2017 (1) TMI 1653 - AT - Income Tax

Deduction u/s. 10A - HELD THAT - In the case of CIT v. Tata Elxsi Ltd. 2011 (8) TMI 782 - KARNATAKA HIGH COURT in which it has been held that where certain expenses are not part of the export turnover, the same should be excluded from the total turnover. We, therefore, following the judgment of the jurisdictional High Court, decide this issue in favour of assessee and direct the AO to recompute the deduction u/s. 10A TPA - comparable selection - HELD THAT - Assessee is engaged in providing software development services and coding of embedded software to its Associated Enterprise (AE) thus companies functionally dissimilar with that of assessee need to be deselected from final list.

Issues Involved:

1. Assessment of total income.
2. Reduction of communication expenses from export turnover under section 10A.
3. Reduction of communication expenses from total turnover under section 10A.
4. Deduction under Chapter VI-A for donations eligible under section 80G.
5. Transfer Pricing adjustments and arm’s length price determination.
6. Economic analysis for transfer pricing.
7. Tax holiday under section 10A and profit shifting.
8. Use of financial year data for transfer pricing.
9. Use of information obtained under section 133(6) for comparability analysis.
10. Rejection of certain comparables in transfer pricing analysis.
11. Acceptance/rejection of companies using comparability criteria.
12. Adjustments for differences in risk profiles.
13. Computation of working capital adjustment.
14. Benefit of +/- 5 percent under section 92C.
15. Levy of interest under section 234B.
16. Initiation of penalty proceedings under section 271(1)(c).

Detailed Analysis:

1. Assessment of Total Income:
The Tribunal noted that the AO erred in assessing the total income at ?4,11,78,787 against the returned income of ?9,38,770. This issue was general and did not require independent adjudication.

2. Reduction of Communication Expenses from Export Turnover:
The Tribunal found that the issue of reducing communication expenses from export turnover while computing the deduction under section 10A was covered by the judgment in CIT v. Tata Elxsi Ltd. (349 ITR 98)(Karn). The Tribunal directed the AO to recompute the deduction in light of this judgment.

3. Reduction of Communication Expenses from Total Turnover:
Similarly, the Tribunal directed the AO to reduce an equal amount from the total turnover if communication expenses are reduced from export turnover, following the same judgment.

4. Deduction under Chapter VI-A for Donations:
The Tribunal restored this issue to the file of the AO for examination in light of the relevant provisions of the Act.

5. Transfer Pricing Adjustments and Arm’s Length Price Determination:
The Tribunal noted that the TPO had made an addition of ?3,99,84,625 to the total income on account of adjustment in the arm’s length price of the software research and development services transaction. The Tribunal referred to the case of Hewlett Packard (India) Global Soft Pvt. Ltd. v. DCIT, where 16 comparables were rejected. The Tribunal directed the AO to recompute the ALP after considering the remaining comparables.

6. Economic Analysis for Transfer Pricing:
The Tribunal found that the TPO erred in disregarding the economic analysis undertaken by the appellant and conducting a fresh analysis. The Tribunal directed the AO to follow the precedent set in the Hewlett Packard case.

7. Tax Holiday under Section 10A and Profit Shifting:
The Tribunal noted the appellant’s claim that since it was availing of a tax holiday under section 10A, there was no intention to shift the profit base out of India. This issue was considered in the context of the overall transfer pricing analysis.

8. Use of Financial Year Data for Transfer Pricing:
The Tribunal found that the TPO erred in using only financial year 2006-07 data, which was not available to the appellant at the time of complying with the transfer pricing documentation requirements. The Tribunal directed the AO to consider this aspect while recomputing the ALP.

9. Use of Information Obtained under Section 133(6) for Comparability Analysis:
The Tribunal noted that the TPO erred in obtaining and relying on information not available in the public domain. This issue was addressed in the context of the overall transfer pricing analysis.

10. Rejection of Certain Comparables in Transfer Pricing Analysis:
The Tribunal found that the TPO erred in rejecting certain comparables considered by the appellant. The Tribunal directed the AO to follow the precedent set in the Hewlett Packard case, where 16 comparables were rejected.

11. Acceptance/Rejection of Companies Using Comparability Criteria:
The Tribunal noted that the TPO erred in accepting/rejecting certain companies using unreasonable comparability criteria. The Tribunal directed the AO to follow the precedent set in the Hewlett Packard case.

12. Adjustments for Differences in Risk Profiles:
The Tribunal found that the TPO erred in not making suitable adjustments on account of differences in the risk profile of the appellant vis-a-vis the comparables. The Tribunal directed the AO to consider this aspect while recomputing the ALP.

13. Computation of Working Capital Adjustment:
The Tribunal noted that the TPO erred in computing the working capital adjustment. The Tribunal directed the AO to follow the precedent set in the Hewlett Packard case.

14. Benefit of +/- 5 Percent under Section 92C:
The Tribunal found that the TPO erred in computing the arms-length price without giving the benefit of +/- 5 percent under the proviso to section 92C. The Tribunal directed the AO to consider this aspect while recomputing the ALP.

15. Levy of Interest under Section 234B:
The Tribunal noted that the AO erred in levying interest of ?71,44,250 under section 234B. This issue was considered in the context of the overall transfer pricing analysis.

16. Initiation of Penalty Proceedings under Section 271(1)(c):
The Tribunal noted that the AO erred in initiating penalty proceedings under section 271(1)(c). This issue was considered in the context of the overall transfer pricing analysis.

Conclusion:
The Tribunal allowed the appeal for statistical purposes, directing the AO to recompute the ALP and other adjustments in light of the precedents set in the Hewlett Packard case and other relevant judgments. The Tribunal emphasized the need for a reasoned and consistent approach in transfer pricing analysis and the computation of deductions under section 10A.

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