2015 (8) TMI 1447 - AT - Income Tax

Computing deduction u/s. 10A - Exclusion of internet charges and travelling expenses incurred in foreign currency from export turnover without reducing the same from the total turnover - Held that - CIT(Appeals) correctly following the decision of the Hon ble High Court of Karnataka in the case of CIT v. Tata Elxsi Ltd. 2011 (8) TMI 782 - KARNATAKA HIGH COURT held that whatever is excluded from the export turnover, has also to be excluded from the total turnover. TPA - ALP determination - comparable selection - Held that - Exclusion of companies unmatched with assessee's transaction of rendering software development services. Advertisement expenses apportioned - provision of marketing support services by the Bangalore Non-STP unit to NVIDIA Singapore - Held that - Non-STP unit of the assessee rendered services exclusively to NVIDIA Singapore and none of the other STP-units had the benefit of those services. This aspect has not been considered by the CIT(A) at all. On the other hand, the CIT(A) as well as the AO proceeded on the assumption that non-STP unit as well as STP units in India would benefit from the advertisement done for NVIDIA Singapore. It is seen that NVIDIA Singapore has acknowledged that software products and advertisement is attributable to those products. Non-STP units of assessee are engaged in software development activities and do not engage in sales or marketing activities or software product. In these circumstances, we find merit in the contention of assessee that advertisement expenses apportioned by the AO and confirmed by the CIT(A) was without any basis. The said addition is accordingly directed to be deleted.

Issues Involved:
1. Exclusion of certain expenses from export turnover and total turnover for deduction under Section 10A.
2. Determination of Arm's Length Price (ALP) for international transactions involving software development services.
3. Treatment of forex loss/gain as operating income.
4. Selection and rejection of comparable companies for Transfer Pricing.
5. Disallowance of depreciation on building.
6. Apportionment of advertisement expenses.
7. Credit for Tax Deducted at Source (TDS).

Issue-Wise Detailed Analysis:

1. Exclusion of Certain Expenses from Export Turnover and Total Turnover for Deduction Under Section 10A:
The Revenue's appeal contested the CIT(A)'s direction to exclude internet charges and travelling expenses incurred in foreign currency from both export turnover and total turnover while computing the deduction under Section 10A. The AO argued that Section 10A only allows for the exclusion of such expenses from export turnover, not total turnover. The CIT(A) relied on the Karnataka High Court decision in CIT v. Tata Elxsi Ltd., which mandates that whatever is excluded from export turnover must also be excluded from total turnover. The Tribunal upheld the CIT(A)'s decision, stating that the Karnataka High Court's ruling is binding.

2. Determination of Arm's Length Price (ALP) for International Transactions Involving Software Development Services:
The assessee challenged the addition suggested by the TPO for the ALP adjustment related to software development services provided to its AE. The TPO accepted 8 out of 21 comparables proposed by the assessee and added 3 new comparables, resulting in a final set of 11 comparables with an average mean margin of 24.32%. The Tribunal directed the exclusion of certain companies such as Bodhtree Consulting Ltd., Infosys Ltd., KALS Information Systems Ltd., Tata Elxsi Ltd., and Persistent Systems Ltd. from the list of comparables due to functional dissimilarities. The AO/TPO was instructed to recompute the arithmetic mean of the profit margins of the remaining comparables.

3. Treatment of Forex Loss/Gain as Operating Income:
The Revenue challenged the CIT(A)'s decision that forex loss/gain should be considered part of operating income for determining profit margins. The Tribunal upheld the CIT(A)'s decision, referencing the ITAT Bangalore Bench's rulings in Trilogy E-Business Software India Pvt. Ltd. and SAP Labs India Pvt. Ltd., which treated forex gain/loss as operating in nature.

4. Selection and Rejection of Comparable Companies for Transfer Pricing:
The Tribunal excluded Bodhtree Consulting Ltd., Infosys Ltd., KALS Information Systems Ltd., Tata Elxsi Ltd., and Persistent Systems Ltd. from the list of comparables, citing reasons such as involvement in software products, significant intangibles, and functional differences from the assessee's software development services.

5. Disallowance of Depreciation on Building:
The AO disallowed depreciation on a building acquired after the amalgamation of Portal Player India Pvt. Ltd., claiming it was put to use in the previous financial year. The CIT(A) upheld the AO's decision due to a lack of evidence from the assessee. The Tribunal remanded the issue back to the AO for fresh consideration, allowing the assessee to provide evidence that no depreciation was claimed by the amalgamating company in the previous year.

6. Apportionment of Advertisement Expenses:
The AO apportioned advertisement expenses incurred by the Non-STP unit to the STP units, assuming all units benefited from the advertisement. The CIT(A) directed apportionment based on turnover. The Tribunal found merit in the assessee's contention that the Non-STP unit exclusively incurred the expenses for marketing support services to NVIDIA Singapore and directed the deletion of the apportionment made by the AO.

7. Credit for Tax Deducted at Source (TDS):
The assessee claimed that full credit for TDS was not granted due to discrepancies in Form 26AS. The Tribunal directed the AO to verify the TDS certificates in light of CBDT Instruction No.5/2013 and afford the assessee an opportunity to present their case.

Conclusion:
The Tribunal dismissed the Revenue's appeal and partly allowed the assessee's appeal, providing specific directions on each issue for further action by the AO. The Tribunal's decisions were based on adherence to legal precedents, functional analysis, and verification of facts.

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