2014 (6) TMI 1009 - AT - Income Tax

TPA - Comparable selection criteria - Held that - Assessee provides software development services to its clients in various countries including its associated enterprises (AE) overseas, thus companies functionally dissimilar with that of assessee need to be deselected from final list. Deduction u/s 10A - reducing communication and freight expenses from the export turnover only while computing deduction - Held that - As relying on case of CIT Vs. Gemplus Jewellery 2010 (6) TMI 65 - BOMBAY HIGH COURT and ITO Vs Saksoft Ltd 2009 (3) TMI 243 - ITAT MADRAS-D we direct the AO to exclude the communication expenses from export turnover as well as total turnover while computing deduction u/s 10A

Summary

Issues:
Transfer pricing adjustments under section 92CA of the Income Tax Act, 1961; Selection of comparables for benchmarking international transactions; Adjustment to deduction under section 10A of the Act for communication and freight expenses.

Transfer Pricing Issues:
The appeal was against the assessment order under sections 143(3) and 144C of the Act for the AY 2007-08. The assessee, a software development services provider, filed its return with a claimed deduction under section 10A. The Transfer Pricing Officer (TPO) rejected the Transfer Pricing (TP) study of the assessee and made adjustments under section 92CA. The Dispute Resolution Panel (DRP) upheld the TPO's order. The assessee raised objections, focusing on the selection of comparables by the TPO. The Tribunal analyzed objections to specific comparables:
- Avani Cimcon Technologies Ltd.: The Tribunal directed to exclude this company as it was involved in product sales along with software services, lacking segment-wise data.
- Celestial Labs Ltd.: The Tribunal ruled out this company as comparable due to functional differences with the assessee.
- Infosys Technologies Ltd. and Wipro Ltd.: These companies were excluded as comparables due to their industrial stature, diversified activities, premium pricing, and economies of scale.
- Mega Soft Ltd.: The Tribunal directed to consider only the segmental margin of this company for ALP computation.
The Tribunal directed the TPO to recompute the ALP considering the directions given and allowed the appeal partially.

Adjustment under Section 10A:
The only other issue was the AO's reduction of communication and freight expenses from the export turnover for computing the deduction under section 10A. The Tribunal relied on precedents and directed the AO to exclude communication expenses from both export and total turnover while computing the deduction under section 10A.

The appeal was partly allowed based on the Tribunal's directions on transfer pricing issues and the adjustment under section 10A.