2016 (4) TMI 1304 - AT - Income Tax

TPA - comparable selection - Held that - Referring to the Software applications developed by the assessee are in the field of telecom call processing, element management systems and signaling protocol adoption, thus companies functionally dissimilar with that of assessed to be deselected from final list. Deduction u/s. 10A - Held that - CIT v. Tata Elxsi Ltd. (2011 (8) TMI 782 - KARNATAKA HIGH COURT), wherein it was held that total turnover is sum total of export turnover and domestic turnover. Hence, when these two items of expenses are to be excluded from export turnover, it automatically gets excluded from total turnover because it cannot be said that these expenses are part of domestic turnover and therefore, when export turnover is reduced, total turnover is automatically reduced because total turnover as per this judgment of Hon ble jurisdictional High Court is sum total of export turnover domestic turnover.

Issues Involved:
1. Legality of the reference to Transfer Pricing Officer (TPO).
2. Errors in the Transfer Pricing (TP) analysis and selection of comparables.
3. Computation of Arm's Length Price (ALP) and adjustments.
4. Levying of interest under sections 234B and 234D.
5. Deduction under section 10A of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Legality of the Reference to Transfer Pricing Officer (TPO):
The assessee contended that the Assessing Officer (AO) erred in referring the case to the TPO without demonstrating the necessity for such a reference. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision. The Tribunal did not find substantial merit in this argument and upheld the reference to the TPO.

2. Errors in the Transfer Pricing (TP) Analysis and Selection of Comparables:
The assessee raised multiple grounds against the TP analysis, including the rejection of its comparables and the inclusion of inappropriate ones by the TPO. The Tribunal, referencing its decision in Kodiak Networks India Pvt. Ltd. v. DCIT, excluded 12 out of 20 comparables considered by the TPO, finding them functionally dissimilar. These included companies like Infosys Technologies Ltd., Persistent Systems Ltd., Tata Elxsi Ltd., and Wipro Ltd. The Tribunal found that the remaining 8 comparables provided an ALP within the permissible range, negating the need for TP adjustments.

3. Computation of Arm's Length Price (ALP) and Adjustments:
The Tribunal computed the ALP based on the remaining 8 comparables, resulting in an average margin of 14.35% without working capital adjustment and 13.86% with it, both within the +/- 5% range of the assessee’s reported margin of 9.60%. Consequently, no TP adjustment was warranted. The Tribunal also noted that the inclusion or exclusion of certain additional comparables (e.g., VGL Softech Ltd.) would not materially impact the final decision.

4. Levying of Interest under Sections 234B and 234D:
The assessee contested the levying of interest under sections 234B and 234D. However, the Tribunal did not provide a detailed discussion on this issue, implying that the levying of interest stood as per the AO's order.

5. Deduction under Section 10A of the Income Tax Act:
The Revenue argued against the exclusion of lease line charges and foreign exchange loss from the total turnover for computing the deduction under section 10A. The Tribunal, following the Karnataka High Court's judgment in CIT v. Tata Elxsi Ltd., held that if such expenses are excluded from export turnover, they must also be excluded from total turnover. Hence, the Tribunal rejected the Revenue's appeal on this ground.

Conclusion:
The Tribunal allowed the assessee's appeal and partly allowed the Revenue's appeal. The key takeaways include the exclusion of 12 comparables from the TP analysis, resulting in no TP adjustment, and the upholding of the exclusion of certain expenses from total turnover for section 10A deductions. The Tribunal's decision was pronounced on April 22, 2016.

← Previous Next →