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2014 (11) TMI 1159 - AT - Income TaxTPA - comparable selection -Held that - Assessee provides services in the fields of Software Technology Services, Outsourcing Services and Customized software development services to its AEs, thus companies functionally dissimilar with that of assessee need not to be selected to final comparability list. Reducing the loss of loss making unit from profit making units for the purposes of section 10A - Held that - As relying on case of Unilever Ltd. vs DCIT 2010 (4) TMI 206 - BOMBAY HIGH COURT wherein held the loss of one unit under section 10A of the Act shall be adjusted against the income liable for deduction under the same but in relation to the income from other unit, we direct the AO to recompute the exemption under section 10A Exclusion of telephone expenses from the computation of exemption under section 10A - Held that - We set aside the orders of the revenue authorities and direct the AO to delete the disallowance and compute the exemption as per law and keeping in view the decision of the Hon ble Bombay High Court in the case of the assessee. Treatment of grant received by the assessee from government - revenue or capital expenditure - Held that - Respectfully following the decision of Hon ble Supreme Court in Ponni Sugars (2008 (9) TMI 14 - SUPREME COURT ) we reverse the orders of the revenue authorities and direct the AO to treat the grant as capital in nature and delete the disallowance.
Issues Involved:
1. Transfer Pricing (TP) adjustments. 2. Working capital adjustment. 3. Foreign exchange fluctuation treatment. 4. Section 10A deduction computation. 5. Treatment of government grants. 6. Granting of foreign tax credit and tax deducted at source (TDS) credit. Detailed Analysis: 1. Transfer Pricing (TP) Adjustments: The assessee, a company substantially owned by Capgemini US LLC, filed an appeal against the order of the Dispute Resolution Panel (DRP) regarding TP adjustments. The primary contention was the selection of comparables and the methodology used. The assessee argued that the comparables selected by the Assessing Officer (AO) were not appropriate due to various filters such as turnover, revenue from software services, and related party transactions. The AO had rejected the comparables provided by the assessee and selected new ones, leading to a higher Profit Level Indicator (PLI) of 27.88% compared to the assessee's 14.13%. The ITAT directed the AO to compute the mean PLI of the comparables cited by the assessee, adhering to the principle of selecting comparables with a minimum turnover of Rs. 100 crores. 2. Working Capital Adjustment: The assessee requested a working capital adjustment, which was initially rejected by the AO and DRP. The ITAT referred to its previous order in the assessee's own case for the assessment year 2007-08, where it allowed the working capital adjustment. The ITAT restored the issue to the AO/TPO to make the working capital adjustment as per the earlier assessment year. 3. Foreign Exchange Fluctuation Treatment: The DRP had treated foreign exchange fluctuations as non-operating income/expenditure. However, the ITAT referred to various cases, including Rushab Diamonds vs ACIT, where it was held that foreign exchange gains or losses related to trade receivables/payables should be treated as part of the operating profit. The ITAT directed the AO to include foreign exchange fluctuations in the operating margins of comparables. 4. Section 10A Deduction Computation: The assessee contested the reduction of losses from loss-making units from the profits of profit-making units for Section 10A deduction purposes. The ITAT referred to the Bombay High Court's decision in the assessee's own case, which held that losses should not be adjusted against the income eligible for Section 10A deduction. The ITAT directed the AO to recompute the exemption under Section 10A accordingly. The ITAT also addressed the exclusion of telecommunication and foreign exchange expenses from the computation of export turnover for Section 10A purposes. The ITAT, following the Bombay High Court's decision, directed the AO to delete these disallowances and compute the exemption as per law. 5. Treatment of Government Grants: The revenue authorities had treated a grant received by the assessee from the government as revenue in nature. The ITAT, referring to the Supreme Court's decision in CIT vs Ponni Sugars & Chemicals Ltd, held that such grants should be treated as capital in nature. The ITAT directed the AO to treat the grant as capital and delete the disallowance. 6. Granting of Foreign Tax Credit and TDS Credit: The assessee raised additional grounds regarding the non-granting of foreign tax credit and TDS credit. The ITAT noted that the assessee had filed a rectification application under Section 154, which was still pending. The ITAT directed the AO to dispose of the rectification application expeditiously. Conclusion: The ITAT partly allowed the appeal, directing the AO to: - Recompute the mean PLI using the comparables cited by the assessee. - Allow the working capital adjustment as per the earlier assessment year. - Include foreign exchange fluctuations in the operating margins. - Recompute the Section 10A exemption without adjusting losses and excluding telecommunication and foreign exchange expenses from export turnover. - Treat the government grant as capital in nature. - Dispose of the rectification application for foreign tax credit and TDS credit.
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