2016 (10) TMI 1238 - AT - Income Tax

Deduction u/s. 10A - disallowance made under the provisions of section 40(a)(ia) and 43B - Held that - We find the Tribunal following the order of the Tribunal in assessee s own case for A.Y. 2007-08 has decided the issue and directed the AO to allow deduction u/s.10A to the assessee on account of disallowance made under the provisions of section 40(a)(ia) and 43B. Addition u/s.92CA - Comparable selection - functinal dis-similarity - Held that - Assessee is engaged in providing Software Development Services and Sales Support Services to Deere and Co. USA thus companies functionally dissimilar with that of assessee and on account of different operating models/different business spheres and distinct mode of operation need to be deselected from list.

Issues Involved:
1. Disallowance of deduction u/s.35D of the I.T. Act.
2. Deduction u/s.10A in respect of disallowance made u/s.40(a)(ia) and 43B.
3. Addition u/s.92CA for computation of the ALP of international transactions.

Detailed Analysis:

1. Disallowance of Deduction u/s.35D:
The assessee raised the issue of disallowance of deduction u/s.35D amounting to Rs. 37,60,272/-. However, the counsel for the assessee did not press this ground during the hearing, and the departmental representative had no objection. Consequently, this ground was dismissed as 'not pressed'.

2. Deduction u/s.10A in Respect of Disallowance Made u/s.40(a)(ia) and 43B:
The assessee claimed a deduction of Rs. 33,63,51,781/- u/s.10A. The AO observed disallowances u/s.40(a)(ia) and 43B and recomputed the deduction u/s.10A, restricting it to Rs. 27,45,03,805/-. The DRP upheld the AO's action. The Tribunal noted that a similar issue had been decided in favor of the assessee in the preceding assessment year, following the judgment of the Hon'ble Bombay High Court in CIT Vs. Gem Plus Jewellery India Pvt. Ltd., which held that increased income due to disallowance u/s.40(a)(ia) and 43B should be considered for deduction u/s.10A. The Tribunal directed the AO to allow the deduction u/s.10A on account of disallowance made under these sections, thus allowing the grounds raised by the assessee.

3. Addition u/s.92CA for Computation of the ALP of International Transactions:
The assessee filed its return declaring total income of Rs. 1,26,81,606/-. The AO referred the computation of the ALP of international transactions to the TPO, who observed that the assessee was engaged in providing Software Development Services and Sales Support Services to Deere and Co., USA. The TPO selected TNMM with external comparables for benchmarking and identified comparable companies. The TPO rejected certain comparables selected by the assessee and introduced new ones, leading to an addition of Rs. 32,87,25,130/-.

Software Development Services:
- The TPO rejected 15 out of 21 comparables selected by the assessee and introduced 3 new comparables, resulting in 9 comparables with an arithmetic mean margin of 27.80%.
- The DRP upheld the selection of most comparables but directed reconsideration of Mindtree Ltd., Quintegra Solutions Ltd., R.S. Software Ltd., and Zylog Systems Ltd.
- The AO accepted Mindtree Ltd. and R.S. Software Ltd. and rejected Quintegra Solutions and Zylog Systems Ltd., finalizing 11 comparables with a margin of 26.10%.

Design Engineering Services:
- The TPO rejected 6 comparables and introduced 2 new ones, resulting in 7 comparables with a margin of 28.29%.
- The DRP directed the exclusion of Informed Technologies Ltd. due to its export ratio.

Tribunal's Decision:
- The Tribunal directed the exclusion of Infosys Technologies Ltd., Kals Information Technology System Ltd., and Bodhtree Consulting Ltd. from the list of comparables based on functional differences and previous Tribunal decisions.
- The Tribunal directed the inclusion of Aztec Soft Ltd. and SIP Technologies Ltd. after verifying related party transactions and persistent loss criteria, respectively.
- For Persistent Systems Pvt. Ltd., the Tribunal directed the TPO/AO to verify the correct operating margin.
- For Design Engineering Services, the Tribunal directed the exclusion of Coral Hubs Ltd., Genesys International Corporation Ltd., and Cosmic Global Ltd. based on functional differences and previous Tribunal decisions.

The Tribunal restored the TP adjustment issue to the AO to recompute the adjustment to the ALP. The appeal was partly allowed for statistical purposes.

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