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2018 (4) TMI 1614 - AT - Income Tax


Issues Involved:
1. Transfer Pricing (TP) adjustments and selection of comparables.
2. Deduction under Section 80JJAA.
3. Deduction under Section 10A.
4. Re-allocation of interest and rent expenses.
5. Exclusion of expenses from export turnover for Section 10A deduction.
6. Applicability of filters such as employee cost, diminishing revenue, and different year ending.

Detailed Analysis:

1. Transfer Pricing (TP) Adjustments and Selection of Comparables:
The assessee, a subsidiary of SAP AG, Germany, engaged in software development services, reported international transactions and sought to justify the consideration received as being at arm's length. The TPO suggested a TP adjustment of ?100,98,86,353/- and identified different comparables. The CIT(A) excluded certain companies based on turnover filters, which was contested by the revenue. The Tribunal held that turnover is not a relevant criterion for comparability, citing the Delhi High Court's decision in Chryscapital Investment Advisors (India) (P.) Ltd. v. DCIT. The Tribunal directed the exclusion of several companies like Avani Cimcon Technologies Ltd., Bodhtree Consulting Ltd., E-Zest Solutions Ltd., Infosys Technologies Ltd., Kals Information Systems Ltd., Persistent Systems Ltd., Quintegra Solutions Ltd., Tata Elxsi Ltd. (seg), Thirdware Solutions Ltd., Wipro Ltd. (seg), Softsol India Ltd., and Lucid Software Ltd., on the grounds of functional dissimilarity, presence of intangibles, and lack of segmental data.

2. Deduction under Section 80JJAA:
The AO denied the claim under Section 80JJAA, arguing that software engineers are not 'workmen'. The CIT(A) allowed the deduction for non-10A units, following the Tribunal's decision in Texas Instruments Ltd., where software engineers not in supervisory positions were considered 'workmen'. The Tribunal upheld this decision, allowing the deduction for non-10A units but not for 10A units, referencing Section 80A(4) which restricts multiple deductions for the same profits.

3. Deduction under Section 10A:
The AO disallowed the deduction under Section 10A for a unit acquired through a slump sale, citing Section 10A(7A). The CIT(A) allowed the claim, relying on CBDT circular No. 1 of 2013. The Tribunal upheld the CIT(A)'s decision, referencing the Bombay High Court's ruling in CIT v. Sonata Software Ltd., which held that slump sale does not constitute a reconstruction of business.

4. Re-allocation of Interest and Rent Expenses:
The AO re-allocated interest and rent expenses from non-10A to 10A units based on assumptions of shifting bonded warehouses. The CIT(A) confirmed this. The Tribunal, however, found no evidence of such shifting and held that reallocation based on assumptions is not permissible, thereby allowing the assessee's appeal on this ground.

5. Exclusion of Expenses from Export Turnover for Section 10A Deduction:
The revenue challenged the CIT(A)'s direction to exclude expenses incurred in foreign currency from both export and total turnover. The Tribunal dismissed this ground, citing the Karnataka High Court's decision in CIT v. Tata Elxsi, which supports the exclusion of such expenses from both export and total turnover.

6. Applicability of Filters:
The Tribunal addressed various filters applied by the TPO:
- Employee Cost Filter: Upheld as appropriate for comparability, referencing decisions in Mentor Graphics P. Ltd. v. DCIT and ST Microelectronics P. Ltd. v. CIT.
- Diminishing Revenue Filter: Rejected by the Tribunal, agreeing with the CIT(A) that revenue trends over time are not necessarily indicative of performance.
- Different Year Ending Filter: The Tribunal upheld the CIT(A)'s rejection of this filter, stating that comparability should be based on the financial year in which the international transaction occurred.

Conclusion:
The Tribunal partly allowed the appeals of both the revenue and the assessee, directing the exclusion of certain comparables and upholding the CIT(A)'s decisions on deductions and re-allocations. The cross-objection filed by the assessee was dismissed due to unexplained delay. The order was pronounced on April 6, 2018.

 

 

 

 

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