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2015 (1) TMI 604 - AT - Income TaxDefinition of export turnover and total turnover - exclusion of foreign exchange gain of ₹ 10,36,754 from the export turnover for the purpose of computing the deduction u/s.10A - Corporate tax issues - Held that - Since the issue is covered by various decisions as accepted by DRP we direct the A.O. to exclude the same amounts from total turnover also. Transfer Pricing Issues - selection of comparable - Held that - Kals Info Systems Ltd., and Accel Transmatics Ltd. are to be excluded for the purpose of comparison while determining the ALP of the impugned transaction in this appeal as they are developing software products and not purely or mainly software development service provider. For Megasoft Ltd. it is found that it has two separate segments i.e. product and services. Therefore, if at all, the AO/TPO considers the aforesaid company to be a comparable, then, he is directed to consider software development services segment alone for comparability analysis. For Infosys Technologies Ltd.as accepted the fact that the assessee is purely a software development service provider to its AE whereas Infosys is not a captive service provider like assessee. It is a fact that Infosys is engaged in diversified activities and also engaged in development of products consultancy and solution. That apart, the size, reputation and brand value of Infosys, in no way makes it comparable to a small captive service provider like assessee therefore excluded. For Tata Elxsi Ltd. (Seg.)is also to be excluded from the list of comparables while determining the, ALP of the international transaction. For Flextronics Software Systems Ltd., (seg) it is functionally different and A.O. could not have taken this company as comparable company without making suitable adjustments for the differences. Therefore, this comparable has to be excluded. However, since, this aspect was not examined by any Coordinate Bench in A.Y. 2006-07, restore this to the file of TPO to examine the functions of the above company and determine whether that is comparable or not, keeping in mind the decision of Coordinate Bench of earlier A.Y. and later A.Y. about the functional differences. The issue is restored to the file of TPO. Working capital adjustment - Held that - There is no reason why negative working capital adjustment was made. Moreover, as already decided to exclude certain comparables which may result in varying working capital adjustment. Therefore, the issue is restored to the file of TPO to rework out it. - Decided in favour of assessee for statistical purposes.
Issues Involved:
1. Definition of export turnover and total turnover for Section 10A deduction. 2. Transfer Pricing issues concerning comparability and working capital adjustment. Issue-wise Detailed Analysis: 1. Definition of Export Turnover and Total Turnover for Section 10A Deduction: The assessee contended that the Assessing Officer (A.O.) erred in excluding the foreign exchange gain of Rs. 10,36,754 from the 'export turnover' for computing the deduction under Section 10A of the Income Tax Act, 1961. Alternatively, the A.O. should have excluded the same from the 'total turnover'. Additionally, the assessee argued that communication expenses of Rs. 1,70,07,809 should be deducted from both total turnover and export turnover. The assessee relied on the decision of ITO vs. Sak Soft Ltd., 313 ITR 353, where the Tribunal upheld the parity concept, i.e., any exclusion from 'export turnover' should also be excluded from 'total turnover' for the purpose of computing deductions under Section 10A. This principle was also upheld in other cases such as ITO vs. DE Block India Software (P) Ltd., ITO vs. Virtusa (India) Ltd., and DCIT vs. Mentor Graphics (I) P. Ltd. The Dispute Resolution Panel (DRP) acknowledged these decisions but upheld the A.O.'s decision to keep the issue alive for the department to pursue further. Consequently, the Tribunal directed the A.O. to exclude the same amounts from the total turnover, allowing Ground Nos. 3 to 5.2. 2. Transfer Pricing Issues: The assessee, engaged in software development services, reported transactions with its Associated Enterprises (A.E.) and filed a Transfer Pricing (T.P.) report prepared by Deloitte, Haskins & Sells. The Transfer Pricing Officer (TPO) rejected the report due to the use of multiple-year data and other deficiencies. The TPO accepted the Transactional Net Margin Method (TNMM) but selected 20 companies as comparables. The assessee objected to specific comparables, particularly Accel Transmatic Ltd., KALS Info Systems Ltd., Megasoft Ltd., Infosys Technologies Ltd., Tata Elxsi Ltd., and Flextronics Software Systems Ltd., arguing they were not comparable due to functional differences, exceptional financial years, or failing the Related Party Transaction (RPT) filter. The Tribunal analyzed these objections based on precedents and functional profiles: - Accel Transmatic Ltd. and KALS Info Systems Ltd.: Excluded due to functional differences and failing the RPT filter, as supported by decisions in Huawei Technologies India Pvt. Ltd. and Trilogy E-Business Software India Pvt. Ltd. - Megasoft Ltd.: Directed the TPO to consider only the software development services segment for comparability. - Infosys Technologies Ltd.: Excluded due to its diversified activities, brand value, and scale of operations, making it incomparable to a small captive service provider. - Tata Elxsi Ltd.: Excluded based on its specialized embedded software development and complex segments. - Flextronics Software Systems Ltd.: The issue was restored to the TPO to examine functional comparability, considering previous years' decisions. The Tribunal rejected the inclusion of certain companies proposed by the assessee due to valid reasons provided by the TPO and lack of supporting decisions from coordinate benches. Working Capital Adjustment: The assessee argued against the negative working capital adjustment, stating it did not bear any working capital risk and had no interest payments related to working capital loans. The Tribunal, referencing the decision in Cordys Software India P. Ltd., remitted the issue back to the TPO to rework the adjustment, considering the assessee's submissions and principles laid down by various coordinate bench decisions. Conclusion: The appeal was allowed for statistical purposes, directing the A.O. and TPO to reexamine the issues as per the Tribunal's guidance. The order was pronounced in the open court on 02.01.2015.
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