2016 (3) TMI 1210 - AT - Income Tax

TPA - comparables selected by the TPO for determination of Arm s Length Price - Held that - Referring to software development services undertaken by assessee companies dissimilar with that of assessee need to be deselected from final list of comparables. Benefit of tolerance range of /- 5% as per the proviso to Section 92C(2) of the Act. If the difference of the price of the international transactions and average price of the comparables is within the tolerance range then the benefit of proviso to Section 92C(2) of the Act is available to the assessee. Accordingly, we direct the A.O./TPO that while computing the ALP after excluding certain comparables as directed by us, the benefit of the proviso to Section 92C(2) of the Act has to be considered. Exclusion of expenditure incurred by the assessee in foreign currency from export turnover - Held that - Following the case of CIT v M/s Tata Elxsi Ltd. & Others 2011 (8) TMI 782 - KARNATAKA HIGH COURT we direct the Assessing Officer to exclude the expenditure in the foreign currency from total turnover as well. Disallowance of computer software expenses by treating the same as capital in nature - Held that - hWen the expenditure in the case of the assessee is towards application software then by following the decision of the co-ordinate bench of this Tribunal in the case of Broadman Communications Technologies Pvt. Ltd. 2015 (6) TMI 1122 - ITAT BANGALORE we decide this issue in favour of the assessee.

Summary

Issues Involved:
1. Transfer Pricing
2. Adjustments under Section 10A of the Act
3. Others (Disallowance of computer software expenses)
4. Consequential Ground (Levy of interest under Section 234B and Section 234D)

Detailed Analysis:

Transfer Pricing:
1. General Grounds: Ground No. 1 was deemed general and did not require specific adjudication. Ground Nos. 2, 5, 6, and 8 were dismissed as not pressed by the assessee.

2. Objections to Comparables: Ground Nos. 3 and 4 addressed the objections against the comparables selected by the TPO for determining the Arm's Length Price (ALP). The assessee, part of the Hewlett Packard Group, provided R&D services and reported an operating profit margin of 8.37%. The TPO rejected 33 out of 39 comparables selected by the assessee, citing reasons such as mergers, revenue thresholds, and functional dissimilarity. The TPO included 14 new comparables, resulting in an adjusted arithmetic mean margin of 18.49%, leading to an upward adjustment of Rs. 54,25,32,620 under Section 92CA of the Act.

3. Functional Comparability: The Tribunal examined the functional comparability of the selected companies:
- Accel Transmatics Ltd. (Seg.) and KALS Technology Ltd.: These companies were excluded based on prior Tribunal decisions, as they were found to be functionally different from the assessee.
- Flextronics Software Ltd. (Seg.): Excluded due to extraordinary events of amalgamation and lack of segmental results, as upheld by the Hyderabad Tribunal and the Hon'ble High Court of Andhra Pradesh & Telangana.
- Megasoft: Excluded due to its product development focus and different financial year, following the Tribunal's decision in Goldman Sachs Services Pvt. Ltd.
- Persistent System Ltd.: Excluded due to functional differences and acquisition events, as upheld by the Hyderabad Tribunal and the Hon'ble High Court of Andhra Pradesh & Telangana.
- Infosys Technologies Ltd.: Excluded based on functional dissimilarity and significant differences in business scale and risk profile, as confirmed by the Hon'ble Delhi High Court in Agnity India Technologies Pvt. Ltd.
- Tata Elxsi Ltd. (Seg.): Excluded based on functional dissimilarity, following the Tribunal's decision in Goldman Sachs Services Pvt. Ltd.

4. Tolerance Range: Ground No. 7 addressed the benefit of the tolerance range of +/- 5% as per the proviso to Section 92C(2) of the Act. The Tribunal directed the AO/TPO to consider this benefit while computing the ALP after excluding certain comparables.

Adjustments under Section 10A of the Act:
1. Exclusion of Expenditure: Ground Nos. 9 and 10 involved the exclusion of expenditure incurred in foreign currency from export turnover. The Tribunal followed the Hon'ble jurisdictional High Court's judgment in CIT v M/s Tata Elxsi Ltd. & Others, which mandated that such expenses should also be excluded from total turnover.

Others (Disallowance of Computer Software Expenses):
1. Nature of Expenditure: Ground No. 11 addressed the disallowance of computer software expenses treated as capital in nature. The Tribunal, following the decision in Broadcom Communications Technologies Pvt. Ltd. Vs. DCIT, held that expenditure on application software should be treated as revenue expenditure.

Consequential Ground:
1. Levy of Interest: Ground No. 12 regarding the levy of interest under Sections 234B and 234D was deemed consequential and mandatory.

Conclusion:
The appeal was partly allowed, with specific directions to exclude certain comparables and adjust the ALP accordingly, consider the benefit of the tolerance range, exclude foreign currency expenditure from total turnover, and treat application software expenses as revenue expenditure.