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2015 (1) TMI 1363 - AT - Income TaxTPA - comparable selection technique - Held that - The Assessee focuses on delivering semiconductor solutions for communications to the home enterprise and mobile markets. Their product portfolio includes Bluetooth short-range wireless products for PC Mobile phones PDAs Keyboards mice and automotive electronics thus companies functinally dissimilar with that of assessee need to be deselected from final list of comparability. Computation of deduction u/s.10A - telecommunication charges consultancy charges repairs and maintenance and certain other expenses incurred by the Assessee (including expenses incurred in foreign currency) are to be excluded from export turnover on the ground that these expenses (except telecommunication charges) are not incurred in rendering technical services rendered to clients outside India - Held that - It would be just and appropriate to direct the Assessing Officer to exclude telecommunication charges consultancy charges repairs and maintenance and certain other expenses incurred by the Assessee (including expenses incurred in foreign currency) both from export turnover and total turnover as has been prayed for by the assessee TDS u/s 195 - Disallowance of interest expenses invoking the provisions of Sec.40(a)(i) - non deduction of tds - DTAA between India and Singapore - Held that - As rendered in the context of taxation of interest income in the hands of the non-resident and are not in the context of point of time at which obligation to deduct tax at source lies on the person making payment to a non-resident. We agree with the submission of the learned DR that the said decisions are therefore not relevant to the facts of the present case. We therefore hold that disallowance u/s.40(a)(i)of the Act in the facts and circumstances of the case is justified. The quantum of sum to be disallowed as we have already stated is to be decided by the AO afresh in view of the discussion on the issue raised in ground no.9 in the earlier part of this order. Provisions of section 40(a)(ia) - assessee failed to deduct at source and pay tax in respect of payments made to contractors for carrying out work u/s. 194C and in respect of payments for professional services rendered u/s. 194J - Held that - The addition was made by the AO on the assumption that rate of tax for TDS on Fees for FTS is 10%. The AO grossed up tax deductible of 53, 579 at 10 times and arrived at a figure of 5, 35, 790. After deducting this sum of 5, 35, 790 from 9, 55, 062 the AO arrived at a further disallowance of 4, 22, 867. This is shown in the chart given in the earlier part of this order in the last two columns. The AO thus proceeded on a wrong assumption that amount disallowed by the assessee in the return of income u/s. 40(a)(ia) was incorrect whereas the amount disallowed by the Assessee was correct. It is this addition that is subject matter of dispute between the assessee and Revenue raised in concise ground No.10. According to the assessee it is a double addition and the figure of 4, 22, 867 has been arrived at in the manner set out in the table given in the earlier paragraph of this order. We have seen the computation of total income in the return filed by the assessee as also in the order of assessment and are of the view that the further disallowance of 4, 22, 867 u/s. 40(a)(ia) is uncalled for as the assessee has already in its computation of total income disallowed the correct figure of 9, 55, 060 to be disallowed u/s. 40(a)(ia) and a further disallowance of 4, 22, 867 is without any basis. The said addition is therefore hereby deleted. Concise ground No.10 is allowed. Disallowance under section 40(a)(ia) & 40(a)(i) - Upholding the action of providing relief u/s 10A on the profits of business in returned income instead of assessed profits (i.e. after adjustments are made to the profit on account of short and non-deduction of TDS - Held that - The action of the AO was not justified. The Tribunal held that under s. 80AB the income that is derived from the eligible business must be computed in accordance with the provisions of ss.30 to 43D as provided in s. 29. Sec.29 provides that the income chargeable to tax under the head Profits and gains of business shall be computed in accordance with the provisions contained in s.30 to 43D . The Tribunal held that unquestionably s. 40(a)(ia) is a section falling between ss. 30 to 43D and therefore effect must be given to the same in computing the profits and gains derived from the eligible business which in that case was a housing project. The Tribunal further held that while giving effect to the computation provisions contained in ss. 30 43D one should not be bogged down by the theory that the disallowed expenditure cannot be considered as profits derived from the housing project or as operational profits. The above ruling of the Tribunal in our view would squarely apply to the present case also. Similar is the ruling rendered by the Hon ble Gujarat High Court in the case of Keval Construction (2013 (7) TMI 291 - GUJARAT HIGH COURT).
