2017 (4) TMI 1375 - AT - Income Tax

Transfer pricing addition - comparable selection criteria - functional similarity - Held that - The assessee has set up offshore development centre for catering to the software development and maintenance need of the group in the global trade and logistic domain. Therefore the assessee is providing software development services to its AE, thus companies functionally dissimilar with that of assessee need to be deselected from final list. Exclusion of the expenditure incurred in foreign currency from export turnover as well as total turnover while computing the deduction under Section 10A - Held that - Respectfully following the aforementioned decision of the Hon ble High Court of Karnataka in the case of Tata Elxsi Ltd. 2015 (10) TMI 634 - KARNATAKA HIGH COURT , we uphold the finding of DRP in directing the Assessing Officer to reduce the expenditure incurred in foreign currency from both export turnover and total turnover for the purpose of computing the deduction under section 10A of the Act in the case on hand. Consequently this ground raised by revenue is dismissed.

Issues Involved:
1. Condonation of delay in filing the appeal.
2. Transfer pricing adjustments and comparability of selected companies.
3. Inclusion and exclusion of certain companies in the set of comparables.
4. Computation of deduction under Section 10A of the Income Tax Act, 1961.

Detailed Analysis:

1. Condonation of Delay in Filing the Appeal:
The assessee filed an application for condonation of a 51-day delay in filing the appeal, supported by an affidavit explaining that the delay was due to the acquisition of the assessee company by an American company, resulting in a restructuring of the management team. The tribunal, after considering the explanation, found sufficient cause for the delay and condoned it in the interest of justice.

2. Transfer Pricing Adjustments and Comparability of Selected Companies:
The assessee, a wholly owned subsidiary of a US-based company, provided software development services and reported financial results and international transactions. The Transfer Pricing Officer (TPO) rejected the assessee's Transfer Pricing (TP) analysis and selected 13 comparables, leading to a proposed adjustment under Section 92CA. The Dispute Resolution Panel (DRP) subsequently rejected 10 of these comparables, applying specific filters, which led both the revenue and the assessee to challenge the DRP's directions.

3. Inclusion and Exclusion of Certain Companies in the Set of Comparables:
The tribunal examined the comparability of various companies, referencing previous tribunal decisions and applying turnover filters:

- E-Zest Solutions Ltd.: Remitted to the TPO for reconsideration.
- Persistent Systems and Solutions Ltd. & Persistent Systems Ltd.: Excluded due to functional dissimilarity and lack of segmental data.
- Sasken Communication Technologies Ltd.: Excluded due to revenue from multiple segments without segmental data.
- Akshay Software Technology Ltd.: Rejected due to lack of segmental reporting and presence of product sales.
- LGS Global Ltd.: Remitted to the TPO for verification of employee costs and functional comparability.
- Evoke Technology Ltd. & R S Software (India) Ltd.: Included as both the assessee and revenue sought their inclusion.
- Acropetal Technologies Ltd. (Seg.): Excluded due to failure to meet the software development services revenue filter.
- ICRA Techno Analytic Ltd.: Excluded due to lack of segmental information.
- Infosys Ltd.: Excluded due to high turnover and brand value.
- L&T Infotech Ltd.: Excluded due to high related party transactions.
- Tata Elxsi Ltd. (Seg.): Excluded due to functional dissimilarity and failure to meet the export earnings filter.

The tribunal applied a turnover filter of 10 times the assessee's turnover, leading to the exclusion of companies with turnovers significantly higher or lower than the assessee's.

4. Computation of Deduction under Section 10A of the Income Tax Act, 1961:
The tribunal upheld the DRP's decision to exclude expenditure incurred in foreign currency from both export turnover and total turnover while computing the deduction under Section 10A, following the decision of the Karnataka High Court in Tata Elxsi Ltd. This ensures uniformity in the computation formula, avoiding anomalies or absurd results.

Conclusion:
The tribunal allowed the assessee's appeal and partly allowed the revenue's appeal, directing the TPO/AO to recompute the Arm's Length Price (ALP) based on the revised set of comparables and to adjust the computation of deduction under Section 10A accordingly.

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