2017 (4) TMI 1627 - AT - Income Tax

TP Adjustment - Comparable selection - HELD THAT - The entire TP issue should go back to the file of AO/TPO for fresh decision because in respect of three comparable companies i.e. M/s ADCC Research Computing Centre Ltd. ii) M/s Bodhtree Consulting Ltd and iii) M/s Onward Technologies Ltd. the TPO has considered the data for different accounting year and not for FY 2002-03. This is by now a settled position of law that the data for the same FY should be considered. This is also true that even if a concerned comparable company is adopting a different accounting period as its accounting year then also the data for relevant FY may be compiled on the basis of quarterly reports of the said company. We restore this matter back to the file of AO/TPO for fresh decision with the direction that the AO/TPO should ascertain the availablility of data for FY 2002-03 and if the same is not directly available because the concerned company is adopting different accounting year he should find out the possibility of compilation of the data for AY 2002-03 on the basis of quarterly reports of the relevant company. Satyam Computer Services Ltd. - We feel it proper that this issue regarding Satyam Computers should also be decided by AO/TPO afresh after finding out the factual aspect as to whether the accounts for current year i.e. FY 2002-03 were also falsified by that company i.e. Satyam Computers and if the assessee can establish that the accounts of that company were falsified in FY 2002-03 then the same should be excluded. Deduction u/s 10A in respect of interest and Misc. income earned by the assessee - HELD THAT - As n the case of CIT Vs Motorola India Electronics (P) Ltd 2014 (1) TMI 1235 - KARNATAKA HIGH COURT held that there is a direct nexus between the interest income and income of the business of the undertaking. In the present case neither any of the authorities below have examined this aspect nor the relevant facts are available on records before us and hence we feel it proper to restore this issue also to the file of the AO for fresh decision. Suppression of cost and consequently its revenue - whether the allegation of the TPO is correct or not that the assessee has suppressed its cost by not including the cost to its AE on account of administrative and management support services and for user of various fixed assets received from its AE free of cost? - HELD THAT - In the present case the allegation is this that the assessee had suppressed its operating cost by availing various services from its AE free of cost. Unless this allegation of the TPO is proved to be wrong the assessee has no case because if the assessee has suppressed its cost by obtaining certain services from its AE free of cost then the cost of such services has to be included in the cost base of the assessee to work out the cost plus margin of the assessee. As per above discussion we have seen that none of the judgments relied by the ld. AR of the assessee is applicable in the present case because of difference in facts. Accordingly ground of the revenue s appeal are allowed for statistical purposes and the matter is restored back to the file of the AO/TPO for fresh decision by adopting only cost of various services not accounted for by the assessee but after excluding the value of ESOP. Computation of total turnover - HELD THAT - As decided in the case of M/s Tata Elxsi Ltd. 2011 (8) TMI 782 - KARNATAKA HIGH COURT total turnover is sum total of export turnover and domestic turnover and therefore if an amount is reduced from the export turnover then the total turnover also goes down by the same amount automatically. In the present case ld. CIT (A) has directed the AO to reduce the communication charges from the total turnover also because the same was reduced by him from the export turnover - therefore we decline to interfere with the same. These grounds of the revenue are rejected.

Summary

Issues Involved:
1. Transfer Pricing
2. Corporate Tax
3. Employee Stock Option Plan (ESOP)
4. Cost-Free Services
5. Notional Interest Expenditure
6. Deduction under Section 10A
7. Telecommunication Charges

Issue-Wise Detailed Analysis:

1. Transfer Pricing:
The assessee contested an adjustment of Rs. 8,42,92,189/- to the arm’s length price (ALP) for software development services rendered to associated enterprises. The Tribunal noted that the Transfer Pricing Officer (TPO) used data from different fiscal years for three comparable companies (ADCC Research, Bodhtree Consulting, and Onward Technologies) instead of the financial year 2002-03. The Tribunal directed the TPO to reconsider the comparables using the appropriate fiscal year data. Regarding Satyam Computer Services Ltd., the Tribunal emphasized verifying whether the accounts for FY 2002-03 were falsified, as alleged. The entire TP issue was remanded to the AO/TPO for fresh decision, ensuring the use of contemporaneous data.

2. Corporate Tax:
The assessee sought deduction under section 10A for interest and miscellaneous income, arguing that the interest income arose from short-term investments of surplus funds. The Tribunal referred to the Karnataka High Court's judgment in CIT Vs Motorola India Electronics (P) Ltd., which allowed such deductions if there was a direct nexus between the interest income and business income. The Tribunal remanded the issue to the AO to verify the nature of the interest income and establish this nexus.

3. Employee Stock Option Plan (ESOP):
The revenue challenged the deletion of adjustment related to ESOP costs. The Tribunal noted that various judicial pronouncements excluded ESOP from operating costs. The Tribunal directed the AO/TPO to exclude the value of ESOP from the cost base while reconsidering the TP adjustments.

4. Cost-Free Services:
The TPO included a notional amount of Rs. 2 Crores for cost-free services (fixed assets, administrative, and management support) provided by the AE, arguing it suppressed the assessee's costs and revenue. The Tribunal found the CIT(A)'s decision to exclude this notional cost from operating expenses justified, as the assessee did not incur actual expenditure. However, the Tribunal remanded the issue for fresh examination, excluding ESOP costs.

5. Notional Interest Expenditure:
The Tribunal addressed the notional interest expenditure issue, directing the AO/TPO to adopt the LIBOR rate, as the TPO had judicially adopted a higher rate of 6% against prevailing market rates. This issue was remanded for fresh consideration.

6. Deduction under Section 10A:
The assessee contested the denial of deduction under section 10A for interest and miscellaneous income. The Tribunal directed the AO to re-examine this issue, considering the direct nexus between interest income and business income, as established in the Motorola India Electronics case.

7. Telecommunication Charges:
The revenue challenged the CIT(A)'s direction to exclude telecommunication charges from total turnover while computing the deduction under section 10A. The Tribunal upheld the CIT(A)'s decision, referencing the Karnataka High Court's judgment in Tata Elxsi Ltd., which mandated reducing such expenses from both export and total turnover.

Conclusion:
Both appeals by the assessee and the revenue were partly allowed for statistical purposes, with several issues remanded to the AO/TPO for fresh consideration. The Tribunal emphasized using contemporaneous data for TP adjustments, excluding ESOP costs from operating expenses, and verifying the direct nexus for section 10A deductions.