2012 (1) TMI 208 - AT - Income Tax

Deduction u/s 10A deuction - Held that - Telecommunication charges and foreign exchange loss are to be excluded not only from total turnover but also from export turnover in computing deduction u/s 10A of the Act.

Summary

Issues Involved:
1. Determination of Arms' Length Price (ALP) in respect of international transactions.
2. Exclusion of telecommunication charges and foreign exchange loss from total turnover while computing deduction under section 10A.
3. Levy of interest under section 234B of the Income-tax Act, 1961.

Detailed Analysis:

1. Determination of ALP in respect of International Transactions:
The assessee challenged the assessment order which included an adjustment of Rs.1,84,11,998/- under section 92CA. The assessee argued that the lower authorities erred in various aspects including:
- Disregarding principles of natural justice.
- Making a reference to the Transfer Pricing Officer (TPO) without demonstrating a motive of tax evasion.
- Using current year data and rejecting the Cost Plus Method (CPM).
- Adopting inappropriate comparables and not providing the opportunity to cross-examine parties.
- Not allowing the benefit of the +/-5% range under section 92C(2).

The Tribunal, after considering the submissions and following the decision in the case of M/s. Genesis Integrating Systems (India) Pvt. Ltd., remitted the matter back to the TPO with specific directions:
- Only consider the operating revenue and cost of transactions relating to associated enterprises.
- Use comparables with a turnover between Rs.1 crore and Rs.200 crores.
- Provide all information relating to comparables to the assessee.
- Allow the assessee to cross-examine the parties whose replies are used against them.
- Address the objections regarding additional comparables.
- Apply the standard deduction of 5% under the proviso to section 92C(2).

2. Exclusion of Telecommunication Charges and Foreign Exchange Loss from Total Turnover:
The assessee contested the exclusion of telecommunication charges and foreign exchange loss from the total turnover while computing the deduction under section 10A. The Tribunal referred to the judgment of the Hon'ble High Court of Karnataka in the case of CIT v M/s. Tata Elxsi Ltd. & Others, which held that such expenses should be excluded from both the export turnover and the total turnover to maintain uniformity in the formula.

The Tribunal directed that telecommunication charges and foreign exchange loss should be excluded from both the total turnover and the export turnover in computing the deduction under section 10A.

3. Levy of Interest under Section 234B:
The assessee also appealed against the levy of interest under section 234B amounting to Rs.35,53,271/-. The Tribunal noted that the levy of interest under section 234B is mandatory and consequential in nature and therefore did not address this issue further.

Conclusion:
The appeal was partly allowed for statistical purposes, with the matter regarding ALP determination remitted back to the TPO for fresh consideration, and directions were issued to exclude telecommunication charges and foreign exchange loss from both total turnover and export turnover while computing the deduction under section 10A. The issue of interest under section 234B was deemed mandatory and consequential, thus not requiring further deliberation.