2016 (7) TMI 1331 - AT - Income Tax

TPA - comparability - selection criteria - Held that - Companies functionally dissimilar with that of assessee which is rendering of software services need to be deselected from final list of comparability.

Summary

Issues Involved:
1. Transfer Pricing Adjustment
2. Computation of Deduction under Section 10A of the IT Act
3. Set-off of Losses Incurred in Pune and Noida Units
4. Levy of Interest under Sections 234B and 234D of the IT Act

Detailed Analysis:

1. Transfer Pricing Adjustment:
- Ground 2.8: The assessee argued that the TPO erred in accepting companies like Infosys Limited and Wipro Limited as comparable companies despite their significant brand-driven sales, which is functionally different from the assessee's business. The Tribunal followed the ruling in the case of M/s Hewlett-Packard (India) Globalsoft Pvt. Ltd., and excluded Infosys Limited and Wipro Limited from the list of comparables due to their ownership of significant intangibles and huge revenues from software products.

- Ground 2.10: The Tribunal agreed with the assessee's contention that companies engaged in software product development (e.g., Megasoft Limited, Flextronics Software Systems Limited, KALS Information Systems Limited, Avani Cimcon Technologies Limited, Lucid Software Limited, Ishir Infotech Limited, E-Zest Solutions Limited, Persistent Systems Limited, and R Systems International Limited) are functionally dissimilar to the assessee's software services business. These companies were excluded from the list of comparables.

- Ground 2.11: The Tribunal found that Celestial Labs Limited, engaged in contract research and bio-informatics, is functionally dissimilar to the assessee and should be excluded from the list of comparables.

2. Computation of Deduction under Section 10A of the IT Act:
- Ground 10: The assessee contested the reduction of lease line charges and expenses incurred in foreign currency from the export turnover without corresponding reduction from the total turnover. The Tribunal ruled in favor of the assessee, citing the judgment of the Hon'ble Karnataka High Court in the case of M/s Tata Elxsi Ltd., which mandates that if expenses are reduced from export turnover, they should also be reduced from total turnover for computing the deduction under Section 10A.

3. Set-off of Losses Incurred in Pune and Noida Units:
- The assessee argued that the losses incurred by its Pune and Noida units should be set off against the profits of the Bangalore unit before computing the deduction under Section 10A. The Tribunal found that the AO had correctly given the deduction on the profits of the Bangalore unit before the set-off of losses from other units. However, the AO erred in not allowing the set-off of these losses against the taxable income after the transfer pricing adjustment.

4. Levy of Interest under Sections 234B and 234D of the IT Act:
- The assessee contended that the levy of interest under Sections 234B and 234D is consequential. The Tribunal did not provide a specific ruling on this issue, indicating that it is a matter of consequential adjustment.

Conclusion:
The Tribunal directed the AO/TPO to exclude the specified companies from the list of comparables and to re-determine the PLI. If the PLI falls within the +/- 5% range of the assessee's profit, no TP adjustment should be made; otherwise, the adjustment should be made as per law. The appeal was allowed for statistical purposes.