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2015 (5) TMI 1129 - AT - Income TaxTPA - selection criteria for comparable - Held that - ITES rendered by the Assessee include customer services, stores help desk, Financial services, one stop processes, pension service, property services and online advertising services. IT services include software development, quality deployment, testing and support services, thus companies functionally dissimilar with that of assessee need to be deselected from final list of comparable. Computing deduction u/s.10A - exclusion of telecommunication charges and insurance expenses of and expenses incurred in foreign current from the export turnover - Held that - Taking into consideration the decision rendered by the Hon ble High Court of Karnataka in the case of CIT v. Tata Elxsi Ltd 2011 (8) TMI 782 - KARNATAKA HIGH COURT we are of the view that it would be just and appropriate to direct the Assessing Officer to exclude telecommunication charges and insurance charges incurred be excluded both from export turnover and total turnover, as has been prayed for by the assessee in the alternative.
Issues Involved:
1. Transfer Pricing Adjustment for Software Development Services 2. Transfer Pricing Adjustment for IT Enabled Services 3. Reimbursement of Expenses and Mark-up 4. Computation of Deduction under Section 10A of the Income Tax Act Detailed Analysis: 1. Transfer Pricing Adjustment for Software Development Services The primary issue was the addition made consequent to the determination of the Arm's Length Price (ALP) for international transactions carried out by the assessee with its Associated Enterprise (AE) in respect of software development services. The Transfer Pricing Officer (TPO) selected 22 comparable companies and calculated an arithmetic mean Profit Level Indicator (PLI) of 20.48%, which was adjusted to 18.61% after a working capital adjustment of 1.87%. This resulted in an ALP of Rs. 74,76,43,878, leading to a shortfall of Rs. 4,49,77,967, which was treated as a transfer pricing adjustment. The assessee objected to the inclusion of certain companies as comparables, arguing that companies with turnovers exceeding Rs. 200 crores should not be considered comparable to the assessee with a turnover of less than Rs. 75 crores. The Tribunal agreed with the assessee, excluding companies such as Flextronics Software Systems Ltd., iGate Global Solutions Ltd., Mindtree Ltd., Persistent Systems Ltd., Sasken Communication Technologies Ltd., and Infosys Technologies Ltd. from the list of comparables. 2. Transfer Pricing Adjustment for IT Enabled Services For IT Enabled Services (ITES), the TPO selected 13 comparable companies and calculated an arithmetic mean PLI of 24.00%, which was adjusted to 21.94% after a working capital adjustment of 2.06%. This resulted in an ALP of Rs. 37,03,51,698, leading to a shortfall of Rs. 3,18,58,464, which was treated as a transfer pricing adjustment. The Tribunal considered the comparability of certain companies chosen by the TPO, such as Maple eSolutions Ltd., Datamatics Financial Services Ltd., Vishal Information Technologies Ltd., Asit C. Mehta Financial Services Ltd., and Goldstone Infratech Ltd., and found that these companies were not comparable based on functional differences and other criteria. 3. Reimbursement of Expenses and Mark-up The assessee received Rs. 2,32,47,077 as reimbursement of expenses from its AE, which the TPO added to the operating revenues and costs for determining the ALP, assuming that no independent party would render such services without a mark-up. The Tribunal, however, held that the reimbursement of expenses, which included expat tax and interest on delayed payment of TDS, should not be marked up as they were purely administrative in nature and did not involve any service element. The Tribunal directed the TPO to exclude these reimbursements from the revenues and costs for comparability analysis under the Transactional Net Margin Method (TNMM). 4. Computation of Deduction under Section 10A of the Income Tax Act The assessee contended that telecommunication charges and insurance expenses should not be excluded from the export turnover while computing the deduction under Section 10A. Alternatively, the assessee argued that if these expenses were excluded from the export turnover, they should also be excluded from the total turnover. The Tribunal, relying on the decision of the Karnataka High Court in CIT v. Tata Elxsi Ltd., directed the Assessing Officer to exclude these expenses from both the export turnover and the total turnover. Conclusion The Tribunal partially allowed the appeal, directing the exclusion of certain companies from the list of comparables for both software development services and IT enabled services, and held that reimbursements of expenses should not be marked up. Additionally, the Tribunal directed the exclusion of telecommunication and insurance expenses from both export turnover and total turnover for the purpose of computing the deduction under Section 10A.
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