2013 (9) TMI 485 - AT - Income Tax

Rejection of comparables - Adjustment in arm s length price - Held that - main reason for excluding Wipro BPO is on the basis of higher turnover claimed by that BPO when compared to the assessee in that case - But assessee s turnover is not small - The company which was once selected as comparable cannot be rejected in other similar circumstances - Decided in favour of assessee. Deduction under S.10A - Foreign exchange gain - Held that - since foreign exchange gain is on account of fluctuations of the foreign exchange received for the services rendered by the assessee, this has to be treated as business income and it has to be considered as profits of the business for computing the deduction under S.10A of the Act - Decided in favour of assessee. Data link charges considered as attributable to delivery of computer software outside India should be excluded from export turnover as well as total turnover, while computing the deduction under S.10A. Further, out of the data link charges spent by the assessee, how much is for intra and inter office services and how much is for delivery of services has not been examined by the Assessing Officer - In case any amounts are to be excluded as attributable to delivery of services outside India, the same should be excluded both from export and total turnover, while computing deduction under S.10A. Non-consideration of profits of overseas branch of the assessee as arising from export of ITES. - For allowing the deduction under S.10A/10B, other conditions are required to be satisfied, including the questions (a) whether the branch is rendering any BPO services; (b) whether the functions are similar; and (c) whether the incomes can be considered as income of STPI eligible for deduction. - matter remanded back for reconsideration.

Issues Involved:
1. Transfer Pricing Issues
2. Non-consideration of Foreign Exchange Gain
3. Leased Line Charges Attribution
4. Profits of Overseas Branch
5. Credit for UK Income Tax
6. Interest under Sections 234B and 234D
7. Communication Charges Exclusion from Total Turnover
8. Arm's Length Price Adjustment
9. Reimbursements in Operating Cost

Issue-wise Detailed Analysis:

Transfer Pricing Issues:
The assessee, a subsidiary of HSBC Holdings Plc, contested the selection of four companies as comparables by the Transfer Pricing Officer (TPO). The Tribunal directed the exclusion of Vishal Information Technologies Ltd., Maple E Solutions Ltd., and Nucleus Netsoft and GIS (India) Ltd., based on a prior decision. Wipro BPO Solutions was retained as a comparable, but the Tribunal instructed the TPO to re-examine the segmental data. The Tribunal also directed the TPO to reconsider the inclusion of Apex Advanced Technology Pvt. Ltd., Pantasoft Technologies Ltd., and R. Systems International Ltd., while rejecting Goldstone Tele Services Ltd. and Gold Stone Technologies Ltd. The Tribunal restored the issue of depreciation and risk adjustments to the TPO for re-examination.

Non-consideration of Foreign Exchange Gain:
The Tribunal held that foreign exchange gains should be treated as business income and included in the profits for computing the deduction under Section 10A of the Income-tax Act, consistent with the assessee's case for the assessment year 2006-07.

Leased Line Charges Attribution:
The Tribunal directed the Assessing Officer to quantify the communication charges attributable to the delivery of computer software outside India and exclude them from both export turnover and total turnover while computing the deduction under Section 10A.

Profits of Overseas Branch:
The Tribunal allowed the assessee's claim for inclusion of profits from the overseas branch as arising from the export of ITES, subject to verification of conditions such as the branch rendering BPO services and similarity of functions. The matter was restored to the Assessing Officer for examination and quantification.

Credit for UK Income Tax:
The Tribunal restored the issue of credit for UK income tax to the Assessing Officer for examination under Article 24 of the Double Taxation Avoidance Agreement between India and the UK, allowing proportionate credit for taxes paid.

Interest under Sections 234B and 234D:
The Tribunal rejected the ground related to interest under Sections 234B and 234D as academic and consequential.

Communication Charges Exclusion from Total Turnover:
The Tribunal upheld the CIT(A)'s decision to exclude communication charges from both export turnover and total turnover, following precedents from coordinate benches and High Courts.

Arm's Length Price Adjustment:
The Tribunal found no mistake in the arithmetic adjustments made by the CIT(A) but noted that the computation is subject to reconsideration by the Assessing Officer due to directions given on other issues.

Reimbursements in Operating Cost:
The Tribunal directed the Assessing Officer/TPO to exclude reimbursement transactions from the operational cost while determining the ALP of international transactions, consistent with the decision for the assessment year 2006-07.

Conclusion:
The assessee's appeal was partly allowed for statistical purposes, the Revenue's appeal was dismissed, and the assessee's cross-objection was allowed. The Tribunal issued detailed directions for re-examination and adjustments on various issues, ensuring compliance with legal precedents and proper computation of deductions and adjustments.

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