2016 (10) TMI 1286 - AT - Income Tax

Deduction u/s 10A - direction of Hon ble DRP to TPO/AO to reduce the telecommunication expenditure and the travelling expenditure incurred in connection with delivery of the software from both export turnover as well as total turnover - HELD THAT - As decided in the case of Tata Elxsi 2011 (8) TMI 782 - KARNATAKA HIGH COURT once item is included in the export turnover it should also be included in the total turnover. Exclude the travelling expenditure and telephone expenses incurred in connection with the software products from both export turnover as well as total turnover. This direction is in consonance with the law laid down by the Hon ble Jurisdictional High Court in the case of CIT Vs. Tata Elxsi Ltd. Supra and therefore we do not find any reason to interfere with the findings of the learned CIT. Accordingly we dismiss the grounds of appeal filed by the revenue. Advances received from AEs as a part of payables for the purpose of computing the working capital adjustment - HELD THAT - There is no dispute that the adjustment for working capital be granted. But the only issue is whether the advance received from AE should be considered as trade payable and be considered for working capital adjustment. The advance received from AE par takes the character of trade payables which is to be adjusted against the future invoice. As a result of receipt of this advance money the necessity for borrowings from outside is reduced to that extent thereby reducing the cost of the borrowings. Thus it has a direct bearing on the profitability of the concern. Therefore the trade payable should be considered while computing the working capital adjustment. Thus the grounds of appeal filed by the revenue are dismissed. TP Adjustment - comparable selection - HELD THAT - The assessee-company is engaged in providing software development services only to its AEs. Being a captive service centre providing contact services to its AEs assumes less than normal risks and all the significant business and entrepreneurial risks are borne by the overseas affiliates thus companies functionally dissimilar with that of assessee need to be deselected from final list.

Issues Involved:
1. Directions of the Dispute Resolution Panel (DRP) opposed to law and facts.
2. Exclusion of expenditure incurred in foreign currency from export turnover and total turnover for deduction u/s 10A.
3. Reliance on the decision of the High Court of Karnataka in the case of M/s Tata Elxsi Ltd.
4. Adjustment based on advance received from AEs for calculating the cost of working capital.
5. Justification of the DRP in directing the TPO to adjust the profit margin for advances received from AE.
6. DRP not upholding the approach of the TPO.
7. Exclusion of M/s. ICRA Techno Analytics Ltd and M/s. Persistent Systems Ltd as comparables.
8. Exclusion of Infosys Ltd as a comparable.
9. General grounds of appeal.
10. Additional grounds that may be urged at the time of hearing.

Detailed Analysis:

1. Directions of the Dispute Resolution Panel (DRP) opposed to law and facts:
- The revenue contended that the directions of the DRP were opposed to the law and facts of the case. However, this was a general ground and did not require specific adjudication.

2. Exclusion of expenditure incurred in foreign currency from export turnover and total turnover for deduction u/s 10A:
- The DRP directed the AO to exclude telecommunication and travel expenses from both export turnover and total turnover. This was in line with the jurisdictional High Court's decision in Tata Elxsi Ltd., which the Tribunal upheld, dismissing the revenue's appeal on this issue.

3. Reliance on the decision of the High Court of Karnataka in the case of M/s Tata Elxsi Ltd.:
- The DRP's direction to follow the Tata Elxsi Ltd. decision was upheld, as it was binding and relevant. The Tribunal dismissed the revenue's contention that the decision had not become final due to pending SLPs.

4. Adjustment based on advance received from AEs for calculating the cost of working capital:
- The DRP directed that advances received from AEs should be considered as trade payables for working capital adjustment. The Tribunal agreed, stating that advances reduce the need for external borrowings, thus affecting profitability.

5. Justification of the DRP in directing the TPO to adjust the profit margin for advances received from AE:
- The Tribunal upheld the DRP's direction to consider advances as trade payables, dismissing the revenue's appeal. This was based on the rationale that advances impact working capital and profitability.

6. DRP not upholding the approach of the TPO:
- The DRP excluded certain companies from the list of comparables due to functional dissimilarity. The Tribunal found no reason to interfere with the DRP's findings, which were based on detailed analysis and precedents.

7. Exclusion of M/s. ICRA Techno Analytics Ltd and M/s. Persistent Systems Ltd as comparables:
- ICRA Techno Analytics Ltd was excluded due to its diversified activities and lack of segment details. Persistent Systems Ltd was excluded because it was involved in both software services and product sales without segmental information. The Tribunal upheld these exclusions, aligning with previous decisions.

8. Exclusion of Infosys Ltd as a comparable:
- Infosys Ltd was excluded due to its high brand value, intangibles, and diversified services. The Tribunal upheld this exclusion, referencing the Delhi High Court's decision in Agnity India Technologies (P.) Ltd.

9. General grounds of appeal:
- Grounds 1, 9, and 10 were general in nature and did not require specific adjudication.

10. Additional grounds that may be urged at the time of hearing:
- The appellant reserved the right to add, alter, amend, or delete any grounds, but no additional grounds were raised during the hearing.

Cross-Objections by Assessee:
- Inclusion of Akshay Software Technologies Ltd.:
- The DRP excluded Akshay Software Technologies Ltd due to its significant foreign currency expenditure indicating onsite software development. The Tribunal upheld this exclusion, noting the functional dissimilarity with the assessee's offshore services.

- Exclusion of Kals Information Systems Ltd and Tata Elxsi Ltd.:
- Kals Information Systems Ltd was excluded due to its involvement in software product development without segment details. Tata Elxsi Ltd was excluded because it provided product design services, which were not comparable to the assessee's software development services. The Tribunal upheld these exclusions based on functional dissimilarity and lack of segmental data.

Conclusion:
- The Tribunal dismissed the revenue's appeal and partly allowed the assessee's cross-objections, upholding the DRP's directions and exclusions of certain comparables based on functional dissimilarity and relevant legal precedents.

← Previous Next →