2015 (4) TMI 56 - AT - Income Tax

Transfer pricing adjustment - adjustment to the Arms Length Price ( ALP ) to an international transaction - Held that - Turnover filter is an important criteria in choosing the comparables. The 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. KALS Information Systems Ltd., Accel Transmatic Ltd. be excluded from the list of 26 comparable arrived at by the TPO. Tata Elxsi Limited predominantly engaged in product designing services and not purely software development services should also be excluded for the purpose of comparison while determining the ALP of the international transaction in question. For segmental margins in so far as it relates to providing software services by Megasoft alone should be taken for the purpose of comparison. Assessing Officer should confine the adjustment, qua the transactions by the assessee with its AE alone. To be more specific, the adjustment is to be made only to the transactions with the AE. Exclusion of expenses incurred on travel expenses in foreign currency and expenses incurred towards communication expenses from export turnover while computing deduction under section 10A n the ground that these expenses are incurred in rendering technical services rendered to clients outside India - Held that - Taking into consideration the decision rendered by the Hon ble High Court of Karnataka in the case of CIT v. Tata Elxsi Ltd 2011 (8) TMI 782 - KARNATAKA HIGH COURT we are of the view that it would be just and appropriate to direct the Assessing Officer to exclude expenses incurred in foreign currency towards travelling and expenses incurred towards communication both from export turnover and total turnover, as has been prayed for by the assessee. - Decided in favour of assessee Non-grant of set-off of brought forward business loss and unabsorbed depreciation against the alleged income - DRP directing the AO to set-off of brought forward business loss and unabsorbed depreciation before computing the deduction under Section 10A - Held that - The carried forward business loss of Sec.10A unit cannot be set off or carried forward during the tax holiday period against any income.The carried forward business loss to the extent it pertains to non- 10A unit can be set off against income of non-10A unit.Sec.10A is an exemption provision and therefore will not enter the computation of total income and therefore there is no question of any carried forward loss being set off against the profits eligible for deduction u/s.10A of the Act and the profit or loss of Sec.10A unit during the tax holiday period is quarantined and loss if any is carried forward to the assessment years immediately following the last of the assessment years for which the Assessee is entitled to claim exemption u/s.10A, for being set off in accordance with law as if it were any other loss to be dealt with in accordance with Sec.70 to 72 and 32(2) of the Act.D RP s order/directions on this issue based on a Tribunal decision rendered prior to the decision of the Hon ble Karnataka High Court in the case of Yokogawa (2011 (8) TMI 845 - Karnataka High Court ) cannot be sustained. We direct the AO to decide the claim of the Assessee in the light of the legal position set out - Decided in favour of assessee for statistical purposes.

Summary

Issues Involved:
1. Addition to total income by way of adjustment to the Arm's Length Price (ALP) for international transactions.
2. Application of the turnover filter for selecting comparable companies.
3. Functional comparability of selected companies.
4. Exclusion of certain expenses from export turnover while computing deduction under section 10A.
5. Set-off of brought forward business loss and unabsorbed depreciation.

Detailed Analysis:

1. Addition to Total Income by Way of Adjustment to the ALP:
The assessee, engaged in software development services, had to determine the ALP for services rendered to its Associated Enterprise (AE). The Transfer Pricing Officer (TPO) selected 20 comparable companies and computed an adjusted arithmetic mean of 22.13%. This resulted in a transfer pricing adjustment of Rs. 2,50,70,787. The assessee objected to the TPO's methodology and the selection of comparables. The Tribunal found that the business profile of the assessee was identical to cases previously decided, such as M/s. Trilogy E-Business Software India Pvt. Ltd., and directed the TPO to re-compute the ALP by excluding certain companies and considering only the software development segment margin of Megasoft Ltd.

2. Application of the Turnover Filter:
The Tribunal discussed the importance of the turnover filter in selecting comparables. It was held that companies with a turnover of more than Rs. 200 crores should be excluded from the list of comparables, as the assessee's turnover was less than Rs. 20 crores. This decision was based on precedents such as the case of Trilogy E-Business Software India Pvt. Ltd. Consequently, companies like Flextronics Software Systems Ltd., iGate Global Solutions Ltd., Mindtree Ltd., Persistent Systems Ltd., Sasken Communication Technologies Ltd., and Infosys Technologies Ltd. were excluded from the list of comparables.

3. Functional Comparability of Selected Companies:
The Tribunal found that certain companies selected by the TPO were not functionally comparable to the assessee. Specifically, KALS Information Systems Limited and Accel Transmission Limited were excluded based on their functional differences, as established in the case of Trilogy E-Business Software India Pvt. Ltd. Additionally, Tata Elxsi Ltd. was excluded for not being functionally comparable, as decided in the case of Yodlee Infotech Pvt. Ltd. The Tribunal directed the TPO to exclude these companies and to consider only the software development segment margin of Megasoft Ltd.

4. Exclusion of Certain Expenses from Export Turnover:
The assessee argued that expenses incurred on travel and communication should not be excluded from export turnover while computing deduction under section 10A. The Tribunal, following the decision of the Karnataka High Court in CIT v. Tata Elxsi Ltd., directed the Assessing Officer to exclude these expenses from both export turnover and total turnover.

5. Set-off of Brought Forward Business Loss and Unabsorbed Depreciation:
The Tribunal addressed the issue of set-off of brought forward business loss and unabsorbed depreciation. It was established that section 10A is an exemption provision, and the profits of the eligible unit do not enter the computation of total income. Therefore, the brought forward business loss and unabsorbed depreciation relating to non-10A units can be set off against other income. However, the loss of the 10A unit during the tax holiday period is quarantined and carried forward to be set off in subsequent years. The Tribunal directed the Assessing Officer to decide the claim of the assessee in light of this legal position.

Conclusion:
The Tribunal partly allowed the appeal, directing the TPO to re-compute the ALP by excluding certain companies and considering only the software development segment margin of Megasoft Ltd. The Tribunal also directed the Assessing Officer to exclude travel and communication expenses from both export turnover and total turnover and to decide the set-off of brought forward business loss and unabsorbed depreciation in accordance with the legal principles established.