % or 26% interest is considered as substantial interest. As the provisions of Section 92A(2 )( a) are from the transfer pricing chapter itself, a limit of 25 % is applied as the threshold limit for the related party transactions. If the limit is reduced further it would only result in eliminating more and more companies, on the other hand if the limit is relaxed then companies with predominantly related party transactions would get included which would not represent uncontrolled transactions. The companies having more than 25% related party transactions should therefore be rejected as comparables. We order that the decision of the ld. CIT (A) on the issue of RPT cannot be upheld. Accordingly, we direct the exclusion of concerns Accel Transmatic Ltd., Geometric Ltd., R.Systems International Ltd. and Ishir Infotech Ltd. in the software development segment of the appellant and Apollo Health Street Limited, Caliber, Point Business Solutions Ltd., HCL Comnet Systems and Services Ltd. and Informed Technologies Ltd. in the ITES segment. Regarding the KALS Information Systems Ltd., we find that the company has got significant revenue from software products and as no segmental are available this needs to be excluded. Similarly, with the case of Lucid Software Ltd. which is predominantly product Development Company, hence the same cannot be taken as a comparable. Similarly Tata Elxsi Ltd. is a product company and the same cannot be taken as a comparable. Regarding the Persistent Systems Ltd., the same is to be excluded owing to extra ordinary event with regard to restructuring during the relevant year wherein the subsidiary Control Net (India) Ltd. was merged with the comparable company. The assessee pleaded for inclusion of the concern Media Soft Solutions Ltd. The TPO had excluded the same because of the low margins. The case of the assessee is that the same merits to be included. However, we find no merit in the same. ITES segment wherein the assessee has chosen 15 comparables to benchmark its transaction - Accentia Technologies Ltd. is found to be functionally not comparable and also owing to the amalgamation of two companies namely, Iridium Technologies Ltd. and Geo Soft Technologies Ltd. Similarly, Bodhtree Consulting Ltd. is excluded; the comparable being mainly into software solutions. Similarly, we find Eclerx Services, Informed Technologies India Ltd. are KPO hence cannot be taken into consideration as a comparable. The concern Infosys BPO Ltd. is engaged in diversified activities and owns intangible and hence cannot be included as comparable. Owing to the reported fraud in the management Maple e-Solutions and Traton Corporation Ltd. cannot be considered as right comparables. The concern High Services Ltd. are providing high-end services and is engaged in web hosting which is not functionally comparable to the assessee. Similarly, Mold Tec Technologies Ltd. is to be excluded as it is providing KPO services. We find Vishal Information Technologies Ltd. has outsourced 43 % of the sales and owing to low employee cost to sales ratio of 2.2 this will not be a correct comparable. Accurate Data Convertor is a development services company and Wipro Ltd. has invested in R D activities for development of IP, hence not meeting the criteria of FAR.
Issues Involved:
1. Exclusion of telecommunication and other expenses from export turnover and total turnover. 2. Reliance on the decision of the High Court in Tata Elxsi Ltd. 3. Exclusion of certain companies as comparables in the transfer pricing analysis. 4. Application of Related Party Transaction (RPT) filter. 5. Functional dissimilarity of certain companies in the software development and IT enabled services segments. 6. Procedural issues in the transfer pricing study. Detailed Analysis: 1. Exclusion of Telecommunication and Other Expenses from Export Turnover and Total Turnover: The revenue challenged the CIT(A)'s direction to exclude telecommunication and other expenses incurred in foreign currency from both "export turnover" and "total turnover." The CIT(A) relied on the decision of the Karnataka High Court in CIT vs Tata Elxsi Ltd. The tribunal upheld the CIT(A)'s decision, stating that the exclusion of these expenses from both export and total turnover is consistent with the High Court's ruling. 2. Reliance on the Decision of the High Court in Tata Elxsi Ltd.: The revenue contended that the CIT(A) erred in relying on the Tata Elxsi Ltd. decision, which the department had not accepted and had filed an SLP against. The tribunal held that the mere filing of an SLP does not invalidate the High Court's order, and thus, no interference with the CIT(A)'s order was warranted. 3. Exclusion of Certain Companies as Comparables in the Transfer Pricing Analysis: The revenue objected to the exclusion of Celestial Labs and Flextronics Software Systems Ltd. as comparables. The CIT(A) excluded these companies based on the RPT filter and the absence of onsite revenue, respectively. The tribunal found no reason to interfere with the CIT(A)'s decision, as these companies did not meet the required filters. 4. Application of Related Party Transaction (RPT) Filter: The assessee argued that the CIT(A) erred in applying an RPT filter of >0%, whereas a filter of >15% should have been applied. The tribunal referenced various judicial precedents, including the Delhi High Court's decision in PCIT Vs Oracle (OFSS) BPO Services (P.) Ltd., which supported a broad threshold figure of 25% RPT for comparables. The tribunal concluded that companies with more than 25% related party transactions should be excluded as comparables. 5. Functional Dissimilarity of Certain Companies in the Software Development and IT Enabled Services Segments: The tribunal analyzed the functional dissimilarity of several companies: - Avani Cimcon Technologies Ltd., e-Zest Solutions Ltd., Flextronics Software Systems Ltd., Ishir Infotech Ltd., Mediasoft Solutions Ltd., and Thirdware Solutions Ltd. were found to be functionally dissimilar and lacking segmental details, thus excluded as comparables. - KALS Information Systems Ltd., Lucid Software Ltd., and Tata Elxsi Ltd. were excluded due to significant revenue from software products and lack of segmental information. - Persistent Systems Ltd. was excluded due to an extraordinary event of restructuring. - Media Soft Solutions Ltd. was not included due to low margins. - In the ITES segment, companies like Accentia Technologies Ltd., Bodhtree Consulting Ltd., Eclerx Services, Infosys BPO Ltd., Maple e-Solutions, Traton Corporation Ltd., High Services Ltd., Mold Tec Technologies Ltd., Vishal Information Technologies Ltd., Accurate Data Convertor, and Wipro Ltd. were excluded for reasons such as functional dissimilarity, extraordinary events, and low employee cost to sales ratio. 6. Procedural Issues in the Transfer Pricing Study: The assessee raised issues regarding the use of multiple year/prior year data, selective information collection, and risk differentials. The tribunal found the TPO's actions to be in accordance with established procedures and dismissed these grounds. Conclusion: The tribunal allowed the assessee's appeal and dismissed the revenue's appeal, upholding the CIT(A)'s decisions on various grounds, including the exclusion of certain expenses from turnover calculations, reliance on judicial precedents, and the application of appropriate filters and comparability analyses in the transfer pricing study.
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