2015 (1) TMI 1360 - AT - Income Tax

Transfer pricing adjustment - selection of comparables - Held that - Assessee being a software development company, thus companies functionally dissimilar with that of assessee need to be deselected from final list. Deduction u/s 10A computation - Held that - Vis- -vis the expenditure of foreign travel we are of the opinion that the definition of export turnover given in clause-iv of Explanation to Section 10A of the Act does not give room to the interpretation sought by the assessee. Assessee has no case that such expenditure was not incurred in foreign exchange for providing technical services outside India. However its claim that foreign travel expenditure as well as telecommunication expenses once excluded from the export turnover have also to be excluded from the total turnover while computing the deduction u/s 10A of the IT Act is acceptable in view of the decision of the Honble jurisdictional High Court in the case of CIT Vs M/s Tata Elxsi Ltd. (2011 (8) TMI 782 - KARNATAKA HIGH COURT). We therefore direct the AO to exclude these amounts from the total turnover while computing the eligible deduction u/s 10A of the Act. Claim of expenditure relating to lease rental income - suh rental income was considered as part of income from other sources - Held that - We find from the records that assessee had made such a claim before the DRP in its submissions. If the assessee had incurred expenditure for earning lease rental income which was considered under the head Income from other sources then the expenditure incurred by it for earning such income will have to be allowed under section 57(iii) of the Act. However the claim of the assessee needs to be examined by the AO. We are of the opinion that the issue has to be considered by the AO and appropriate relief to be given to the assessee if it is eligible according to law. Ground is allowed for statistical purposes.

Summary

Issues Involved:

1. Transfer Pricing (TP) issues, including the selection of comparables for determining the Arms Length Price (ALP) of international transactions.
2. Corporate tax issues, specifically the exclusion of foreign travel and telecommunication expenditures from export turnover and total turnover while computing the deduction under Section 10A of the Income Tax Act.
3. Deduction of expenditure related to lease rental income under Section 57(iii) of the Income Tax Act.

Detailed Analysis:

1. Transfer Pricing (TP) Issues:

The primary grievance of the assessee was the selection of comparables for testing the ALP of international transactions. The assessee, a software development company, had filed its return declaring income after claiming deductions under Section 10A of the Act. The Transfer Pricing Officer (TPO) reworked the segmental results, leading to a TP adjustment confined to the software development segment. The TPO selected 26 comparables, but the assessee disputed many of these selections.

The Tribunal referred to a similar case, NXP Semiconductors India Pvt. Ltd., where 26 comparables were considered, and 14 were excluded for functional dissimilarities. The Tribunal directed the exclusion of the following companies from the list of comparables:

- Accel Transmatic Ltd. (Seg.)
- Avani Cimcon Tech. Ltd.
- Celestial Labs Ltd.
- E-Zest Solutions Ltd.
- Helios & Matheson Information Tech. Ltd.
- Infosys Technologies Ltd.
- Ishir Infotech Ltd.
- KALS Information Systems Ltd. (Seg.)
- Lucid Software Ltd.
- Persistent Systems Ltd.
- Quintegra Solutions Ltd.
- Tata Elxsi Ltd.
- Thirdware Solutions Ltd.
- Wipro Ltd.

The Tribunal also directed the TPO to rework the results of M/s Megasoft Ltd. based on segmental data and to re-compute the ALP of international transactions with the revised list of comparables.

2. Corporate Tax Issues:

Foreign Travel and Telecommunication Expenditures:

The assessee contested the exclusion of foreign travel expenditure from export turnover while computing the deduction under Section 10A. The Tribunal upheld the exclusion of foreign travel expenditure from export turnover but directed that such expenditure, along with telecommunication expenses, should also be excluded from total turnover, in line with the decision of the jurisdictional High Court in CIT Vs M/s Tata Elxsi Ltd. This adjustment ensures a fair computation of the deduction under Section 10A.

3. Deduction of Expenditure Related to Lease Rental Income:

The assessee claimed that expenditure related to earning lease rental income, if considered under the head "Income from other sources," should be allowed as a deduction under Section 57(iii) of the Act. The Tribunal directed the Assessing Officer (AO) to examine this claim and provide appropriate relief if the expenditure was incurred for earning the lease rental income.

Conclusion:

The Tribunal's order resulted in a partial allowance of the assessee's appeal, directing significant adjustments in the selection of comparables for TP purposes and the computation of deductions under Section 10A. The AO was also instructed to examine the claim for deduction of expenditure related to lease rental income. The Stay Petition filed by the assessee was dismissed as infructuous.