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2014 (2) TMI 83 - AT - Income TaxAdjustment to Arm s length price u/s 92 of the Act - International transaction with Associated enterprises Selection of Comparables Held that - The arithmetic mean of profit margin to cost of the remaining comparable companies chosen by the TPO after excluding the aforesaid companies is only 7.97% - The profit margin to cost of the Assessee is 14.91% which is much higher than the arithmetic mean of the comparable companies chosen by the TPO (after exclusion of some of the comparable companies chosen by the TPO for reasons set out in the earlier paragraphs) - no adjustment to ALP is called for - the addition sustained by the DRP deserves to be deleted and is accordingly directed to be deleted the arguments were made on market risk adjustments and also working capital adjustment - the arithmetic mean of the comparables is less than the margin of the assessee. Deduction u/s 10A of the Act Expenses incurred in foreign currency for travelling and internet connection charges Held that - The decision in CIT v. Tata EIxsi Ltd. 2011 (8) TMI 782 - KARNATAKA HIGH COURT followed - while computing deduction under section 10A of Act expenditure incurred by the assessee if excluded from the export turnover should also be excluded from the total turnover the AO is directed to reduce the expenses incurred for travelling and internet connection charges from the export turnover as well as the total turnover while computing deduction u/s. 10A of the Act Decided in favour of Assessee.
Issues Involved:
1. Adjustment to the Arm's Length Price (ALP) of an international transaction under Section 92 of the Income-tax Act, 1961. 2. Exclusion of expenses incurred in foreign currency from export turnover while computing deduction under Section 10A of the Income-tax Act, 1961. 3. Charging of interest under Sections 234B and 234D of the Income-tax Act, 1961. Detailed Analysis: Adjustment to the Arm's Length Price (ALP): The primary issue in this appeal was the adjustment to the ALP of an international transaction entered into by the assessee with its Associated Enterprises (AE) under Section 92 of the Act. The assessee, a wholly-owned subsidiary of SMS, USA, provided Information Technology Enabled Services (ITES) to its AE. The assessee filed a transfer pricing (TP) study using the Transactional Net Margin Method (TNMM) and identified nine comparable companies to justify the arm's length nature of the transaction. The Transfer Pricing Officer (TPO) accepted two of these companies but rejected the other seven, proposing 18 additional comparables, resulting in an arithmetic mean of net profit margins of 24.75%. Upon review, the Tribunal excluded several of the TPO's comparables for reasons such as extraordinary events, functional dissimilarity, and outsourcing of work. For instance, Accentia Technologies Ltd. was excluded due to mergers and acquisitions during the relevant period, which affected its financial results. Similarly, Acropetal Technologies Ltd. and Coral Hubs Ltd. were excluded due to functional dissimilarity and outsourcing of work, respectively. The Tribunal also excluded companies like Eclerx Services Ltd. and Genesys International Corporation Ltd. due to their classification as Knowledge Process Outsourcing (KPO) rather than Business Process Outsourcing (BPO). After excluding these companies, the remaining comparables had an arithmetic mean of 7.97%, which was lower than the assessee's profit margin of 14.91%. Consequently, no adjustment to the ALP was deemed necessary, and the addition sustained by the Dispute Resolution Panel (DRP) was deleted. Exclusion of Expenses from Export Turnover: The second issue concerned the exclusion of expenses incurred in foreign currency from export turnover while computing the deduction under Section 10A. The assessee argued that such expenses should not be excluded from export turnover. Alternatively, if excluded, they should also be excluded from total turnover. The Tribunal directed the Assessing Officer (AO) to exclude these expenses from both export turnover and total turnover, in line with the Karnataka High Court's decision in CIT v. Tata Elxsi Ltd., ensuring a fair computation of the deduction under Section 10A. Charging of Interest: The final issue was the charging of interest under Sections 234B and 234D, which was deemed consequential. The Tribunal directed the AO to provide consequential relief based on the outcome of the primary issues. Conclusion: The appeal by the assessee was allowed, with the Tribunal directing the exclusion of certain comparables for ALP determination and ensuring the correct computation of the deduction under Section 10A by excluding specific expenses from both export turnover and total turnover. The interest under Sections 234B and 234D was to be recalculated accordingly.
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