2013 (6) TMI 56 - AT - Income Tax

Transfer pricing adjustment - determination of Arms Length Price (ALP) - reduction of the amount of telecommunication and travel expenses incurred in foreign currency for providing technical services attributable to delivery of software outside India as provided u/s 10A and without simultaneously reducing the said amount from total turnover - Held that - As decided in CIT v Tata Elxsi Ltd. 2011 (8) TMI 782 - KARNATAKA HIGH COURT when the expenses are reduced from the export turnover while computing deduction under section 10A the same should also be reduced from the total turnover in order to maintain parity between the numerator and the denominator. Thus AO directed to reduce the said sum from the export turnover as well as from the total turnover while computing deduction under section 10A. Inappropriate filters in process of selecting the comparable companies under TNMM - assessee had adopted CPM/CUP method by comparing the man hour rates charged by major software companies in India with the rates charged by the assessee, whereas the TPO adopted the TNMM - Held that - An identical issue to that of the present one had cropped up in the assessee s own case for the AY 2006-07 wherein after due consideration of the issue in detail, directed the assessing officer/TPO to consider (1) whether CPM/CUP is the most appropriate method to determine the ALP of the assessee s international transaction and (ii) whether the foreign exchange gain/loss is arising in the normal course of the business and whether it should be considered as part of operating in nature for both the assessee as well as for the comparable companies. Thus this issue is restored on the files of AO/TPO for fresh consideration. In conformity with the findings of the case of Trilogy E-Business 2013 (1) TMI 672 - ITAT BANGALORE we are of the considered view that (i) Accel Transmatic Ltd (Seg); (ii) Avani Cimcon Technologies Ltd; (iii) Celestial Labs. Ltd., & (iv) KALS Information Systems Ltd (seg) cannot qualify as comparables in the case of the assessee under consideration. Lucid Software Limited - Held that - As following the order of the Tribunal in the case of Telcordia Technologies India (P.) Ltd. (2012 (6) TMI 388 - ITAT MUMBAI) direct the Assessing Officer/TPO not to include Lucid Software Limited as a comparable. After excluding from the TPO s list of comparables, the companies having turnover exceeding ₹ 200 crores and five companies which are functional dissimilar to that of the assessee, the following thirteen companies in TPO list are retained as comparables Datamatics Limited, E Zest Solutions Limited, Geometric Ltd. (seg), Helios & Matheson Information Technology Ltd, IshirInfotech Ltd, LGS Global Ltd (Lanco Global Solutions Ltd), Mediasoft Solutions Pvt. Ltd, Megasoft Ltd (Seg), Quintegra Solutions Ltd, R S Software (India) Ltd, R Systems International Ltd (Seg), SIP Technologies & Exports Ltd, Thirdware Solutions Ltd (Seg. Megasoft Ltd - Held that - In conformity with the findings of the earlier Bench in the case of Trilogy E-Business Software India (P.) Ltd. s (supra), we are of the considered view that the TPO was justified in selecting M/s. Megasoft Ltd as comparable. However, the AO/TPO is directed to take segmental margins of 23.11% for comparability. It is ordered accordingly. Ishir InfoTech Limited - Held that - The issue is restored to the file of the AO/TPO to examine whether professional fees paid in the case of Ishir Info Tech is for the work outsourced. If the said amount is paid for the work outsourced, Ishir Infotech will not qualify 25% employee cost filter as salary paid, excluding the professional fee paid as compared to operating revenue. It is ordered accordingly. Foreign Exchange gains/Loss impact - Held that - Direct the AO/TPO to consider the foreign exchange gain or loss as part of the operating cost or revenue, as the case may be, for both the assessee as well for the comparable companies. Incorrect margin computation of comparable margin - Held that - It was the contention of the assessee that the working capital adjustment has been wrongly worked out by the TPO which requires reconciliation. Since the assessee s allegation requires to be reconciled at the AO/ TPO s level, the issue is remitted back on the files of the AO/TPO with a direction to verify the veracity of the assessee s claim and to rectify the same, if it so warrants. Risk adjustment - Held that - AO/TPO is directed to work out the ALP of the assessee and if found that the differential in the margin of the assessee and the comparable is beyond 5% bandwidth recognized in proviso to section 92C (2) then adjustment is required to be made to the reported value of the assessee s transaction with its AE.

Summary

Issues Involved:

1. Re-computation of deduction under section 10A of the Act.
2. Transfer Pricing adjustments.

Detailed Analysis:

I. Re-computation of Deduction under Section 10A (Ground Nos. 2 & 3):

The Assessing Officer (AO) had re-computed the deduction under section 10A by reducing foreign exchange expenditure amounting to Rs. 10,18,13,341 from the export turnover without making a corresponding adjustment to the total turnover. The assessee argued that these expenses should not be reduced from the export turnover. Alternatively, if reduced, the same should also be reduced from the total turnover. This alternative submission was supported by the jurisdictional High Court in CIT v Tata Elxsi Ltd. (2012) 349 ITR 98 (Kar.), and in the assessee's own case for AY 2002-03. The Tribunal directed the AO to reduce Rs. 10,18,13,341 from both export turnover and total turnover while computing the deduction under section 10A, allowing ground no.3 and dismissing ground no.2 as unnecessary to adjudicate.

II. Transfer Pricing (Ground Nos. 5 to 16):

A. Methodology for Determining ALP (Ground Nos. 6 & 7):

The assessee used the Comparable Uncontrolled Price (CUP) and Cost Plus Method (CPM) to determine the Arms Length Price (ALP), comparing man-hour rates charged by major software companies in India. The Transfer Pricing Officer (TPO) rejected this, applying the Transaction Net Margin Method (TNMM) instead. The Tribunal restored the issue to the AO/TPO for fresh consideration, directing them to evaluate whether CPM/CUP is the most appropriate method and whether foreign exchange gain/loss should be considered as part of operating revenue.

B. Exclusion of Certain Comparables Based on Turnover and Functional Dissimilarity (Ground Nos. 10, 11, 12):

The Tribunal excluded eight companies from the TPO's list of comparables due to their high turnover exceeding Rs. 200 crores, following the reasoning in previous Tribunal decisions such as Trilogy E-Business Software India Pvt. Ltd. and Telcordia Technologies India Pvt. Ltd. Additionally, five companies were excluded due to functional dissimilarity, with detailed reasons provided for each exclusion based on prior Tribunal findings.

C. Specific Adjustments and Re-computation:

1. Foreign Exchange Gains/Losses (Ground No. 12):
The Tribunal directed that foreign exchange gains/losses should be considered as part of the operating revenue or cost for both the assessee and the comparables, following the decision in Trilogy E-Business.

2. Incorrect Margin Computation (Ground No. 13):
The Tribunal acknowledged the assessee's grievance regarding arithmetical mistakes in the TPO's order and directed the TPO to address the issue expeditiously.

3. Working Capital Adjustment (Ground No. 14):
The Tribunal remitted the issue back to the AO/TPO to verify and rectify the alleged errors in the working capital adjustment.

4. Risk Adjustment (Ground No. 15):
The Tribunal remanded the issue back to the AO/TPO to decide afresh, consistent with the findings in the case of M/s. Insilica Semiconductors India Pvt. Ltd v. ITO.

Conclusion:

The Tribunal directed the AO/TPO to re-compute the ALP in accordance with the Tribunal's directions. If the differential in the margin of the assessee and the comparables exceeds the 5% bandwidth, an adjustment is required. The appeal was partly allowed as indicated, and the order was pronounced on February 22, 2013, in Bangalore.