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2015 (1) TMI 838 - AT - Income TaxTransfer pricing adjustment - addition to the total income by way of adjustment to the Arms Length Price - selection of comparables - Held that - KALS Information Systems Limited and Accel Transmatic, Tata Elxsi Ltd. companies be excluded from the list of 14 comparable arrived at by the TPO as are not functionally comparable with that of the Assessee. Comparable company at Sl.No.6 viz., Flextronics Software Systems Pvt. Ltd. should be taken as a comparable, while comparable at Sl.No.24 viz., Tata Elxsi Ltd. should be rejected as a comparable. Lucid Software Ltd., is engaged in the development of software products whereas the assessee, in the case on hand, is in the business of providing software development services, thus excluded. TPO is directed to compute ALP after excluding the 4 comparable companies dealt with in this order. - Decided in favour of assessee. Entitlement to claim deduction u/s.10A - expenses that are reduced from the export turnover should also be reduced from the total turnover - AO in the draft assessment order dated 10.12.2009 has referred to the fact that the proposal to exclude the aforesaid charges from the export turnover was accepted by the Assessee and therefore the export turnover is being reduced accordingly - Held that - A perusal of the provisions of Sec.144C of the Act makes it clear that the draft assessment order of the AO will attain finality to the extent that the Assessee does not object to the proposals in the draft assessment order. The DRP is at liberty to consider any issue after due opportunity to the AO and the Assessee. The directions issued by the DRP are binding on the Assessing officer. The above provisions of Sec.144C of the Act which are applicable to the Assessee for the present assessment year, are applicable notwithstanding anything to the contrary under any other provisions of this Act. We are of the view that in the light of the above statutory provisions, the Assessee cannot seek to raise an issue before the Tribunal in respect of which he has not filed any objection before the DRP nor has the DRP considered the issue in exercise of their powers under Sec.144C (8) of the Act. We therefore decline to admit the additional ground for adjudication. - Decided against assessee.
Issues Involved:
1. Adjustment to the Arm's Length Price (ALP) for international transactions. 2. Exclusion of certain comparable companies from the list used by the Transfer Pricing Officer (TPO). 3. Computation of deduction under section 10A of the Income Tax Act. 4. Disallowance of expenses due to non-deduction of tax at source. Detailed Analysis: 1. Adjustment to the Arm's Length Price (ALP) for International Transactions: The primary issue in both appeals (AY 2006-07 and AY 2009-10) concerns the adjustment to the ALP for international transactions involving software development services rendered to associated enterprises (AEs). The assessee used the Transaction Net Margin Method (TNMM) to determine the ALP, selecting six comparable companies with an arithmetic mean profit margin of 10.59%. The TPO, however, identified 14 comparable companies for AY 2006-07 and 11 for AY 2009-10, arriving at higher arithmetic means of 21.72% and 24.32%, respectively. The TPO's adjustments led to significant additions to the assessee's income, which were confirmed by the Dispute Resolution Panel (DRP). 2. Exclusion of Certain Comparable Companies: The Tribunal considered the exclusion of specific comparable companies used by the TPO based on functional dissimilarity and turnover filters: - AY 2006-07: The Tribunal directed the exclusion of KALS Information Systems Ltd., Accel Transmatic Ltd., Tata Elxsi Ltd., and Lucid Software Ltd. These companies were found to be either engaged in software product development or had other functional dissimilarities. - AY 2009-10: The Tribunal excluded companies with turnovers exceeding Rs. 200 crores, including Tata Elxsi Ltd., Zylog Systems Ltd., Larsen & Toubro Infotech, Mindtree Ltd., Persistent Systems Ltd., Sasken Communication Technologies Ltd., and Infosys Technologies Ltd. Additionally, KALS Information Systems Ltd. and Bodhtree Consulting Ltd. were excluded for functional dissimilarity. 3. Computation of Deduction under Section 10A: The assessee sought to raise an additional ground regarding the exclusion of telecommunication expenses from the export turnover while computing the deduction under section 10A. The Tribunal declined to admit this additional ground, noting that the assessee had not raised any objection before the DRP. The Tribunal emphasized that under section 144C, the draft assessment order attains finality to the extent that the assessee does not object to the proposals. 4. Disallowance of Expenses Due to Non-Deduction of Tax at Source: For AY 2009-10, the AO disallowed a sum of Rs. 71,88,842 paid to M/s. Pivotal Corporation, a non-resident, without deduction of tax at source. The assessee claimed this was a reimbursement of expenses and thus not subject to tax deduction. The AO disagreed, citing a lack of substantiation. The assessee did not raise objections before the DRP, and the Tribunal upheld the disallowance, reiterating that issues not raised before the DRP cannot be contested at the Tribunal level. Conclusion: The appeals were partly allowed, with the Tribunal directing the TPO to recompute the ALP after excluding the specified comparable companies. The additional ground concerning section 10A deductions and the disallowance of expenses due to non-deduction of tax at source were dismissed. The Tribunal's decisions emphasize the importance of functional comparability and adherence to procedural requirements under section 144C.
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