2017 (3) TMI 1785 - AT - Income Tax

Deduction u/s 10A - exclude the expenditure incurred in foreign currency from both export turnover as well as total turnover - HELD THAT - Now the issue is covered against the revenue by the jurisdictional High Court in the case of Tata Elxsi 2011 (8) TMI 782 - KARNATAKA HIGH COURT held that the same is required to be reduced from export turnover as well as total turnover. Respectfully following the ratio of the decision of the Hon'ble jurisdictional High Court we direct that expenses incurred in foreign exchange towards insurance, travelling and communication are to be reduced both from export turnover as well as total turnover. TP Adjustment - Comparable selection - HELD THAT - Assessee is into software development services thus companies functionally dissimilar with that of assessee need to be deselected from final list.

Summary

Issues Involved:
1. Transfer Pricing Adjustments
2. Expenditure incurred in foreign currency
3. Exclusion of certain companies from the list of comparables

Issue-wise Detailed Analysis:

1. Transfer Pricing Adjustments:
The respondent assessee, a software development service provider, reported international transactions with its AE and justified the consideration received as being at Arm's Length Price (ALP) using the Transaction Net Margin Method (TNMM). The assessee's profit margin was 13.09%, higher than the 10.24% average of selected comparables. The Transfer Pricing Officer (TPO) accepted the TNMM method but rejected the Profit Level Indicator (PLI) used by the assessee, instead adopting operating profit to operating cost as the PLI. The TPO identified a different set of comparables, resulting in a transfer pricing adjustment of ?2,10,40,490/-. The CIT(A) excluded eight companies based on the turnover filter of 1 to 200 crores.

2. Expenditure incurred in foreign currency:
The Assessing Officer (AO) reduced the benefit under section 10A by deducting telecommunication and foreign travel expenditure incurred in foreign currency from the export turnover without reducing the same from the total turnover, resulting in an addition of ?11,06,771/-. The CIT(A) followed the decision in CIT vs. Tata Elxsi (349 ITR 98) and held that such expenses should be reduced from both export turnover and total turnover. The Tribunal upheld this view, dismissing the revenue's grounds of appeal on this issue.

3. Exclusion of certain companies from the list of comparables:
The Tribunal considered the functional dissimilarity and peculiar economic circumstances of several companies. It upheld the exclusion of the following companies from the list of comparables:

- Avani Cimcom Technologies Ltd.: Engaged in software products, not functionally comparable.
- Bodhtree Consulting Ltd.: Despite fluctuating margins, included as comparable.
- Celestial Biolabs Ltd.: Engaged in bioinformatics software products/services, not comparable.
- KALS Information Systems Ltd.: Engaged in software products and training, not comparable.
- Infosys Technologies Ltd.: Significant intangibles and brand value, not comparable.
- Wipro Ltd.: Engaged in both software and product development, significant intangibles, not comparable.
- Tata Elxsi Ltd.: Engaged in product design services, not comparable.
- E-Zest Solutions Ltd.: Engaged in high-end ITES/KPO services, not comparable.
- Thirdware Solutions Ltd.: Engaged in product development and trading in software, not comparable.
- Lucid Software Ltd.: Engaged in software product development, not comparable.
- Persistent Systems Ltd.: Engaged in product development and design services, not comparable.
- Quintegra Solutions Ltd.: Engaged in product engineering services, acquisitions during the year, not comparable.
- Softsol India Ltd.: Excluded due to related party transactions exceeding 15%.

The Tribunal directed the TPO/AO to recompute the ALP after excluding these companies and considering the claim of risk adjustment and working capital adjustment.

Conclusion:
The Tribunal dismissed the revenue's appeal regarding the exclusion of foreign currency expenditure from both export and total turnover and upheld the exclusion of certain companies from the list of comparables based on functional dissimilarity. The appeal filed by the revenue was partly allowed, and the Cross Objection (C.O.) was dismissed.