2015 (9) TMI 1612 - AT - Income Tax

Reducing expenditure in foreign currency on telecommunication and travel, both from export turn over as well as total turnover for computation of deduction u/s. 10A - Held that - High Court in the case of CIT v. Tata Elxsi Ltd. 2011 (8) TMI 782 - KARNATAKA HIGH COURT . Just because the judgment has not been accepted by the Revenue and it has moved an SLP before the Hon ble Apex Court would not be a reason for not following the judgment. We find no error in the order of AO in this regard. Ground. 1 is dismissed. Comparable selection criteria - Held that - DRP was justified in directing exclusion of comparables having turnover in excess of ₹ 200 crores. No reason to interfere. Ground 2 is dismissed. There is a clear finding given by the Tribunal in the case of selecting comparables, 15% is the threshould limit of RPTS. Accordingly, we set aside the order of DRP and direct the AO/TPO to consider 15% as threshold limit for RP transactions and consider all the comparables in the list of comparables which do not have RPT exceeding 15%, for the analysis of international transactions of the assessee for the impugned assessment year, provided other conditions for comparability are satisfied. Ordered accordingly. Ground 3 of the Revenue is treated as allowed for statistical purpose. Remit this issue of comparability of Akshay Software Technologies back to the file of the AO/TPO for fresh consideration in accordance with law, after considering the correct RPT of the said company. Kals Information Systems was not a proper comparable to a software development services company. Web site services is generally considered as falling within ITES segment. That ICRA Techno Analytics was also involved in web-development and hosting is clear from the background information mentioned in its significant accounting policies reproduced supra. Hence, in our opinion before considering ICRA Techno analytics as a proper comparable, it is necessary for a segmental analysis of its results. This issue, in our opinion, requires a fresh look by the AO/TPO so that necessary inputs are taken from the said company for proper analysis of its segmental results and deciding the comparability with that of the assessee. AO/TPO is directed to consider both Kals Information Systems Ltd and ICRA Techno Analytics Ltd, for comparability after ensuring that they pass the RPT filter, and if required segmental data can be obtained. We, therefore, set aside the orders of lower authorities with regard to Kals Information Systems Ltd (seg) and ICRA Techno Analytics (seg) back to the file of AO/TPO for consideration afresh.

Issues Involved:
1. Reduction of expenditure in foreign currency for computation of deduction under Section 10A of the Income-tax Act, 1961.
2. Exclusion of comparables with turnover exceeding Rs. 200 crores for ALP analysis.
3. Exclusion of comparables with Related Party Transactions (RPT) exceeding 15%.
4. Rejection of comparables selected by the assessee.
5. Inclusion of Kals Information Systems Ltd. and ICRA Techno Analytics Ltd. as comparables.

Detailed Analysis:

Issue 1: Reduction of Expenditure in Foreign Currency for Computation of Deduction under Section 10A
The Revenue challenged the DRP's direction to reduce expenditure in foreign currency on telecommunication and travel from both export turnover and total turnover for Section 10A deduction computation. The Tribunal upheld the DRP's decision, citing the jurisdictional High Court's judgment in CIT v. Tata Elxsi Ltd., which the Revenue had not accepted but was still binding. The Tribunal found no error in the AO's order and dismissed this ground.

Issue 2: Exclusion of Comparables with Turnover Exceeding Rs. 200 Crores for ALP Analysis
The Revenue contested the DRP's direction to exclude comparables with turnover over Rs. 200 crores from the list selected by the TPO for ALP analysis. The Tribunal referenced the Genisys Integrating Systems (India) (P.) Ltd. case, emphasizing the importance of size in comparability. The Tribunal supported the DRP's application of the turnover filter, agreeing that companies with turnover between Rs. 1 crore and Rs. 200 crores should be considered comparable. This ground was dismissed.

Issue 3: Exclusion of Comparables with Related Party Transactions Exceeding 15%
The Revenue objected to the DRP's exclusion of Larsen & Toubro Infotech Ltd., Persistent Systems Ltd., and R S Software (India) Ltd. based on RPTs. The Tribunal cited the 24/7 Customer.com (P.) Ltd. case, which set a 15% threshold for RPTs. Both parties agreed on this threshold. The Tribunal directed the AO/TPO to apply the 15% RPT filter and include comparables that meet this criterion. This ground was allowed for statistical purposes.

Issue 4: Rejection of Comparables Selected by the Assessee
The assessee challenged the rejection of Akshay Software Technologies Ltd. by the TPO due to unavailable RPT data. The Tribunal noted that the financial statements for FY 2010-11, which included FY 2009-10 data, showed an RPT of 4.33%. The Tribunal remitted the issue back to the AO/TPO for verification of these figures and reconsideration of Akshay Software Technologies Ltd. as a comparable. This ground was partly allowed.

Issue 5: Inclusion of Kals Information Systems Ltd. and ICRA Techno Analytics Ltd. as Comparables
The assessee contested the inclusion of Kals Information Systems Ltd. and ICRA Techno Analytics Ltd. due to functional dissimilarity and lack of segmental data. The Tribunal acknowledged the need for segmental analysis and proper verification of these companies' functional profiles. The Tribunal remitted the issue back to the AO/TPO for fresh consideration, ensuring that these companies meet the RPT filter and proper segmental data is obtained. This ground was partly allowed for statistical purposes.

Conclusion:
Both the appeals of the Revenue and the assessee were partly allowed for statistical purposes. The Tribunal directed the AO/TPO to reconsider specific comparables based on the established criteria and thresholds.

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