2017 (1) TMI 1734 - AT - Income Tax

Computation of deduction u/s. 10A - exclusion of expenditure on travelling and communication from the total turnover as well as the export turnover - HELD THAT - There should be 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. See TATA ELXSI LTD . 2011 (8) TMI 782 - KARNATAKA HIGH COURT . TP Adjustment - comparable selection - HELD THAT - Assessee is a captive service provider engaged in the business of developing, testing, customizing and maintaining high quality software for its Associated Enterprises (AE) thus companies functionally dissimilar with that of assessee need to be deselected.

Issues Involved:
1. Exclusion of expenditure on traveling and communication from total turnover for deduction under Section 10A.
2. Inclusion/exclusion of comparables for computing Arm's Length Price (ALP) with respect to international transactions.
3. Application of Related Party Transactions (RPT) filter.
4. Eligibility for a standard deduction of 5% from ALP under Section 92C(2).
5. Consideration of size, turnover, and brand for treating a company as a comparable.
6. Use of financial data from the assessment year 2004-2005.
7. Application of various quantitative and qualitative filters for comparables.
8. Imposition of interest under Section 234B and 234C.

Detailed Analysis:

1. Exclusion of Expenditure on Traveling and Communication:
The Revenue challenged the CIT(A)'s decision to exclude traveling and communication expenses from the total turnover for the purpose of computing deduction under Section 10A. The Tribunal upheld the CIT(A)'s decision, noting that it was consistent with the jurisdictional High Court's ruling in CIT v. Tata Elxsi Ltd., which supported the exclusion of such expenses from both total and export turnover.

2. Inclusion/Exclusion of Comparables for ALP:
The Tribunal examined the comparables used by the Transfer Pricing Officer (TPO) and the CIT(A). The CIT(A) had excluded several comparables based on RPT, turnover filter, and super profits. The Tribunal upheld the exclusion of companies like Infosys Technologies Ltd., Satyam Computer Services, and Flextronics Software Systems Ltd. due to functional dissimilarities, high turnover, and unreliable financial data. The Tribunal also excluded Bodhtree Consulting Ltd., Sankhya Infotech Ltd., and Visual Soft Technologies Ltd. for being functionally different from the assessee.

3. Application of RPT Filter:
The CIT(A) excluded comparables with any RPT, while the Tribunal noted that the RPT filter should be applied within a range of 15% to 25%. The Tribunal upheld the exclusion of companies with significant RPT but retained some comparables that fell within the acceptable range.

4. Eligibility for Standard Deduction from ALP:
The Revenue contested the CIT(A)'s allowance of a 5% standard deduction from the ALP under Section 92C(2). The Tribunal confirmed the CIT(A)'s decision, referencing the case of SAP Labs India Pvt. Ltd., which established that the pre-amended proviso allowed for such a deduction.

5. Consideration of Size, Turnover, and Brand:
The Tribunal agreed with the CIT(A) that factors like size, turnover, and brand are crucial in determining comparability. Consequently, companies like Infosys Technologies Ltd. were excluded due to their significantly larger size and brand value compared to the assessee.

6. Use of Financial Data from AY 2004-2005:
The assessee objected to the use of financial data from the assessment year 2004-2005, which was not available at the time of compliance. The Tribunal did not find merit in this objection, as the data used by the TPO was relevant and available at the time of assessment.

7. Application of Various Filters for Comparables:
The Tribunal examined the filters applied by the CIT(A) and upheld the exclusion of companies that did not meet the criteria for functional similarity, turnover, and RPT. The Tribunal also excluded companies involved in product development or those with extraordinary events like mergers and acquisitions.

8. Imposition of Interest under Sections 234B and 234C:
The assessee contested the imposition of interest under Sections 234B and 234C. The Tribunal did not specifically address this issue in the detailed analysis, implying that the imposition of interest was upheld as per the provisions of the Income Tax Act.

Conclusion:
The Tribunal's judgment provided a detailed analysis of the inclusion and exclusion of comparables for determining the ALP, upheld the exclusion of certain expenses from the total turnover for Section 10A deduction, and confirmed the application of a 5% standard deduction from the ALP. The judgment emphasized the importance of functional similarity, turnover, and RPT in selecting comparables and upheld the CIT(A)'s approach in most aspects. The appeal and cross-objections were partly allowed for statistical purposes.

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