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2013 (10) TMI 599 - AT - Income TaxExemption u/s 10A - Transfer pricing adjustment - Business of software development with associated enterprise - Exclusion from export turnover - Held that - if any expenditure is to be reduced from the export turnover then the same is to be excluded from the total turnover also - As per ITO v. Sak Soft Ltd.(2009 -TMI - 70681 - ITAT MADRAS-D) There should be uniformity in the ingredients of both the numerator and the denominator of the formula Section 10-A is a beneficial section. It is intended to provide incentives to promote exports. If the export turnover in the numerator is to be arrived at after excluding certain expenses the same should also be excluded in computing the export turnover as a component of total turnover in the denominator. The reason being the total turnover includes export turnover. The components of the export turnover in the numerator and the denominator cannot be different - Following decision of Commissioner of Income-tax Versus Tata Elxsi Ltd. 2011 (8) TMI 782 - KARNATAKA HIGH COURT - Decided in favour of assessee. Rejection of comparable - Held that - TPO in his order has brought out the differences between a product company and a software development services provider. Thus it is clear that he is aware of the functional dissimilarity between a product company and a software development service provider. Having taken note of the difference between the two functions the Assessing Officer ought not to have taken the companies which are into both the product development as well as software development service provider as comparables unless the segmental details are available. Even if he has adopted the filter of more than 75% of the revenue from the software services for selecting a comparable company he ought to have taken the segmental results of the software services only. The percentage of expenditure towards the development of software products may differ from company to company and also it may not be proportionate to the sales from the sale of software products. Under section 133(6) of the I.T. Act the TPO has the power to call for the necessary details from the comparable companies. It is seen that the Assessing Officer/TPO has exercised this power to call for details with regard to the various companies. As seen from the annual report of Foursoft Limited which is reproduced inthe TPO s Order the said company has derived income from software licence also and AMCs - The method adopted by the TPO to allocate expenditure proportionately to the software development services and software product activity cannot be said to be correct and reasonable. Wherever the Assessing Officer/TPO cannot make suitable adjustment to the financial results of the comparable companies with the assessee-company to bring them on par with the assessee these companies are to be excluded from the list of comparables. Therefore we direct the Assessing Officer/TPO to exclude these three companies from the list of comparables - Decided partly in favour of assessee. Assessing Officer/TPO is directed to exclude after due verification comparables from the list with the related party transactions or controlled transactions in excess of 15% of the total revenue for the financial year 2006-07 - Following decision of Sony India (P) Limited. Versus Deputy Commissioner Of Income-tax Circle - 9(1) 2008 (9) TMI 420 - ITAT DELHI-H - Decided partly in favour of assessee.
Issues Involved:
1. Computation of relief under section 10A. 2. Selection of comparable companies for determining the Arm's Length Price (ALP) under Transfer Pricing regulations. 3. Exclusion of communication expenses from export turnover and total turnover for computing deduction under section 10A. Detailed Analysis: 1. Computation of Relief under Section 10A: The assessee argued that communication expenses of Rs. 10,60,618/- should not be excluded from the export turnover for computing the deduction under section 10A, as these expenses were incurred in the normal course of business. Alternatively, if excluded from the export turnover, they should also be excluded from the total turnover. The Tribunal, following the Karnataka High Court decision in Tata Elxsi Ltd., directed the Assessing Officer to exclude the communication expenses from both the export turnover and total turnover for the purpose of computing the deduction under section 10A. 2. Selection of Comparable Companies for Determining the ALP: The primary issue was the selection of comparable companies by the Transfer Pricing Officer (TPO) for determining the ALP. The Tribunal addressed objections to specific companies: - Exensys Software Solutions Limited: The assessee objected to its inclusion due to an extraordinary event (amalgamation with Holool India Limited) affecting its margins. The Tribunal remanded the issue to the TPO for reconsideration, directing exclusion if the amalgamation impacted financial results. - Infosys Technologies Limited: The Tribunal excluded this company, noting its giant status and diversified activities, making it incomparable to the assessee, a smaller entity. - Tata Elxsi Limited: The Tribunal remanded this issue to the TPO to reconsider its inclusion based on new information indicating its specialized nature in embedded software development. - Flextronics Software Limited, Foursoft Limited, and Thirdware Software Solution Limited: The Tribunal found these companies engaged in both software and product development, lacking segmental details. It directed their exclusion due to functional dissimilarity and the inability to make suitable adjustments for differences. - Megasoft Limited: The Tribunal directed the TPO to consider only the segmental margin of its software development services, as the TPO had incorrectly used the combined result. - Kals Information Systems Limited and Lucid Software Limited: The Tribunal excluded these companies based on functional dissimilarity and lack of segmental data, following precedents from other Tribunal decisions. - Accel Transmatic Limited and Avani Syncom Technologies Limited: The Tribunal directed their exclusion, citing functional differences and reliance on previous Tribunal decisions. - Ishir Infotech Limited: The Tribunal excluded this company due to its failure to meet the employee cost filter and related party transaction (RPT) filter, following the precedent set by the Bangalore Tribunal. 3. Exclusion of Communication Expenses from Export Turnover and Total Turnover: The Revenue's appeal against the CIT(A)'s order to exclude communication expenses from both export turnover and total turnover was dismissed. The Tribunal upheld the CIT(A)'s decision, aligning with the Karnataka High Court's ruling in Tata Elxsi Ltd. Conclusion: - The assessee's appeals (ITA.No.1196/Hyd/2010 and ITA.No.2102/Hyd/2011) were partly allowed for statistical purposes, with directions to the Assessing Officer/TPO for reconsideration and exclusion of certain companies from the list of comparables. - The Revenue's appeal (ITA.No.1197/Hyd/2010) was dismissed. - The Tribunal emphasized the necessity of functional similarity and availability of segmental data for selecting comparables in transfer pricing cases.
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