2022 (4) TMI 1441 - AT - Income Tax

TP Adjustment - comparable selection - turnover filter - HELD THAT - We hold that companies listed in ground raised by the Assessee except Inteq Software Pvt. Ltd., whose turnover in the current year is less than Rs.200 Crores should be excluded from the list of comparable companies. TPO is directed to verify the turnover of these companies for Financial Years 2013-14 and 2014-15 and if in these years the turnover is less than 200 Crores, then the margins of these years shall be taken in working out the average profit margin of 3 years. RPT filter has to be applied adopting the threshold limit of 15%. We hold and direct accordingly. Inclusion of comparable companies compared to assessee engaged in software development services. Assessee cannot seek to exclude the company from the list of comparable companies, unless the Assessee is able to show that the presence of intangibles is owing to factors which can affect the functional comparability of this company with the Assessee. Set off and carry forward of business loss while assessing the total income of the Appellant - Provision of set off and carry forward as contemplated under Chapter-VI of the Act would not be attracted and therefore intra head set off sought by seeking to rely on the provision of section 70(1) of the Act and seeking to restrict the deduction u/s 10A and 10AA of the Act to the extent of gross total income as contemplated u/s 80A(2) of the Act, cannot be sustained. We therefore hold that deduction u/s.10A of the Act has to be allowed without setting off losses of non-10A unit before allowing the deduction under section 10A of the Act. In view of the aforesaid decision of Yokogawa India Ltd., the AO is directed not to set off the losses of non-10A units against profits of 10A units before allowing deduction u/s. 10A of the Act.

Issues Involved:
1. Determination of Arm's Length Price (ALP) for Software Development Services.
2. Choice of comparable companies and application of turnover filter.
3. Exclusion of R.S. Software (India) Ltd. based on Related Party Transaction (RPT) filter.
4. Corporate tax issue regarding set-off and carry forward of business loss in relation to Section 10AA of the Income Tax Act.

Detailed Analysis:

1. Determination of Arm's Length Price (ALP) for Software Development Services:
The Assessee, engaged in providing Software Development Services to its Associated Enterprise (AE), filed a Transfer Pricing Study (TP Study) using the Transaction Net Margin Method (TNMM) to justify the price paid in the international transaction as at ALP. The Assessee selected Operating Profit/Operating Cost (OP/OC) as the Profit Level Indicator (PLI) for comparison. The Transfer Pricing Officer (TPO) accepted TNMM as the Most Appropriate Method (MAM) and used the same PLI. The TPO identified 13 comparable companies and computed the ALP, resulting in an addition of Rs. 1,53,10,085/- to the total income of the Assessee.

2. Choice of Comparable Companies and Application of Turnover Filter:
The Assessee contested the inclusion of certain companies with high turnover as comparables. The Tribunal noted that the Assessee's turnover was Rs. 18.52 Crores, and companies with turnover exceeding Rs. 200 Crores should be excluded. The Tribunal upheld the principle that high turnover is a ground for exclusion, following the decision in Dell International Services India (P) Ltd. vs. DCIT and Autodesk India Pvt. Ltd. vs. DCIT. Consequently, companies listed in Ground No. 16, except Inteq Software Pvt. Ltd., were directed to be excluded if their turnover exceeded Rs. 200 Crores for the relevant financial years.

3. Exclusion of R.S. Software (India) Ltd. Based on Related Party Transaction (RPT) Filter:
The Tribunal addressed the exclusion of R.S. Software (India) Ltd. due to related party transactions exceeding 15%. The Tribunal referenced the Karnataka High Court's decision in Yodlee Infotech Pvt Ltd., which upheld a 15% threshold for RPT filter. Given that R.S. Software (India) Ltd. had a 17.52% RPT, the Tribunal directed its exclusion from the list of comparables.

4. Corporate Tax Issue Regarding Set-Off and Carry Forward of Business Loss in Relation to Section 10AA:
The Assessee raised an additional ground regarding the set-off of losses of non-10A units against the eligible profits of 10A units. The Tribunal referred to the Supreme Court's decision in Yokogawa India Ltd., which held that the deduction under Section 10A should be computed independently for each eligible undertaking before aggregation of income and set-off of losses. Therefore, the Tribunal directed the AO not to set off losses of non-10A units against profits of 10A units before allowing the deduction under Section 10A.

Conclusion:
The appeal was partly allowed. The Tribunal directed the TPO/AO to recompute the ALP of the international transaction of rendering Software Development Services by the Assessee to AE, excluding certain companies based on turnover and RPT filters. Additionally, the AO was instructed not to set off losses of non-10A units against profits of 10A units before allowing the deduction under Section 10A, in accordance with the Supreme Court's ruling in Yokogawa India Ltd.

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