2017 (4) TMI 1575 - AT - Income Tax

TP Adjustment - comparable selection - HELD THAT - Vishal Information Technology Ltd. - We deem it appropriate to remand the matter back to the TPO/AO with a direction to decide this issue afresh after giving liberty to the assessee to furnish the record to prove that data entry charges and vendor payments are not related to cost of employees and further prove that its prices were influenced by Indian company. RPT filter - Since the CIT(A) has rejected the comparable companies by applying 0% RPT filter as well as by applying the other criteria which are not acceptable to the revenue as this Tribunal in series of decisions have held that the tolerance range of RPT in normal circumstances is 15% and in extreme circumstances it can be extended up to 25%. Therefore we modify the impugned order of the CIT(A) on the issue of related party filter at 15% instead of 0% offered by the CIT(A) We deem it appropriate to direct the learned TPO/AO to consider the turnover filter while rejecting the comparables and also more particularly Wipro BPO Solution Ltd. as it was pointed out by the learned AR that the turnover of the Wipro is 18 times more than that of the assessee. It is of the consistent view that the turnover is within the range of 1/10th of the turnover or up to 10 times then the comparable is considered to be good comparable. However if the comparable turnover is more than 10 times it is held not to be an appropriate or a good comparable. The learned TPO will keep the consistent view of the Tribunal while applying RPT filter of 15% as well as simultaneously consider the turnover filter in the light of the consistent view of the Tribunal as stated herein above. Exclusion of telecommunication charges and travel expenses from the export turnover as well as total turnover while computing the deduction u/s 10A - HELD THAT - This issue of exclusion of the expenses incurred in foreign exchange from the export turnover as well as from the total turnover is settled by the judgment of Hon ble Jurisdictional High Court in the case of Tata Elxsi 2011 (8) TMI 782 - KARNATAKA HIGH COURT Thus the Hon ble Karnataka High Court that the total turnover is sum total of export turnover and domestic turnover and therefore if an amount is excluded from export turnover the total turnover is also reduced by the same amount as a consequences of deduction from export turnover. In this view of the matter we direct the AO to exclude the above expenses from total turnover as well while computing the deduction u/s 10A

Summary

Issues Involved:

1. Exclusion of certain expenses from total turnover for deduction under Section 10A.
2. Transfer Pricing adjustments and selection of comparables.
3. Application of Related Party Transaction (RPT) filter.
4. Charging of interest under Sections 234B and 234D.

Detailed Analysis:

1. Exclusion of Certain Expenses from Total Turnover for Deduction Under Section 10A:

The Revenue contended that lease line expenses, insurance expenses, and expenditure incurred in foreign currency should be excluded from the export turnover but not from the total turnover. The Tribunal referenced the judgment of the Hon’ble Karnataka High Court in Tata Elxsi, which held that there should be uniformity in the ingredients of both the numerator and the denominator of the formula for computing deduction under Section 10A. Thus, if an amount is excluded from the export turnover, it should also be excluded from the total turnover. Consequently, the Tribunal directed the AO to exclude the expenses from the total turnover while computing the deduction under Section 10A.

2. Transfer Pricing Adjustments and Selection of Comparables:

The assessee objected to the inclusion of Vishal Information Technology Ltd. as a comparable, arguing it was functionally dissimilar. The Tribunal noted that Vishal Information Technology Ltd. was primarily engaged in outsourcing services, which made it functionally different from the assessee. The Tribunal directed the AO/TPO to exclude Vishal Information Technology Ltd. from the list of comparables, following earlier decisions which established that companies engaged in Knowledge Process Outsourcing (KPO) with different business models should not be considered comparable to IT enabled services (ITES) companies.

3. Application of Related Party Transaction (RPT) Filter:

The CIT(A) applied a 0% RPT filter, which was contested by the Revenue. The Tribunal modified this to a 15% RPT filter, referencing consistent views from previous Tribunal decisions that a tolerance range of 15% is proper and reasonable. The Tribunal directed the AO/TPO to re-calculate the arm's length price using the modified RPT filter and to consider the turnover filter, ensuring that comparable companies' turnovers are within a range of 1/10th to 10 times of the assessee's turnover.

4. Charging of Interest Under Sections 234B and 234D:

The assessee contested the upholding of interest charges under Sections 234B and 234D. However, the judgment did not provide a detailed analysis or ruling on this issue, suggesting that it was not a primary focus of the Tribunal's decision.

Conclusion:

Both the appeals of the assessee and the Revenue were partly allowed for statistical purposes. The Tribunal directed the AO/TPO to re-evaluate the comparables and the application of the RPT filter, and to exclude certain expenses from the total turnover while computing the deduction under Section 10A, in line with the principles established by the Hon’ble Karnataka High Court.