2016 (10) TMI 1394 - AT - Income Tax

TP Adjustment - comparable selection - Applicability of turnover filter - TPO has applied turnover slab of Rs.1 crore to Rs.200 crores for excluding some of the companies - HELD THAT - As it gives ambiguous result as two entities having difference of Rs.1 crore cannot be considered as comparable, whereas on the other hand difference of Rs.199 crores can be considered as comparable company. Therefore, such classification of comparables on the basis of Rs.1 Crore to Rs.200 Crores of turnover is not appropriate and acceptable. The turnover, no doubt, is a relevant factor to be taken into account, but there should be some proper and reasonable parameter to apply the difference of turnover between the assessee and the comparable which may be a reasonable multiple. This Tribunal in case of ITO Vs. Maxim India Integrated Circuit Design Pvt. Ltd. 2016 (3) TMI 1138 - ITAT BANGALORE has taken a similar view as under. Accordingly, by applying the turnover filter of 10 times to the turnover of the assessee's on both sides the following 10 companies are directed to be excluded from the set of comparables as not satisfying the turnover filter of 10 times of the turnover of the assessee - i.e., R S Software (India) Ltd., Geometric Software Solutions Co. Ltd.,Tata Elxsi Ltd. (Seg.), Visual Soft Technologies Ltd. (Seg.),Sasken Communication Technologies Ltd. (Seg.), iGate Global Solutions, Flextronics (Seg.),L T Infotech Ltd., Satyam and Infosys Bodhtree Consulting Ltd., Exensys Software Solutions Ltd.,Sankhya Infotech Ltd., Four Soft Ltd. and Thirdware Solutions Ltd. be deselcted on functional dissimilarity with the software development services provider like the assessee. We direct the A.O./TPO to exclude these five companies namely (i) Bodhtree Consulting Ltd., (ii) Exensys Software Solutions Ltd., (iii) Sankhya Infotech Ltd., (iv) Four Soft Ltd. and (v) Thirdware Solutions Ltd. After exclusion of 10 companies on the ground of having turnover more than 10 times than the assessee and 5 companies as functionally not comparable only two companies are left which are as under i) Lanco Global Systems Ltd. ii) Sasken Communication Technologies Ltd. (Seg.) Accordingly, the TPO/A.O. is directed to recomputed the ALP by considering the benefit as per the proviso to section 92C. Exclusion of expenses from the export turnover as well as total turnover while computing the deduction u/s 10A - HELD THAT - The Hon ble Karnataka High Court in the case of CIT v M/s Tata Elxsi Ltd. Others 2011 (8) TMI 782 - KARNATAKA HIGH COURT had held that while computing the exemption u/s 10A, if the export turnover in the numerator is to be arrived at after excluding certain expenses, the same should also be excluded from the total turnover in the denominator. Comaprable deselected on high turnover and functional dissimilarity - Accel Transmatic Ltd. (Seg.), Avani Cincom Technologies Ltd., Celestial Labs Ltd., E-Zest Solutions Ltd., Ishir Infotech Ltd.,KALS Information Systems Ltd. (Seg.) and Thirdware Solutions Ltd. Claim of deduction regarding Employees Stock Compensation paid to the parent company - assessee has submitted that the assessee did not claim the deduction for a sum paid in respect of Employee Stock Option which was paid by the assessee to its parent company in lieu of the shares allotted to the employees of the assessee under Employeees Stock Option Scheme - HELD THAT - There is no dispute that for the year under consideration the assessee did not claim the deduction in respect of the payment made to the parent company on account of Employees Stock Option and compensation. However we find that an identical issue has been considered in assessee's own case for the Assessment Year 2008-09 and it was held that it is an allowable deduction. Therefore, so far as the issue of allowability of the deduction is concerned it has been decided in favour of the assessee by this Tribunal by following the decision of the Special Bench in the case of Biocon Ltd. 2013 (8) TMI 629 - ITAT BANGALORE However since the relevant to details of the claim has not been examined by the Assessing Officer Apportionment of the expenditure between 10A and non-10A units is also required to be examined and verified. Therefore the claim of the assessee has to be apportioned between units eligible under Section 10A and the units which is not eligible for the deduction under Section 10A and then it has to be allowed against the respective income of the separate units. In view of the above facts and circumstances of the case, we set aside this issue to the record of the Assessing Officer for a limited purpose of verification and examination of the relevant record regarding apportionment of the amount between the 10A unit and non-10A unit.

Summary

Issues Involved:
1. Arm's Length Price (ALP) determination.
2. Turnover filter application.
3. Functional dissimilarity of comparables.
4. Exclusion of expenses from export turnover.
5. Deduction under Section 10A.
6. Employee Stock Option compensation deduction.

Detailed Analysis:

1. Arm's Length Price (ALP) Determination:
The primary issue was whether the price charged by the assessee to its associated enterprises satisfied the arm's length test under Chapter X of the Income Tax Act, 1961. The Transfer Pricing Officer (TPO) had selected 17 comparable companies to determine the ALP, leading to an upward adjustment under Section 92CA of Rs. 82,26,807. The CIT (Appeals) confirmed this adjustment. The Tribunal found that the turnover filter applied by the TPO was not appropriate, leading to the exclusion of certain companies from the comparables set.

2. Turnover Filter Application:
The Tribunal noted that the TPO's turnover slab of Rs. 1 crore to Rs. 200 crores was inappropriate as it gave unrealistic results. Instead, a turnover filter of 10 times the assessee's turnover was applied. This led to the exclusion of 10 companies from the comparables list. The Tribunal directed the TPO/A.O. to recompute the ALP by considering the turnover filter of 10 times on both sides.

3. Functional Dissimilarity of Comparables:
The assessee sought exclusion of five companies on the grounds of functional dissimilarity. The Tribunal, relying on previous decisions, directed the exclusion of these companies from the comparables list. The Tribunal emphasized that companies engaged in different functions, such as product development or owning significant intangibles, should not be compared with the assessee, which was a software development service provider.

4. Exclusion of Expenses from Export Turnover:
The revenue's appeal raised the issue of excluding expenses from the export turnover while computing the deduction under Section 10A. The Tribunal upheld the CIT (Appeals)'s order, following the Karnataka High Court's decision in CIT v. Tata Elxsi Ltd., which mandated that expenses excluded from the numerator (export turnover) should also be excluded from the denominator (total turnover).

5. Deduction under Section 10A:
The Tribunal reiterated that there should be uniformity in the ingredients of both the numerator and the denominator of the formula for computing the deduction under Section 10A. The Tribunal directed the A.O./TPO to recompute the ALP by considering the benefit under the proviso to Section 92C.

6. Employee Stock Option Compensation Deduction:
The assessee raised an additional ground for the deduction of Employee Stock Option compensation paid to the parent company. The Tribunal noted that this issue had been decided in favor of the assessee for the Assessment Year 2008-09. However, since the relevant details were not examined by the Assessing Officer for the current year, the Tribunal set aside the issue to the Assessing Officer for verification and examination of the relevant records.

Conclusion:
The Tribunal directed the exclusion of certain companies from the comparables list based on turnover and functional dissimilarity. It upheld the exclusion of expenses from the export turnover while computing the deduction under Section 10A. The issue of Employee Stock Option compensation deduction was remanded to the Assessing Officer for verification. The appeals were partly allowed.