2016 (8) TMI 1163 - HC - Income Tax

TPA - determination of the Arm s Length Price (ALP) - selection of comparables criteria - Held that - Qualification that the appropriate threshold limit ought to be 75% as the assessee s export earnings were more than 90% (infact 100%) of the total income need to be adhered for selction of comparable. Exclusion of of communication charges incurred in foreign currency attributable to delivery of computer software outside India from total turnover in order to compute deduction under section 10AA - Held that - As in the case of section 10A, so also in the case of section 10AA of the Act, the expression total turnover has not been defined. The export turnover is a part of the total turnover. There is nothing in the section or any other provision of the Act that warrants the exclusion of export turnover from the numerator but not from the denominator i.e. from the total turnover. The plain language certainly militates against such a construction.

Summary

Issues Involved:
1. Determination of the ‘Arm’s Length Price’ (ALP) of certain international transactions.
2. Exclusion of communication charges incurred in foreign currency from total turnover for computing deduction under section 10AA of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Determination of the ‘Arm’s Length Price’ (ALP) of Certain International Transactions:

Comparable Selection:
- The assessee, a subsidiary of Mercer Mauritius Limited, engaged in IT and IT-enabled services, reported three types of international transactions. The Transfer Pricing Officer (TPO) accepted two types but proposed an adjustment of ?6.16 crores for the third type.
- The filters adopted by the assessee and the TPO included criteria such as availability of financial information, persistent negative net worth, significant foreign exchange earnings, and substantial transactions with related parties.
- Dispute arose regarding the comparability of certain companies. The Tribunal allowed the assessee’s appeal on this issue.

Specific Comparables:

Allsec Technologies Limited:
- The TPO rejected this comparable due to export revenues being slightly below the 75% threshold and diminishing sales. The Tribunal disagreed, noting the deviation of 0.55% was negligible and acceptable, emphasizing that transfer pricing is not an exact science.

Cosmic Global Limited:
- Initially included by the assessee but later excluded due to outsourcing charges constituting 57.31% of total operating costs. The Tribunal held that financial results of enterprises involved in dissimilar activities cannot be compared, thus excluding Cosmic Global from the list.

Genesys International Corporation Ltd.:
- Excluded by the Tribunal as it provides geospatial services, which are entirely different from the assessee's services related to human resources.

R. Systems International Limited:
- Excluded by the TPO due to a different financial year. The Tribunal included it, stating that if financial data for the corresponding period is available, it can be used for comparison. The Rule 10(B)(4) supports this view.

Coral Hub Ltd.:
- The Tribunal excluded this comparable as it outsources a significant portion of its work (90% of total operating costs), making it incomparable to the assessee, which conducts its activities in-house.

2. Exclusion of Communication Charges Incurred in Foreign Currency from Total Turnover:

Section 10AA Deduction:
- The issue was about reducing the amount of deductions under section 10AA of the Act. The Tribunal accepted the assessee’s contention that telecommunication charges should be excluded from both export turnover and total turnover, following the judgment of the Delhi High Court in Commissioner of Income Tax v. Genpact India and the Bombay High Court in CIT v. Gem Plus Jewellery India Ltd.

Legal Interpretation:
- The Bombay High Court held that "export turnover" must have the same meaning in both the numerator and denominator of the formula used for deduction computation. Excluding telecommunication charges from export turnover but not from total turnover would lead to an absurdity.

Conclusion:
- The High Court agreed with the Tribunal’s decision to exclude telecommunication charges from total turnover, ensuring consistency in the definition of "export turnover" and "total turnover" for deduction purposes under section 10AA.

Final Judgment:
- Both questions were answered in favor of the assessee. The appeal was dismissed, affirming the Tribunal’s decisions on the comparables and the exclusion of communication charges from total turnover.