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2019 (12) TMI 78 - AT - Income TaxTP Adjustment - Comparable selection - HELD THAT - Assessee is in the business of rendering Software Development Services (SWD services) and Information Technology Enabled Services (ITES) to its Associated Enterprise(AE) which is non-resident at cost plus 10% mark up. It is not in dispute that the transaction of rendering of SWD services and ITES to its AE were international transactions and in view of the provisions of sec. 92 of the Income Tax Act, 1961 (Act), income arising from such international transactions has to be determined having regard to Arms Length Price (ALP), thus companies functionally dissimilar with that of assessee need to be deselected from final list. Deduction under section 10A - CIT(A) appeal however held that whatever is excluded from export turnover should also be reduced from the total turnover while allowing deduction u/s.10A - HELD THAT - The revenue is in appeal against the aforesaid direction of the CIT(A). It is not in dispute before us in the case of CIT Vs. Tata Elxsi Ltd. 2011 (8) TMI 782 - KARNATAKA HIGH COURT has held that whatever is excluded from the export turnover should also be excluded from the total turnover while computing deduction under section 10A of the Act. This view of the Hon ble Karnataka High Court has been upheld by the Hon ble Supreme Court in the case of CIT Vs. HCL Technologies Ltd. 2018 (5) TMI 357 - SUPREME COURT . We hold that telecommunication charges should be excluded both from the export turnover as well as from the total turnover and deduction under section 10A computed accordingly.
Issues Involved:
1. Determination of Arm's Length Price (ALP) for Software Development Services (SWD) and Information Technology Enabled Services (ITES). 2. Exclusion and inclusion of comparable companies for Transfer Pricing analysis. 3. Computation of deduction under section 10A of the Income Tax Act. Detailed Analysis: 1. Determination of ALP for SWD Services: The Assessee, engaged in rendering Software Development Services (SWD) and ITES to its Associated Enterprise (AE), filed cross appeals regarding the determination of ALP for the assessment year 2011-12. The Assessee used the Transaction Net Margin Method (TNMM) as the Most Appropriate Method (MAM) and selected 13 comparable companies. The arithmetic mean of these companies indicated that the Assessee's profit margin was at Arm's Length. The Assessing Officer (AO) referred the matter to the Transfer Pricing Officer (TPO), who selected 13 comparable companies with an arithmetic mean profit margin of 24.82%. The TPO computed the price for rendering SWD services at ?54,87,33,178, leading to an addition of ?7,35,34,045 to the Assessee's total income. The Assessee appealed to the CIT(A), who excluded ICRA Technologies and Tata Elxsi from the comparables, leaving 11 companies. The Assessee then contested the inclusion of seven companies and the exclusion of one company (LGS Global Ltd.). 2. Exclusion and Inclusion of Comparable Companies: a. Exclusion of Comparable Companies: - Accropetal Technologies Ltd.: Excluded due to revenue from software development being less than 75% of total operating revenue. The ITAT Bangalore in a similar case also excluded this company. - E-Zest Solutions Ltd.: Remanded for fresh consideration due to functional dissimilarity and lack of segmental data. - Infosys Ltd., Larsen & Toubro Infotech Ltd., Persistent Systems Ltd.: Excluded based on previous ITAT decisions due to factors like brand value, diverse activities, and lack of segmental details. - Sasken Communication Technologies Ltd., Persistent Systems & Solutions Ltd.: Remanded for fresh consideration due to diverse activities and lack of segmental details. b. Inclusion of Comparable Companies: - LGC Global Ltd.: Remanded for fresh consideration based on a previous ITAT decision. 3. Computation of Deduction under Section 10A: The CIT(A) directed the exclusion of expenses from both the export turnover and total turnover while computing the deduction under section 10A. This was in line with the Karnataka High Court's decision in CIT Vs. Tata Elxsi Ltd., upheld by the Supreme Court in CIT Vs. HCL Technologies Ltd. Conclusion: The appeal by the Assessee was partly allowed, while the appeal by the revenue was dismissed. The AO/TPO was directed to determine the ALP in both SWD and ITES segments following the guidelines provided and after affording the Assessee an opportunity to be heard. The computation of deduction under section 10A was to be done by excluding telecommunication and travel expenses from both export and total turnover.
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