2015 (12) TMI 1562 - AT - Income Tax

Transfer pricing adjustment - selection of comparables - Held that - After exclusion of Celestial Biolabs Ltd. from the final set of comparables arrived at by the TPO the arithmetic mean of the comparables according to the assessee would be 20.83% which is within the 5% range of 21.11% and the TP adjustment made by the AO/TPO is to be deleted. We therefore set aside the issue to the file of the AO/TPO for verification of the assessee s claim and decide the issue afresh in accordance with law after providing reasonable opportunity of being heard to the assessee. The AO/TPO is also directed to recompute the working capital/risk adjustment as claimed by the assessee. Deduction u/s 10A - expenditure incurred in foreign currency and telecommunication charges are to be excluded from the export turnover for the purpose of computation of deduction u/s. 10A - Held that - The Hon ble High Court of Karnataka in the case of CIT v. Tata Elxsi Ltd.(2011 (8) TMI 782 - KARNATAKA HIGH COURT ) held that whatever expenditure is excluded from the export turnover has to be excluded from the total turnover as well. Respectfully following the decision of the Hon ble jurisdictional High Court we allow the alternate ground raised by the assessee in this regard. Relief allowable u/s. 10A of the Act is to be computed after setting off the brought forward depreciation losses of the assessee - Held that - The issue has to be set aside to the file of the Assessing Officer. Accordingly we remit the issue to the Assessing Officer for fresh consideration and decision in accordance with the decision of the Chennai Bench of the Tribunal in the case of S.R.A. Systems Ltd. 2014 (3) TMI 357 - ITAT CHENNAI wherein held un-absorbed depreciation has to be set-off before computing the exemption allowable u/s.10A & the assessee can claim deduction u/s.10A before setting off of brought forward losses

Issues Involved:
1. Transfer Pricing Analysis and Comparable Selection
2. Working Capital Adjustment
3. Exclusion of Foreign Currency and Telecommunication Charges from Export Turnover
4. Computation of Deduction u/s 10A after Setting Off Brought Forward Depreciation Losses

Detailed Analysis:

1. Transfer Pricing Analysis and Comparable Selection:
The primary issue in this appeal was the transfer pricing analysis for the assessee company, a subsidiary of Interwoven Inc. of the US, engaged in software development and technical support services. The TPO (Transfer Pricing Officer) and the taxpayer used the TNMM (Transactional Net Margin Method) for the transfer pricing study. The TPO accepted the aggregation of the software services and ITES (IT Enabled Services) segments, as both activities were interrelated and served a single customer, IWOV Inc.

The TPO included additional comparables such as Celestial Labs, Flextronics (Aricent Technologies), and Avani Cincom, despite these not being present in the Capitaline/Prowess databases for the relevant year. The TPO justified this inclusion by referencing the OECD guidelines, which support both deductive and additive approaches in the selection of comparables.

The assessee challenged the inclusion of several companies as comparables, arguing that they failed to meet the criteria for comparability. However, the additional ground raised by the assessee regarding these companies was dismissed as not pressed during the hearing.

2. Working Capital Adjustment:
The TPO computed the working capital adjustment using the formula from the OECD Guidelines, 2010, adopting a rate of 12.68% p.a. based on the PLR (Prime Lending Rate) of SBI for short-term working capital loans. The working capital adjustment was computed at 1.87%.

The assessee's counsel pointed out that the ALP (Arm's Length Price) determined by the TPO prior to the working capital adjustment was 23.65%, compared to the assessee's determined ALP of 14.87%. The TPO only accepted one comparable from the assessee's TP report, rejecting the remaining 41 comparables.

3. Exclusion of Foreign Currency and Telecommunication Charges from Export Turnover:
The assessee contended that expenditure incurred in foreign currency and telecommunication charges should be excluded from the export turnover for computing the deduction u/s 10A of the Act. The Tribunal relied on the decision of the Hon'ble Karnataka High Court in Tata Elxsi Ltd. (349 ITR 98), which held that any expenditure excluded from the export turnover must also be excluded from the total turnover.

4. Computation of Deduction u/s 10A after Setting Off Brought Forward Depreciation Losses:
The AO had set off the brought forward depreciation while computing the deduction u/s 10A. The assessee argued that this issue was covered by the decision of the Hon'ble Karnataka High Court in Yokogawa India Ltd. (341 ITR 385). The Tribunal noted that the AO proceeded with the set-off despite the Revenue challenging the High Court's decision before the Supreme Court.

The Tribunal referred to its decision in Safran Aerospace India Ltd., where it held that brought forward losses and unabsorbed depreciation cannot be set off for computing the deduction u/s 10A, following the principle that where two views are possible, the one favoring the assessee should be adopted.

Conclusion:
The Tribunal directed the AO/TPO to exclude Celestial Biolabs Ltd. from the final set of comparables and to verify the assessee's claim that the arithmetic mean of the comparables would fall within the acceptable range after this exclusion, thus deleting the TP adjustment. The issue of setting off brought forward depreciation losses was remitted to the AO for fresh consideration in line with the Tribunal's decision in S.R.A. Systems Ltd. The appeal was partly allowed for statistical purposes.

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