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2017 (9) TMI 1602 - AT - Income TaxTPA - selection of comparable - selection criteria - Held that - Referring to software development and quality analysis services undertaken by Mentor India for Mentor Group as an independent contractor the companies functionally dissimilar with that of assessee need to be deselected from final list of comparable. Inclusion of communication charges in the gross turnover for the purpose of calculating the deduction u/s 10A - Held that - As decided in assessee s own case we are inclined to accept the plea of the assessee that communication charges need to be excluded both from the export turnover as well as from the total turnover for the purpose of computing exemption u/s 10A and we direct the TPO/AO to recalculate the exemption by excluding the amount of impugned communication charges from both the total turnover as well as export turnover.
Issues Involved:
1. Transfer Pricing Adjustment. 2. Rejection of Comparables. 3. Use of Secret Data. 4. Selection of High Margin Comparables. 5. Exclusion of Communication Expenses from Export Turnover for Section 10A Deduction. Issue-wise Detailed Analysis: 1. Transfer Pricing Adjustment: The assessee challenged the adjustment of ?5,99,75,325 to the value of international transactions related to software development services under Section 92CA(3) of the Income Tax Act, 1961. The adjustment was initially proposed at ?11,36,80,487 but was revised following the directions of the Hon’ble Dispute Resolution Panel (DRP). The DRP directed the Transfer Pricing Officer (TPO) to exclude Bodhtree Consulting Ltd from the final set of comparables, leading to the revised adjustment amount. 2. Rejection of Comparables: The assessee contended the rejection of certain comparables in their Transfer Pricing documentation, namely Larsen & Toubro Infotech Limited, ICRA Techno Analytics Limited, and Computech International Limited. The assessee argued that these companies were functionally similar and should have been included in the comparability analysis. 3. Use of Secret Data: The assessee argued that the TPO used data not available in the public domain, obtained under Section 133(6), without sharing it with the assessee, thus violating the principle of natural justice. 4. Selection of High Margin Comparables: The assessee challenged the inclusion of high-margin companies such as Infosys, KALS Information Systems Limited, Tata Elxsi Limited, and Wipro Limited as comparables. The ITAT had previously excluded these companies in the assessee’s own case for the assessment year 2006-07, and the Delhi High Court had upheld this decision. The ITAT noted that the department failed to demonstrate any factual differences between the assessment year 2006-07 and the year under appeal. Consequently, the ITAT ordered the exclusion of these high-margin companies from the final list of comparables. 5. Exclusion of Communication Expenses from Export Turnover for Section 10A Deduction: The assessee contested the recomputation of the deduction under Section 10A, where the department excluded communication expenses of ?3,63,70,508 from the export turnover but did not exclude the same from the total turnover. The ITAT, following its own precedent and supported by various judicial pronouncements, held that communication charges should be excluded from both the export turnover and the total turnover for the purpose of computing the deduction under Section 10A. This decision was also upheld by the Delhi High Court in the department’s appeal. Conclusion: The ITAT ruled in favor of the assessee on both the issues of comparables and the exclusion of communication expenses for Section 10A deduction. The appeal of the assessee was allowed, and the TPO/AO was directed to recalculate the exemption by excluding the communication charges from both the total turnover and the export turnover. The ITAT emphasized the importance of consistency and adherence to judicial precedents in transfer pricing matters.
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