2016 (12) TMI 1583 - AT - Income Tax

TPA - selection of comparable - Held that - Assessee-company is engaged in the business of providing Information Technology IT and IT enabled services ITES thus companies dissimilar with that of assessee need to be deselected from final list of comparable. Deduction u/s 10A computation - exclusion of lease line charges from the Total Turnover - Held that - This issue is squarely covered by the decision of the Hon ble Bombay High Court in the case of CIT Vs. Gem Plus Jewellery India Ltd. 2010 (6) TMI 65 - BOMBAY HIGH COURT wherein it has been held that communication charges etc. attributable to the delivery of the computer software outside India which are to be reduced from the export turnover should be reduced from the total turnover as well while computing the deduction u/s. 10A. Thus we affirm the order of Ld.CIT(A) to reduce the same from the export turnover as well as total turnover while computing the deduction u/s. 10A of the I.T. Act.

Summary

Issues Involved:
1. Computation of Margins
2. Selection of Comparable Companies
3. Working Capital Adjustments
4. Exclusion of Lease Line Charges from Total Turnover

Issue-wise Detailed Analysis:

1. Computation of Margins:
The Assessee contested the computation of operating margin/operating cost (PLI) of five comparable companies by the TPO, which was upheld by the CIT(A). The Assessee argued that the TPO made errors in the margin computations of Accentia Technologies Limited, Flextronics Software Systems Limited, Iservices India Private Limited, and ICRA Techno Analytics Limited. For instance, the TPO did not reduce the proportional depreciation from the segmental revenue for Accentia, used the financial statement of the wrong fiscal year for Flextronics, and excluded foreign exchange fluctuations twice for Iservices. The Tribunal restored this issue to the AO/TPO for verification and correction, if necessary.

2. Selection of Comparable Companies:
The Assessee argued against the selection of high profit margin companies and high turnover companies as comparables by the TPO, which was upheld by the CIT(A). The Assessee contended that Mold Tek Technologies Limited, Vishal Information Technologies Limited, eClerx Services Limited, and Maple Esolutions Limited were functionally different or had unreliable financials. The Tribunal accepted the Assessee’s objections, citing various judicial precedents, and directed the TPO to exclude these companies from the list of comparables.

3. Working Capital Adjustments:
The Assessee claimed a working capital adjustment of 2.27%, which was rejected by the TPO and upheld by the CIT(A). The Assessee argued that differences in debtors and creditors materially affected the net profit margin. The Tribunal opined that the TPO should have allowed the working capital adjustment, as done in similar cases like Capital IQ Information Systems (India) Pvt. Ltd. and United Health Group Information Services Pvt. Ltd. The Tribunal directed the TPO to examine the issue and make necessary adjustments if warranted.

4. Exclusion of Lease Line Charges from Total Turnover:
The Revenue contested the CIT(A)’s direction to exclude lease line charges from the total turnover while computing the deduction under section 10A. The Tribunal upheld the CIT(A)’s decision, citing the Hon’ble Bombay High Court’s ruling in CIT Vs. Gem Plus Jewellery India Ltd. and the ITAT, Chennai’s Special Bench decision in ITO Vs. Sak Soft Ltd., which mandated that communication charges excluded from export turnover should also be excluded from total turnover.

Conclusion:
The Assessee’s appeal was allowed for statistical purposes, and the Revenue’s appeal was dismissed. The Tribunal directed the AO/TPO to re-examine the computation of margins and working capital adjustments and to exclude certain companies from the comparables list. The exclusion of lease line charges from the total turnover was affirmed.