2013 (5) TMI 834 - AT - Income Tax

Computing deduction u/s 10A - Held that - The expenditure on foreign travel and telecommunication should be reduced both from the export turnover and the total turnover of the assessee. Determining the Arm s Length Price (ALP) of international transaction of software development service by making upward transfer pricing adjustment - Held that - Lower authorities were not justified in not excluding profit or loss in respect of domestic transactions for determining the profit declared by the assessee in respect of AE transactions. They were not justified in adopting the profit level achieved by the assessee in respect of all its transactions including domestic transactions as the profit level declared in respect of AE transactions. Further we find that the assessee had furnished separately its working of the profit declared by it in respect of its AE transactions before the TPO as well as before the DRP. The lower authorities could not point out any specific defect in the said working of the assessee. As per the said working of the assessee the assessee claimed to have earned a profit level of 34.17% of the cost in respect of AE transactions. Before us also the ld. CIT/DR could not point out any specific defect in this working of the assessee. There is no legal requirement that the segmentwise working submitted before the TPO should be audited by the assessee s CA. Moreover it is not open to the Revenue to reject the working prepared by the assessee without pointing out any error therein. In absence of any error being pointed out in the working shown by the assessee wherein it has claimed that it has achieved a profit level of 34.17% of the cost in respect of transactions with AE we have no option but to accept the same. the rate of profit achieved in other comparable cases are to be compared with profit level declared by the assessee in respect of its AE transactions after excluding domestic transactions. Therefore on comparing the same we find that the profit level declared by the assessee in respect of its AE transactions is more than the profit level in respect of comparable cases found by the TPO. In the above circumstances in our considered view the lower authorities were not justified in making addition to the income of the assessee. the rate of profit achieved in other comparable cases are to be compared with profit level declared by the assessee in respect of its AE transactions after excluding domestic transactions. Therefore on comparing the same we find that the profit level declared by the assessee in respect of its AE transactions is more than the profit level in respect of comparable cases found by the TPO. In the above circumstances in our considered view the lower authorities were not justified in making addition to the income of the assessee.

Issues Involved:
1. Reduction in the amount of deduction under section 10A of the Act.
2. Determination of Arm's Length Price (ALP) of international transaction of software development service by making upward transfer pricing adjustment.

Issue-wise Detailed Analysis:

1. Reduction in the amount of deduction under section 10A of the Act:

The assessee contested the reduction of the deduction under section 10A from Rs. 92,42,254/- to Rs. 88,88,340/- by the AO and DRP. The AO had reduced the foreign travel expenditure and telecommunication expenses from the export turnover while computing the deduction, which the assessee argued was incorrect. The assessee claimed that these expenses were not related to providing technical services outside India and should not be excluded from the export turnover. Additionally, the assessee argued that if these expenses were reduced from the export turnover, they should also be reduced from the total turnover.

The Tribunal noted that the assessee did not make any submissions on grounds 2.1 to 2.6, leading to their dismissal for want of prosecution. However, on ground 2.7, the Tribunal referred to the decision in the case of ITO vs Sak Soft Ltd., which established that parity should be maintained between the export turnover and total turnover. The Tribunal concluded that the foreign travel and telecommunication expenses should be reduced from both the export turnover and the total turnover. Consequently, this ground of appeal was allowed.

2. Determination of Arm's Length Price (ALP) of international transaction of software development service by making upward transfer pricing adjustment:

The assessee, a wholly-owned subsidiary of a US-based company, provided software development services to its parent company and unrelated entities. The TPO rejected the assessee's transfer pricing documentation and conducted a fresh search for comparables, leading to an upward adjustment of Rs. 5.23 Crores.

The DRP upheld the TPO's approach, rejecting the segmental results provided by the assessee on the grounds that they were unaudited. The DRP also dismissed the assessee's objections regarding the comparables selected by the TPO, the use of single-year data, and the rejection of loss-making comparables.

The Tribunal reviewed the submissions and concluded that the lower authorities erred in comparing the entire entity's data instead of focusing solely on the international transactions with AEs. The Tribunal found that the assessee's segmental profit of 34.17% for AE transactions was higher than the comparable profit rate of 20.76% determined by the TPO. The Tribunal emphasized that the segmental working provided by the assessee, though unaudited, was not found to have any specific defects by the lower authorities.

The Tribunal referred to the decision in DCIT vs Stratex Networks (India) Pvt. Ltd., which supported the view that only international transactions should be considered for comparison. Consequently, the Tribunal deleted the addition of Rs. 5,23,19,210/- made by the lower authorities, allowing the ground of appeal related to the transfer pricing adjustment.

Conclusion:

The appeal was partly allowed, with the Tribunal ruling in favor of the assessee on both the reduction in deduction under section 10A and the transfer pricing adjustment issues. The decision emphasized maintaining parity between export turnover and total turnover and the importance of focusing on international transactions for transfer pricing comparisons.

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