2014 (6) TMI 997 - AT - Income Tax

TPA - selection of comparable - Held that - The assessee is engaged in providing software development services only to its AE in USA on cost plus basis. Assessee is registered under the Software Technology Parks of India s Scheme of Government of India as 100% export oriented unit, thus companies functionally dissimilar with that of assessee or any extraordinary event undertaken need to be deselected from final list of comparable. Allowance of risk adjustment - Held that - It is a fact that the assessee has raised the issue of risk adjustment before the TPO as well as the DRP. In our considered opinion, this issue may become academic if the assessee s contention in respect of comparables selected/rejected by TPO is accepted. Therefore, we restore this issue to the file of the AO/TPO for considering afresh if need be, after working out the margin in terms with our directions issued in respect of comparables selected/rejected by the TPO. If, after excluding/including the comparables as per our directions, hereinabove, the assessee s margin is found to be within Arm s length, then, issue of risk adjustment may not arise. This ground of the assessee is considered to be allowed for statistical purposes. Excluding communication expenses from the export turnover while computing deduction u/s 10A - Held that - This issue is squarely covered by the decision of the Hon ble Bombay High Court in case of CIT Vs. Gemplus Jewellery 2010 (6) TMI 65 - BOMBAY HIGH COURT and ITO Vs Saksoft Ltd (2009 (3) TMI 243 - ITAT MADRAS-D). Following the ratio laid down in the aforesaid judgments, we direct the AO to exclude the communication expenses from export turnover as well as total turnover while computing deduction u/s 10A of the Act.

Summary

Issues Involved:
1. Transfer pricing issues including selection/rejection of comparables and risk adjustment.
2. Exclusion of communication expenses from export turnover while computing deduction u/s 10A.
3. Levy of interest u/s 234B.
4. Initiation of proceedings u/s 271(1)(c).

Detailed Analysis:

1. Transfer Pricing Issues:

Selection/Rejection of Comparables:
- Accel Transmatic Ltd.: The assessee argued that this company is functionally different due to the sale of IP rights and failing the 75% service revenue filter. The ITAT Bangalore Bench in Huawei Technologies India Pvt. Ltd. Vs. ITO excluded this company as a comparable for a purely software development service provider. The Tribunal agreed and directed its exclusion.
- KALS Info Systems Ltd.: Similar to Accel Transmatic, this company was excluded based on its functional differences and failing the salary cost filter, as supported by the ITAT Bangalore Bench in Huawei Technologies India Pvt. Ltd. Vs. ITO.
- Megasoft Ltd.: The assessee contended that only the software development services segment should be considered. The Tribunal directed the AO/TPO to consider this segment alone if treated as comparable.
- Infosys Technologies Ltd.: The Tribunal excluded this company due to its diversified activities, brand value, and scale, making it incomparable to the assessee, a small captive service provider.
- Tata Elxsi Ltd.: The Tribunal excluded this company, following the ITAT Bangalore Bench's decision in Huawei Technologies India Pvt. Ltd. Vs. ITO, due to its specialized embedded software development activities.

Rejection of Comparables by TPO:
- VMF Softech Ltd.: The Tribunal found the TPO's rejection based on the employee cost filter incorrect and restored the issue for reconsideration.
- TVS Infotech Ltd.: The Tribunal directed reconsideration, noting the company's operating profit for FY 2004-05.
- PSI Data Systems Ltd.: The Tribunal directed reconsideration, noting the lack of evidence for product development and the company's operating profit from software services.
- Larsen & Toubro Infotech Ltd.: The Tribunal upheld the rejection due to the company's large turnover and non-captive service provider status.
- Birla Technologies Ltd.: The Tribunal directed reconsideration, noting the incorrect application of the RPT filter.
- Goldstone Technologies Ltd.: The Tribunal directed reconsideration, noting discrepancies between the TPO's reliance on statements and the company's annual report.
- Quintegra Solutions Ltd.: The Tribunal directed reconsideration, noting the incorrect assessment of the company's on-site operations.

Risk Adjustment:
- The Tribunal restored the issue to the AO/TPO for fresh consideration, noting it may become academic if the assessee's contentions on comparables are accepted.

2. Exclusion of Communication Expenses:
- The Tribunal directed the AO to exclude communication expenses from both export turnover and total turnover while computing deduction u/s 10A, following the Hon'ble Bombay High Court's decision in CIT Vs. Gemplus Jewellery and ITO Vs Saksoft Ltd.

3. Levy of Interest u/s 234B:
- The Tribunal dismissed this ground as infructuous, noting that the levy of interest is consequential in nature.

4. Initiation of Proceedings u/s 271(1)(c):
- The Tribunal dismissed this ground as premature for consideration at this stage.

Conclusion:
- The appeal is partly allowed, with directions for reconsideration on certain transfer pricing issues and the exclusion of communication expenses from export turnover.