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2014 (11) TMI 716 - AT - Income TaxComputation of deduction u/s 10A/10B - Exclusion of telecommunication charges from export turnover Expenses incurred in foreign currency Held that - CIT (A) rightly directed the AO to recompute the deduction u/s 10A by excluding telecommunication charges from both export turnover in the numerator and total turnover from the denominator while applying the relevant formula the order of the CIT(A) is upheld Decided against revenue. Transfer pricing adjustment Determination of ALP by exclusion of M/s.Eclerx Services Ltd. Abnormal profits Held that - M/s.Eclerx Services Ltd., has an operating profit of 89.36% which is abnormal comparing to the operating profit of other companies - the assessee has also brought out the reasons as to why M/s.Eclerx Services Ltd., enjoy higher profit when compared with the assessee company - TPO has not dealt with these factors in a reasoned manner but rejected the same abruptly - The share holding pattern of the company is a decisive factor to determine the goodwill earned by the company which will directly attribute to the profit of the company - When the majority of the shares are held by Renowned Personalities in the field of business it will definitely influence the profitability of the company. The fact that 80% of the shares of M/s.Eclerx Services Ltd., is held by local business magnets of great prominence is not disputed - the turnover of the company will also determine the strength of the company to earn more profit - when a business entity is totally depended on a single client, the bargaining power of the company will be very limited to secure higher rates for services rendered - The capital infrastructure of the company will also influence the profitability of the company - Higher the capital infrastructure, higher will be the profitability - CIT(A) is justified in deleting the addition made by the AO Decided against revenue.
Issues Involved:
1. Recompute the deduction under Section 10A by excluding freight, telecommunication charges, etc., incurred in foreign currency from both the export turnover and the total turnover. 2. Deletion of the addition made by the Transfer Pricing Officer (TPO) on account of adjustment to the Arm's Length Price (ALP) by excluding M/s. Eclerx Services Ltd. on the basis of abnormal profits. Issue-wise Detailed Analysis: 1. Recompute the Deduction under Section 10A: During the assessment proceedings, the Assessing Officer observed that the assessee had incurred Rs. 63,82,818 towards telecommunication charges, which were not excluded from the export turnover for the purpose of computing the deduction under Section 10A/10B. The Assessing Officer recomputed the deduction by excluding 50% of the internet access charges from the export turnover without reducing the same from the total turnover. On appeal, the Commissioner of Income Tax (Appeals) [CIT(A)] directed the Assessing Officer to recompute the deduction by excluding telecommunication charges from both export turnover and total turnover, following judicial precedents from various higher forums. The Tribunal upheld the CIT(A)'s decision, noting that the CIT(A) had decided the issue based on higher judiciary decisions, and the Revenue could not provide any favorable decision to support its claim. Therefore, the Tribunal found no infirmity in the CIT(A)'s order and dismissed the Revenue's ground on this issue. 2. Deletion of the Addition Made by the TPO: The TPO had determined the profit level indicator at 22.67% as against 15.34% adopted by the assessee, enhancing the ALP by Rs. 2,01,34,947. The TPO selected ten companies for comparison, including M/s. Eclerx Services Ltd., which showed an operating profit margin of 89.36%. The assessee contested the inclusion of M/s. Eclerx Services Ltd. as a comparable, citing various reasons such as differences in shareholding patterns, turnover, regular contracts, capital assets, functional dissimilarities, and pricing patterns. The TPO rejected the assessee's submissions, stating that factors like shareholding patterns and the number of contracts did not impact the operating profit ratio. On appeal, the CIT(A) deleted the addition, observing that M/s. Eclerx Services Ltd. had an abnormal profit margin and significant dissimilarities with the assessee company. The CIT(A) noted that excluding M/s. Eclerx Services Ltd., the arithmetic mean of profit margins of the remaining nine companies was 15.26%, whereas the assessee's profit margin was 16.85%. The Tribunal upheld the CIT(A)'s decision, agreeing that M/s. Eclerx Services Ltd.'s operating profit of 89.36% was abnormal compared to other companies, and the factors cited by the assessee justified its exclusion as a comparable. The Tribunal concluded that the CIT(A) was justified in deleting the addition made by the Assessing Officer based on the TPO's order, and dismissed the Revenue's ground on this issue. Conclusion: In conclusion, the Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decisions on both issues. The CIT(A) correctly directed the recomputation of the deduction under Section 10A by excluding telecommunication charges from both export turnover and total turnover and rightly excluded M/s. Eclerx Services Ltd. as a comparable for determining the ALP due to its abnormal profit margin and dissimilarities with the assessee company.
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