2017 (6) TMI 1315 - AT - Income Tax

Deductions u/s. 10A - reduction of the items of expenditure incurred in foreign currency i.e; on communication and travel which are attributable to the delivery of software outside India and in rendering of technical services outside India - HELD THAT - Jurisdictional High Court of Karnataka in the case of Tata Elxsi Ltd. 2011 (8) TMI 782 - KARNATAKA HIGH COURT has held that when certain expenses are excluded from the, export turnover for the purpose of computing deduction admissible under the Act, like u/s. 10A of the Act, such expenses are also to be excluded from total turnover, as export turnover forms part of total turnover. The decision in the case of Tata Elxsi Ltd. (supra) has also been followed by the Hon'ble Court in the case of CIT v. Motor Industries Co. Ltd. 2015 (7) TMI 876 - KARNATAKA HIGH COURT , holding that if any expenditure is sought to be reduced from export turnover, then it should also be reduced from total turnover for the purposes of computing the eligible deduction u/s 10A of the Act. In this legal and factual matrix of the case, as discussed above, we find no reason/requirement to interfere with or deviate from the finding rendered by the DRP on this issue and, therefore, uphold the same. - Decided against revenue Risk adjustment - DRP order in granting the assessee 1% risk adjustment arbitrarily and on an ad hoc basis - HELD THAT - While the co-ordinate benches of this Tribunal in specific cases have been directing the TPO to grant the assessee risk adjustment, if warranted, based on examination of the working submitted by the assessee; in this case however we find that the DRP has allowed ad hoc risk adjustment of 1%, without any examination of the assessee's working of risk, the facts of the case or assigning reasons for its finding. In these factual circumstances, we are of the opinion that the decision of the DRP in granting the assessee an ad hoc 1% risk adjustment is baseless and bereft of any examination of the assessee's working of risk, if any, the facts of the assessee's, case vis a vis the comparable companies etc. We, therefore, set aside the order of the DRP granting the assessee ad hoc risk adjustment of 1%. Consequently, ground of Revenue's appeal is allowed. TP Adjustment - comparable selection - HELD THAT - Exclusion of companies from the list of comparables on account of it failing to satisfy the filter of 75% revenues to be from software technology services revenue. Companies functionally dissimilar with that of assessee's international transactions in software development services need to de deselected from final list.

Summary

Issues Involved:
1. Deduction under Section 10A of the Income-tax Act.
2. Risk adjustment in Transfer Pricing.
3. Rejection and selection of comparables in Transfer Pricing.
4. Working capital adjustment in Transfer Pricing.
5. Interest under Section 234C of the Income-tax Act.

Issue-wise Detailed Analysis:

1. Deduction under Section 10A of the Income-tax Act:
The Revenue contended that the Dispute Resolution Panel (DRP) erred in directing the Assessing Officer (AO) to exclude the expenditure incurred in foreign currency towards the delivery of software from both export turnover and total turnover while computing the deduction under Section 10A. The Tribunal upheld the DRP's decision, referencing the Karnataka High Court's ruling in CIT v. Tata Elxsi Ltd., which stated that if certain expenses are excluded from export turnover, they must also be excluded from total turnover. Consequently, the Tribunal found no merit in Revenue's grounds and dismissed them.

2. Risk Adjustment in Transfer Pricing:
The Revenue challenged the DRP's arbitrary grant of a 1% risk adjustment to the assessee without proper examination. The Tribunal noted that the DRP allowed the adjustment without analyzing the assessee's risk working or the facts of the case. Consequently, the Tribunal set aside the DRP's decision, finding it baseless and unsupported by any examination, thereby allowing Revenue's ground on this issue.

3. Rejection and Selection of Comparables in Transfer Pricing:
The assessee contested the exclusion of certain comparables and inclusion of others by the TPO and DRP. The Tribunal examined each comparable in detail:
- Acropetal Technologies Ltd.: The Tribunal directed the exclusion of this company, as it did not meet the 75% software development services revenue filter and was functionally different from the assessee.
- E-Infochips Ltd.: The Tribunal also directed the exclusion of this company due to its functional dissimilarity and lack of segmental information.
- Thinksoft Global Services Ltd.: The Tribunal directed the inclusion of this company, noting it was functionally comparable and had been accepted as such in the previous assessment year.
- FCS Software Solutions Ltd.: The Tribunal directed the inclusion of this company, rejecting the TPO's reasoning that high working capital adjustment distorted profit margins.

4. Working Capital Adjustment in Transfer Pricing:
The assessee argued against the restriction of working capital adjustment to 1.63%. The Tribunal, referencing the case of Moog Controls (India) (P.) Ltd., directed the TPO/AO to allow actual adjustments for differences in working capital positions between the assessee and comparable companies, rejecting any upper limit on such adjustments.

5. Interest under Section 234C of the Income-tax Act:
The assessee contested the levy of interest under Section 234C. The Tribunal upheld the AO's action, noting that the charging of interest is consequential and mandatory as per the Supreme Court's ruling in CIT v. Anjum M.H. Ghaswala. The AO was directed to recompute the interest while giving effect to the Tribunal's order.

Conclusion:
The Tribunal partly allowed both the Revenue's and assessee's appeals. The Tribunal upheld the DRP's decision on the Section 10A deduction, set aside the DRP's 1% risk adjustment, directed the inclusion/exclusion of specific comparables, allowed actual working capital adjustments, and upheld the levy of interest under Section 234C.