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2015 (11) TMI 1136 - AT - Income TaxComputing deduction u/s 10A - exclusion of tele-communication charges and insurance expenditure incurred in foreign currency from the export turnover as well as the total turnover as directed by the CIT(A) - Held that - This issue is now covered by the decision in the case of ACIT vs. Tata Elxsi 2011 (8) TMI 782 - KARNATAKA HIGH COURT wherein held there should be uniformity in the ingredients of both the numerator and the denominator of the formula Section 10-A is a beneficial section. It is intended to provide incentives to promote exports. If the export turnover in the numerator is to be arrived at after excluding certain expenses the same should also be excluded in computing the export turnover as a component of total turnover in the denominator. The reason being the total turnover includes export turnover. The components of the export turnover in the numerator and the denominator cannot be different. Formula will be Profits of the business of the undertaking Export turn over / (Export turnover domestic turn over) Total Turn Over Transfer pricing adjustment - assessee has raised objections against inclusion of 4 companies viz. Infosys Ltd. Persistent Systems Ltd. Tata Elxsi and Wipro Ltd. - Held that - Infosys Technologies Ltd. is not functionally comparable with the assessee because it owns significant intangibles as well as brands earning revenue from software products apart from software development services. Since no separate segment of SDS and software products is available therefore this company cannot be considered as a good comparable for the purpose of ALP in respect of international transaction of rendering SDS. Accordingly when this company is functionally not comparable with the assessee we decline to interfere with the impugned order of the CIT(A) directing the AO/TPO to exclude this company on the basis of turnover filter Persistent Systems Ltd. be excluded from the list of comparables as relying on 3DPLM Software Solution Ltd. v DCIT 2014 (12) TMI 612 - ITAT BANGALORE as it is engaged in product development and product design services while the assessee is a software development services provide. Also the segmental details are not given separately. Tata Elxsi Ltd company is predominantly engaged in product designing services and not purely software development services. The details in the Annual Report show that the segment software development services relates to design services and are not similar to software development services performed by the assessee. Wipro Ltd. company is engaged both in software development and product development services. There is no information on the segmental bifurcation of revenue from sale of product and software services. The TPO appears to have adopted this company as a comparable without demonstrating how the company satisfies the software development sales 75% of the total revenue filter adopted by him. Another major flaw in the comparability analysis carried out by the TPO is that he adopted comparison of the consolidated financial statements of Wipro with the stand alone financials of the assessee; which is not an appropriate comparison. Also this company owns intellectual property in the form of registered patents and several pending applications for grant of patents a company owning intangibles cannot be compared to a low risk captive service provider who does not own any such intangible and hence does not have an additional advantage in the market. As the assessee in the case on hand does not own any intangibles following the aforesaid decision of the co-ordinate bench of the Tribunal i.e. 24/7 Customer.Com Pvt. Ltd. (2013 (1) TMI 45 - ITAT BANGALORE) we hold that this company cannot be considered as a comparable to the assessee M/s.VGL Software Ltd. company was neither selected by the assessee in the TP analysis nor by the TPO while passing the TP order under section 92CA of the Act. However the CIT(A) included the same in the list of comparables while passing the impugned order without giving any opportunity of being heard to the AO/TPO. Since comparability of this company has not been examined at the level of the TPO/AO therefore without going into merits of the issue of comparability we set aside the issue of comparability of this company to the record of the AO/TPO for considering the functional and other criteria of comparability for including the said company in the list of comparables for determining the ALP in respect of international transaction of the assessee. Avani Cincom Technologies Ltd. and Celestial Biolabs Ltd. companies cannot be considered as functionally comparable with the assessee. Accordingly we do not find any error or illegality in the order of the CIT(A) and decline to interfere with the order of the CIT(A) qua this issue. KALS Information Systems Ltd. company was developing software products and was not purely or mainly a software service provider hence functionally dissimilar.
Issues Involved:
1. Exclusion of telecommunication charges and insurance expenditure from export turnover and total turnover for deduction u/s 10A. 2. Exclusion of specific companies as comparables based on turnover and functional dissimilarity. 3. Inclusion of a new comparable company by CIT(A). 4. Exclusion of certain companies from the list of comparables. 5. Additional grounds raised by the assessee regarding procedural and legal issues in transfer pricing. Detailed Analysis: Issue 1: Exclusion of Telecommunication Charges and Insurance Expenditure from Export Turnover and Total Turnover for Deduction u/s 10A The CIT(A) directed the AO to exclude telecommunication charges and insurance expenditure from the total turnover as well as the export turnover when computing the deduction under section 10A. This direction was upheld by the ITAT, relying on the jurisdictional High Court's decision in ACIT vs. Tata Elxsi (349 ITR 98), which mandates uniformity in the numerator and denominator of the formula for computing the deduction under section 10A. The High Court emphasized that excluding certain expenses from the export turnover should also mean their exclusion from the total turnover to avoid anomalies and uphold legislative intent. Issue 2: Exclusion of Specific Companies as Comparables Based on Turnover and Functional Dissimilarity The revenue challenged the exclusion of several companies by CIT(A) based on turnover filters and functional dissimilarity. The ITAT examined the comparability of four companies (Infosys Ltd., Persistent Systems Ltd., Tata Elxsi Ltd., and Wipro Ltd.) and upheld their exclusion based on functional dissimilarity. The Tribunal noted that these companies were not comparable due to significant intangibles, revenue from software products, and lack of segmental data. The decisions were supported by various precedents where these companies were consistently found not comparable to software development service providers like the assessee. Issue 3: Inclusion of a New Comparable Company by CIT(A) The CIT(A) included M/s VGL Software Ltd. as a comparable without the TPO/AO examining its comparability. The ITAT set aside this inclusion, directing the AO/TPO to consider the functional and other criteria of comparability afresh, as the financial details were not initially available in the public domain and were later obtained during appellate proceedings. Issue 4: Exclusion of Certain Companies from the List of Comparables The CIT(A) excluded three companies (Avani Cincom Technologies Ltd., Celestial Biolabs Ltd., and KALS Information Systems Ltd.) from the list of comparables, which the revenue contested. The ITAT upheld the CIT(A)'s decision, noting that these companies were functionally dissimilar and lacked segmental data, as established in prior Tribunal decisions. The ITAT emphasized the importance of functional comparability and consistent application of judicial precedents. Issue 5: Additional Grounds Raised by the Assessee Regarding Procedural and Legal Issues in Transfer Pricing The assessee raised several procedural and legal issues, including the necessity of demonstrating tax evasion motive, flawed process of issuing notices u/s 133(6), and reliance on incomplete information. The ITAT did not find it necessary to adjudicate these grounds separately, as the primary issues had already been addressed in the additional ground regarding the exclusion of certain companies from the comparables list. Conclusion: The ITAT partly allowed both the revenue's and the assessee's appeals. The exclusion of specific expenses from the total turnover for section 10A deduction was upheld. The exclusion of certain companies based on functional dissimilarity and turnover filters was also upheld, while the inclusion of a new comparable by CIT(A) was remanded for fresh consideration. Procedural and legal issues raised by the assessee were not separately adjudicated, as the primary issues had been resolved.
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