2019 (2) TMI 1707 - AT - Income Tax

Computation of deduction u/s. 10A - reducing the expenditure incurred in foreign currency both from the export turnover as well as the total turnover - HELD THAT - We find that so long as the judgment of Hon'ble jurisdictional High Court holds the field, all subordinate authorities are supposed to follow the same. Therefore, we find no infirmity in the order of the DRP, which has adjudicated the issue following the judgment of the Hon'ble jurisdictional High Court in the case of Tata Elxsi Ltd. 2011 (8) TMI 782 - KARNATAKA HIGH COURT . We accordingly confirm the order of DRP. TP Adjustment - comparable selection - assessee submitted that the TPO having chosen lower turnover filter ought to have excluded companies whose turnover was less than ₹ 200 crores - HELD THAT - As rightly submitted by the assessee, the decision rendered by the Hon'ble High Court of Karnataka in the case of Acusis Software (I) P. Ltd. 2018 (8) TMI 1885 - KARNATAKA HIGH COURT does not positively say that for a company to be excluded on the basis of high turnover, the tolerance range of turnover of 10 times on both the sides of assessee's turnover has to be seen. Even the Tribunal in the order against which the appeal was filed, did not proceed on application of turnover filter with any such condition. Therefore, it is not correct to say that for application of turnover filter, tolerance range of turnover of 10 times on both the sides of assessee's turnover has been laid down by the Hon'ble High Court. The Hon'ble High Court held that the order of Tribunal is correct and calls for no interference and further held that no question of law arose for consideration. The decision rendered in the case of Autodesk (I) P. Ltd. 2018 (7) TMI 1862 - ITAT BANGALORE of the Tribunal after analysing every conflicting views has ultimately concluded that the law laid down in the case of Genesis Integrated Systems (I) P. Ltd. 2011 (8) TMI 952 - ITAT BANGALORE has to be followed.

Summary

Issues Involved:
1. Reduction of expenditure incurred in foreign currency from export turnover and total turnover for deduction u/s. 10A.
2. Application of turnover filter for selecting comparable companies in Transfer Pricing analysis.

Issue-wise Detailed Analysis:

1. Reduction of Expenditure Incurred in Foreign Currency:
The revenue's appeal raised the issue of whether the expenditure incurred in foreign currency should be reduced from both the export turnover and the total turnover for the purpose of computing the deduction under section 10A of the Income-Tax Act, 1961. The revenue argued that the judgment of the Hon'ble Karnataka High Court in the case of Tata Elxsi Ltd., which supported such reduction, should not be followed because an SLP had been filed in the Hon'ble Supreme Court. However, the Tribunal noted that since the Supreme Court had not stayed the operation of the High Court's judgment, all subordinate authorities were bound to follow it. Consequently, the Tribunal found no infirmity in the order of the Dispute Resolution Panel (DRP) and confirmed it.

2. Application of Turnover Filter in Transfer Pricing Analysis:
The assessee, a wholly owned subsidiary providing Information Technology enabled Services (ITeS), used the Transactional Net Margin Method (TNMM) to justify the arm's length price (ALP) of international transactions with its Associate Enterprise (AE). The Transfer Pricing Officer (TPO) accepted only one of the assessee's selected comparables and added nine new comparables, leading to an adjustment in the total income of the assessee.

The assessee objected to the TPO’s selection, arguing that companies with turnover less than ?200 crores should be excluded from the comparability analysis, as the assessee's turnover was ?328 crores. The DRP accepted this argument, following the decision of the Bangalore ITAT in the case of Genisys Integrating Systems, which categorized companies based on turnover into small, medium, and large.

The revenue challenged this decision, citing a Karnataka High Court judgment in the case of M/s. Acusis Software, which suggested that a comparable company’s turnover should not be less or more than 10 times the assessee’s turnover. However, the Tribunal clarified that the High Court did not lay down a strict 10 times turnover criterion and upheld the DRP’s decision to exclude companies with turnover less than ?200 crores and more than ?2000 crores, following the Genisys Integrating Systems case.

Conclusion:
The Tribunal dismissed the revenue's appeal, upholding the DRP's application of the turnover filter and confirming the reduction of expenditure incurred in foreign currency from both export turnover and total turnover for the purpose of section 10A deduction. The Cross Objection by the assessee regarding functional comparability became academic and was dismissed.