Issues Involved:
1. Adjustment in the Arm's Length Price (ALP) of international transactions. 2. Exclusion of certain comparable companies. 3. Application of turnover filter. 4. Computation of deduction under Section 10A. 5. Disallowance under Section 40(a)(i) and 40(a)(ia) for non-deduction of tax at source. 6. Deduction under Section 10A on enhanced profits due to disallowance. Issue-wise Detailed Analysis: 1. Adjustment in the Arm's Length Price (ALP) of International Transactions: The Assessee, a wholly-owned subsidiary of Broadcom Netherlands BV, provided software development services to its Associated Enterprise (AE). The Transfer Pricing Officer (TPO) made an adjustment of Rs. 2,92,24,427 to the total income of the Assessee due to discrepancies in the ALP of international transactions. The TPO selected 26 comparable companies and determined an arithmetic mean PLI of 25.14%, which was adjusted to 23.18% after factoring in the working capital adjustment. This led to the computation of the ALP as Rs. 28,57,64,427, resulting in a shortfall and an adjustment of Rs. 2,62,24,427. 2. Exclusion of Certain Comparable Companies: The Assessee sought to exclude certain companies from the list of comparables chosen by the TPO, arguing that they were not functionally comparable. The Tribunal examined the functional profiles of these companies and referred to previous ITAT decisions where similar companies were held to be not comparable. The Tribunal directed the exclusion of companies such as Accel Transmatic Ltd., Avani Cimcon Technologies Ltd., Celestial Labs Ltd., KALS Information Systems Ltd., Ishir Infotech Ltd., Lucid Software Ltd., and Megasoft Ltd. from the final list of comparables. 3. Application of Turnover Filter: The Assessee contended that companies with a turnover exceeding Rs. 200 crores should be excluded from the list of comparables. The Tribunal referred to its earlier decision in the case of Trilogy E-Business Software India Pvt. Ltd. and agreed with the Assessee. Consequently, companies like Flextronics Software Systems Ltd., iGate Global Solutions Ltd., Mindtree Ltd., Persistent Systems Ltd., Sasken Communication Technologies Ltd., Tata Elxsi Ltd., Wipro Ltd., and Infosys Technologies Ltd. were excluded from the final list of comparables. 4. Computation of Deduction under Section 10A: The Assessee argued that certain expenses excluded from export turnover should also be excluded from total turnover while computing the deduction under Section 10A. The Tribunal, following the decision of the Karnataka High Court in CIT v. Tata Elxsi Ltd., directed the AO to exclude telecommunication charges, consultancy charges, repairs and maintenance, and other expenses from both export turnover and total turnover. 5. Disallowance under Section 40(a)(i) and 40(a)(ia) for Non-deduction of Tax at Source: The AO disallowed interest expenses of Rs. 28,65,514 under Section 40(a)(i) due to non-deduction of tax at source. The Tribunal directed the AO to verify the Assessee's claim that tax was deducted and paid for certain periods and, if found correct, to delete the disallowance to that extent. Additionally, the Tribunal upheld the disallowance for the remaining periods, rejecting the Assessee's argument based on the DTAA between India and Singapore. 6. Deduction under Section 10A on Enhanced Profits Due to Disallowance: The Assessee claimed that if disallowances under Section 40(a)(i) and 40(a)(ia) were sustained, the enhanced profits should be eligible for deduction under Section 10A. The Tribunal, relying on the Gujarat High Court's decision in ITO v. Keval Construction, agreed with the Assessee and directed that deduction under Section 10A should be allowed on the enhanced profits. Conclusion: The Tribunal partly allowed the Assessee's appeal, directing the exclusion of certain comparables, applying the turnover filter, and allowing deduction under Section 10A on enhanced profits due to disallowance. The Tribunal also directed the AO to verify and, if correct, delete the disallowance under Section 40(a)(i) for the periods where tax was deducted and paid.
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