2015 (10) TMI 2716 - AT - Income Tax

Transfer pricing addition - comparable selection criteria - functional similarity - Held that - The assessee is into software design and development services thus companies functionally dissimilar with that of assessee need to be deselected from final list. Deduction u/s 10A - data link charges being excluded from the export turnover - Held that - By virtue of definition of export turnover given Explanation-2(iv) to Sec.10A of the IT Act, 1961, interpretation sought by the assessee cannot be accepted. However, its alternative contention for exclusion of such amount from the total turnover also, while calculating deduction u/s 10A of the IT Act, 1961 is reasonable in view of case of CIT Vs M/s Tata Elxsi Ltd., (2011 (8) TMI 782 - KARNATAKA HIGH COURT)

Issues Involved:
1. Selection of comparables for benchmarking international transactions.
2. Application of +/-5% benefit under Section 92C(2) of the IT Act.
3. Exclusion of data link charges from export turnover for Section 10A deduction.

Detailed Analysis:

1. Selection of Comparables for Benchmarking International Transactions:

The assessee, a wholly-owned subsidiary of a US company, engaged in software design and development services, contested the selection of comparables used by the Transfer Pricing Officer (TPO) for benchmarking international transactions. The TPO had selected 20 comparables, including four from the assessee's list, and determined an average Profit Level Indicator (PLI) of 20.68%. The assessee argued for the exclusion of several companies based on functional dissimilarity, high turnover, and Related Party Transactions (RPT) exceeding 15%.

The Tribunal, referencing the decision in M/s ThoughtWorks Tech.(Ind.) Pvt. Ltd., agreed to exclude companies like M/s Aztec Software Ltd., M/s Infosys Ltd., M/s Kals Info Systems Ltd., M/s Mindtree Consulting Ltd., M/s Persistent Systems Ltd., M/s Sasken Communication Ltd., M/s Tata Elxsi Ltd., M/s Accel Transmatics Ltd., M/s Flextronics Software Systems Ltd., M/s Megasoft Ltd., and M/s iGate Global Solutions Ltd. The Tribunal remitted the comparability of M/s Geometric Software Ltd., M/s Mindtree Consulting Ltd., and M/s Persistent Systems Ltd. back to the AO/TPO for fresh consideration.

2. Application of +/-5% Benefit under Section 92C(2) of the IT Act:

The assessee had claimed that the average PLI of its comparables, after adjustments, fell within the +/-5% range of its own PLI, negating the need for adjustments towards the Arm's Length Price (ALP). However, the TPO rejected this claim, and the Tribunal did not find it necessary to address this issue separately as it was inherently covered in the selection of comparables.

3. Exclusion of Data Link Charges from Export Turnover for Section 10A Deduction:

The assessee contested the exclusion of data link charges amounting to Rs. 16,55,375/- from the export turnover while calculating the deduction under Section 10A of the IT Act. The Tribunal upheld the exclusion of these charges from the export turnover based on the definition provided in Explanation-2(iv) to Section 10A. However, it accepted the alternative contention that these charges should also be excluded from the total turnover, referencing the jurisdictional High Court's decision in CIT Vs M/s Tata Elxsi Ltd. Consequently, this ground was partly allowed.

Conclusion:

The appeal was partly allowed for statistical purposes. The Tribunal directed the exclusion of specific companies from the list of comparables and remitted the comparability of certain others back to the AO/TPO for fresh consideration. Additionally, it ordered the exclusion of data link charges from both export and total turnover for Section 10A deduction calculations. The order was pronounced on October 30, 2015.

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