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2014 (12) TMI 804 - AT - Income TaxComputation of deduction u/s 10A - Exclusion of expenses on travel exenses in foreign currency expenses towards telecommunication expenses form export turnover Held that - following the decision in CIT v. Tata Elxsi Ltd 2011 (8) TMI 782 - KARNATAKA HIGH COURT the AO is directed to exclude expenses incurred in foreign currency towards travelling and expenses incurred towards telecommunication both from export turnover and total turnover Decided in favour of assessee. Transfer pricing adjustment Selection of comparables - Turnover Filter - addition to total income on ALP to international transaction as per u/s 92CA Held that - Following the decision in Trilogy E-Business Software India (P.) Ltd. Versus Deputy Commissioner of Income-tax. Circle 12(4). Bangalore 2013 (1) TMI 672 - ITAT BANGALORE wherein it has been held that the TNMM is the most appropriate method for determining the ALP of the international transaction - the provisions of law clearly lay down the principle that the turnover filter is an important criteria in choosing the comparables - assessee s turnover is ₹ 47,46,66,638. It would therefore fall within the category of companies in the range of turnover between 1 crore and 200 crores - thus, companies having turnover of more than 200 crores have to be eliminated from the list of comparables. Improper selection of comparables KALS Information Systems Ltd. - Held that - Following the decision in Trilogy E-Business Software India (P.) Ltd. Versus Deputy Commissioner of Income-tax. Circle 12(4). Bangalore 2013 (1) TMI 672 - ITAT BANGALORE wherein it has been held that the TPO has drawn conclusions on the basis of information obtained by issue of notice u/s.133(6) of the Act The information which was not available in public domain could not have been used by the TPO, when the same is contrary to the annual report of this company as highlighted by the Assessee in its letter dated 21.6.2010 to the TPO - this company was developing software products and not purely or mainly software development service provider. Accel Transmatic Ltd. Held that - The company should not be treated as comparables was considered by the Tribunal in Capgemini India (P.) Ltd. Versus Additional Commissioner of Income-tax, Range-10(2), Mumbai 2011 (5) TMI 509 - ITAT, MUMBAI where the assessee was software developer - this company was not comparable in the case of the assessees engaged in software development services business. Tata Elxsi Limited. Functionally not comparable - Held that - This company is predominantly engaged in product designing services and not purely software development services - The references made to the Annual Report by the learned Authorised Representative show that the segment software development and services relates to design services and are not similar to software support services performed by the assessee - this company is not to be considered for inclusion in the set of comparable in the case on hand for the period under consideration and therefore direct the TPO to exclude this company from the final set of comparables for the period under consideration the company should also be excluded for the purpose of comparison while determining the ALP of the international transaction. Megasoft Ltd. Held that - Following the decision in Trilogy E-Business Software India (P.) Ltd. Versus Deputy Commissioner of Income-tax. Circle 12(4). Bangalore 2013 (1) TMI 672 - ITAT BANGALORE wherein it has been held that only segmental data of the said company should be taken for the purpose of comparison - neither the TPO nor the DRP have noticed that there is bound to be a difference between the Assessee and Megasoft and the profit arising to the Megasoft as a result of the existence of the software product segment and no finding has been given that reasonably accurate adjustments can be made to eliminate the material effects of such differences - the profit margin of 23.11% which is the margin of the software service segment be taken for comparability - segmental margins in so far as it relates to providing software services by Megasoft alone should be taken for the purpose of comparison Decided partly in favour of assessee.
Issues Involved:
1. Exclusion of expenses from export turnover while computing deduction under section 10A. 2. Addition to the total income by way of adjustment to the Arm's Length Price (ALP) for an international transaction. Detailed Analysis: 1. Exclusion of Expenses from Export Turnover: The primary issue raised by the assessee concerns the exclusion of travel expenses in foreign currency and telecommunication expenses from the export turnover while computing the deduction under section 10A of the Income-tax Act, 1961. The assessee contended that these expenses should not be excluded as they were incurred in the development of computer software, not in rendering technical services. Alternatively, the assessee argued that if these expenses are excluded from the export turnover, they should also be excluded from the total turnover. The Tribunal, considering the decision of the Karnataka High Court in CIT v. Tata Elxsi Ltd [2012] 349 ITR 98 (Karn), directed the Assessing Officer to exclude these expenses from both export turnover and total turnover, thus accepting the assessee's alternate plea. Consequently, no further adjudication was required on this issue. 2. Adjustment to Arm's Length Price (ALP): The second issue pertains to the addition to the total income by way of adjustment to the ALP for an international transaction between the assessee and its Associated Enterprise (AE). The assessee, a wholly-owned subsidiary of a US-based company, provided software development research and development services to its holding company and was remunerated on a cost-plus 10% markup basis. The transaction was subjected to the ALP test as per section 92C of the Act. The assessee adopted the Transaction Net Margin Method (TNMM) and reported an operating profit margin of 11.37%. The Transfer Pricing Officer (TPO) identified 20 comparable companies and determined an adjusted arithmetic mean PLI of 19.17%, leading to a transfer pricing adjustment of Rs. 68,91,931. The assessee challenged the comparables chosen by the TPO and the methodology adopted. The Tribunal, referencing its decision in the case of Trilogy E-Business Software India Pvt. Ltd., directed the exclusion of certain companies with turnovers exceeding Rs. 200 crores from the final list of comparables, as they were not comparable to the assessee's turnover of less than Rs. 20 crores. Additionally, the Tribunal excluded KALS Information Systems Limited and Accel Transmatic Limited from the comparables, as they were not functionally similar to the assessee. Tata Elxsi Ltd. was also excluded based on a prior Tribunal decision, which found it not functionally comparable to a software development service provider. For Megasoft Ltd., the Tribunal directed that only the segmental margin related to software services should be considered. The Tribunal concluded that if the specified comparables are excluded, the profit margin of the assessee would fall within the permissible range, and thus, the price received by the assessee would be considered at arm's length. The Tribunal directed the TPO to recompute the ALP accordingly, resulting in a partial allowance of the assessee's appeal. Conclusion: The Tribunal's judgment addressed the exclusion of certain expenses from export turnover and the proper selection of comparables for determining the ALP in international transactions. The decision emphasized adherence to established legal precedents and functional comparability in transfer pricing adjustments.
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