2017 (1) TMI 1388 - AT - Income Tax

Transfer Pricing adjustments - selection of comparables - Held that - The assessee company is software development and technical support service provider for Symantec Group Companies and operates as contract development centre for providing software services thus companies dissimilar with that of assessee need to be deselected from final list of comparable. Deduction u/s. 10AA - Held that - We direct the Assessing Officer to reduce the expenditure incurred in foreign exchange are to be excluded from both export turnover and total turnover for the purpose of deduction u/s. 10A and accordingly direct the Assessing Officer. See Sak Soft Limited 2009 (3) TMI 243 - ITAT MADRAS-D

Issues Involved:
1. Transfer Pricing Adjustments
2. Deduction under Section 10AA of the Income Tax Act

Issue-wise Detailed Analysis:

1. Transfer Pricing Adjustments:

The assessee challenged the selection of comparables by the Transfer Pricing Officer (TPO) and sought the exclusion of four specific comparables from the list used to determine the Arms Length Price (ALP). The comparables in question were:

(i) Acropetal Technologies Ltd (seg):
The assessee argued that Acropetal Technologies Ltd. was functionally non-comparable as it engaged in software development solutions and other non-comparable services without segmental information. The Tribunal agreed with the assessee, noting that Acropetal Technologies Ltd. had different business models and did not pass the 75% export turnover filter. The Tribunal directed the TPO to exclude Acropetal Technologies Ltd. from the list of comparables.

(ii) E-Zest Solutions Limited:
The assessee contended that E-Zest Solutions Limited was involved in high-end knowledge process outsourcing (KPO) services and product engineering, making it functionally non-comparable. The Tribunal found that E-Zest Solutions Limited was engaged in product engineering services and high-end KPO services, which were not comparable to the assessee's software development services. The Tribunal directed the TPO to exclude E-Zest Solutions Limited from the list of comparables.

(iii) Persistent Systems Limited:
The assessee argued that Persistent Systems Limited was an outsourced product development company with income from licensing products, making it non-comparable. The Tribunal noted that Persistent Systems Limited was engaged in product development and had income from license fees, with segmental information available for different business segments. The Tribunal directed the TPO to exclude Persistent Systems Limited from the list of comparables.

(iv) Sasken Communication Technologies Limited:
The assessee contended that Sasken Communication Technologies Limited was involved in multimedia products and wireless broadband services, making it functionally non-comparable. The Tribunal found that Sasken Communication Technologies Limited was engaged in research and development related to multimedia and wireless broadband, with significant expenditure on R&D and ownership of intellectual property rights (IPR). The Tribunal directed the TPO to exclude Sasken Communication Technologies Limited from the list of comparables.

2. Deduction under Section 10AA of the Income Tax Act:

The assessee claimed a deduction under Section 10AA of ?18,01,20,312/-. The Assessing Officer (AO) excluded expenditure incurred in foreign currency and insurance from the export turnover without reducing it from the total turnover, leading to an excess claim addition of ?1,10,51,626/-. The Dispute Resolution Panel (DRP) confirmed the AO's action. The assessee argued that the special bench decision in the case of M/s. Sak Soft Limited should be followed, which mandates that expenses excluded from export turnover should also be excluded from total turnover. The Tribunal found that the issue was covered by the decision in the assessee's own case for the earlier assessment year 2010-11, where it was held that expenses excluded from export turnover should also be excluded from total turnover. The Tribunal directed the AO to reduce the expenditure incurred in foreign exchange from both export turnover and total turnover for the purpose of deduction under Section 10AA.

Conclusion:

The Tribunal allowed the appeal of the assessee for statistical purposes, directing the exclusion of the four comparables from the list used for Transfer Pricing Adjustments and the reduction of foreign exchange expenditure from both export turnover and total turnover for the purpose of deduction under Section 10AA.

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