2017 (9) TMI 1642 - AT - Income Tax

Transfer Pricing Adjustment - comparables selection criteria - functional dissimilarity - Held that - The assessee provides software development services and customer support service to its Associated Enterprises thus companies functionally dissimilar with that of assessee need to be deselected from final list. Exclusion of telecommunication expenses incurred in foreign currency from export turnover as well as total turnover while computing the deduction under Section 10A - Held that - We find that the issue of expenditure incurred towards telecommunication expenses in foreign currency is reduced from export turnover an equal amount should also be reduced from total turnover while computing the deduction under section 10A of the Act, is covered in favour of the assessee by the decision of the Hon ble Karnataka High Court in the case of CIT v. Tata Elxsi Ltd. 2011 (8) TMI 782 - KARNATAKA HIGH COURT .

Summary

Issues Involved:
1. Condonation of delay in filing the appeal.
2. Transfer Pricing Adjustment and selection of comparables.
3. Treatment of foreign exchange gain/loss as operating in nature.
4. Inclusion of Thinksoft Global Services Ltd. as a comparable.
5. Exclusion of telecommunication expenses from export turnover and total turnover for Section 10A deduction.

Issue-wise Detailed Analysis:

1. Condonation of Delay in Filing the Appeal:
The assessee filed an appeal with a delay of 3 days, justified by the director's unavailability due to being out of the country. The Tribunal, considering the explanation and the fact that the delay included a weekend, condoned the delay, stating it was neither intentional nor willful.

2. Transfer Pricing Adjustment and Selection of Comparables:
The primary issue was the Transfer Pricing (TP) adjustment in the software development services segment. The assessee's TP study selected 21 companies with a mean margin of 14.13%, claiming arm's length pricing. The Transfer Pricing Officer (TPO) rejected this analysis and selected 11 comparables, resulting in an adjusted mean margin of 27.21% and a proposed TP adjustment of ?1,89,15,209. The Dispute Resolution Panel (DRP) included Thinksoft Global Services Ltd. but the assessee sought exclusion of five companies: Kals Information Systems Ltd., Bodhtree Consulting Ltd., Tata Elxsi Ltd. (Seg.), Persistent Systems Ltd., and Infosys Ltd. The Tribunal, referencing a previous decision in a similar case, directed the exclusion of these five companies due to functional dissimilarity.

3. Treatment of Foreign Exchange Gain/Loss as Operating in Nature:
The assessee argued that foreign exchange gain/loss should be treated as operating in nature, supported by a Delhi High Court decision in Pr. CIT v. Ameriprise India (P.) Ltd. The Tribunal agreed, stating that forex gain/loss from export receivables is operating in nature and directed the TPO/AO to consider it as such for both the assessee and comparables.

4. Inclusion of Thinksoft Global Services Ltd. as a Comparable:
The revenue challenged the DRP's direction to include Thinksoft Global Services Ltd. The TPO initially proposed its inclusion but later excluded it due to high working capital adjustment. The Tribunal, referencing a previous case (ARM Embedded Technologies (P.) Ltd.), found that the company's primary revenue was from software services, not financial activities, and upheld its inclusion as a comparable.

5. Exclusion of Telecommunication Expenses from Export Turnover and Total Turnover for Section 10A Deduction:
The revenue contested the DRP's direction to exclude telecommunication expenses from both export turnover and total turnover when computing the Section 10A deduction. The Tribunal, following the Karnataka High Court's decision in CIT v. Tata Elxsi Ltd., ruled in favor of the assessee, stating that if such expenses are excluded from export turnover, they must also be excluded from total turnover.

Conclusion:
The Tribunal partly allowed the assessee's appeal by excluding certain comparables and treating forex gain/loss as operating in nature. It dismissed the revenue's appeal, upholding the inclusion of Thinksoft Global Services Ltd. and the exclusion of telecommunication expenses from both export and total turnover for Section 10A deduction.