2015 (8) TMI 1437 - AT - Income Tax

TPA - exclusion of comparables - functional similarity - Held that - Assessee a company engaged in the business of providing software design and maintenance service and marketing support had operating revenues thus companies functionally dissimilar with that of assessee need to be deselected from final list. Exclusion of telecommunication and other expenses incurred in foreign currency from total turnover also while computing deduction u/s. 10A - Held that - The issue regarding parity between total turnover and export turnover stands already resolved by the Hon ble jurisdictional High Court in the case of CIT v. Tata Elxsi Ltd. 2011 (8) TMI 782 - KARNATAKA HIGH COURT

Summary

Issues Involved:
1. Adjustments on the pricing of international transactions.
2. Inclusion and exclusion of specific companies from the list of comparables.
3. Adjustment of working capital.
4. Computation of deduction under Section 10A of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Adjustments on the Pricing of International Transactions:
The assessee, engaged in software design and maintenance services, had operating revenues of Rs. 85,32,91,086 with a profit margin of 10.20%. The Transfer Pricing Officer (TPO) applied various filters and rejected 12 of the 17 comparables selected by the assessee, adding 11 new comparables. The TPO's adjusted arithmetic mean margin was 24.32%, which after a negative working capital adjustment of 1.71%, resulted in a PLI of 22.61%. The TPO recommended an adjustment of Rs. 9,60,59,331 under Section 92CA.

2. Inclusion and Exclusion of Specific Companies from the List of Comparables:
The assessee sought the exclusion of Bodhtree Consulting Ltd and Kals Information Systems Ltd due to functional dissimilarity and the inclusion of Thinksoft Global Services Ltd and FCS Software Solutions Ltd, which were initially proposed by the TPO but later rejected. The CIT (A) excluded companies with turnover exceeding Rs. 200 crores but retained Bodhtree Consulting Ltd and Kals Information Systems Ltd. The Tribunal found that Bodhtree Consulting Ltd and Kals Information Systems Ltd were not proper comparables due to functional differences and abnormal profits. The Tribunal directed the inclusion of Thinksoft Global Services Ltd and FCS Software Solutions Ltd, as their exclusion by the TPO was based on incorrect reasoning regarding working capital adjustments.

3. Adjustment of Working Capital:
The TPO restricted the working capital adjustment to 1.71%, which was challenged by the assessee. The Tribunal cited a previous decision in Rambus Chip Technologies (India) (P.) Ltd., directing that working capital adjustments should be on an actual basis rather than an upper cap. The Tribunal remanded the issue to the AO/TPO to correctly work out the PLI of the final comparables after giving due adjustment for the working capital on an actual basis.

4. Computation of Deduction under Section 10A of the Income Tax Act:
The Revenue's appeal contested the CIT (A)'s direction to exclude telecommunication and other expenses incurred in foreign currency from total turnover while computing the deduction under Section 10A. The Tribunal upheld the CIT (A)'s decision, referencing the jurisdictional High Court's ruling in CIT v. Tata Elxsi Ltd., which established parity between total turnover and export turnover.

Conclusion:
The Tribunal partly allowed the assessee's appeal for statistical purposes, directing the inclusion of Thinksoft Global Services Ltd and FCS Software Solutions Ltd as comparables and the exclusion of Bodhtree Consulting Ltd and Kals Information Systems Ltd. The TPO was instructed to recompute the PLI with actual working capital adjustments. The Revenue's appeal was dismissed, affirming the CIT (A)'s computation of the Section 10A deduction.