2019 (1) TMI 1691 - AT - Income Tax

Deduction u/s.10A - CIT (A) directing the AO to reduce the expenses deducted both from export turnover as well as from the total turnover for the purpose of computation of deduction - HELD THAT - We find that this issue is put to rest by the judgment of the Hon ble Supreme Court in the matter of CIT v. HCL Technologies Ltd 2018 (5) TMI 357 - SUPREME COURT wherein the Hon ble Supreme Court has decided the issue in favour of the assessee holding that the expenses be reduced both from the export turnover as well as from the total turnover. TPA - Comparable selection - HELD THAT - Companies functionally dissimilar with that of assessee need to be deselected from final list. Direct the TPO to apply RPT filter of 25% on all comparable instead of 15% and find out the fresh comparables which are otherwise functionally comparable with that of the assessee

Issues Involved:

1. Computation of deduction under Section 10A of the Income Tax Act.
2. Application of turnover filter for comparables.
3. Exclusion of companies with abnormal profits.
4. Inclusion of comparables with different accounting years.
5. Exclusion of specific companies based on functional dissimilarity.
6. Related Party Transaction (RPT) filter application.

Detailed Analysis:

1. Computation of Deduction under Section 10A of the Income Tax Act:

The Revenue challenged the CIT(A)'s direction to the AO to recompute the deduction allowable under Section 10A by reducing communication expenses from both export turnover and total turnover. The Tribunal upheld the CIT(A)'s decision, referencing the Supreme Court's ruling in CIT v. HCL Technologies Ltd, which clarified that expenses excluded from export turnover must also be excluded from total turnover to avoid making the formula unworkable and absurd.

2. Application of Turnover Filter for Comparables:

The Revenue contested the exclusion of five companies based on a turnover filter of ?100 crore to ?200 crores. The Tribunal noted the jurisdictional High Court's approval of applying a turnover filter of ten times the assessee's turnover. Consequently, the Tribunal remanded the matter to the CIT(A) to examine the functional profile of iGate Global Solutions Ltd, Flextronics Software Systems Ltd, and L & T Infotech Ltd, while excluding Satyam Computer Services and Infosys Technology Ltd due to their turnovers exceeding ten times that of the assessee.

3. Exclusion of Companies with Abnormal Profits:

The Revenue objected to the exclusion of Exensys Software Solutions Ltd and Thirdware Solutions Ltd due to their high-profit margins. The Tribunal upheld the exclusion, citing previous Tribunal decisions that considered the functional dissimilarity and extraordinary events affecting these companies' financials, such as mergers and diversified activities.

4. Inclusion of Comparables with Different Accounting Years:

The Revenue argued against the exclusion of comparables based on different accounting years. The Tribunal agreed with the Revenue, directing the TPO to recast the accounts to align with the assessee's financial year, following the Punjab & Haryana High Court's decision in Mercer Consulting India P. Ltd. The Tribunal allowed the ground for statistical purposes, permitting the TPO to consider other comparables excluded due to different accounting years.

5. Exclusion of Specific Companies Based on Functional Dissimilarity:

- Bodhtree Consulting Ltd: The Tribunal upheld the exclusion due to its turnover being less than one-tenth of the assessee's turnover.
- Geometric Software Solutions Co. Ltd: The Tribunal agreed with the CIT(A) that the company was functionally dissimilar due to its involvement in product lifecycle management services and lack of segmental break-up.
- Tata Elxsi Ltd: The Tribunal upheld the exclusion, noting the company's engagement in IT-enabled services, which differed from the assessee's software development services.

6. Related Party Transaction (RPT) Filter Application:

The Tribunal addressed the issue of RPT filters, noting that a 0% RPT filter was impractical. Instead, it endorsed a 15% RPT filter, which could be relaxed to 25% in exceptional circumstances. The Tribunal directed the TPO to apply a 25% RPT filter due to the limited number of comparables remaining after exclusions, aligning with the Tribunal's decision in ACI Worldwide Solutions P. Ltd.

Conclusion:

The Tribunal's judgment provided detailed directives on various issues concerning the computation of deductions, application of turnover filters, exclusion of companies based on abnormal profits, inclusion of comparables with different accounting years, functional dissimilarity, and RPT filters. The appeal of the Revenue was partly allowed, and the cross-objection of the assessee was partly allowed, with specific matters remanded for further examination.

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