2013 (11) TMI 1615 - AT - Income Tax

Transfer pricing adjustment - risk adjustment - Held that - TPO himself has computed risk adjustment at 0.73% we are inclined to allow the benefit of risk adjustment to the assessee at 1% Re-compute the deduction u/s 10A of the Act after reducing the communication charges both from the export turnover as well as total turnover.

Issues Involved:
1. Rejection of Claim for Risk Adjustment
2. Rejection of Comparable Companies Selected by the Assessee
3. Selection of Certain Companies as Comparables by the TPO
4. Corporate Tax Issues Relating to Deduction u/s 10A of the Act

Detailed Analysis:

1. Rejection of Claim for Risk Adjustment:
The assessee raised the issue of rejection of its claim for risk adjustment, quantified at 3.66% using the Capital Asset Pricing Model (CAPM). The TPO rejected this claim, arguing that the assessee assumes various risks, such as single customer risk and country/political risks. The TPO concluded that no risk adjustment could be allowed. However, one member of the DRP panel supported the necessity of risk adjustment, suggesting a referral to experts in economics and management for precise determination. The Tribunal, considering the facts and precedents, allowed a 1% risk adjustment, noting that the TPO's own computation suggested a 0.73% adjustment and that the assessee, being a captive service provider, operates in a risk-mitigated environment.

2. Rejection of Comparable Companies Selected by the Assessee:
The assessee challenged the rejection of two comparable companies: Akshay Software Technologies Limited and MAARS Software International Limited. The TPO excluded Akshay Software based on the onsite revenue filter and MAARS Software due to functional differences and its operation through a branch. The Tribunal found that the DRP did not specifically address these rejections and remitted the issue back to the Assessing Officer/TPO for reconsideration, emphasizing the need to properly consider the objections and relevant data.

3. Selection of Certain Companies as Comparables by the TPO:
The assessee objected to 11 companies selected by the TPO as comparables, arguing they were functionally different or had other disqualifying factors. The Tribunal noted that the TPO's order in the present case mirrored that in Intoto Software India (P.) Ltd., where the same set of 26 comparables was used. Following the precedents set in Intoto Software and other cases, the Tribunal directed the exclusion of several companies, including Accel Transmatics Ltd., Avani Cimcon Technologies Ltd., Flextronics Software Systems Ltd., Infosys Technologies Ltd., Ishir Infotech Ltd., Kals Information Systems Ltd., Lucid Software Ltd., Tata Elxsi Ltd., Thirdware Solutions Ltd., Wipro Ltd., and Megasoft Ltd. The Tribunal emphasized that the functional differences, high turnover, and other factors made these companies unsuitable as comparables for the assessee, a purely software development service provider.

4. Corporate Tax Issues Relating to Deduction u/s 10A of the Act:
The assessee contested the reduction of communication expenses from the export turnover without a corresponding reduction from the total turnover while computing the deduction u/s 10A of the Act. The Tribunal agreed with the assessee, citing decisions from various High Courts and the ITAT Special Bench, which held that such expenses should be reduced from both the export turnover and total turnover. The Tribunal directed the Assessing Officer to re-compute the deduction accordingly.

Conclusion:
The Tribunal directed the Assessing Officer/TPO to re-compute the ALP and the income of the assessee, considering the Tribunal's findings on the various issues raised. The appeal was partly allowed, providing relief to the assessee on several grounds.

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