2017 (3) TMI 1933 - AT - Income Tax

Computation of deduction u/s 10A - HELD THAT - We find that this issue is covered by the Jurisdictional High Court s decision in CIT v Tata Elxsi 2011 (8) TMI 782 - KARNATAKA HIGH COURT . It clearly lays down the principle that while computing deduction u/s 10A, if the export turnover is calculated after excluding certain expenses, such expenses should also be excluded in computing the total turnover. Since the DRP s decision is in accordance with the ratio of the jurisdictional High Court, supra, we confirm it. Therefore, the Revenue s appeal grounds fail. TP Adjustment - comparable selection - HELD THAT - Comparables, ICRA Techno Analytics Ltd, Infosys Techologies Ltd, Kals information Systems Ltd (Seg) and Tata Elxsi Ltd (Seg) are functionally different, thus be excluded. R S Software (India) Ltd be included as company is engaged in the provision of software development services. Onsite development should not be a criteria to judge comparability. Onsite revenue is not one of the filters adopted by the TPO in the order. Persistent Systems Solutions Ltd be included as per notes to accounts, the company is predominantly engaged in providing software development services to its global customers. As per revenue recognition, the company derives income from software services. Nature of Donation - operating or non operating - assessee submitted that donation is not closely linked to the business operations and should be considered as nonoperating in nature - HELD THAT - As decided in the case of M/s. Capital One Services India P. Ltd 2015 (4) TMI 1359 - ITAT BANGALORE wherein it has been held that donation is not in the nature of normal business activity and hence should not be considered as operating. Following the decision, the AO is directed to treat donation as non operating one. Risk adjustment seeked on the basis of additional ground - assessee submitted that suitable adjustment should be provided to account for differences in risk profile of the comparables - HELD THAT - AR submitted that the TPO is not against granting any risk adjustment but the risk has to be established by the assessee . In the facts and circumstances, this issue is remitted back to the TPO/AO shall re-adjudicate it in accordance with law.

Summary

Issues Involved:

1. Computation of deduction under Section 10A.
2. Selection of comparables for Transfer Pricing analysis.
3. Inclusion of specific comparables.
4. Treatment of donations as non-operating expenses.
5. Risk adjustment for differences in risk profiles.

Detailed Analysis:

1. Computation of Deduction under Section 10A:

The primary issue was the recomputation of the deduction under Section 10A by the AO, who reduced expenses on communication and travel from the export turnover without making a corresponding reduction from the total turnover. The Tribunal referenced the Jurisdictional High Court’s decision in CIT v Tata Elxsi, which mandates that if certain expenses are excluded from the export turnover, they must also be excluded from the total turnover. The Tribunal confirmed the DRP’s decision, which was in line with this principle, thereby dismissing the Revenue’s appeal on this ground.

2. Selection of Comparables for Transfer Pricing Analysis:

The assessee used the Transactional Net Margin Method (TNMM) for its international transactions, selecting 21 comparables with an average net margin of 11.26%. The TPO retained 7 of these comparables, introduced 4 new ones, and recalculated the average net margin at 21.22%, leading to an addition of Rs.1,66,67,453/- to the total income. The DRP upheld some of the assessee’s contentions, excluding certain comparables like ICRA Techno Analytics Ltd, Infosys Technologies Ltd, Kals Info Systems Ltd, and Tata Elxsi Ltd, while also excluding R S Software Ltd and Persistent Systems Ltd suo-moto. The Tribunal upheld the DRP’s decision, finding the comparables functionally different from the assessee.

3. Inclusion of Specific Comparables:

The Tribunal examined the inclusion of R S Software (India) Ltd and Persistent Systems & Solutions Ltd. The TPO/DRP had excluded these comparables due to reasons like onsite software development and lack of segmental information. The assessee argued for their inclusion, stating that onsite development should not be a criterion for exclusion and that the company was predominantly engaged in software development services. The Tribunal directed the TPO/AO to include these comparables in the final set.

4. Treatment of Donations as Non-Operating Expenses:

The assessee argued that donations should be considered non-operating in nature, relying on the Tribunal’s decision in M/s. Capital One Services India P. Ltd, which held that donations are not part of normal business activity. The Tribunal directed the AO to treat donations as non-operating expenses.

5. Risk Adjustment for Differences in Risk Profiles:

The assessee sought a risk adjustment to account for differences in risk profiles between itself and the comparables, citing the Tribunal’s decision in Heliosoft India P. Ltd, which allowed a risk adjustment of 1%. The DR argued that the risk must be established by the assessee. The Tribunal remitted this issue back to the TPO/AO for re-adjudication in accordance with the law.

Conclusion:

The Tribunal partly allowed both the Revenue’s appeal and the assessee’s cross-objection, providing detailed directions on the computation of deductions, selection and inclusion of comparables, treatment of donations, and risk adjustments. The order was pronounced in the open court on 21st March 2017.