2014 (7) TMI 1238 - HC - Income Tax

Deduction u/s 10A computation - Held that - Communication expenses should be excluded from both export turnover as well as total turnover for the purpose of computing deduction under Section 10A. TPA - comparable companies selection - Held that - On the question of comparable cases, the learned Tribunal in paragraph 15 of the judgment and order has held that the Coordinate Benches have already decided that these companies are not to be selected for comparable cases for various reasons. Similarly, on the question of software segmentation, the learned Tribunal in paragraph 17 has followed various judgments of the Coordinate Benches. No substantial question of law.

Issues:
1. Rejection of comparable companies based on large scale of operations and profit margins.
2. Rejection of comparable companies based on functional differences in the Software/ITES Sector.
3. Rejection of comparable companies due to supernormal profits and profit level indicators.
4. Rejection of comparable companies based on extraordinary events like merger/demerger.
5. Acceptance of taxpayer's contentions and rejection of comparables without prior objection.
6. Admission of additional grounds by the Tribunal for raising contentions on selected comparables.
7. Exclusion of communication expenses from export turnover for deduction under Section 10A of the Income-tax Act, 1961.

Analysis:
1. The appeal challenged the Tribunal's rejection of comparable companies due to large scale of operations without considering profit margins. The appellant argued that turnover does not influence profit margins. The Court noted the Tribunal's consistent decisions and upheld their reasoning, citing precedents like the Saksoft case and others. The appellant did not challenge these decisions elsewhere. The Court dismissed the appeal.

2. The Tribunal rejected comparable companies based on functional differences in the Software/ITES Sector. The Court observed that the Tribunal followed decisions of Coordinate Benches on this issue. The Court found no reason to interfere with the Tribunal's decision and dismissed the appeal.

3. Comparable companies were rejected by the Tribunal due to supernormal profits and profit level indicators. The appellant contested this decision, highlighting the arithmetic mean of comparables as the profit indicator. The Court, however, upheld the Tribunal's decision, citing past judgments and dismissing the appeal.

4. The Tribunal rejected comparable companies based on extraordinary events like merger/demerger. The appellant failed to demonstrate the impact of such events on profitability. The Court upheld the Tribunal's decision, emphasizing the lack of evidence from the appellant and dismissed the appeal.

5. The Tribunal accepted the taxpayer's contentions and rejected comparables without prior objection. The appellant raised concerns about the inclusion of comparables. However, the Court noted that the appellant did not object earlier in the process. The appeal was dismissed based on these grounds.

6. The Tribunal admitted additional grounds for raising contentions on selected comparables in the Transfer Pricing (TP) study. The appellant contested this decision. The Court found no error in the Tribunal's actions and dismissed the appeal accordingly.

7. The Tribunal excluded communication expenses from export turnover for deduction under Section 10A of the Income-tax Act, 1961. The appellant questioned this exclusion, citing the absence of a provision in the Act for reducing communication expenses from total turnover. The Court upheld the Tribunal's decision, citing precedents and dismissing the appeal.

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