2016 (11) TMI 1499 - AT - Income Tax

Allowability of deduction u/s 10A - Held that - AO is directed to allow 10A deductions in respect of the export business without setting of the loss from the non export business. TPA - rejecting the foreign company as the tested party - Held that - Having perused the relevant documents in order to verify as to whether the assessee has provided the necessary relevant information about the tested party and also the comparables to the tax administration to verify the same, we have verified the T.P. documentation filed by the assessee. We are satisfied that all the necessary information about the tested party and also the foreign comparables adopted by the assessee have not been provided by the assessee before the AO or the TPO to verify the same and for arriving at the ALP. Therefore, we are satisfied that the assessee has not done a proper TP study and therefore, the TPO has rightly rejected the foreign company as a tested party and the foreign comparables for arriving at the ALP Selection of comparable criteria - Held that - Assessee is into the software development and providing call centre services exclusively to its AE, thus companies functionally dissimilar with that of assessee need to be deselctded from final list.

Issues Involved:
1. Maintainability of the appeal.
2. Deduction under section 10A of the Income Tax Act.
3. Selection of the tested party for Transfer Pricing (T.P.) study.
4. Selection of comparable companies for Transfer Pricing (T.P.) study.
5. Exclusion and inclusion of specific companies in the final list of comparables.
6. Standard deduction and adjustments under section 92CA of the Act.

Detailed Analysis:

1. Maintainability of the Appeal:
The Revenue objected to the maintainability of the appeal on the grounds that Form No.36 was signed by an Authorized Signatory instead of the Managing Director/Director. The Tribunal held that this was a curable defect and could be rectified. The assessee promptly rectified the defect by filing a revised Form No.36 signed by the Director. The Tribunal referenced several cases, including *Lallooram Pyarelal vs. Income Tax Officer* and *Wipro Information Technology Ltd vs. Dy.CIT*, which supported the view that such defects are curable and do not affect the maintainability of the appeal.

2. Deduction under Section 10A:
The assessee argued that the deduction under section 10A should be allowed without setting off the loss from non-export business. The Tribunal referred to the judgment of the Hon'ble Andhra Pradesh High Court in the assessee's own case for A.Y 2005-06, which supported the assessee's claim. The Tribunal also discussed the conflicting decisions of the Karnataka High Court and the Supreme Court's stance, ultimately following the decision favorable to the assessee. The AO was directed to allow the 10A deduction without setting off the non-export business loss.

3. Selection of the Tested Party for T.P. Study:
The assessee contended that the foreign subsidiary with the least complex activities should be the tested party, while the TPO and CIT (A) rejected this on the grounds that they could not verify foreign comparables. The Tribunal noted that both OECD guidelines and the UN manual allow for a foreign company to be the tested party if relevant information is provided. However, the Tribunal found that the assessee did not provide sufficient information about the tested party and comparables, thus upholding the TPO's rejection of the foreign company as the tested party.

4. Selection of Comparable Companies for T.P. Study:
The TPO adopted the assessee company as the tested party and selected 15 comparables. The assessee challenged the inclusion of four companies: Fortune Infotech Ltd, Tricom India Ltd, Ultramarine & Pigments Ltd, and Goldstone Teleservices Ltd. The Tribunal reviewed the functional dissimilarities and other factors, directing the exclusion of Fortune Infotech Ltd and Tricom India Ltd based on previous Tribunal decisions. Ultramarine & Pigments Ltd was excluded due to abnormal profits, and Goldstone Teleservices Ltd was remitted for verification of its export turnover.

5. Exclusion and Inclusion of Specific Companies:
The Tribunal directed the inclusion of Ace Software Exports Ltd, rejecting the TPO's application of the RPT filter, referencing a previous Tribunal decision. The Tribunal upheld the exclusion of Vishal Information Technologies Ltd and Allsec Technologies Ltd based on their business models and loss-making status, respectively.

6. Standard Deduction and Adjustments under Section 92CA:
The Revenue's appeal included objections to the exclusion of certain comparables and the standard deduction. The Tribunal allowed the Revenue's appeal partly, in line with the amended provisions of section 92 of the Act.

Conclusion:
The Tribunal's order resulted in partial allowances for both the assessee's and Revenue's appeals, with specific directions for inclusion/exclusion of certain comparables and the application of section 10A deductions. The decision emphasized the importance of providing comprehensive and verifiable data in T.P. studies and upheld the curability of procedural defects in appeal filings.

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