2016 (9) TMI 1514 - AT - Income Tax

TPA - rejection of use of contemporarious data and multiple year data - HELD THAT - This ground is rejected as it has been held in a number of cases by the Coordinate Benches of this Tribunal that it is only the data pertaining to the relevant financial year that has to be considered for determination of the ALP and multiple data is not to be considered. Comparable selection - HELD THAT - Assessee is a software development services company thus companies functionally dissimilar with that of assessee need to be deselected from final list. Treatment to provisions for bad and doubtful debts of the comparable companies as part of their operating expenses - HELD THAT - Bad debts and the provision for bad and doubtful debts are part of the operating expenses and are to be taken into consideration while computing the comparable companies. See KENEXA TECHNOLOGIES (P.) LTD. VERSUS DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE -2 (1) , HYDERABAD 2014 (11) TMI 587 - ITAT HYDERABAD - we direct the AO to treat the provisions for bad and doubtful debts of the comparable companies as part of their operating expenses and to re-compute the margins of the comparable companies accordingly. This ground of appeal is treated as allowed for statistical purposes. Non-allowing of deduction u/s 10A - voluntary TP adjustment offered by the assessee - not considering the revised return filed by the assessee for computing the deduction u/s 10A - HELD THAT - We find that this issue is covered in favour of the assessee by the judgment of iGATE Global Solutions Ltd 2014 (6) TMI 1007 - KARNATAKA HIGH COURT we direct the AO to allow the deduction u/s 10A of the Act on the ALP adjustment voluntarily offered by the assessee Exclusion of the internet connection charges only from the export turnover while computing deduction u/s 10A - HELD THAT - We direct the AO to exclude them from both the export turnover as well as total turnover for the purpose of computation u/s 10A as held in the case of Tata Elxsi Ltd 2011 (8) TMI 782 - KARNATAKA HIGH COURT . This ground of appeal is accordingly allowed. Levy of interest u/s 234B and 234C is consequential in nature - AO is directed to give consequential relief to the assessee, if any, while giving effect to this order.

Issues Involved:

1. Rejection of transfer pricing documentation.
2. Use of single year data versus multiple year data.
3. Selection and rejection of comparable companies.
4. Error in margin computation.
5. Adjustment for risk differences.
6. Deduction under section 10A.
7. Exclusion of internet connection charges from export turnover.
8. Opportunity to provide explanation on proposed adjustments.
9. Levy of interest under sections 234B and 234C.
10. Initiation of penalty proceedings under section 271(1)(c).

Detailed Analysis:

1. Rejection of Transfer Pricing Documentation:
The Tribunal did not specifically address the rejection of transfer pricing documentation as a separate issue, implying that the rejection was part of the broader analysis of the comparables and the ALP determination.

2. Use of Single Year Data versus Multiple Year Data:
Ground No. 2 was rejected. The Tribunal affirmed that only the data pertaining to the relevant financial year should be considered for determining the Arm's Length Price (ALP), rejecting the use of multiple year data.

3. Selection and Rejection of Comparable Companies:
- Comp-U-Learn Tech India Ltd: The Tribunal noted that this company is engaged in diversified activities and lacks segmental information. The issue was remanded to the AO/TPO to examine if segmental information for software development services could be obtained.
- E-Infochips Bangalore Ltd: The Tribunal found that this company is engaged in both software development and ITES, lacks segmental information, and has fluctuating profits. It was excluded from the list of comparables.
- KALS Information Systems Ltd: The Tribunal held that this company is engaged in the development of software and software products, making it functionally different from the assessee. It was excluded from the list of comparables.
- Tata Elxsi Ltd: The Tribunal found this company to be engaged in complex activities without available segmental information. It was excluded from the list of comparables.

4. Error in Margin Computation:
The Tribunal directed the AO to treat provisions for bad and doubtful debts of the comparable companies as part of their operating expenses and to re-compute the margins of the comparable companies accordingly, following the decision in Kenexa Technologies Pvt. Ltd vs. DCIT.

5. Adjustment for Risk Differences:
Ground No. 6 was rejected as academic, since the exclusion of certain comparables (Ground No. 3) brought the assessee within the acceptable margin range.

6. Deduction under Section 10A:
- Voluntary TP Adjustment: The Tribunal directed the AO to allow the deduction under section 10A on the ALP adjustment voluntarily offered by the assessee, following the decision in iGATE Global Solutions Ltd.
- Revised Return: The Tribunal directed the AO to consider the revised return filed by the assessee for computing the deduction under section 10A.

7. Exclusion of Internet Connection Charges from Export Turnover:
The Tribunal directed the AO to exclude internet connection charges from both the export turnover and the total turnover for the purpose of computing the deduction under section 10A, following the decision in Tata Elxsi Ltd.

8. Opportunity to Provide Explanation on Proposed Adjustments:
Ground No. 10 was rejected as the learned Counsel for the assessee did not advance any arguments on this ground.

9. Levy of Interest under Sections 234B and 234C:
Ground No. 11 was noted as consequential. The AO was directed to give consequential relief to the assessee, if any, while giving effect to the order.

10. Initiation of Penalty Proceedings under Section 271(1)(c):
Ground No. 12 was rejected as premature.

Conclusion:
The appeal was partly allowed, with specific directions to the AO regarding the exclusion of certain companies from the list of comparables, the treatment of bad debts, and the computation of deductions under section 10A. The Tribunal provided detailed reasoning for each decision, ensuring adherence to established legal precedents and principles.

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