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2016 (3) TMI 1384 - AT - Income TaxDeduction u/s 10A - exclusion of telecommunication expenses incurred in foreign currency from the export turnover as well as from total turnover - HELD THAT - Issue decided in ACIT v. Tata Elxsi Ltd 2011 (8) TMI 782 - KARNATAKA HIGH COURT uniformity in the ingredients of both the numerator and the denominator of the formula Section 10-A is a beneficial section. It is intended to provide incentives to promote exports. If the export turnover in the numerator is to be arrived at after excluding certain expenses the same should also be excluded in computing the export turnover as a component of total turnover in the denominator. The reason being the total turnover includes export turnover - substantial question of law framed is answered in favour of the assessee and against the revenue. Negative working capital adjustment - HELD THAT - No need for making any negative working capital adjustment when assessee does not carry any working capital risk. In fact TPO should have done necessary working capital adjustment to the profits of the selected comparables so as to make them comparable to the assessee. In view of this we direct the TPO not to make negative working capital adjustment. It is undisputed that the Assessee is also a captive service provider such as the Assessee in the case decided by the Adaptec (India) P. Ltd. 2015 (6) TMI 288 - ITAT HYDERABAD and therefore making a negative working capital adjustment without appreciating the fact that the company does not bear any working capital risks was not correct. There is no allegation in the case of the assessee that the assessee has used any borrowed fund for working capital or there is any risk of money lost in credit time provided to the customers. - Decided in favour of assessee.
Issues Involved:
1. Exclusion of telecommunication expenses incurred in foreign currency from the export turnover as well as from total turnover. 2. Direction of the CIT(Appeals) to provide risk adjustment. 3. Negative working capital adjustment. Issue-wise Detailed Analysis: 1. Exclusion of Telecommunication Expenses: The Revenue challenged the CIT(A)'s direction to exclude telecommunication expenses incurred in foreign currency from both the export turnover and the total turnover while computing the deduction under Section 10A of the Income Tax Act. The CIT(A) followed the ratio laid down by the jurisdictional High Court in the case of Tata Elxsi Limited (349 ITR 98). The High Court held that for the purpose of applying the formula under sub-section (4) of Section 10A, expenses like freight, telecommunication charges, or insurance attributable to the delivery of articles or software outside India should be excluded from both the export turnover and the total turnover. This ensures uniformity in the ingredients of both the numerator (export turnover) and the denominator (total turnover) of the formula. The Tribunal upheld the CIT(A)'s order, finding no error or illegality, and followed the jurisdictional High Court's judgment. 2. Direction to Provide Risk Adjustment: The CIT(A) directed the Transfer Pricing Officer (TPO) to provide risk adjustment if the working capital adjustment remained negative. The TPO had initially considered a negative working capital adjustment, which increased the Profit Level Indicator (PLI) of the comparables. The Revenue contended that the CIT(A) erred in directing the TPO to grant risk adjustment without specific differences in risk and its impact on profit margin. The Tribunal noted that the assessee had not provided the working of risk adjustment before the TPO, and thus the TPO did not work out any risk adjustment. However, the Tribunal held that since the TPO had worked out the working capital adjustment, the principle of consistency required the TPO to consider the risk adjustment claim, subject to the assessee furnishing the relevant details and working. The Tribunal modified the CIT(A)'s finding, directing the TPO to consider the risk adjustment claim accordingly. 3. Negative Working Capital Adjustment: The assessee, in their Cross Objection, contended that the TPO's negative working capital adjustment was unjustified as the assessee did not claim any working capital adjustment and did not use any borrowed funds for working capital purposes. The Tribunal referred to the Hyderabad Bench's decision in the case of Adaptec (India) P. Ltd. v. ACIT, where it was held that a captive service provider running its business without any working capital risk should not have a negative working capital adjustment. The Tribunal found that there was no allegation that the assessee used borrowed funds for working capital or faced any risk of money lost in credit time provided to customers. Following the coordinate Bench's decision, the Tribunal held that the negative working capital adjustment was not justified in the assessee's case. Conclusion: The appeal and the Cross Objection were partly allowed. The Tribunal upheld the CIT(A)'s order on excluding telecommunication expenses from both export and total turnover, modified the CIT(A)'s direction on risk adjustment, and ruled against the negative working capital adjustment. The judgment emphasized consistency and adherence to established legal principles in transfer pricing adjustments.
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