2014 (2) TMI 838 - AT - Income Tax

Transfer pricing adjustments - Classification of assessee company - Whether the assessee was one of ITES company only when the assessee is both in the activities of IT as well as ITES Held that - The assessee has been categorised as ITES Company - According to the TPO, companies within the category of data processing services come within the back office operation as per the CBDT Circular No. SO 890 (E) dated 26-9-2000 - the overall business of the assessee is ITES - This view of the TPO was also upheld by the DRP - the matter is required to be considered afresh by the TPO thus, the matter remitted back to the TPO for fresh adjudication Decided in favour of Assessee. Selection of comparables Held that - Since the issue relating to classification of the assessee remitted back to the TPO and since the final classification of the assessee IT and ITES company or only ITES Company, would have an impact on the selection of comparables thus, this matter also remitted back to the TPO for adjudication. Claim of pre-operating expenses as part of operating cost Held that - The assessee s claim cannot be accepted as the facts and materials on record shows that the assessee was incorporated as a company on 17-1-2007, it has been clearly mentioned that the assessee company has commenced its operations from 1st April, 2007 and hence when the assessee company has commenced its operations from 1st April, 2007, the assessee s claim of prior period expenses for the period subsequent to the commencement of operation cannot be accepted. We therefore dismiss the grounds raised by the assessee. Computation of deduction u/s 10A of the Act Exclusion of communication charges Held that - The decision in CIT v. Gem plus Jewellery India Ltd. 2010 (6) TMI 65 - BOMBAY HIGH COURT followed thus, the AO is directed to re- compute the deduction claimed u/s 10A of the Act after reducing communication charges both from the export turnover as well as total turnover Decided in favour of Assessee.

Issues:
1. Classification of the assessee as an ITES company by the TPO and DRP.
2. Selection of comparable companies by the TPO and DRP.
3. Disallowance of pre-operating expenditure as part of operating cost.
4. Exclusion of communication charges from export turnover only while computing deduction u/s 10A of the Act.

Issue 1: Classification of the assessee as an ITES company
The TPO classified the assessee as an ITES company, considering data processing services under back office operations. The assessee contested this classification, presenting evidence of being registered as a 100% EOU for providing both IT and ITES services. The ITAT remitted the issue back to the TPO for a fresh consideration based on the assessee's submissions and supporting documents.

Issue 2: Selection of comparable companies
The ITAT remitted the issue of selecting comparable companies to the TPO, pending the final classification of the assessee as an IT or ITES company. The decision on classification would impact the selection of comparables, necessitating a fresh assessment by the TPO.

Issue 3: Disallowance of pre-operating expenditure
The assessee claimed pre-operating expenditure as part of the operating cost, citing expenses incurred during the gestation period for establishing new premises. However, the ITAT dismissed the claim, noting the company's commencement of operations from 1st April 2007 and lack of specific objections raised before the DRP.

Issue 4: Exclusion of communication charges from export turnover
The ITAT directed the Assessing Officer to recompute the deduction claimed u/s 10A of the Act, instructing the reduction of communication charges from both export turnover and total turnover. Relying on relevant case law, the ITAT ruled in favor of the assessee on this issue.

In conclusion, the ITAT partially allowed the appeal by the assessee, addressing key issues related to classification, selection of comparables, expenditure disallowance, and turnover calculation for deduction purposes under section 10A of the Act.

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