2018 (10) TMI 991 - HC - Income Tax

Deduction u/s 10A - excluding the expenditure incurred in foreign exchange and communication / internet charges from total turnover for working out the deduction - Held that - The first question stands answered in favour of the Assessee and against the Revenue by a judgment of in the case of Commissioner of Income Tax, Central-III v/s HCL Technologies Limited 2018 (5) TMI 357 - SUPREME COURT . TPA - Selection of comparables - Held that - Any inclusion or exclusion of comparables per se cannot be treated as a question of law unless it is demonstrated to the Court that the Tribunal or any other lower authority took into account irrelevant considerations or excluded relevant factors in determination of Arm s Length Price and that impacts significantly the same. See THE PR. COMMISSIONER OF INCOME TAX-1 VERSUS BARCLAYS TECHNOLOGY CENTRE INDIA PRIVATE LTD. 2018 (8) TMI 574 - BOMBAY HIGH COURT . We think that whether one instance or one illustration or one entity is comparable to another in determination of the Arm s Length Price, is essentially a question of fact. There, the relevant factors and tests are applied to the circumstances of the given case. The entity before the Court or Tribunal its business and that of the comparables business activity is, therefore, the crucial issue. We do not see how the Revenue can complain before us when this Court has been emphasizing throughout such an aspect.

Summary

Issues involved:
1. Exclusion of expenditure incurred in foreign exchange and communication/internet charges from 'total turnover' for working out the deduction under Section 10A of the Income Tax Act.
2. Direction to rework the Arm's Length Price by excluding certain comparables selected by the Transfer Pricing Officer.

Analysis:

Issue 1: Exclusion of expenditure from 'total turnover' for Section 10A deduction
The first issue pertains to the exclusion of expenditure incurred in foreign exchange and communication/internet charges from 'total turnover' for calculating the deduction under Section 10A of the Income Tax Act. The Tribunal upheld the order of the Ld. CIT(A) in excluding this expenditure. However, the High Court noted that a similar issue was addressed by the Hon'ble Supreme Court in a previous judgment, ruling in favor of the Assessee. The High Court observed that the exclusion of such expenditure is in line with legal principles and does not raise any substantial question of law.

Issue 2: Direction to rework Arm's Length Price by excluding certain comparables
The second issue involves the direction given by the Tribunal to the Assessing Officer to rework the Arm's Length Price by excluding seven comparables out of the 16 selected by the Transfer Pricing Officer. The High Court referenced previous decisions emphasizing that the inclusion or exclusion of comparables is primarily a question of fact, not law. The Court highlighted that the determination of comparables involves a detailed analysis of business activities and relevant factors specific to each case. The High Court reviewed the detailed analysis conducted by the Tribunal regarding the exclusion of the seven comparables and found the Tribunal's decision to be well-founded. The Court concluded that the Tribunal's order, supported by valid reasons, did not exhibit any legal error or perversity. Therefore, the reworked Arm's Length Price based on the exclusion of certain comparables was deemed appropriate, and the Appeals were dismissed.

In conclusion, the High Court upheld the Tribunal's decisions on both issues, emphasizing that the exclusion of certain expenditure for Section 10A deduction and the reworking of the Arm's Length Price by excluding specific comparables were fact-specific determinations that did not raise substantial questions of law. The Appeals were dismissed, and no costs were awarded.