2018 (7) TMI 2257 - HC - Income Tax

Deduction under section 10A - Whether Tribunal is correct in directing the assessing officer to exclude expenses incurred in foreign currency and other expenses that has been excluded from ETO from the total turnover also and accordingly recomputed the deduction under section 10A? - HELD THAT - As decided in HCL Technologies Ltd. 2018 (5) TMI 357 - SUPREME COURT when the object of the formula is to arrive at the profit from export business expenses excluded from export turnover have to be excluded from total turnover also. Otherwise any other interpretation makes the formula unworkable and absurd. Hence we are satisfied that such deduction shall be allowed from the total turnover in same proportion as well Comparable selection - HELD THAT - We direct the TPO to include Akshay Software Technologies Ltd. (2) Maars Software International Ltd and (3) VJIL Consulting Ltd. for the reasons by the Assessee Negative working capital adjustment - HELD THAT - No need for making any negative working capital adjustment when assessee does not carry any 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 - See Adaptec (India) P. Ltd. 2015 (6) TMI 288 - ITAT HYDERABAD Comparability economic adjustments - adjustments to be carried out in situations where there are differences between the tested parties and comparable - HELD THAT - As upheld by the recent High Court ruling the case of Chryscapital Investment Advisors (India) Pvt. Ltd. 2015 (4) TMI 949 - DELHI HIGH COURT wherein the Hon ble Court has held that appropriate adjustments should be carried out in situations where there are differences between the tested parties and comparables and in case such differences perceptible in the comparables cannot be eliminated on account of adjustments or otherwise then such comparables have to be rejected - thus direct the TPO to work out appropriate risk adjustment. This Court in a recent judgment in Pr. Commissioner of Income Tax Bangalore and Another Vs. M/s. Softbrands India P.Ltd. 2018 (6) TMI 1327 - KARNATAKA HIGH COURT has held that in these type of cases unless an ex-facie perversity in the findings of the learned Income Tax Appellate Tribunal is established by the appellant the appeal at the instance of an assessee or the Revenue under Section 260-A of the Act is not maintainable.

Summary

Issues:
- Interpretation of provisions under section 10A for deduction calculation
- Exclusion of certain comparables by Transfer Pricing Officer
- Working capital adjustment direction by Tribunal
- Appropriateness of adjustments between tested parties and comparables
- Maintainability of appeal under Section 260-A based on Tribunal's findings

Interpretation of provisions under section 10A for deduction calculation:
The appeal raised substantial questions of law regarding the correct interpretation of Section 10A for deduction calculation. The Revenue challenged the Tribunal's direction to exclude certain expenses from the total turnover, arguing that such exclusions should only apply to export turnover. The counsel for the Appellants referred to a Supreme Court decision and a Karnataka High Court ruling to support their position. The Supreme Court's decision emphasized that expenses excluded from export turnover must also be excluded from total turnover to align with legislative intent. The Court concluded that any other interpretation would be impermissible and illogical, ensuring deductions are allowed proportionally from both turnovers.

Exclusion of certain comparables by Transfer Pricing Officer:
The Revenue contested the exclusion of certain comparables by the Transfer Pricing Officer (TPO) based on functional dissimilarity. The Tribunal upheld the Assessee's request to include three previously excluded companies, citing errors in the grounds for exclusion provided by the TPO. The Tribunal's decision was based on the Assessee's arguments regarding the validity of the exclusion criteria used by the TPO. This issue highlighted the importance of proper justification for excluding comparables and the need for functional similarity in such assessments.

Working capital adjustment direction by Tribunal:
The Revenue questioned the Tribunal's directive to the TPO to make working capital adjustments considering comparables after excluding three companies. The Tribunal's decision was influenced by a ruling from the Hyderabad Bench, emphasizing that no negative working capital adjustment is necessary when the Assessee does not carry any working capital risk. This issue underscored the significance of considering working capital adjustments in transfer pricing analyses based on the specific circumstances of the Assessee.

Appropriateness of adjustments between tested parties and comparables:
The Revenue raised concerns about the Tribunal's direction to make appropriate adjustments between tested parties and comparables, especially when differences exist. The Tribunal's decision was supported by various Tribunal and High Court rulings emphasizing the necessity of economic adjustments in such situations. The issue highlighted the importance of ensuring comparability in transfer pricing analyses by making necessary adjustments to eliminate differences between parties.

Maintainability of appeal under Section 260-A based on Tribunal's findings:
The judgment discussed the maintainability of appeals under Section 260-A of the Act based on the Tribunal's findings. The Court emphasized that appeals challenging the selection of comparables or application of filters do not generally give rise to substantial questions of law. The Court clarified that dissatisfaction with Tribunal findings alone is insufficient to invoke Section 260-A. This issue clarified the criteria for determining the merit of appeals related to transfer pricing disputes and the need for substantial legal questions to be raised for appeal validity.