2017 (2) TMI 1211 - AT - Income Tax

TPA - Comparability Analysis adopted by the TPO for determination of arm s length price - Held that - Assessee is engaged in the business of providing software development services for which it is remunerated on a cost plus 15% margin, thus companies functionally dissimilar with that of assessee need to be excluded from final list of comparable. Deduction u/s. 10A - Held that - As fairly contended that this issue is squarely covered by the case of CIT v. Tata Elxsi Ltd.(2011 (8) TMI 782 - KARNATAKA HIGH COURT) in which it has been held that once a particular item is to be excluded from the export turnover, it should also be excluded from the total turnover. We accordingly following the same, set aside the order of the CIT(Appeals) and restore the matter to the file of Assessing Officer with a direction to recompute the deduction u/s. 10A following the judgment supra.

Issues Involved:
1. Exclusion of certain companies as comparables.
2. Application of diminishing revenue filter.
3. Application of different year ending filter.
4. Application of employee cost filter.
5. Computation of deduction under Section 10A.
6. Inclusion of certain companies as comparables.
7. Allowance of appropriate adjustments to comparable companies.
8. Additional grounds regarding turnover filter and related party transaction filter.

Detailed Analysis:

1. Exclusion of Certain Companies as Comparables:
The CIT(A) excluded several companies such as M/s. Celestial Biolabs Ltd, M/s. Flextronics Ltd., iGate Global Solutions Ltd., Infosys Technologies Ltd., Mindtree Ltd., Persistent Systems Ltd., Sasken Communication Technologies Ltd., Tata Elxsi Ltd., and Wipro Ltd. The Tribunal upheld this exclusion based on functional dissimilarity, as established in the case of M/s. Infineon Technologies India Pvt. Ltd. The Tribunal found that these companies were functionally different from the assessee, who provided software development services to its AE.

2. Application of Diminishing Revenue Filter:
The CIT(A) rejected the diminishing revenue filter applied by the TPO. The Tribunal found no specific discussion on this issue in the provided text, so it can be inferred that the Tribunal did not find merit in the application of this filter.

3. Application of Different Year Ending Filter:
The CIT(A) rejected the different year ending filter applied by the TPO. The Tribunal did not provide specific details on this issue, indicating that it upheld the CIT(A)'s rejection of this filter.

4. Application of Employee Cost Filter:
The CIT(A) rejected the employee cost filter applied by the TPO. The Tribunal did not provide specific details on this issue, indicating that it upheld the CIT(A)'s rejection of this filter.

5. Computation of Deduction Under Section 10A:
The CIT(A) directed the AO to recompute the deduction allowable under Section 10A after reducing communication expenses and expenses incurred in foreign currency from the total turnover. The Tribunal upheld this direction, relying on the jurisdictional High Court's decision in CIT v. Tata Elxsi Ltd., which mandates that expenses excluded from export turnover should also be excluded from total turnover.

6. Inclusion of Certain Companies as Comparables:
The assessee contested the inclusion of M/s. E-Zest Solutions and M/s. LGS Global Ltd. as comparables, citing functional differences. The Tribunal found merit in these objections based on established precedents and functional dissimilarity. The Tribunal excluded these companies from the list of comparables.

7. Allowance of Appropriate Adjustments to Comparable Companies:
The CIT(A) upheld the AO/TPO's decision not to allow appropriate adjustments under Rule 10B for differences in marketing expenditure, R&D expenditure, and risk profile. The Tribunal did not provide specific details on this issue, indicating that it upheld the CIT(A)'s decision.

8. Additional Grounds Regarding Turnover Filter and Related Party Transaction Filter:
The assessee argued that certain companies should be excluded based on the turnover filter (10 times the assessee's turnover) and related party transaction filter (greater than 25% of sales). The Tribunal upheld the application of the turnover filter, excluding companies with turnovers significantly higher than the assessee's. However, it found no justification for excluding Softsol India Ltd. based on the related party transaction filter, as its RPT was 18.3%, which is within the acceptable range.

Conclusion:
The Tribunal's decision involved a detailed examination of functional comparability, turnover filters, and adherence to legal precedents. The Tribunal upheld the CIT(A)'s exclusion of several companies based on functional dissimilarity and turnover filters, directed the AO to recompute the Section 10A deduction following the jurisdictional High Court's decision, and found no merit in the application of diminishing revenue, different year ending, and employee cost filters. The Tribunal's approach emphasized consistency with established legal principles and functional analysis.

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