2015 (5) TMI 149 - AT - Income Tax

Computation of deduction under section 10A - AO and DRP excluding expenses incurred on travel expenses in foreign currency and expenses incurred towards telecommunication expenses from export turnover on 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 telecommunication both from export turnover and total turnover as has been prayed for by the assessee. Addition to total income by way of adjustment to the Arms Length Price ( ALP ) to an international transaction - selection of comparables - Held that - TPO is directed to compute ALP after excluding the 8 comparable companies Avani Cimcon Technologies Ltd., Celestial Biolabs Ltd.,KALS Information Systems Ltd., Infosys Technologies Ltd., Wipro Ltd., Tata Elxsi Ltd.,Thirdware Solutions Ltd.,. Lucid Software Ltd. as not functionally comparable with a software development service provider such as the Assessee - Decided in favour of assessee.

Summary

Issues Involved:
1. Exclusion of expenses from export turnover for deduction under section 10A.
2. Adjustment to the Arm's Length Price (ALP) for international transactions under section 92CA.
3. Selection of comparable companies for determining ALP.

Issue-Wise Detailed Analysis:

1. Exclusion of Expenses from Export Turnover:
The assessee challenged the exclusion of travel expenses in foreign currency and telecommunication expenses from export turnover while computing the deduction under section 10A. The assessee argued that it was engaged in software development, not rendering technical services. Alternatively, the assessee contended that if these expenses were excluded from export turnover, they should also be excluded from total turnover. The Tribunal, relying on the Karnataka High Court decision 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 alternative plea.

2. Adjustment to the Arm's Length Price (ALP):
The assessee contested the addition to total income by adjusting the ALP for an international transaction under section 92CA. The assessee only sought adjudication on the comparability of certain companies selected by the Transfer Pricing Officer (TPO). The Tribunal noted that the business profile of the assessee was identical to that in the case of M/S.3DPLM Software Solutions Ltd. and proceeded to analyze the comparability of the selected companies.

3. Selection of Comparable Companies:
The Tribunal examined the comparability of various companies selected by the TPO:

- Avani Cimcon Technologies Ltd.: Excluded due to functional dissimilarity as it was engaged in software products, not software development services.
- Celestial Biolabs Ltd.: Excluded as it was involved in bio-informatics software product/services, making it functionally different from the assessee.
- KALS Information Systems Ltd.: Excluded because it was engaged in software products and training services, not purely software development services.
- Infosys Technologies Ltd.: Excluded due to its significant brand value, ownership of intellectual property rights, and substantial revenues from software products.
- Wipro Ltd.: Excluded because it was engaged in both software and product development services, and the segmental bifurcation of revenue was not available.
- Tata Elxsi Ltd.: Excluded as it was predominantly engaged in product design services, not purely software development services.
- Thirdware Solutions Ltd.: Excluded due to involvement in product development and trading in software, with no separate segmental profit and loss accounts for software development services.
- Lucid Software Ltd.: Excluded as it was engaged in software product development, making it functionally different from the assessee.

The Tribunal directed the TPO to compute the ALP after excluding these eight companies from the list of comparables. The remaining grounds of appeal related to charging of interest and initiation of penalty proceedings were deemed consequential and not appealable.

Conclusion:
The Tribunal partially allowed the appeal, directing the exclusion of specific expenses from both export and total turnover for section 10A deduction and the exclusion of certain companies from the list of comparables for determining the ALP. The decision was pronounced on April 10, 2015.