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2018 (7) TMI 1877 - AT - Income TaxTPA - comparable selection - Functional similarity - Held that - The assessee is basically providing Software Development Services (SDS), Information Technology Enabled Services (ITES) and Consultancy Services (CS) to its group entities worldwide, thus companies functionally dissimilar with that of assessee need to be deselected from final list. Exclusion of comparable if it fails the employee cost filter of less than 25% applied by the Transfer Pricing Officer himself. Addition on account of shortfall in price charged to the A.E. towards services rendered under the Intellectual Property Services Agreement (IPSA) - Held that - Content development or animation and website services are coming within the ambit of I.T. enabled products or services. Thus, keeping in view the aforesaid fact, it has to be concluded that the services rendered under IPSA are to be treated as ITES. As could be seen from the order of the Transfer Pricing Officer, though, he has treated the revenue earned of ₹ 8.47 crores as ITES, however, he has benchmarked it separately without aggregating it with all services rendered ITES segment. The DRP has also failed to rectify the error committed by the Transfer Pricing Officer by benchmarking it separately. Since, the Transfer Pricing Officer has not benchmarked this particular transaction by aggregating it with other ITES, we are inclined to restore the issue to the Assessing Officer for undertaking the necessary exercise of benchmarking the transaction by aggregating with other ITES and determine the arm s length price by applying the average margin of the comparables selected under the ITES segment, subject to our direction contained in this order with regard to the comparables under ITES segment. Mode of computation of deduction under section 10A and section 10AA of the Act after reducing / setting-off of losses in some other STP / SEZ unit - Held that - The issue now stands settled by the decision of the Hon ble Supreme Court in Yokogawa India Ltd. 2016 (12) TMI 881 - SUPREME COURT wherein, held that even after amendment made to section 10A of the Act by making it a deduction provision instead of exemption provision, there is no material change in the nature of deduction claimed by the assessee which has to be allowed from the gross total income before set-off of loss. Therefore, in view of the ratio laid down by the Hon ble Supreme Court as discussed above, assessee s claim of deduction under section 10A of the Act unit-wise is allowable. The Assessing Officer is directed to compute the deduction accordingly. Disallowance of deduction under section 10A in respect of income / profit derived under the intellectual property services agreement - Held that - When the Transfer Pricing Officer has classified the income received under IPSA agreement to be of the nature of ITES and has also benchmarked it as such, the AO cannot take a contrary view by stating that it is not in the nature of ITES only for disallowing assessee s claim of deduction under section 10A of the Act. The Department cannot be permitted to take contrary view with regard to the nature of a particular item of income for its own advantage. Once, the income under the IPSA has been classified to be in the nature of ITES, assessee s claim of deduction under section 10A of the Act have to be allowed. In view of the above, we direct the Assessing Officer to allow assessees claim of deduction under section 10A of the Act in respect of income earned from IPSA. However, we make it clear such deduction has to be computed on the amount of ₹ 90,41,87,522 as claimed in the return of income and as per grounds raised before us. Disallowance u/s 40(a)(ia) - Held that - If the expenditure claimed by the assessee pertains to STPI / SEZ unit, on disallowance of such deduction the profit of STPI / SEZ unit will get enhanced, hence, the assessee will be eligible to avail deduction under section 10A of the Act to that extent. We direct the Assessing Officer to examine the aforesaid claim of the assessee having regard to the facts and material brought on record and allow the same after factual verification. Further, the assessee has submitted that the provision made has been reversed on 1st April 2008, in the books of account of the assessee. In this context, a certificate dated 20th April 2018, issued by the Chartered Accountant was submitted before us. Obviously, this is a fresh claim made by the assessee before us. Therefore, in all fairness, this claim of the assessee is also required to be examined by the Assessing Officer.
