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2018 (4) TMI 1614 - AT - Income TaxTPA - identification of eligible comparables - filters application - Held that - Turnover is not relevant criteria for deciding comparability. Accordingly this ground of appeal is allowed - employee cost filter is appropriate in search process of comparables as employee cost filter is a key value driver. The provisions of sub-section (4) of 10B provide that the data to be used in analyzing comparability of uncontrolled transactions with an international transaction shall be the data relating to the financial year in which international transaction had been entered into. In the light of the plain provisions of the law we do not see any reason to differ from the finding of the ld. CIT(A). Hence the ground of appeal filed by the revenue is dismissed. Deduction u/s 10A - exclude the reimbursement of expenses incurred in foreign currency both from the export turnover as well as from total turnover for the purpose of computation of deduction - Held that - This issue is no longer res integra as the Hon ble jurisdictional High Court in the case of CIT v. Tata Elxsi (2011 (8) TMI 782 - KARNATAKA HIGH COURT) held that such expenditure incurred in foreign currency should be deducted from export turnover as well as total turnover. Hence this ground of appeal filed by the revenue is dismissed. Benefit u/s. 80JJA in respect of salaries paid to newly employed employees - AO denied the claim on the ground that software engineers are not workmen - Held that - Once an assessee s claim is allowed under section 10A 10AA 10B or 10BA then to the extent such deduction has been allowed no other deduction could be allowed under any other provision of the Act. Assessee had claimed deduction of its income u/s. 10A in respect of its units 2 3 and 4. As per the assessee even if deduction under section 10A is allowed for these units a further deduction u/s. 80JJA is also allowable. Argument of the assessee s counsel is that the limitation put in by Section 80A(4) would apply only to profit linked deductions. There can be no dispute that deduction under Section 10A of the Act is profit linked. In so far as deduction u/s. 80JJA is concerned a look at sub-section (1) of the said section is required as held in assessee s own case clearly show that the deduction is given on profits and gains derived from industrial undertaking engaged in manufacture of production of article or thing. It is only for quantification of the amount that 30% is applied. In our opinion the deduction is very much linked to the profits of the undertaking. We are therefore unable to accept this line of argument taken by the counsel. In the result we hold that assessee is not eligible for deduction u/s. 80JJAA in respect of its units 2 3 and 4. However denial of such claim in respect of unit-1 where it was not claiming any deduction in our opinion is incorrect. We therefore set aside the orders of authorities below for the limited purpose of quantifying the eligible deduction u/s. 80JJA in respect of Unit-1. Deduction u/s. 10A with respect to the unit acquired viz. Virsa Systems Pvt. Ltd. which had STP unit in Chandigarh after obtaining necessary approval from STPI - Held that - The benefit of section 10A was held to have attached itself to the STP unit of the software division which was owned by IOCL till October 19 1994 and it was owned by the assessee subsequent to that date. What is material according to the Tribunal is not who owns the undertaking but whether the undertaking is entitled to the benefit available under section 10A. As regards the issue of transfer by IOCL to the assessee the Tribunal noted that section 10A(9) was substituted by the Finance Act 2000 with effect from April 1 2002. Section 10A(9) provided that where during any previous year the ownership or beneficial interest in an undertaking of the business is transferred by any means the deduction under sub-section (1) shall not be allowed to the assessee for the assessment year relevant to such previous year and the subsequent years. Tribunal noted that if a transfer between IOCL and the assessee were to be effected after April 1 2001 that would result in the undertaking being disentitled to the benefit under section 10A. This was a pointer to the fact that prior to the substitution a transfer of ownership or beneficial interest in the undertaking would not disentitle an assessee to the benefit of section 10A. - decided against revenue. Gain arising out of variations in foreign exchange currency is operating in nature - Held that - Foreign exchange gain earned by the assessee in relation to sale/purchase emanating from international transactions should be treated as operating in nature. Re-allocation of rent expenses relating to non-10A unit - Held that - There was no shifting of bonded warehouse from unit II to unit I. No addition can be made based on presumptions/assumptions. Thus we allow this ground of appeal. Companies functionally dissimilar with that of assessee software development services need to be deselected from final list.
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 Rs. 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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