2017 (11) TMI 1131 - AT - Income Tax

TPA - comparable selection - Held that - As apparent from the impugned order of the DRP that the DRP has adjudicated only selective points from the objections raised by the assessee instead of going into all aspects of functional comparability. The learned Authorised Representative of the assessee has relied upon various decisions on the issue of functional dissimilarity of these companies in both segments and therefore we find that the issue of comparability in respect of all these companies where the assessee raised objections of functional dissimilarity require a proper verification and examination. Accordingly, we set aside the entire TP issue in both segments i.e. software development services as well as ITES to the record of the DRP for adjudication of the same afresh by a speaking and reasoned order on all the aspects of functional comparability as raised by the assessee. Needless to say the assessee be afforded an opportunity of hearing and also to support its objections with precedent. Deduction under section 10A computation - Held that - We find that the issue of expenditure incurred towards travel expenses in foreign currency is reduced from export turnover an equal amount should also be reduced from total turnover while computing the deduction under section 10A of the Act, is covered in favour of the assessee by the decision of the Hon ble Karnataka High Court in the case of CIT v. Tata Elxsi Ltd. 2011 (8) TMI 782 - KARNATAKA HIGH COURT .

Summary

Issues:
1. Comparability analysis and determination of arm’s length price in respect of Software development services.
2. Comparability analysis and determination of arm’s length price in respect of Information technology enabled services.
3. Exclusion of travel expenses incurred in foreign currency from export turnover while computing deduction under Section 10A of IT Act.

Analysis:
1. The appeal was against the assessment order passed under Section 143(3) r.w.s. 144C of the Income-tax Act, 1961 for the Assessment Year 2009-10. The assessee challenged the benchmarking of fee transactions of captive software services, arguing that differences in functions, assets, and risks were not considered. The selection of comparables was disputed due to significant differences in functional and risk profiles. The DRP's decision was criticized for not addressing all aspects of functional comparability raised by the assessee. The Tribunal set aside the TP issue for both software development services and ITES for a fresh examination by the DRP, emphasizing the need for a comprehensive review of functional comparability.

2. Another issue raised was the inclusion of R System International Limited as a comparable. The assessee withdrew this ground during the appeal, which was accepted by the Tribunal without objection. The Tribunal dismissed this ground as not pressed by the assessee.

3. The final issue concerned the exclusion of travel expenses incurred in foreign currency from export turnover when computing deduction under Section 10A of the IT Act. The Tribunal referred to a decision by the Hon’ble Karnataka High Court in the case of CIT v. Tata Elxsi Ltd., which held that when travel expenses in foreign currency are reduced from export turnover, an equal amount should also be reduced from total turnover for computing the deduction under section 10A. Following this precedent, the Tribunal ruled in favor of the assessee on this issue, resulting in the partial allowance of the appeal.

In conclusion, the Tribunal addressed the comparability issues in software development and ITES segments, dismissed the ground regarding R System International Limited, and ruled in favor of the assessee concerning the treatment of travel expenses for computing deductions under Section 10A of the IT Act.