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2018 (3) TMI 1198 - AT - Income TaxTPA - ALP determination - comparable adjustment - Held that - Assessee is providing back office services relating to creation and maintenance of database of prospective employers and candidates who have sent their resumes to HSII in accordance with the preset criteria developed by HSII and including into search palace, thus companies functionally dissimilar with that of assessee need to be deselected from final-list. Exclusion of telecommunication expenses from the total turnover in order to calculate deduction u/s 10A - Held that - When it is not in dispute that for the purpose of section 10A, the term total turnover is to be interpreted by computing the entire export turnover as well as domestic turnover and in case, expenses are to be excluded from export turnover, the same are to be excluded from the total turnover also for the purpose of computing the deduction u/s 10A of the Act. So, we are of the considered view that ld. CIT (A) has rightly directed the AO to exclude the telecommunication expenses amounting to ₹ 9,15,422/- from total turnover for the purpose of calculating the deduction u/s 10A of the Act.
Issues Involved:
1. Jurisdictional error by the Assessing Officer (AO) in referring the matter to the Transfer Pricing Officer (TPO). 2. Adjustment to the arm's length price (ALP) of international transactions. 3. Validity of initiation of penalty proceedings under section 271(1)(c) of the Income-tax Act. 4. Exclusion of certain comparables by the CIT(A) and inclusion of others by the TPO. 5. Exclusion of telecommunication expenses from total turnover while calculating deduction under section 10A. Issue-wise Detailed Analysis: 1. Jurisdictional Error by AO: The taxpayer argued that the AO did not record any reasons in the assessment order to justify the referral to the TPO for computation of the arm's length price (ALP) as required under section 92CA(1) of the Income-tax Act. However, this issue was not specifically adjudicated in the judgment. 2. Adjustment to ALP: The taxpayer challenged various aspects of the ALP adjustment made by the TPO and upheld by the CIT(A), including the rejection of the taxpayer's TP documentation and selection of comparables. The TPO had selected 20 comparables with an average margin of 29.16%, which was reduced to 23.56% after the CIT(A) excluded Moldtek Technologies Ltd. The Tribunal examined each disputed comparable in detail: - Accentia Technologies Ltd.: Excluded due to extraordinary events, insufficient segmental data, and failing the employee cost filter. - Acropetal Technologies Ltd.: Excluded as it was engaged in Knowledge Process Outsourcing (KPO) services, unlike the taxpayer, which was a low-end BPO. - Cross Domain Solution Pvt. Ltd.: Excluded due to functional dissimilarity and involvement in high-end KPO services. - Eclerx Services Ltd.: Excluded due to its KPO nature, extraordinary events, and significant advertising expenditure. - HCL Comnet Systems & Services Ltd.: Excluded due to different financial year ending and significant related party transactions. - Genesys International Ltd.: Excluded due to functional dissimilarity, significant intangibles, R&D activities, and high fluctuating margins. - Infosys BPO Ltd.: Excluded due to high brand value, significant R&D expenditure, and diversified business activities. - Vishal Information Technologies Ltd.: Excluded due to functional dissimilarity and failing the employee cost filter. - Wipro Ltd.: Excluded due to significant ownership of intellectual property, high turnover, and diversified business activities. 3. Validity of Initiation of Penalty Proceedings: The taxpayer's ground regarding the initiation of penalty proceedings under section 271(1)(c) was considered consequential and did not require specific findings. 4. Exclusion of Certain Comparables by CIT(A) and Inclusion by TPO: The Tribunal upheld the CIT(A)'s decision to exclude Moldtek Technologies Ltd. from the list of comparables due to functional dissimilarity, insignificant employee cost to sales ratio, and extraordinary profit margins. 5. Exclusion of Telecommunication Expenses from Total Turnover: The Tribunal upheld the CIT(A)'s direction to exclude telecommunication expenses amounting to ?9,15,422 from the total turnover while calculating the deduction under section 10A. This was based on the principle that expenses excluded from export turnover should also be excluded from total turnover. Conclusion: The appeal filed by the taxpayer was partly allowed, and the appeal filed by the Revenue was dismissed. The Tribunal's judgment provided a detailed analysis of each comparable and upheld the CIT(A)'s decisions on various grounds, ensuring a fair and just determination of the taxpayer's ALP and related tax liabilities.
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