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2016 (8) TMI 1321 - AT - Income TaxTPA - comparability analysis - Held that - The assessee is a company incorporated under the Companies Act, 1956 and is wholly owned subsidiary of Akamai Technologies Inn., USA. The assessee provides back office support services and related IT enabled services (ITES) to its AE, which includes voice based support services, voice/non-voice based technical support services, invoice processing, accounts receivables and collection processing, thus companies functionally dissimilar with that of assessee need to be deselected from final list. Determination of ALP - foreign exchange fluctuation income arising from the sales realization exclusion from operating profit - Held that - The foreign exchange gain or loss arising from the export turnover realization would be part of the operating profit of the assessee as well as the comparable company. Therefore, foreign exchange fluctuation income arising from the sales realization cannot be excluded from the operating profit for the purpose of determining arms length price. However rule of parity has to be maintained by considering the gain or loss on account of foreign exchange fluctuation in the cases of comparable also. Benefit of second proviso to sec. 92C for considering the tolerance range of 5% - Held that - The benefit of the proviso is available if the price of the international transaction of the assessee is within the tolerance limit of 5% of the comparable price determined by the TPO. Accordingly, we direct the AO/TPO to consider the benefit of proviso to sec. 92C if the price of the assessee is within the tolerance range as provided in the said proviso.
Issues Involved:
1. Exclusion of telecommunication and travel expenses from export turnover while computing deduction u/s 10A. 2. Transfer Pricing adjustments and comparability analysis. 3. Levying of interest u/s 234B and 234C and initiation of penalty proceedings u/s 271(1)(c). Issue-wise Detailed Analysis: 1. Exclusion of Telecommunication and Travel Expenses from Export Turnover: The primary issue was whether telecommunication and travel expenses incurred in foreign currency should be excluded from the export turnover while computing the deduction u/s 10A. The Tribunal referred to the judgment of the Hon'ble Karnataka High Court in the case of CIT v. Tata Elxsi Ltd. [2012] 349 ITR 98 (Kar.), which held that there should be uniformity in the ingredients of both the numerator and the denominator of the formula, ensuring that what is excluded from the numerator (export turnover) should also be excluded from the denominator (total turnover). Consequently, the Tribunal directed the AO to exclude these expenses from the total turnover as well, following the principle established in Tata Elxsi Ltd. 2. Transfer Pricing Adjustments and Comparability Analysis: Several grounds were raised concerning the Transfer Pricing (TP) adjustments made by the AO/TPO, including the rejection of certain filters, use of single-year data, and inclusion of certain comparables. The Tribunal addressed these issues as follows: - Rejection of Filters and Use of Information u/s 133(6): The Tribunal dismissed the grounds related to the rejection of filters and use of information obtained u/s 133(6) due to the lack of specific arguments from the assessee. - Inclusion of Certain Comparables: The Tribunal considered the inclusion of specific companies in the set of comparables. It excluded Datamatics Financial Services Ltd. (seg.) based on the related party transactions filter, following the decision in Goldman Sachs Services (P.) Ltd. The Tribunal also excluded Maple e-Solutions Ltd., Vishal Information Technologies Ltd., Asit C Mehta Financial Services Ltd., and Apex Knowledge Solutions Pvt. Ltd. due to functional dissimilarities and other specific reasons, as established in previous Tribunal decisions. - Foreign Exchange Fluctuations: The Tribunal held that foreign exchange gains or losses arising from export turnover realization should be considered part of the operating profit for both the assessee and comparable companies, following the decision in SAP Labs India (P.) Ltd. v. Asstt. CIT [2011] 44 SOT 156 (Bang.). - Benefit of Tolerance Range: The Tribunal directed the AO/TPO to consider the benefit of the second proviso to sec. 92C, allowing a tolerance range of + 5%, if the price of the international transaction is within this range. 3. Levying of Interest and Penalty Proceedings: The Tribunal did not specifically address the ground related to the levying of interest u/s 234B and 234C and the initiation of penalty proceedings u/s 271(1)(c), as it was a common ground that did not require specific adjudication. Conclusion: The Tribunal partly allowed the appeal of the assessee, directing the AO/TPO to exclude certain expenses from the total turnover while computing the deduction u/s 10A, exclude specific companies from the set of comparables, consider foreign exchange gains as part of the operating profit, and apply the tolerance range benefit if applicable.
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