2015 (11) TMI 538 - AT - Income Tax

Exclusion of telecommunication expenditure and foreign currency expenditure from total turnover while computing the deduction available u/s.10A - Held that - Parity has to be there between export turnover and total turnover while excluding items from the export turnover. CIT (A) correctly directed exclusion of telecommunication expenditure and foreign currency expenditure from total turnover while computing the deduction available u/s.10A as relying on case of CIT v. Tata Elxsi Ltd 2011 (8) TMI 782 - KARNATAKA HIGH COURT - Decided against revenue. Exclusion of all comparables that were having any related party transactions (RPT) from the list of comparables considered for bench marking the pricing of international transactions of the assessee as per CIT(A) - Held that - CIT (A) fell in error in directing exclusion of comparables which were having any RPTs. RPT ratio has to be considered at 15% in accordance with the above decision. Vis-a-vis argument of the Ld. AR that a few of the companies which come back to the list of comparables, still had to be excluded, for other reasons, we are of the opinion that the submission warrants consideration. These companies will be considered by us when we take up the appeal of the assessee, while adjudicating on the grounds taken by the assessee seeking exclusion of certain comparable companies. - Partly in favour of revenue. Eligiblity for 5% deduction while making the ALP analysis relying on proviso to Section 92C(2) - Held that - The impugned assessment year being 2005-06, the proviso to Section 92C(2) as it stood prior to substitution brought in by Finance (No.2) Act, 2009, w.e.f. 1.10.2009 applied. The question whether / - 5% disallowance could be allowed as a standard deduction, had come up before this Tribunal in the case of Sap Labs India P. Ltd v. ACIT 2010 (8) TMI 676 - ITAT, BANGALORE . CIT (A) had followed the Coordinate Bench decision in Sap Labs India P. Ltd (supra), wherein it was held that prior to the substitution, the second limb of the old proviso could be construed as a standard deduction available to the assessee. - Decided against revenue. Exclusion of certain companies from the list of comparables questioned by assessee - Held that - . Though abnormal profits as such may not be a reason for exclusion of a company from the list of comparables, if such abnormal profits were caused due to amalgamation then unless contribution of the amalgamating company to the profits are brought out, in our opinion, comparability gets eroded. We are therefore of the opinion that Exensys Software Solutions Ltd, has to be excluded from the list of comparables. Infosys Technologies Ltd and Satyam Computers Ltd be excluded based on functionality for the former and unreliable financial results for the latter. No sufficient data to come to a conclusion that Thirdware Solutions Ltd was into software product development and not in software development services. Its revenue stream does show some licence income, but there was substantial software services income also. We are therefore of the opinion that the issue whether Thirdware Solutions Ltd can be considered as a good comparable requires a fresh look by the AO / TPO, after getting requisite information from the concerned company. Hence, comparability of Thirdware Solutions Ltd is remitted back to the file of AO / TPO. Tata Elxsi Ltd, and Sankhya Infotech Ltd directed to be excluded as these companies were functionally different.. TPO has been able to demonstrate that Flextronics Software Systems Ltd was predominantly into software development service. Just because an insignificant portion of revenue was generated from sale of products and related services or business process outsourcing, a conclusion cannot be drawn that it was not into software development services. We are therefore of the opinion that Flextronics Software Systems Ltd was properly considered as a good comparable. Coming to Foursoft Ltd, admittedly RPT was in excess of 15% is directed to be excluded. Geometric Software Solutions Co. requires a fresh look by the AO so as to verify whether RPT exceeded 15%

Issues Involved:
1. Exclusion of telecommunication and foreign currency expenditure from total turnover for deduction under Section 10A.
2. Exclusion of comparables with related party transactions (RPT) for transfer pricing analysis.
3. Exclusion of companies with abnormal profits from the list of comparables.
4. Eligibility for 5% deduction in Arm's Length Price (ALP) analysis under Section 92C(2).
5. Exclusion of certain companies from the list of comparables based on functionality, segmental results, and RPT filter.

Detailed Analysis:

1. Exclusion of Telecommunication and Foreign Currency Expenditure from Total Turnover:
The Revenue contested the CIT (A)'s direction to exclude telecommunication expenditure of Rs. 2,74,80,645 and foreign currency expenditure of Rs. 3,73,26,570 from the total turnover while computing the deduction available under Section 10A of the Income-tax Act, 1961. The Tribunal found that the CIT (A)'s direction was consistent with the jurisdictional High Court's judgment in CIT v. Tata Elxsi Ltd (349 ITR 98), which mandated parity between export turnover and total turnover. Therefore, the Tribunal dismissed this ground of the Revenue's appeal.

2. Exclusion of Comparables with Related Party Transactions (RPT):
The Revenue challenged the CIT (A)'s direction to exclude all comparables with any RPT from the list considered for benchmarking the pricing of international transactions. The Tribunal noted that the CIT (A)'s direction was against various Tribunal decisions, including 24/7 Customer.com Pvt Ltd vs DCIT, which held that an entity could be considered uncontrolled if its RPT did not exceed 10 to 15 percent of total revenue. The Tribunal concluded that the CIT (A) erred in directing the exclusion of comparables with any RPT and held that the RPT ratio should be considered at 15%. The Tribunal partially allowed this ground and decided to consider the exclusion of certain companies while adjudicating the assessee's appeal.

3. Exclusion of Companies with Abnormal Profits:
The Revenue argued that the CIT (A) directed the exclusion of companies with abnormal profits without providing reasons related to the functions, assets, and risks assumed by such companies. The Tribunal observed that the CIT (A) excluded Exensys Software Solutions Ltd and Thirdware Solutions P. Ltd due to abnormal profits caused by extraordinary events like amalgamation and functional differences. The Tribunal decided to discuss the comparability of these companies while adjudicating the grounds raised by the assessee. This ground was treated as partly allowed for statistical purposes.

4. Eligibility for 5% Deduction in ALP Analysis:
The Revenue contended that the CIT (A) erred in holding the assessee eligible for a 5% deduction while making the ALP analysis, relying on the proviso to Section 92C(2) as it stood before its substitution by Finance (No.2) Act, 2009. The Tribunal upheld the CIT (A)'s decision, which was consistent with the Special Bench decision in Sap Labs India P. Ltd v. ACIT, allowing the 5% deduction as a standard deduction. This ground of the Revenue's appeal was dismissed.

5. Exclusion of Certain Companies from the List of Comparables:
The assessee sought the exclusion of certain companies from the list of comparables based on functionality, segmental results, and RPT filter. The Tribunal considered various arguments and precedents, including the coordinate bench decision in Symbol Technologies India P. Ltd and other relevant cases. The Tribunal directed the exclusion of Infosys Technologies Ltd, Satyam Computers Ltd, Exensys Software Solutions Ltd, Tata Elxsi Ltd, Sankhya Infotech Ltd, and Foursoft Ltd from the list of comparables. The comparability of Thirdware Solutions Ltd and Geometric Software Solutions Co was remitted back to the AO/TPO for further consideration. The Tribunal also upheld the inclusion of Flextronics Software Systems Ltd as a comparable and directed the exclusion of companies with RPT exceeding 15%.

Conclusion:
Both the appeals of the assessee and the Revenue were partly allowed for statistical purposes. The AO/TPO was directed to rework the average mean PLI of the comparables, consider necessary working capital adjustments, and proceed as per law to verify the pricing of the international transactions undertaken by the assessee in the software development services segment.

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