2018 (7) TMI 2160 - HC - Income Tax

Computation of deduction u/s 10AA - expenses and foreign exchange loss reduced from the Export Turnover has to be reduced from the Total Turnover - HELD THAT - In the case of CIT v. Tata Elxsi Ltd 2011 (8) TMI 782 - KARNATAKA HIGH COURT has held that charges/expenses relating to telecommunication insurance charges and foreign exchange loss should be excluded both from export turnover and total turnover while computing deduction u/s.10A of the Act i.e. whatever is removed from the numerator should also be excluded from the denominator while working total turnover and export turnover for allowing deduction u/s.10A. The aforesaid decision of the jurisdictional High Court has been upheld in the case of CIT v. HCL Technologies Ltd.. 2018 (5) TMI 357 - SUPREME COURT . The telecommunication charges should be excluded both from the export turnover as well as total turnover while computing deduction u/s.10AA of the Act. TP Adjustment - comparable selection - substantial question of law - HELD THAT - Whether the comparables have been rightly picked up or not Filters for arriving at the correct list of comparables have been rightly applied or not do not in our considered opinion give rise toany substantial question of law. The present appeals filed by the Revenue do not give rise to any substantial question of law and the suggested substantial questions of law do not meet the requirements of Section 260-A of the Act and thus the appeals filed by the Revenue are found to be devoid of merit and the same are liable to be dismissed. The same yardsticks and parameters will have to be applied even if such appeals are filed by the Assessees because there may be cases where the Tribunal giving its own reasons and findings has found certain comparables to be good comparables to arrive at an Arm s Length Price in the case of the assessees with which the assessees may not be satisfied and have filed such appeals before this Court. Therefore we clarify that mere dissatisfaction with the findings of facts arrived at by the learned Tribunal is not at all a sufficient reason to invoke Section 260-A of the Act before this Court.

Summary

Issues:
1. Interpretation of expenses and foreign exchange loss in relation to export turnover and total turnover under section 10A of the Income Tax Act, 1961.
2. Exclusion of certain comparables in transfer pricing analysis based on functional dissimilarity.
3. Working capital adjustment without an upper cap in transfer pricing analysis.

Issue 1: The High Court addressed the interpretation of expenses and foreign exchange loss in relation to export turnover and total turnover under section 10A of the Income Tax Act, 1961. The Court referred to the decision in the case of M/s.Tata Elxsi Ltd. vs. Asst.Commissioner of Income Tax, where it was held that expenses excluded from export turnover must also be excluded from total turnover to maintain legislative intent and avoid illogical results. The Court cited the Hon'ble Supreme Court's affirmation of this principle in the case of Commissioner of Income-tax, Central – III vs. HCL Technologies Ltd. The judgment emphasized that excluding such expenses from total turnover is imperative to prevent unintended consequences and ensure a logical interpretation of the law.

Issue 2: The Court examined the exclusion of certain comparables in transfer pricing analysis based on functional dissimilarity. The Tribunal directed the exclusion of specific companies from the list of comparables due to differences in the nature of services provided compared to the assessee. Detailed analysis of each comparable was provided, highlighting the functional dissimilarities and revenue sources of the companies. The Court upheld the Tribunal's decision to exclude these comparables, emphasizing the importance of considering functional comparability in transfer pricing analysis to determine an arm's length price accurately.

Issue 3: The High Court also addressed the issue of working capital adjustment without an upper cap in transfer pricing analysis. The Tribunal considered the arguments presented by the assessee regarding risk adjustment and working capital adjustment based on previous case law. The Court found merit in the submissions and allowed the revised ground of the assessee's appeal, directing the TP Officer to provide actual working capital adjustment without restrictions. This decision underscored the importance of considering risk and working capital adjustments in transfer pricing analysis to ensure a fair determination of the arm's length price.

In conclusion, the High Court dismissed the appeal filed by the Appellants-Revenue, stating that no substantial question of law arose in the case. The judgment emphasized the importance of adhering to established legal principles in interpreting the Income Tax Act and conducting transfer pricing analysis. The decision provided clarity on the interpretation of expenses, exclusion of comparables, and working capital adjustments in transfer pricing assessments.