2013 (1) TMI 801 - AT - Income Tax

TPA - selection of comparable - Held that - Assessee is a service provider operating with limited or no risk at all thus companies functionally dissimilar with that of assessee need to be excluded from final list of comparable. Deduction under s. 10A - Held that - We direct the AO to recompute the deduction under s. 10A after reducing communication charges both from the export turnover as well as the total turnover.

Summary

Issues Involved:
1. Transfer pricing adjustments.
2. Exclusion of certain comparables in transfer pricing.
3. Computation of deduction under Section 10A.
4. Levy of interest under Section 234B.
5. Initiation of penalty proceedings under Section 271(l)(c).

Detailed Analysis:

1. Transfer Pricing Adjustments:
The primary issue relates to transfer pricing adjustments made by the Assessing Officer (AO) based on the Transfer Pricing Officer's (TPO) determination. The assessee, engaged in software design and development, had international transactions with its associated enterprise (AE) and used the Transactional Net Margin Method (TNMM) to justify the arm's length price (ALP). The TPO rejected the assessee's transfer pricing study, citing the use of multiple-year data and the inclusion of companies irrespective of their verticals/horizontals. The TPO conducted a fresh search and selected 26 comparables, leading to an adjustment of Rs. 1,04,47,136.

2. Exclusion of Certain Comparables in Transfer Pricing:
The assessee contested the inclusion of Infosys Technologies Ltd. and Wipro Ltd. as comparables, arguing these companies' turnovers were disproportionately high compared to the assessee's Rs. 15 crores. The Tribunal agreed, noting that the TPO should apply the same turnover filter logic consistently. The Tribunal referenced previous decisions, emphasizing that companies with significantly higher turnovers and different risk profiles should not be considered comparables. Consequently, the Tribunal directed the AO to recompute the ALP excluding Infosys and Wipro.

3. Computation of Deduction under Section 10A:
The assessee challenged the reduction of communication charges from the export turnover without a corresponding reduction from the total turnover while computing the deduction under Section 10A. The Tribunal agreed with the assessee, citing consistent judicial pronouncements, including decisions from the Bombay High Court and Karnataka High Court, which mandated that communication charges should be deducted from both export and total turnover. The Tribunal directed the AO to recompute the deduction accordingly.

4. Levy of Interest under Section 234B:
The assessee's challenge to the levy of interest under Section 234B was deemed consequential and dependent on the final determination of income. Hence, the Tribunal did not adjudicate this issue at this stage, treating it as academic.

5. Initiation of Penalty Proceedings under Section 271(l)(c):
Similarly, the initiation of penalty proceedings under Section 271(l)(c) was considered consequential and dependent on the final income determination. The Tribunal dismissed this ground as academic.

Conclusion:
The Tribunal allowed the assessee's appeal in part. It directed the AO to exclude Infosys Technologies Ltd. and Wipro Ltd. from the list of comparables and to recompute the ALP. Additionally, the Tribunal instructed the AO to recompute the deduction under Section 10A by reducing communication charges from both export and total turnover. The issues related to interest under Section 234B and penalty proceedings under Section 271(l)(c) were dismissed as academic.