2017 (1) TMI 1618 - AT - Income Tax

TPA - Comparable selection criteria - functional dissimilarity - Held that - The assessee, provided data processing and other IT enabled services to its AEs located in various parts of the world. It is registered under the Software Technology Parks of India Scheme and is claiming tax holiday benefit in respect of the profits earned by it from the research and development services, thus companies functionally dissimilar with that of assessee need to be deselected from final list. Adjustments made in respect of computation u/s 10A - AO excluded the expenditure incurred in foreign currency on travel, from export turn over for the purpose of computing deduction u/s.10A - Assessee pleaded that it is rendering BPO Services and ITES and as not engaged in rendering technical services, the expenditure incurred in foreign currency on travel should not be excluded from the export turnover for the purpose of computing deduction u/s.10A. - Held that - Similar matter came up before this Tribunal in assessee s own case for A. Y. 2008-09 2015 (10) TMI 483 - ITAT BANGALORE AO is directed to exclude the above expenditure both from ETO and TTO. The assessee s appeal in this regard is allowed. Addition u/s 43B - leave encashment which remained outstanding as on the last day of the PY - Held that - When a challenge was made before the Hon ble Calcutta High Court in Exide Industries Ltd and another v. UOI & others 2007 (6) TMI 175 - CALCUTTA HIGH COURT , it struck down section 43B(f) being arbitrary, unconscionable and dehors the Apex Court decision in the case of Bharath Earth Movers Ltd (2000 (8) TMI 4 - SUPREME COURT) as the amendment did not disclose the reasons which would be consistent with the provisions of the Constitution and the laws of the land and not for the sole object of nullifying the apex Court decision. On SLP the SC held that Pending hearing and final disposal of the Civil Appeal, Department is restrained from recovering penalty and interest which has accrued till date. It is made clear that as far as the outstanding interest demand as of date is concerned, it would be open to the Department to recover that amount in case civil appeal of the Department is allowed. In the circumstances, this issue is remitted back to the AO to decide the issue based on the outcome of the Hon ble Supreme Court s decision in the above case. Ordered accordingly

Summary

Issues Involved:
1. Rejection of comparables for Transfer Pricing (TP) adjustments.
2. Adjustments made in respect of computation under Section 10A.
3. Disallowance of leave encashment under Section 43B(f).

Issue-wise Detailed Analysis:

1. Rejection of Comparables for Transfer Pricing (TP) Adjustments:
The assessee contested the inclusion of certain companies as comparables for TP adjustments, arguing that they were not functionally similar and had peculiar circumstances or unreliable financials. The Tribunal admitted additional grounds of appeal to reject the following companies as comparables:

- Maple eSolutions Limited: Rejected due to unreliable financials and extraordinary events during the year, including acquisition by Triton Corporation Limited.
- Triton Corp Limited: Rejected on grounds of unreliable financials and extraordinary events.
- Accurate Data Converters Private Limited: Excluded due to failure to meet the employee cost filter.
- Infosys BPO Limited: Rejected due to functional dissimilarity and the presence of peculiar business circumstances.

The Tribunal relied on previous decisions in Magma Design Automation India P. Ltd and AOL Online India P. Ltd, which established that these companies should not be considered as comparables for benchmarking IT-enabled services (ITeS) businesses. The Tribunal directed the Transfer Pricing Officer (TPO) to exclude these companies from the list of comparables and to re-evaluate the comparability of M/s I Services India P Ltd and Accurate Data Converters Ltd after obtaining necessary annual reports and affording due opportunity to the assessee.

2. Adjustments Made in Respect of Computation under Section 10A:
The Assessing Officer (AO) excluded ?20,51,19,242 incurred in foreign currency on travel from the export turnover for computing the deduction under Section 10A. The assessee argued that since it is rendering BPO services and ITES, this expenditure should not be excluded from the export turnover. Additionally, the AO reduced ?2,62,94,302 towards foreign exchange loss from the export turnover alone, which the assessee contended should also be reduced from the total turnover.

The Tribunal referred to its previous decision in the assessee's own case for A.Y. 2008-09 and the Karnataka High Court ruling in CIT v Tata Elxsi Ltd, which held that if expenses are excluded from the export turnover, they should also be excluded from the total turnover. Consequently, the AO was directed to exclude the aforementioned expenses from both export turnover and total turnover while computing the deduction under Section 10A.

3. Disallowance of Leave Encashment under Section 43B(f):
The AO disallowed ?6,83,81,220 towards leave encashment, which remained outstanding as of the last day of the previous year, under Section 43B(f). The assessee argued that this disallowance was arbitrary and referred to the Calcutta High Court decision in Exide Industries Ltd and another v. UOI & others, which struck down Section 43B(f). However, the Supreme Court, in its interim order, allowed the department to recover the amount while the civil appeal was pending.

The Tribunal remitted this issue back to the AO to decide based on the outcome of the Supreme Court's final decision in the Exide Industries Ltd case.

Conclusion:
The Tribunal allowed the appeal of the assessee, directing the TPO to exclude certain comparables for TP adjustments and to re-evaluate others. For the computation under Section 10A, the AO was instructed to exclude specific expenses from both export turnover and total turnover. The issue of leave encashment disallowance was remitted back to the AO pending the Supreme Court's decision.