2013 (11) TMI 199 - AT - Income Tax

Deduction u/s 10A - Exemption u/s 10A - Setting off of losses Held that - Following CIT v. Yokogawa India Ltd. 2011 (8) TMI 845 - Karnataka High Court - The assessee was entitled to claim deduction u/s 10A of the Act for the STPI Unit - it was clear that the income of the section10A unit had to be excluded before arriving at the gross total income of the assessee - the income eligible for exemption under section 10A would not enter into computation as the same had to be deducted at source level. For the purpose of computation of relief u/s 10A of the Act, the foreign currency expenses have to be excluded not only from the export turnover but also to be reduced from the total turnover of the assessee Explaining in CIT v. Tata Elxsi Ltd. & Others 2011 (8) TMI 782 - KARNATAKA HIGH COURT - when the expenses were reduced from the export turnover while computing deduction u/s 10A of the Act, the same should also be reduced from the total turnover in order to maintain parity between the numerator and the denominator - The AO was, therefore, directed to exclude the foreign currency expenses from the export turnover and also reduce the same from the total turnover of the assessee while computing the deduction u/s 10A of the Act. Transfer Pricing Adjustment u/s 92C(3) - Software Research and Development - Transfer Pricing Computation of Arm s Length Price - International transaction Arm s Length Price - Assessee provided software research & development support services to its Associated Enterprise - Remunerated on a cost plus basis - assessee adopted the Transactional Net Margin Method TNMM - Comparable - Comparability of the comparable relied upon by the TPO Turnover filter is an important criterion in choosing the comparables - Inappropriate computation of operating margins of comparables and that of the Assessee - Following Trilogy E-Business Software India (P.) Ltd. Versus Deputy Commissioner of Income-tax 2013 (1) TMI 672 - ITAT BANGALORE - Circle 12(4). BangaloreTreating foreign exchange gain or loss and provision for bad debts as non-operating in nature and fringe benefit tax as part of operating cost - AO was directed to work out the ALP of the assessee in accordance with the direction and if found that the difference in the margin of the assessee and the comparables was beyond 5% band-with recognized in proviso to section 92C(2) of the Act, then adjustment was required to be made to the reported value of the assessee s transaction with its AE. PRE-SALES AND MARKETING SERVICES - Following Lenovo (India) (P.) Ltd. v. ACIT 2012 (5) TMI 283 - ITAT BANGALORE The similar transaction with the associated enterprises for the subsequent years had been considered by the TPO and had been accepted without any ALP adjustments - There had to be a continuity and uniformity in the approach of the Revenue towards an issue and particularly in the case of the same assessee - the adjustments have been made only for the relevant assessment year, whereas similar transactions have been accepted to be at ALP for the subsequent years even though the same method had been followed by the assessee - When the facts and circumstances are the exactly the same, the Revenue cannot be permitted to take a different approach in two different assessment years.

Summary

Issues Involved:
1. Deduction u/s 10A of the Act
2. Transfer Pricing Adjustment for Software Research and Development
3. Transfer Pricing Adjustment for Pre-Sales and Marketing Services

Detailed Analysis:

I. Deduction u/s 10A of the Act:
The assessee company claimed a deduction of Rs. 15,88,47,365/- u/s 10A of the Act for profits from its STPI Unit. The AO rejected this claim, arguing that the undertaking was formed by transferring previously used machinery from the Branch Office of the Holding Company, which violates the conditions of sub-section (2) of section 10A. The AO cited that the old plant and machinery constituted 48% of the assets, thus failing to meet the requirement that the undertaking must be formed by new machinery or plant.

The assessee contended that the unit was transferred on a going-concern basis and had been claiming relief u/s 10A since the financial year 2003-04. The Tribunal, referencing the case of LG Soft India (P.) Ltd and the jurisdictional High Court's ruling in Yokogawa India Ltd., concluded that the relief under section 10A is specific to the undertaking and not the owner. The Tribunal also noted the CBDT Circular No.01/2013, which clarified that tax benefits under sections 10A, 10AA, and 10B would continue despite a change in ownership, provided there is no splitting or reconstruction of the business.

The Tribunal directed the AO to exclude foreign currency expenses from both the export turnover and the total turnover for computing the deduction u/s 10A, in line with the Tata Elxsi Ltd. ruling. Consequently, the Tribunal allowed the assessee's claim for deduction u/s 10A.

II. Transfer Pricing Adjustment:

(A) Software Research and Development:
The assessee had international transactions for software development services with its AE, adopting TNMM and selecting 19 comparables with an average margin of 14.49%. The TPO, however, selected 26 comparables with an adjusted arithmetical profit level indicator of 22.89%, resulting in an adjustment of Rs. 6,83,39,400/-.

The Tribunal noted the similarity between the assessee's case and the Trilogy E-Business Software India (P.) Ltd. case, where certain companies were rejected based on turnover filter and functional dissimilarity. The Tribunal excluded eight companies from the TPO's list due to their high turnover and two companies (Avani Cimcom Technologies Ltd. and Celestial Labs. Ltd.) due to functional dissimilarity. The Tribunal also directed the AO to use the segmental margin of 23.11% for Megasoft Ltd. instead of the entity level margin.

After these adjustments, the Tribunal directed the AO to recompute the ALP and determine if the difference falls within the permissible 5% range. If so, no adjustment would be required.

(B) Pre-Sales and Marketing Services:
The assessee rendered pre-sales and marketing support services to its AE, adopting TNMM with four comparables showing an average margin of 6.32%. The TPO selected different comparables with an average margin of 32.77%, leading to an adjustment.

The Tribunal found that the TPO incorrectly categorized the services as commission agency services and noted that the assessee had no authority to conclude contracts on behalf of its AE. The Tribunal also highlighted that the assessee's transactions for the subsequent year (AY 2008-09) were accepted without adjustments, referencing the Lenovo (India) (P.) Ltd. case for continuity in the Revenue's approach.

The Tribunal directed the AO to verify if similar transactions were accepted for AY 2008-09 and, if so, to adopt the same TP analysis for the current year. The Tribunal restored the issue to the AO/TPO for fresh examination.

Conclusion:
The appeal was partly allowed, with the Tribunal granting the deduction u/s 10A and directing the AO to recompute the ALP for software development services and pre-sales and marketing services based on the specified adjustments and verifications.