2017 (4) TMI 1377 - AT - Income Tax

TPA - comparable selection criteria - Held that - Assessee is engaged in the business of providing software development services to its associated enterprise. It also renders software development services and sales and marketing support services to its associated enterprise. The services are provided on cost plus basis thus companies functionally dissimilar with that of assessee need to be deselected from final list. Uphold the directions of the DRP to allow working capital adjustment on similar principles/ method as it was computed for software development services. Direction for treating the foreign exchange loss as an operating in nature - Held that - As considered the rival submissions and uphold the directions of the DRP to the extent of foreign exchange loss which arose out of the current year s transactions alone as an operating in nature . Thus we direct the AO/TPO to examine and allow foreign exchange loss which arose out of the current year transactions only. To this extent the Revenue s appeal is allowed. Deduction under section 10A - AO has reduced Rs. 32, 54, 872/- being telecommunication charges and Rs. 9, 88, 27, 170/- being expenses incurred in foreign currency from the export turnover. However he has not reduced them from the total turnover which reduced the deduction claim by Rs. 1, 64, 75, 929/- - Held that - On assessee s objections the DRP following the Jurisdictional High Court order in CIT v Tata Elxsi Ltd and others 2011 (8) TMI 782 - KARNATAKA HIGH COURT directed the AO to exclude the above expenses from Total Turnover also for computing the deduction u/s 10 A on which the Revenue is on appeal. We heard the rival submissions. Since the DRP applied the jurisdictional High Court s decision which is on operation as on date we uphold the order of the DRP.

Issues Involved:
1. Deduction under Section 10A
2. Transfer Pricing (TP) adjustments for Software Development Services
3. Transfer Pricing (TP) adjustments for Sales and Marketing Services
4. Working Capital Adjustment for Marketing Support Services
5. Treatment of Foreign Exchange Loss
6. Computation of Total Turnover for Section 10A Deduction

Detailed Analysis:

1. Deduction under Section 10A:
The Assessee claimed a deduction of Rs. 18,62,45,826/- under Section 10A. The Assessing Officer (AO) reduced Rs. 32,54,872/- for telecommunication charges and Rs. 9,88,27,170/- for expenses incurred in foreign currency from the export turnover but not from the total turnover. This reduced the deduction claim by Rs. 1,64,75,929/-. The Dispute Resolution Panel (DRP) directed the AO to exclude these expenses from the total turnover as well, following the Jurisdictional High Court order in CIT v Tata Elxsi Ltd and others 349 ITR 98. The Tribunal upheld the DRP's direction.

2. Transfer Pricing (TP) Adjustments for Software Development Services:
The Assessee adopted the Transactional Net Margin Method (TNMM) and selected 14 comparables, with a Profit Level Indicator (PLI) of 13.67%. The Transfer Pricing Officer (TPO) retained 6 comparables, introduced 7 new ones, and computed an adjusted margin of 23.92%, leading to an addition of Rs. 100,889,071/- to the total income. The Tribunal examined the comparability of various companies:
- Acropetal Technologies Ltd (seg): Excluded due to functional dissimilarity and failing the employee cost filter.
- E-Zest Solutions Ltd: Excluded for failing the lower turnover filter.
- E Infochips Ltd: Excluded due to functional dissimilarity and abnormal profits.
- ICRA Techno Analytics Ltd: Excluded due to substantial RPT and functional dissimilarity.
- Infosys Technologies Ltd: Excluded due to high turnover, brand value, and functional dissimilarity.
- Larsen & Toubro Infotech Ltd: Excluded for functional dissimilarity and failing the turnover filter.
- Persistent Systems & Solutions Ltd: Excluded due to diversified activities and lack of segmental data.
- Persistent Systems Ltd: Excluded for similar reasons as Persistent Systems & Solutions Ltd.
- Sasken Communication Technologies: Excluded due to functional dissimilarity and lack of segmental data.
- Tata Elxsi (Seg): Excluded for functional dissimilarity and failing the export earning filter.

3. Transfer Pricing (TP) Adjustments for Sales and Marketing Services:
The Assessee selected 6 comparables with a PLI of 7.26%. The TPO retained one comparable, introduced 2 new ones, and computed an average margin of 18.25%, leading to an addition of Rs. 24,959,672/-. The Tribunal examined the comparability of various companies:
- Asian Business Exhibition & Conferences Ltd: Excluded due to functional dissimilarity.
- ICC International Agencies Ltd: Excluded due to trading activity and functional dissimilarity.

4. Working Capital Adjustment for Marketing Support Services:
The DRP directed the AO to allow working capital adjustment on similar principles as for software development services. The Tribunal upheld this direction.

5. Treatment of Foreign Exchange Loss:
The DRP directed the AO to treat the foreign exchange loss arising out of current year transactions as operating in nature. The Tribunal upheld this direction but limited it to losses arising from current year transactions.

6. Computation of Total Turnover for Section 10A Deduction:
The AO had reduced telecommunication charges and expenses incurred in foreign currency from the export turnover but not from the total turnover. The DRP directed the AO to exclude these from the total turnover as well, following the Jurisdictional High Court order. The Tribunal upheld the DRP's direction.

Conclusion:
The Tribunal allowed the Assessee's appeal and partly allowed the Revenue's appeal. The Tribunal upheld the DRP's directions on various issues, including the exclusion of certain comparables and the computation of total turnover for Section 10A deduction. The Tribunal directed the AO/TPO to recompute the ALP based on the final set of comparables and to allow the working capital adjustment and foreign exchange loss as per the DRP's directions.

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