2017 (7) TMI 1406 - AT - Income Tax

TP Adjustment - Provision of software development services - comparable selection - HELD THAT - Companies functionally dissimilar with that of assessee need to be deselected. Deduction allowable u/s. 10A after reducing the telecommunication charges and expenses incurred for travel in foreign currency both from the export turnover as well as the total turnover - HELD THAT - We find that the CIT (A) holding that the expenses excluded from the export turnover should also be excluded from the total turnover for computation of deduction u/s. 10A of the Act. We find that this issue is also covered by the decision of the jurisdictional High Court in the case of Tata Elxsi Ltd. 2011 (8) TMI 782 - KARNATAKA HIGH COURT . In view of the same, we see no merit in the appeal of the revenue and the same is dismissed.

Summary

Issues Involved:
1. Transfer Pricing Adjustment.
2. Re-computation of Deduction under Section 10A.
3. Inclusion and Exclusion of Comparable Companies.
4. Penalty Proceedings under Section 271(1)(c).

Detailed Analysis:

1. Transfer Pricing Adjustment:
The assessee-company, engaged in software development, reported international transactions and submitted a transfer pricing study using the Transactional Net Margin Method (TNMM). The TPO accepted the TNMM but rejected the company's comparables, introducing new ones and applying specific filters. The TPO computed a transfer pricing adjustment of ?1,64,73,489/-. The assessee contested the inclusion of certain companies like Bodhtree, Tata Elxsi, Persistent Systems, and Infosys Ltd., arguing they were functionally dissimilar. The Tribunal analyzed each company's functional profile and decided:

- Bodhtree: The Tribunal found Bodhtree engaged in software development, thus included as a comparable.
- Tata Elxsi: Excluded due to its engagement in product design services, which are functionally dissimilar.
- Infosys Ltd.: Excluded as it owns significant intangibles and has substantial revenues from software products, making it functionally different.
- Persistent Systems: Excluded due to its involvement in software products without segmental details.

2. Re-computation of Deduction under Section 10A:
The AO restricted the deduction under Section 10A by reducing telecommunication and travel expenses from the export turnover. The Dispute Resolution Panel (DRP) directed the AO to exclude these expenses from both export and total turnover, following the Karnataka High Court's decision in Tata Elxsi Ltd. The Tribunal upheld the DRP's direction, rejecting the revenue's appeal, noting that the issue is settled by the jurisdictional High Court.

3. Inclusion and Exclusion of Comparable Companies:
The Tribunal meticulously examined the functional profiles of the contested comparable companies:

- Bodhtree: Included as it was engaged in software development.
- Tata Elxsi: Excluded due to its involvement in product design services.
- Infosys Ltd.: Excluded for owning significant intangibles and generating substantial software product revenue.
- Persistent Systems: Excluded as it engaged in software products without segmental details.

4. Penalty Proceedings under Section 271(1)(c):
The assessee also contested the initiation of penalty proceedings under Section 271(1)(c). However, the Tribunal did not provide a detailed discussion on this issue in the judgment.

Conclusion:
The Tribunal partly allowed the assessee's appeal, directing the exclusion of Tata Elxsi, Infosys Ltd., and Persistent Systems from the list of comparables. The revenue's appeal was dismissed, upholding the DRP's direction to re-compute the deduction under Section 10A by excluding telecommunication and travel expenses from both export and total turnover.