2018 (7) TMI 1402 - AT - Income Tax

TPA - comparable selection criteria - Held that - Considering assessee to be an ITES provider, companies functionally dissimilar with that of assessee need to be deselected from final list. Deduction u/s 10A - Held that - While computing the deduction u/s 10A of the Act, if any expenditure is to be excluded from the export turnover, then the same is to be excluded from the total turnover as well. AO is bound to give the benefit of variation ( )5% margin under the proviso to sub-section (2) of section 92C of the Act and if the assessee s margin is within ( )5% of the average margin of the comparables, then no adjustment is to be made. The AO is directed accordingly.

Summary

Issues:
1. Determination of ALP for international transactions
2. Exclusion of certain companies as comparable for transfer pricing analysis
3. Exclusion of telecommunication expenses from turnover calculation under section 10A

Analysis:
1. The case involved the Revenue's appeal and the Assessee's Cross Objection for the A.Y 2010-11 regarding the final assessment order passed under section 143(3) r.w.s. 144C of the I.T. Act. The assessee, engaged in software development and IT services, had international transactions with its AE, leading to a proposed adjustment by the TPO. The DRP granted partial relief, prompting the Revenue to appeal. The issues raised included the rejection of certain companies as comparables and adjustments to turnover and expenses.

2. Concerning the exclusion of companies as comparables, the Revenue disputed the rejection of Infosys BPO, TCS-E-Serve Ltd, and e-Clerx Services Ltd by the DRP. The Tribunal upheld the DRP's decision citing functional dissimilarity and past precedents. Notably, Infosys BPO and TCS E-Serve Ltd were considered dissimilar due to their significantly larger scale of operations compared to the assessee, as supported by relevant case law. The DRP's direction was deemed appropriate, and the Revenue's grounds were rejected.

3. The judgment also addressed the treatment of telecommunication expenses under section 10A. Following the Supreme Court's decision in CIT vs. HCL Technologies Ltd, it was established that any exclusion from export turnover should also apply to total turnover. As the DRP's decision aligned with this legal principle, the Tribunal saw no reason to interfere. Consequently, the Revenue's appeal was dismissed, and the cross objections of the assessee were partly allowed, emphasizing the correct calculation of excluded telecommunication charges for statistical purposes.

This comprehensive analysis of the judgment highlights the key issues, legal arguments, and decisions made by the Tribunal, providing a detailed overview of the case's intricacies and outcomes.