2017 (4) TMI 1480 - AT - Income Tax

TP Adjustment - exclusion of companies from the set of comparables by applying the turnover filter of more than 200 Crores - HELD THAT - Turnover of the assessee from international transactions is 17.07 Crores. Since the Dispute Resolution Panel ( DRP ) has excluded six companies by applying the turnover filter of more than 200 Crores the revenue has challenged the directions of the DRP and consequent assessment order. Though the filter of 200 Crores may not be appropriate filter however even if we apply the turnover filter of 10 times of the assessee s turnover on both sides the companies which are having more than 171 Crores of turnover are required to be excluded. In view of the fact that the DRP has excluded the companies which are having more than 200 Crores turnover which is more than the filter to be applied at 10 times of the assessee s turnover which comes to 171 Crores we do not find any reason to interfere with the impugned order and directions of the DRP as by applying the filter of 10 multiples all these six companies are required to be excluded from the set of comparables. Risk adjustment allowed by the DRP - HELD THAT - When the assessee has not given any details and computation for risk adjustment then the claim of the assessee is purely hypothetical in nature. The co-ordinate bench of this Tribunal in the case of Zyme Solutions Pvt. Ltd. Vs. ITO 2016 (1) TMI 1436 - ITAT BANGALORE has considered an identical issue. When the assessee has not made any attempt to quantify the risk or furnish the details for computation of risk adjustment then by following the decision of the co-ordinate bench we decide this issue in favour of the revenue and set aside the directions of the DRP. Deduction under section 10A - Exclusion of expenditure incurred towards telecommunications insurance and travel in foreign currency both from export turnover and total turnover - HELD THAT - Respectfully following the aforementioned decision of the Hon ble High Court of Karnataka in the case of Tata Elxsi Ltd. 2011 (8) TMI 782 - KARNATAKA HIGH COURT we uphold the directions of DRP in directing the Assessing Officer to reduce the expenditure incurred towards telecommunications insurance and travel in foreign currency from both export turnover and total turnover for the purpose of computing the deduction under section 10A of the Act in the case on hand. Consequently this ground raised by revenue is dismissed. Restricting the deduction under Section 10A by reducing the foreign exchange loss from the export turnover - HELD THAT - Foreign exchange loss has to be considered only arising from the sale proceeds and pertaining to the period relevant to the assessment year under consideration. Since the assessee has contended that it was not given an appropriate opportunity to make submissions therefore in the facts and circumstances of the case and in the interest of justice we set aside this issue to the record of the Assessing Officer for proper verification and adjudication of this issue as per law. We make it clear that foreign exchange loss is reduced from the export turnover the same has to be also reduced from the total turnover for the purpose of computing the deduction under Section 10A

Issues Involved:
1. Exclusion of companies from comparables based on turnover filter.
2. Risk adjustment allowed by the Dispute Resolution Panel (DRP).
3. Exclusion of certain expenses from export turnover and total turnover for deduction under Section 10A.
4. Reduction of foreign exchange loss from export turnover.
5. Incorrect computation of tax demand and interest under Section 234D.

Detailed Analysis:

1. Exclusion of Companies from Comparables Based on Turnover Filter:
The revenue challenged the DRP's decision to exclude six companies from the set of comparables by applying a turnover filter of more than ?200 Crores. The assessee, a software development services provider, reported international transactions totaling ?17.07 Crores. The Tribunal noted that even if a turnover filter of ten times the assessee's turnover (?171 Crores) was applied, companies with turnovers exceeding ?171 Crores should be excluded. Since the DRP excluded companies with turnovers over ?200 Crores, which is more stringent than the ten times filter, the Tribunal found no reason to interfere with the DRP's order.

2. Risk Adjustment Allowed by the DRP:
The revenue contended that the assessee did not provide any computation or details for the risk adjustment claim, making the DRP's directions unsustainable. The Tribunal agreed, referencing a coordinate bench decision in Zyme Solutions Pvt. Ltd. Vs. ITO, which emphasized that without quantifying the risk, the claim remains hypothetical. The Tribunal decided in favor of the revenue, setting aside the DRP's directions for a 1% risk adjustment.

3. Exclusion of Certain Expenses from Export Turnover and Total Turnover for Deduction Under Section 10A:
The issue was whether expenses on telecommunications, insurance, and travel in foreign currency should be excluded from both export turnover and total turnover when computing the deduction under Section 10A. The Tribunal upheld the DRP's directions, referencing the Karnataka High Court's decision in Tata Elxsi Ltd., which mandates that such expenses should be excluded from both export turnover and total turnover to maintain uniformity in the formula used for computing the deduction.

4. Reduction of Foreign Exchange Loss from Export Turnover:
The assessee argued that the Assessing Officer (AO) did not provide an opportunity to contest the reduction of foreign exchange loss from export turnover and used incorrect figures. The Tribunal noted that foreign exchange loss should be considered only if it arises from sale proceeds relevant to the assessment year. The Tribunal remanded the issue to the AO for proper verification and adjudication, emphasizing that any reduction in export turnover should also be mirrored in the total turnover for Section 10A computation.

5. Incorrect Computation of Tax Demand and Interest Under Section 234D:
The assessee contested the incorrect computation of tax demand and the consequential levy of interest under Section 234D. The Tribunal noted that this issue is consequential in nature and did not require a detailed adjudication.

Conclusion:
The Tribunal partly allowed the appeals of both the assessee and the revenue for statistical purposes, directing specific issues back to the AO for further verification and adjudication as per law. The decision emphasized the importance of proper computation and uniform application of filters and adjustments in tax assessments.

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