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2016 (8) TMI 1426 - AT - Income TaxDeduction u/s 10A - exclusion of the expenditure incurred in foreign currency from the export turnover for the purpose of computing the deduction under Section 10A - HELD THAT - The Hon ble Jurisdictional High Court in the case of CIT v M/s Tata Elxsi Ltd. & Others 2011 (8) TMI 782 - KARNATAKA HIGH COURT had held that while computing the exemption u/s 10A, if the export turnover in the numerator is to be arrived at after excluding certain expenses, the same should also be excluded from the total turnover in the denominator. We direct the Assessing Officer/TPO to exclude the above mentioned expenses both from the export turnover as well as from the total turnover while computing deduction u/s 10A. Deduction under Section 10A without setting off of loss incurred by the non-STPI unit - HELD THAT - substituted/amended provisions of sec.10A/10B which are applicable in the case of the assessee as well as the decision of the Tribunal in case of Biocon 2014 (12) TMI 838 - ITAT BANGALORE , we decide this issue in favour of the assessee and direct the AO to allow deduction u/s 10A without setting off the domestic losses. Transfer Pricing Adjustment - comparable selection - HELD THAT - Assessee is engaged in developing, testing and software solution for group companies as well as for marketing services and solution in India for manufacturing and hospitality industry thus companies functionally dissimilar with that of assessee need to be deselected from final list. Applying a fixed slab of turnover gives absurd results of comparability however the Tribunal has taken a view that the turnover in any case can be considered as a parameter / criteria for deciding the comparability but the proper yardstick would be a range of multiples of turnover of the tested party on both sides. Company following different financial year ending on 31.12.2006 - the financial data is not relating to the same period from 1.4.2006 to 31.3.2007. Since the contemporaneous data are not available in respect of this company as provided under Rule 10B(4) of the IT Rules, therefore, we are of the view that this company cannot be considered as a good comparable for want of contemporaneous financial data to be compared with the assessee. Accordingly, we direct the Assessing Officer / TPO to exclude this company from the list of comparables Since we have excluded various companies from the list of comparables selected by the TPO, accordingly, the A.O/TPO is directed to recompute the ALP from the remaining set of comparables and after considering the benefit of provision to section 92C regarding tolerance range of or 5%.
Issues Involved:
1. Exclusion of expenditure incurred in foreign currency from export turnover for Section 10A deduction. 2. Deduction under Section 10A without setting off loss incurred by the non-STPI unit. 3. Transfer Pricing Adjustment and inclusion/exclusion of certain comparable companies. Issue-wise Detailed Analysis: 1. Exclusion of Expenditure Incurred in Foreign Currency from Export Turnover for Section 10A Deduction: The assessee argued that the expenditure incurred in foreign currency should not be deducted from the export turnover as it was not for the delivery of software outside India. The Tribunal referenced the Karnataka High Court's decision in CIT v. Tata Elxsi Ltd. (349 ITR 98), which held that if certain expenses are excluded from the export turnover in the numerator, they should also be excluded from the total turnover in the denominator. The Tribunal directed the Assessing Officer (AO) to exclude the expenses from both export and total turnover while computing the deduction under Section 10A. 2. Deduction under Section 10A Without Setting Off Loss Incurred by the Non-STPI Unit: The assessee contended that the deduction under Section 10A should be calculated based on the profits of the STPI unit without setting off the losses of the non-STPI unit. The Tribunal referenced the Karnataka High Court's decision in CIT v. Yokogawa India Ltd. (341 ITR 385), which clarified that the income of the 10A unit should be excluded before arriving at the gross total income of the assessee. The Tribunal followed this precedent and directed the AO to allow the deduction under Section 10A without setting off the domestic losses. 3. Transfer Pricing Adjustment and Inclusion/Exclusion of Certain Comparable Companies: The assessee challenged the Transfer Pricing Officer's (TPO) selection of comparables and the resulting adjustments. The Tribunal considered the functional comparability of various companies and made the following decisions: - Genysis International Corporation Ltd.: Rejected due to revenue from ITES and lack of segmental results. - Hyper Soft Technology Ltd.: Rejected as it was a software product and trading company. - VGL Software Limited: Rejected due to lack of financial data and response to the TPO's notice. - Accel Transmatics Ltd.: Rejected based on previous Tribunal decisions highlighting its diverse activities. - Avani Cincom Ltd.: Rejected due to revenue from software products and lack of segmental details. - Celestial Labs Ltd.: Rejected as it was primarily a research and development company. - Persistent Systems Ltd., e-Zest Solutions Ltd., Thirdware Software Solutions Ltd.: Rejected based on previous Tribunal decisions and functional differences. - Flextronics Software Systems Ltd.: Accepted as there was no substantial reason for exclusion. - Helios & Matheson Information Technology Ltd.: Rejected due to functional differences and previous Tribunal decisions. - i-Gate Global Solutions Ltd.: Accepted as no substantial reason for exclusion was found. - Ishir Infotech Ltd.: Rejected due to failure of the employee cost filter. - KALS Information Systems Ltd.: Rejected due to functional differences and previous Tribunal decisions. - Megasoft Ltd.: Issue set aside for verification of the correct operating margin. - Mindtree Ltd.: Accepted as no substantial reason for exclusion was found. - R S System International Ltd.: Rejected due to different financial year. - Sasken Communication Technologies Ltd.: Rejected based on previous Tribunal decisions. - Infosys Ltd., Wipro Ltd., Tata Elxsi Ltd.: Rejected due to brand value, size, and functional differences. The Tribunal directed the AO/TPO to recompute the Arm's Length Price (ALP) from the remaining set of comparables and consider the benefit of the +/- 5% range as per Section 92C. Conclusion: The appeal was partly allowed, with directions to the AO/TPO to adjust the computation of deductions and ALP based on the Tribunal's findings on the comparability of companies and the correct interpretation of Section 10A.
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