2018 (7) TMI 484 - HC - Income Tax

Deduction u/s 10A - Held that - What is excluded from export turnover must also be excluded from total turnover , since one of the components of total turnover is export turnover. Any other interpretation would run counter to the legislative intent and would be impermissible. In the instant case, if the deductions on freight, telecommunication and insurance attributable to the delivery of computer software under Section 10A of the IT Act are allowed only in Export Turnover but not from the Total Turnover then, it would give rise to inadvertent, unlawful, meaningless and illogical result which would cause grave injustice to the Respondent which could have never been the intention of the legislature. Comparable selection criteria - Held that - This Court in Prl.Commissioner of Income Tax & Anr. Vs. M/s.Softbrands India Pvt. Ltd. (2018 (6) TMI 1327 - KARNATAKA HIGH COURT ) has held that in these type of findings of the learned Tribunal remained final fact findings of the learned Tribunal and are binding on the lower authorities of the Department as well as this Court and unless an established ex-facie perversity is found in the findings of the learned Tribunal, the appeal u/s.260A of the Act is not maintainable.

Issues involved:
1. Transfer Pricing - Exclusion of comparables
2. Transfer Pricing - Functionality analysis
3. Transfer Pricing - Specific information consideration
4. Transfer Pricing - Intangibles evaluation
5. Transfer Pricing - Related Party Transaction (RPT) filter
6. Transfer Pricing - Comparable set criteria
7. Corporate Tax - Deduction under section 10A for A.Y. 2008-09

Detailed Analysis:

1. Transfer Pricing - Exclusion of Comparables:
The Appellants-Revenue filed an appeal under section 260A of the Income Tax Act, 1961, challenging the exclusion of certain comparables by the ITAT, Bangalore Bench 'B'. The Appellants raised substantial questions of law regarding the exclusion of specific companies from the list of comparables. The Tribunal, after considering the arguments, directed the Assessing Officer/TPO to exclude companies like Avani Cincom Technologies Ltd., Bodhtree Consulting Ltd., and Celestial Biolabs Ltd. from the list of comparables based on functional dissimilarity and previous judicial decisions.

2. Transfer Pricing - Functionality Analysis:
The Tribunal evaluated the functionality of the comparables in relation to the assessee's software development services. It considered the functionally different nature of certain companies and excluded them from the comparable set. The decision was based on the functional analysis and the requirement for comparables to be functionally similar to the assessee in providing software development services to its AEs.

3. Transfer Pricing - Specific Information Consideration:
The Tribunal emphasized the importance of considering specific information collected under section 133(6) of the Act while determining comparables. It highlighted the need to assess whether the comparables are functionally similar to the assessee based on the information provided. The Tribunal directed the exclusion of companies like Celestial Biolabs Ltd. by relying on specific information collected under section 133(6) and previous Tribunal decisions.

4. Transfer Pricing - Intangibles Evaluation:
The Tribunal examined the issue of significant intangibles held by companies like Wipro Ltd. despite their revenue not comprising software product sales. It questioned the basis for attributing significant intangibles to Wipro Ltd. and whether such intangibles impacted the comparability analysis in transfer pricing assessments.

5. Transfer Pricing - Related Party Transaction (RPT) Filter:
The Tribunal addressed the issue of fixing the Related Party Transaction (RPT) filter at 15% of total revenue and excluding companies like Softsol India Ltd. based on this filter. It considered the application of the RPT filter in determining comparables and the need for a specific basis for setting the 15% cut-off for the RPT filter in the case of the assessee.

6. Transfer Pricing - Comparable Set Criteria:
The Tribunal discussed the impact of applying different filters or criteria for selecting comparables on the overall comparable set. It highlighted the importance of maintaining consistency in applying filters and criteria to ensure the selection of an appropriate comparable set for transfer pricing analysis under section 92CA of the Act.

7. Corporate Tax - Deduction under Section 10A for A.Y. 2008-09:
The Tribunal addressed the issue of recomputing the deduction under section 10A by reducing certain expenses from the total turnover, not just the export turnover. It referenced previous judicial decisions, including the Karnataka High Court and Supreme Court judgments, to support the interpretation that certain expenses should be excluded from both export turnover and total turnover for computing deductions under section 10A.

In conclusion, the Tribunal dismissed the appeals filed by the Revenue, stating that no substantial question of law arose in the case. It emphasized the need for consistent application of parameters in transfer pricing assessments and clarified that mere dissatisfaction with Tribunal findings is not sufficient to invoke section 260A of the Act.

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