2019 (4) TMI 1752 - AT - Income Tax

TP Adjustment - Comparable selection - HELD THAT - Companies functionally dissimilar with that of assessee's software development segment and ITES segment need to be deselected from final list. Deduction u/s 10A on account of adjustment of export turnover - AO excluded the value of telecommunication expenses from export turnover only - HELD THAT - This issue is squarely covered by the Jurisdictional High Court in the case of CIT Vs. Tata Elxsi Ltd. 2011 (8) TMI 782 - KARNATAKA HIGH COURT as held there should be uniformity in the ingredients of both the numerator and the denominator of the formula, Section 10-A is a beneficial section Foreign exchange loss / gain - Whether not be considered as operating gain / loss? - HELD THAT - CIT(A) has followed various Tribunal orders and held that foreign exchange fluctuation gain / loss is operating profit / operating loss. To this extent, there is no quarrel but whether such foreign exchange fluctuation gain / loss should be considered for the purpose of TP analysis, it has to be ascertained as to whether such gain / loss is in respect of current year s turnover or in respect of earlier year s turnover because for TP analysis, we are not comparing the operating profit alone of the tested party with the operating profit of the comparables. We are comparing the profit percentage of tested party with profit percentage of comparable companies. The profit percentage is worked out on the basis of operating profit divided by turnover and hence, if any part of the operating profit is computed by considering the item of income or loss, which is not arising out of the present year s turnover, it will give absurd result because such exchange fluctuation gain / loss will increase or decrease the operating profit being the numerator but the corresponding turnover will not be part of denominator if the same is not in relation to the current year s turnover - Set aside the order of CIT(A) on this issue and restore back the matter to his file for fresh decision in the light of above discussion after providing reasonable opportunity of being heard to both sides. Accordingly, ground nos. 3, 4 and 5 are allowed for statistical purposes. Rejecting comparable companies identified by the assessee using export earnings greater than 75% of the sales as a comparability criterion - HELD THAT - We find that there is no finding of CIT(A) as to which comparables are affected by change in the export earnings filter in ITES segment. Hence it amounts to setting aside of the matter to the AO and as per the provisions of section 251(1A) of IT Act, the CIT(A) can confirm, reduce or enhance the assessment but he cannot remand the matter to the file of AO. Hence on this issue, the order of CIT(A) is not sustainable and therefore, we reverse the same and restore to the order of AO on this issue. - Decided in favour of revenue

Summary

Issues Involved:
1. Rejection of Transfer Pricing (TP) documentation and adjustments.
2. Inclusion/exclusion of certain companies in the comparability analysis for software development and customer support services.
3. Application of quantitative and qualitative filters by the Transfer Pricing Officer (TPO).
4. Computation of Arm's Length Price (ALP) and working capital adjustments.
5. Treatment of foreign exchange gain/loss.
6. Computation of deduction under Section 10A of the Income Tax Act.
7. Inclusion of export receipts for certain months in export turnover.
8. Application of +/-5% range while determining ALP.
9. Miscellaneous issues including the levy of interest and initiation of penalty.

Detailed Analysis:

1. Rejection of Transfer Pricing (TP) Documentation and Adjustments:
The assessee contended that the CIT(A) erred in upholding the TPO's rejection of the TP documentation and adjustments made to the transfer price for software development and customer support services, arguing that the international transactions did not satisfy the arm's length principle under the Income Tax Act, 1961. The Tribunal found that the CIT(A) had not provided a detailed discussion on the exclusion of Infosys Ltd. and decided to exclude Infosys Ltd. from the list of comparables based on significant intangibles and revenues from software products, following previous Tribunal orders.

2. Inclusion/Exclusion of Companies in Comparability Analysis:
The Tribunal addressed the inclusion of six comparables in the software development segment and four in the ITES segment. The Tribunal excluded Bodhtree Consulting Ltd., Infosys Ltd., Persistent Systems Ltd., Sasken Communication Technologies Ltd., Tata Elxsi Ltd., and Larsen & Toubro Infotech Ltd. from the software development segment, and Accentia Technologies Ltd., Infosys BPO Ltd., Cosmic Global Ltd., and Eclerx Services Ltd. from the ITES segment, following previous Tribunal decisions and functional dissimilarities.

3. Application of Quantitative and Qualitative Filters:
The Tribunal examined the application of different quantitative and qualitative filters by the TPO, including employee cost greater than 25% of total revenue, export earnings greater than 75% of sales, different accounting years, and turnover less than 1 crore. The Tribunal found the application of these filters arbitrary and inconsistent, directing the TPO to apply the same export sales filter in the ITES sector as in the software sector.

4. Computation of Arm's Length Price (ALP) and Working Capital Adjustments:
The Tribunal directed the inclusion of Thinksoft Global Services Ltd. and FCS Software Solutions Ltd. in the final set of comparables for the software development segment, setting aside the issue of working out the correct PLI of the final set of comparables by computing and allowing working capital adjustment on an actual basis.

5. Treatment of Foreign Exchange Gain/Loss:
The Tribunal noted that the CIT(A) had followed various Tribunal orders in treating foreign exchange gain/loss as operating profit/loss. However, the Tribunal emphasized the need to ascertain whether such gain/loss is related to the current year's turnover or an earlier year's turnover, directing the CIT(A) to re-examine this aspect.

6. Computation of Deduction under Section 10A:
The Tribunal upheld the CIT(A)'s decision to follow the Jurisdictional High Court's ruling in the case of Tata Elxsi Ltd., directing the AO to exclude telecommunication charges/freight charges incurred in foreign currency from the total turnover while computing the deduction under Section 10A.

7. Inclusion of Export Receipts for Certain Months in Export Turnover:
The Tribunal restored the matter to the CIT(A) for a decision on the inclusion of export receipts for January, February, and March 2009 in the export turnover, which the AO had excluded due to the assessee's inability to produce the corresponding softex forms.

8. Application of +/-5% Range While Determining ALP:
The Tribunal did not address this issue specifically in the detailed analysis provided, indicating that it may have been part of the grounds not pressed by the assessee.

9. Miscellaneous Issues Including Levy of Interest and Initiation of Penalty:
The Tribunal noted that the levy of interest under Section 234B and the initiation of penalty under Section 271(1)(c) are mandatory and premature, respectively, and therefore did not require adjudication.

Conclusion:
The Tribunal's decision involved a detailed analysis of various grounds raised by the assessee and revenue, resulting in the exclusion of certain comparables, re-examination of foreign exchange gain/loss treatment, and directions for the computation of working capital adjustments and deductions under Section 10A. The appeals of both the assessee and revenue were partly allowed, with specific issues remanded for further consideration.