Issues Involved:
1. Transfer Pricing Adjustments 2. Deduction under Section 10A of the Income-tax Act 3. Disallowance under Section 40(a)(ia) of the Income-tax Act Detailed Analysis: 1. Transfer Pricing Adjustments: Selection/Rejection of Comparables: - Acropetal Technologies Ltd. and R.S. Software (India) Ltd.: - The Tribunal found that Acropetal Technologies Ltd. had substantial on-site development expenses and foreign currency expenditure, indicating significant on-site development activities. This failed the on-site revenue filter of 60% and employee cost filter of 25% applied by the Transfer Pricing Officer (TPO). Similarly, R.S. Software (India) Ltd. was rejected by the TPO for having substantial on-site revenue. The Tribunal directed the exclusion of both companies from the list of comparables. - KALS Information System Ltd.: - The Tribunal observed that KALS Information System Ltd. was engaged in software development and sale of proprietary products, making it functionally different from the assessee. The Tribunal directed the exclusion of this company from the list of comparables. - Thirdware Solutions Ltd.: - The Tribunal noted that Thirdware Solutions Ltd. was involved in both software services and sale of software products. Given its functional dissimilarity and the lack of complete financial data, the Tribunal directed its exclusion from the list of comparables. - E-Zest Solutions Ltd.: - The Tribunal found that E-Zest Solutions Ltd. was engaged in high-end technical services and product development, classifying it as a Knowledge Process Outsourcing (KPO) service provider. The Tribunal directed its exclusion from the list of comparables. - Other Comparables: - The Tribunal refrained from deliberating on the acceptability of Avani Simcon Technologies Ltd., E-Infochips Ltd., SIP Technologies and Exports Ltd., Wipro Ltd. (SEG), and Infosys Technologies Ltd., as the exclusion of the previously mentioned comparables already brought the assessee’s margin within the acceptable range. ITES/BPO Segment: - Genesys International Corporation Ltd. and Nucleus Netsoft and GIS India Ltd. (SEG): - The Tribunal found that both companies were engaged in KPO services, making them functionally different from the assessee. Following the Tribunal’s decision in the assessee’s own case for the previous year, both companies were excluded from the list of comparables. - E-Clerx Services Ltd.: - The Tribunal noted that E-Clerx Services Ltd. provided high-end KPO services and directed its exclusion from the list of comparables. - Cross Domain Solutions Ltd.: - The Tribunal found that Cross Domain Solutions Ltd. provided KPO services and lacked segmental details. It directed the exclusion of this company from the list of comparables. - Allsec Technologies Ltd.: - The Tribunal observed that Allsec Technologies Ltd. continued its operations post-merger and was wrongly rejected by the TPO. However, due to the lack of clear impact of the merger on profitability, the Tribunal did not include this company as a comparable. - Accentia Technologies Ltd.: - The Tribunal noted that Accentia Technologies Ltd. had undergone mergers which could impact its financial results. The Tribunal directed its exclusion from the list of comparables. Other Issues: - Working Capital Adjustment: - The Tribunal directed the TPO to consider the assessee’s claim for working capital adjustment, as allowed in the subsequent assessment year. - Departmental Representative’s Contentions: - The Tribunal rejected the Departmental Representative’s plea to challenge the comparables selected by the TPO and restore the issue to the TPO for fresh analysis, citing the Tribunal’s and High Court’s decisions that the Department cannot challenge the TPO’s selections in the assessee’s appeal. 2. Deduction under Section 10A: Computation of Deduction: - The Tribunal directed the Assessing Officer (AO) to compute the deduction under Section 10A unit-wise before setting off losses, in line with the Supreme Court’s decision in CIT v. Yokogawa India Ltd. Income from IPSA: - The Tribunal found that the income from the Intellectual Property Services Agreement (IPSA) was classified by the TPO as ITES and directed the AO to allow the deduction under Section 10A for this income. 3. Disallowance under Section 40(a)(ia): Provision for Expenditure: - The Tribunal noted that the provision for expenditure was based on estimation and required verification of whether it had crystallized during the year. The Tribunal directed the AO to examine the assessee’s claim that the payee was not identifiable and verify the reversal of the provision in the subsequent year. Deduction under Section 10A: - The Tribunal directed the AO to allow deduction under Section 10A on the enhanced profit due to disallowance under Section 40(a)(ia), subject to factual verification. Additional Grounds: - The Tribunal admitted additional grounds related to the computation of disallowance under Section 10A and restored them to the AO for fresh adjudication. Conclusion: The Tribunal’s detailed analysis and directions on various issues, including the selection/rejection of comparables, computation of deduction under Section 10A, and disallowance under Section 40(a)(ia), provide a comprehensive resolution of the disputes raised in the appeal.
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