2016 (12) TMI 1712 - AT - Income Tax

TPA - Comparable selection criteria - Held that - Assessee is engaged in the business of providing software services, IT and IT enabled Services, thus companies functionally dissimilar with that of assessee need to be deselected from final list. Computation of deduction u/s. 10A - Held that - This issue is squarely covered by the order of jurisdictional High Court in the case of CIT v. Tata Elxsi Ltd. 2011 (8) TMI 782 - KARNATAKA HIGH COURT in which it has been held that whatever expenses are excluded from export turnover should also be excluded from the total turnover.

Issues Involved:
1. Transfer Pricing (TP) adjustments for software development services and business process services/ITeS segments.
2. Computation of deduction under Section 10A of the Income Tax Act.
3. Disallowance of expenses for non-deduction of tax at source.
4. Levy of interest under Sections 234B and 234D of the Income Tax Act.

Detailed Analysis:

Transfer Pricing (TP) Adjustments:

1.1 Comparability Analysis for Software Development Services:
The assessee contested the inclusion of certain companies as comparables by the TPO, arguing that these companies were functionally different, had different risk profiles, or had peculiar economic circumstances. The Tribunal examined each comparable in detail:

- Accel Transmatics Ltd.: Excluded due to high Related Party Transactions (RPT) and functional dissimilarity, as it was engaged in animation services.
- Avani Cimcon Technologies Ltd., Celestial Labs Ltd., E-Zest Solutions Ltd., Flextronics Software Systems Ltd., Helios & Matheson Information Technology Ltd., Infosys Technologies Ltd., Ishir Infotech Ltd., KALS Information Systems Ltd., Lucid Software Ltd., Megasoft Ltd., Persistent Systems Ltd., Tata Elxsi Ltd., Thirdware Solutions Ltd., and Wipro Ltd.: Excluded based on functional dissimilarity, abnormal growth, lack of segmental data, or high RPT.

1.2 Arbitrary Filters:
The Tribunal noted that the TPO applied arbitrary filters without establishing functional analysis, leading to the inclusion of inappropriate comparables.

1.3 Turnover and Size Differences:
The Tribunal excluded companies with significant differences in turnover and size compared to the assessee, adhering to the upper limit of 10 times and lower limit of 1/10th times the turnover of the assessee.

1.4 Segmental Data Unavailability:
Companies without available segmental data were excluded as comparables.

1.5 Peculiar Economic Circumstances:
Companies with peculiar economic circumstances or extraordinary events during the year were excluded.

1.6 Highly Fluctuating Profits:
The Tribunal excluded companies with highly fluctuating profits, deeming them unsuitable for comparison.

1.7 Re-examination of Megasoft Ltd.:
The Tribunal directed the AO/TPO to re-examine Megasoft Ltd. due to issues related to RPT and segmental data.

2. Comparability Analysis for ITeS Segment:
Similar issues were raised for the ITeS segment, with the Tribunal excluding several companies based on RPT, functional dissimilarity, abnormal growth, and lack of segmental data.

- Accentia Technologies Ltd., Apollo Healthstreet Ltd., Asit C. Mehta Financial Services Pvt. Ltd., Bodhtree Consulting Ltd., Eclerx Services Ltd., HCL Comnet Systems & Services Ltd., Informed Technologies Ltd., Infosys BPO Ltd., I-Services India Pvt. Ltd., Maple Esolutions Ltd., Mold-Tek Technologies Ltd., Spanco Ltd., Triton Corp Ltd., Vishal Information Technologies Ltd., and Wipro Ltd.: Excluded due to reasons similar to those in the software development services segment.

3. Mark-up on Expenses Recovered from Associated Enterprises:
The Tribunal found that the TPO erred in including recovery of expenses in operating revenue and cost for determining mark-up, as these were pass-through costs.

4. Variation of 5% from the Arithmetic Mean:
The Tribunal noted that the TPO did not grant the benefits of the proviso to Section 92C(2) of the Income Tax Act, which should be available to the assessee.

Corporate Tax Issues:

5. Computation of Deduction under Section 10A:
The Tribunal directed the AO to compute the deduction under Section 10A in light of the jurisdictional High Court's decision in CIT v. Tata Elxsi Ltd., which mandates that expenses excluded from export turnover should also be excluded from total turnover.

6. Disallowance of Expenses for Non-Deduction of Tax at Source:
The Tribunal set aside the issue to the AO for re-examination in light of CBDT Circular No. 715 dated 8.8.1998.

7. Interest under Section 234B:
The Tribunal dismissed the ground as it was not pressed by the assessee.

8. Interest under Section 234D:
The Tribunal noted that the levy of interest under Section 234D is consequential in nature and does not require independent adjudication.

Conclusion:
The appeal was partly allowed for statistical purposes, with the Tribunal directing the AO/TPO to recompute the ALP and other adjustments in accordance with the guidelines provided.

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