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2017 (9) TMI 1757 - AT - Income TaxTPA - comparable selection criteria - Held that - As regards the employee cost filter is a proper criteria for selection of the comparable, we find that this Tribunal has taken a consistent view that the employee cost to the total cost is a relevant factor to decide the business model and functional profile of the comparable. Therefore, when the TPO has applied a filter for all the comparable companies then the same cannot be rejected for the purpose of including one company in the set of comparables. Deselection of companies dissimilar with that of assessee as pure software development services provider.
Issues Involved:
1. Exclusion of expenses incurred in foreign currency from export turnover and total turnover for Section 10A deduction. 2. Transfer Pricing Adjustment and functional comparability of companies selected by the TPO in Software Development Services. 3. Inclusion and exclusion of specific companies in ITES and Marketing Support Services segments. Detailed Analysis: 1. Exclusion of Expenses Incurred in Foreign Currency from Export Turnover and Total Turnover for Section 10A Deduction: The Tribunal addressed the issue of whether expenses incurred in foreign currency should be excluded from both the export turnover and total turnover while computing the deduction under Section 10A of the Income Tax Act, 1961. The Tribunal found that if such expenses are reduced from export turnover, an equal amount should also be reduced from total turnover, aligning with the decision of the Hon'ble Karnataka High Court in CIT v. Tata Elxsi Ltd. [2012] 349 ITR 98. This issue was decided against the revenue and in favor of the assessee. 2. Transfer Pricing Adjustment and Functional Comparability of Companies Selected by the TPO in Software Development Services: The Tribunal dealt extensively with the functional comparability of companies selected by the TPO. The TPO had selected 20 companies as comparables, and the CIT (Appeals) excluded 8 companies based on turnover and high-profit margin filters. The Tribunal restored 4 companies to the set of comparables as both parties agreed not to apply the turnover filter. The Tribunal then examined the functional comparability of the remaining companies in detail, referencing previous Tribunal decisions and the functional profiles of the companies. The Tribunal directed the exclusion of 12 companies from the set of comparables, including Avani Cimcon Technologies, Celestial Biolabs, e-Zest Solutions, Infosys Technologies, KALS Information Systems, Lucid Software, Persistent Systems, Quintegra Solutions, Softsol India, Tata Elxsi, Thirdware Solutions, and Wipro Ltd. The Tribunal also excluded Bodhtree Consulting Ltd. after examining its functional profile and revenue recognition policy. 3. Inclusion and Exclusion of Specific Companies in ITES and Marketing Support Services Segments: - ITES Segment: The Tribunal upheld the exclusion of Genesys International Corporation Ltd., noting that it provides high-end GIS services, which are not functionally comparable to the ITES provided by the assessee. This decision was supported by previous Tribunal decisions that highlighted the functional dissimilarity due to the specialized nature of GIS services and the skilled manpower required. - Marketing Support Services Segment: The Tribunal addressed the inclusion of ICC International Ltd. (Seg.) and Priya International Limited (Seg.). The Tribunal upheld the exclusion of ICC International Agencies, noting its involvement in trading and commission agency services for machinery, which are not comparable to the marketing support services provided by the assessee. Similarly, Priya International was excluded based on its functional profile, which includes commissioning agency and trading of chemicals, making it functionally dissimilar to the assessee's services. Conclusion: The Tribunal's detailed analysis led to the exclusion of several companies from the set of comparables based on functional dissimilarity and other relevant factors. The decision emphasized the importance of accurate functional comparability in Transfer Pricing adjustments and upheld the principle that expenses incurred in foreign currency should be excluded from both export and total turnover for Section 10A deductions. The appeal of the revenue and the cross-objection of the assessee were partly allowed.
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