2017 (9) TMI 1863 - AT - Income Tax

Deduction u/s 10A - Computation of deduction - HELD THAT - This issue is covered in favour of the assessee by the judgment of Hon ble Karnataka High Court rendered in the case of CIT Vs. Tata Elxsi Ltd. 2011 (8) TMI 782 - KARNATAKA HIGH COURT this issue is decided in favour of the assessee and the AO is directed to reduce the telecommunication expenses incurred in foreign currency and attributable to computer software and also other foreign currency expenses which are reduced by AO from export turnover for the purpose of computing deduction u/s 10A allowed the assessee to reduce from total turnover also for the purpose of computing this deduction because it was held by Hon ble High Court that total turnover is sum of total of export turnover and domestic turnover and therefore, if any amount is reduced from export turnover then the total turnover also gets reduced by the same amount automatically. Accordingly ground no. 4 is allowed. Comparable selection - HELD THAT - Various objections were raised by the assessee regarding various comparables such as high turnover, over size, brand and high profitability and on none of these objections, any specific finding has been recorded by the DRP and such a cryptic order of DRP cannot be approved. Hence, we feel it proper to restore this matter back to the file of DRP for fresh decision by way of a speaking and reasoned order. Foreign exchange gain considered for computing profit percentage for the purpose of ALP - HELD THAT - Foreign exchange gain is nothing but an integral part of the sales proceeds of an assessee carrying on export business. To this extent, there is no quarrel but in our considered opinion, even after holding that the Foreign Exchange fluctuation gain is operating profit, it has to be seen as to whether the same can be considered for the purpose of computing ALP if the said gain is not in respect of sale of the present year. This is so because for the purpose of ALP under TNMM, what is determined is the percentage of profit by dividing the profit of the year by turnover of the year and such profit percentage of the assessee is compared with the average profit percentage of the comparables. Hence, even after holding that foreign exchange fluctuation gain is operating profit, it has to be seen as to whether the said gain is in respect of turnover of the present year or turnover of the earlier year because if the gain is on account of turnover of the present year than the gain is included in the numerator i.e. profit but the relevant turnover is not included in the denominator and therefore, the result will be absurd. Hence, we restore this matter to the file of the A.O. with the direction that the foreign exchange gain should be considered for computing profit percentage for the purpose of ALP if it is in respect of turnover of the present year. We feel it proper that either the foreign exchange gain of comparable should not be considered in that situation or such details should be obtained from the respective comparable companies u/s. 133(6) of the IT Act, 1961. Ground allowed for statistical purposes

Issues Involved:
1. Assessment of total income.
2. Reduction of telecommunication expenses from export turnover for deduction under section 10A.
3. Reduction of foreign currency travel expenses from export turnover for deduction under section 10A.
4. Reduction of expenses from total turnover for computing deduction under section 10A.
5. Addition to total income due to adjustment in arm's length price.
6. Disregarding the economic analysis undertaken by the appellant.
7. Ignoring the tax holiday under section 10A.
8. Use of financial year 2006-07 data for arm's length price determination.
9. Rejection of certain comparables based on various criteria.
10. Use of non-public information for comparability analysis.
11. Inclusion of certain companies as comparables.
12. Exclusion of foreign exchange fluctuation gain/loss from operating income.
13. Incorrect computation of working capital adjustment.
14. Lack of adjustments for differences in risk profiles.
15. Not giving benefit of +/- 5% under section 92C.
16. Levy of interest under sections 234B and 234C.
17. Initiation of penalty proceedings under section 271(1)(c).

Issue-wise Detailed Analysis:

1. Assessment of Total Income:
The appellant did not press ground no. 1, which contested the assessment of total income at ?3,43,14,900 against the returned income of ?11,94,451. Consequently, this ground was rejected as not pressed.

2. Reduction of Telecommunication Expenses from Export Turnover:
Ground no. 2, which challenged the reduction of telecommunication expenses from export turnover, was not pressed by the appellant and thus rejected.

3. Reduction of Foreign Currency Travel Expenses from Export Turnover:
Ground no. 3, concerning the reduction of foreign currency travel expenses from export turnover, was also not pressed and rejected.

4. Reduction of Expenses from Total Turnover:
Ground no. 4 was decided in favor of the appellant based on the judgment in CIT Vs. Tata Elxsi Ltd., which held that if any amount is reduced from export turnover, the same amount should also be reduced from total turnover for computing the deduction under section 10A. The AO was directed to comply accordingly.

5. Addition to Total Income Due to Adjustment in Arm's Length Price:
Grounds nos. 5 to 10 were considered general in nature and did not require separate adjudication.

6. Disregarding the Economic Analysis:
Addressed under grounds nos. 5 to 10, which were treated as general and not separately adjudicated.

7. Ignoring the Tax Holiday under Section 10A:
Also covered under grounds nos. 5 to 10.

8. Use of Financial Year 2006-07 Data:
Included in the general grounds nos. 5 to 10.

9. Rejection of Certain Comparables:
Ground no. 11 involved the exclusion of various comparables. The DRP's order was found to be cryptic, lacking specific findings on objections raised by the appellant. The matter was restored to the DRP for fresh decision on the exclusion of seven specific comparables, with a direction to provide a speaking and reasoned order.

10. Use of Non-Public Information:
Addressed within the general grounds nos. 5 to 10.

11. Inclusion of Certain Companies as Comparables:
Part of ground no. 11, which was restored to the DRP for fresh decision.

12. Exclusion of Foreign Exchange Fluctuation Gain/Loss:
Ground no. 12 was restored to the AO to determine whether the foreign exchange gain was related to the turnover of the present year or an earlier year. If related to the present year, it should be included in operating profit; otherwise, it should not be considered.

13. Incorrect Computation of Working Capital Adjustment:
No arguments were advanced for ground no. 13, and it was treated as not pressed and dismissed.

14. Lack of Adjustments for Differences in Risk Profiles:
Ground no. 14 was also treated as not pressed and dismissed.

15. Not Giving Benefit of +/- 5% Under Section 92C:
Ground no. 15 was similarly treated as not pressed and dismissed.

16. Levy of Interest Under Sections 234B and 234C:
Ground no. 16 was not pressed and dismissed.

17. Initiation of Penalty Proceedings Under Section 271(1)(c):
Ground no. 17 was not pressed and dismissed.

Conclusion:
The appeal filed by the assessee was partly allowed for statistical purposes, with specific directions for the DRP and AO to provide detailed and reasoned orders on the contested issues. The overall decision emphasized the need for clear and specific findings on each objection raised by the appellant.

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