2015 (11) TMI 1579 - AT - Income Tax

Eligible deduction u/s.10A - Held that - We find that CIT (A) had relied on the decision of jurisdictional High Court in the case of CIT v. Tata Elxsi Ltd (2011 (8) TMI 782 - KARNATAKA HIGH COURT ), wherein it was held unequivocally by their Lordships that items excluded from export turnover had to be excluded from the total turnover also while working out the eligible deduction. TPA - selection of comparable - Held that - Infosys Ltd could not be considered as a comparable, as it was a giant company in the area of development of software, assuming all risks leading to higher profits. Kals Information Systems Ltd company cannot be selected as a comparable as it was engaged in development of software and software products. Persistent Systems and Solutions Ltd DRP rightly directed exclusion of Persistent Systems and Solutions Ltd from the list of comparables. DRP has also given a finding that assessee was rendering contract software development services to its principal abroad and such services were provided by it through projects and assignments contracted to it by their principals abroad. Thus, according to us, DRP was justified in directing exclusion of persistent Systems and Solutions Ltd, considering the functional profile of the assessee as dissimilar from that of Persistent Systems and Solutions Ltd.

Summary

Issues:
- Appeal and cross objection against assessment under section 143(3) of the Income-tax Act, 1961.
- Exclusion of expenditure from export turnover while computing deduction under section 10A.
- Exclusion of certain companies from comparables for analyzing international transactions pricing.
- Incompatibility of companies as comparables for software development services.

Analysis:
1. Exclusion of Expenditure from Export Turnover:
The Revenue challenged the exclusion of expenditure from export turnover while computing the deduction under section 10A. The CIT (A) relied on a jurisdictional High Court decision that items excluded from export turnover must also be excluded from total turnover for determining the eligible deduction. The Tribunal upheld the CIT (A)'s decision, emphasizing the importance of following the High Court's judgment until a different view is established.

2. Exclusion of Companies from Comparables:
The Revenue contested the exclusion of certain companies, including Infosys Ltd, from the list of comparables for analyzing pricing in international transactions. The Tribunal noted that Infosys Ltd's brand value and revenue composition warranted its exclusion as a comparable. The Tribunal also supported the exclusion of ICRA Techno Analytics Ltd due to lack of segmental information and functional dissimilarities. Similarly, Kals Information Systems Ltd and Persistent Systems and Solutions Ltd were excluded based on functional analysis and revenue sources, aligning with the Tribunal's consistent approach in similar cases.

3. Incompatibility of Companies for Software Development Services:
The disagreement arose regarding the compatibility of certain companies as comparables for software development services. The Tribunal upheld the exclusion of companies like Kals Information Systems Ltd and Persistent Systems and Solutions Ltd, emphasizing the functional dissimilarities and revenue sources. The decision was supported by the companies' annual reports and functional profiles, justifying their exclusion from the list of comparables.

In conclusion, the Tribunal dismissed the Revenue's appeal and upheld the exclusions directed by the Dispute Resolution Panel (DRP) for Infosys Ltd, ICRA Techno Analytics Ltd, Kals Information Systems Ltd, and Persistent Systems and Solutions Ltd from the comparables list. The Tribunal found no merit in the Revenue's challenges and affirmed the DRP's directions, ensuring a fair analysis of international transactions in software development services.