2014 (12) TMI 386 - AT - Income Tax

Denial of exemption u/s 10A in respect of Gurgaon and Chennai units Held that - As decided by the HC in the earlier assessment year, it has been held that CIT(A) was of the view that the assessee had not started commercial production in the year ending 3l.03.2005, but, the AO had also observed that the assessee has started production even prior to 15.03.2005, when the STPI approved the proposal - the Tribunal has recorded finding of fact that the assessee had made and issued invoices on 31.03.2005 - the assessee satisfied the requirement of commencement of production stipulated in Section l0A - assessee could not place on record the copy of the letter written by them, informing STPI about commencement of production, but, there was evidence in the form of reports for the months of January, February and April, 2006, which were examined and referred by the Tribunal - the Tribunal has rightly observed that intimation to STPI was a mere ministerial requirement and not a precondition for registration, which was granted earlier - no benefit or advantage was obtained by the assessee by wrongly claiming and raising the invoices on 31.03.2005 - even if they had raised the invoices in the next financial year, benefit of Section 10A would have been available on the invoice amount - It is accepted that benefit of Section 10A was granted in the AO in the next assessment year decided in favour of assessee. Transfer pricing adjustment Determination of ALP Application of upper filter - Held that - Assessee rightly contended that with regard to the application of upper filter up to ₹ 200 crores as the assessee was a midsized company having a turnover of ₹ 23 crores only - The comparison of a small assessee with giant sized companies having huge turnover will definitely not serve the purpose of selecting appropriate comparables relying upon CIT Versus Agnity India Technologies Pvt. Ltd. 2013 (7) TMI 696 - DELHI HIGH COURT thus, the AO is directed to re-adjudicate the issue of arm s length pricing and determine the same by excluding the comparables having turnover of more than ₹ 200 crores - The AO will also take into account the bank and finance charges as part of operating expenses of comparables for arriving at the margin AO will only take segmental results relating to services only for comparing the companies M/s. Kals Information Systems, Avani Cincon, LGS Global Ltd. and Bothtree Consulting Systems as the consolidated results of these companies cannot be compared with the assessee, as assessee is admittedly into service providing activities - if segmental results of the companies relating to similar services as being provided by assessee are not available, then these companies will have to be excluded as comparables Decided in favour of assessee.

Summary

Issues Involved:
1. Denial of exemption under Section 10A of the Income Tax Act for Gurgaon and Chennai units.
2. Adjustment in transfer pricing made by the Transfer Pricing Officer (TPO).

Detailed Analysis:

1. Denial of Exemption under Section 10A:
The assessee contested the denial of exemption under Section 10A for its Gurgaon and Chennai units. The Tribunal found that the issue was already covered in favor of the assessee by a previous Tribunal order and upheld by the Hon'ble High Court. The High Court had dismissed the Revenue's appeal, confirming that the assessee had commenced production before the stipulated date, and the intimation to the Software Technology Park of India (STPI) was a ministerial requirement, not a precondition for registration. The Tribunal, following the High Court's decision, ruled in favor of the assessee, allowing the exemption under Section 10A for both units.

2. Adjustment in Transfer Pricing:
The assessee raised several issues regarding the TPO's adjustments in transfer pricing:

a. Turnover Filter:
The assessee argued against the TPO's application of a lower turnover filter of Rs. 1 crore and the absence of an upper turnover cap. The Tribunal agreed with the assessee, citing various judicial precedents that supported an upper turnover filter of Rs. 200 crores. The Tribunal ruled that companies with turnovers exceeding Rs. 200 crores should not be used as comparables for the assessee, which had a turnover of Rs. 23 crores.

b. Employee Cost Filter:
The assessee contested the TPO's exclusion of companies with employee costs less than 25% of total costs. The Tribunal upheld the TPO's application of this filter, stating that a service provider company must necessarily have high employee costs.

c. Inclusion of Specific Comparables:
The assessee objected to the inclusion of Avani Sincom Technologies, Kals Information Systems, Bodhtree Consulting Ltd., and LGS Global Ltd. as comparables, arguing that these companies were involved in product development and sales, unlike the assessee. The Tribunal directed the Assessing Officer to re-examine whether segmental data related to service provision were used for comparison. If segmental data were unavailable, these companies should be excluded as comparables.

d. Finance and Bank Charges:
The assessee argued that finance and bank charges should be considered part of operating expenses while computing margins. The Tribunal agreed, directing the Assessing Officer to include these charges as operating expenses for comparables.

Conclusion:
The Tribunal partly allowed the assessee's appeal for statistical purposes, directing the Assessing Officer to re-adjudicate the transfer pricing issue by excluding comparables with turnovers exceeding Rs. 200 crores, including finance and bank charges in operating expenses, and using segmental results for specific companies. If segmental data were unavailable, those companies should be excluded as comparables. The Tribunal's decision was pronounced in the open court on 12th September 2014.