2016 (10) TMI 1144 - AT - Income Tax

TPA - selection of comparable - Held that - Assessee is providing BPO services thus companies functionally dissimlar with that of assessee need to deselected from final list. Deduction allowable to the assessee u/s 10A - Held that - These grounds is covered in favour of the assessee by the judgment of the Hon ble Karnataka High Court rendered in the case of M/s Tata Elxsi Ltd. 2011 (8) TMI 782 - KARNATAKA HIGH COURT wherein it was held that the total turnover is sum total of domestic turnover and export turnover and therefore if an amount is reduced from the export turnover then the total turnover also gets reduced by the same amount. Thus we direct the AO to re-calculate the deduction allowable to the assessee u/s 10A of the Act by reducing the total turnover also by the same amount by which export turnover was reduced by the AO in respect of foreign currency expenses incurred towards technical services rendered outside India.

Issues Involved:
1. Assessment of total income.
2. Reduction of foreign currency expenses from "export turnover".
3. Equal reduction from total turnover for computing deduction under Section 10A.
4. Opportunity of being heard regarding reduction of unabsorbed depreciation.
5. Transfer Pricing (TP) adjustments and comparability analysis.
6. Exclusion of certain comparables.
7. Use of financial year data for determining arm's length price.
8. Penalty proceedings initiation under Section 271(1)(c).

Detailed Analysis:

1. Assessment of Total Income:
The assessee contested the assessment of total income at ?2,86,60,019 against a returned income of NIL. The Tribunal noted that this ground is general in nature and does not require separate adjudication.

2. Reduction of Foreign Currency Expenses from "Export Turnover":
The assessee argued that foreign currency expenses should not be reduced from "export turnover" while computing profits eligible for deduction under Section 10A. The Tribunal cited the Karnataka High Court judgment in M/s Tata Elxsi Ltd., which held that if an amount is reduced from export turnover, the total turnover must also be reduced by the same amount. The Tribunal directed the AO to re-calculate the deduction accordingly.

3. Equal Reduction from Total Turnover for Computing Deduction under Section 10A:
The Tribunal followed the same Karnataka High Court judgment, directing that both export turnover and total turnover should be reduced by the same amount of foreign currency expenses. This ensures a fair computation of deductions under Section 10A.

4. Opportunity of Being Heard Regarding Reduction of Unabsorbed Depreciation:
The assessee claimed that they were not given an opportunity to be heard regarding the reduction of unabsorbed depreciation before the deduction under Section 10A. The Tribunal did not provide a specific ruling on this issue, as it was implicitly covered under the broader application of the Karnataka High Court's judgment.

5. Transfer Pricing Adjustments and Comparability Analysis:
The assessee challenged the addition of ?2,81,69,410 to the total income due to TP adjustments. They argued that the AO/TPO ignored the fact that the assessee was availing tax holidays under Section 10A, negating any intent to shift profits out of India. The Tribunal considered the assessee's request for the exclusion of certain comparables based on functional differences, turnover filters, and other criteria.

6. Exclusion of Certain Comparables:
The Tribunal examined the exclusion of 13 comparables divided into four groups:
- Group 1: Bodhtree Consulting Ltd., Eclerx Services Ltd., Mold Tek Technologies Ltd. (functionally different as KPOs).
- Group 2: Infosys BPO Ltd., Wipro Ltd. (Seg.), HCL Comnet Systems & Services Ltd. (turnover filter).
- Group 3: Vishal Information Technologies Ltd., Informed Technologies India Ltd., Accentia Technologies Ltd. (Seg.), Spanco Ltd. (Seg.), Asit C Mehta Financial Services Ltd. (employees' cost filter).
- Group 4: Maple E-Solutions Ltd., Triton Corp Ltd. (fraudulent financial statements).

The Tribunal directed the AO/TPO to exclude 11 out of these 13 companies from the list of final comparables.

7. Use of Financial Year Data for Determining Arm's Length Price:
The Tribunal noted that the AO/TPO used only the financial year 2006-07 data, which was not available to the assessee at the time of compliance. The Tribunal did not provide a specific ruling on this issue but implied that the AO/TPO should ensure fairness in data usage.

8. Penalty Proceedings Initiation under Section 271(1)(c):
The assessee contested the initiation of penalty proceedings under Section 271(1)(c). The Tribunal did not specifically address this issue but indicated that the AO should follow the law and provide sufficient opportunity for the assessee to be heard.

Conclusion:
The Tribunal partly allowed the appeal, directing the AO to re-calculate deductions under Section 10A by reducing both export and total turnover by the same amount of foreign currency expenses. The Tribunal also directed the exclusion of 11 comparables from the TP analysis and instructed the AO to re-compute the arm's length price accordingly. The appeal was allowed for statistical purposes, ensuring that the AO follows proper legal procedures and provides the assessee with adequate opportunities to be heard.

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