2020 (1) TMI 616 - AT - Income Tax

TP Adjustment - Comparable selection - HELD THAT - As compared to the software development services income of assessee companies functionally dissimilar with that of assessee need to be deselected from final list. Foreign exchange loss - HELD THAT - When a query was raised to the learned Authorised Representative with Respect to disclosure of loss in the Balance Sheet., the learned Authorised Representative demonstrated with copy of Balance Sheet, but there is no clarity on foreign Exchange loss claim. Therefore we considering the facts and submissions and the disclosure, Restore this disputed issue to the file of learned CIT (Appeals) to adjudicate afresh and allow this ground of appeal of Revenue for statistical purposes. Working Capital Adjustment - HELD THAT - Transfer pricing order on Working Capital Adjustment, we find that the TPO has computed it at 5.97% but has not given any basis for restricting the adjustment to 1.71%. In various cases relating to transfer pricing adjustment, this Tribunal has been directing to give Working Capital Adjustment on actual basis and the TPO having arrived at 5.97%, ought to have adopted the same instead of restricting it to 1.71%. in view of the same, we deem it proper to remand this issue to the file of the TPO/A.O. for working out the ALP after giving adjustment of working capital as per the calculation of the A.O. in annexure D annexed to the transfer pricing order. This ground of appeal is accordingly allowed.

Summary

Issues Involved:
1. Exclusion of certain companies from the list of comparables.
2. Inclusion of certain companies in the list of comparables.
3. Treatment of foreign exchange loss.
4. Reduction of foreign exchange expenditure from both export turnover and total turnover for Section 10A deduction.
5. Functional dissimilarity of comparables.
6. Working Capital Adjustment.

Detailed Analysis:

1. Exclusion of Certain Companies from the List of Comparables:
The appellant argued for the exclusion of four comparables: Acropetal Technologies Ltd., ICRA Techno Analytics Ltd., Persistent Systems Ltd., and Sasken Communication Technologies Ltd., on the grounds of functional dissimilarity. The Tribunal agreed with the appellant, citing previous decisions, and directed the TPO to exclude these companies from the final list of comparables. Specifically, Acropetal Technologies Ltd. was excluded due to its failure to meet the revenue filter of 75% from software development services.

2. Inclusion of Certain Companies in the List of Comparables:
The appellant sought the inclusion of FCS Software Solutions Pvt. Ltd., arguing it was functionally comparable and engaged in providing software development services. The Tribunal, referencing previous decisions, directed the TPO to include FCS Software Solutions Pvt. Ltd. in the final list of comparables for determining the ALP.

3. Treatment of Foreign Exchange Loss:
The appellant contended that the foreign exchange loss should be allowed as an expenditure under Section 37 of the Act. The CIT(A) supported this view, referencing the Supreme Court decisions in CIT vs. Woodward Governor and Sutlej Cotton Mills Ltd. vs. CIT. However, due to a lack of clarity on the disclosure of the foreign exchange loss in the balance sheet, the Tribunal restored this issue to the CIT(A) for fresh adjudication.

4. Reduction of Foreign Exchange Expenditure from Both Export Turnover and Total Turnover for Section 10A Deduction:
The CIT(A) directed the AO to reduce the foreign exchange expenditure from both export turnover and total turnover for the purpose of Section 10A deduction. This decision was upheld by the Tribunal, referencing the jurisdictional High Court decision in Tata Elxsi Limited vs. CIT.

5. Functional Dissimilarity of Comparables:
The revenue argued that the CIT(A) erred in selecting comparables that were functionally different. The Tribunal, however, found no merit in this argument and confirmed the CIT(A)’s order, which excluded E-infochip Ltd. due to the absence of segmental data.

6. Working Capital Adjustment:
The revenue contended that the CIT(A) was not justified in allowing the Working Capital Adjustment. The Tribunal, referencing the coordinate bench decision in the assessee’s own case for the Asst. Year 2009-10, restored this issue to the CIT(A) for fresh adjudication.

Conclusion:
The Tribunal partly allowed the appeals of both the assessee and the revenue for statistical purposes, directing fresh adjudication on certain issues and confirming the CIT(A)’s decisions on others. The order was pronounced in the open court on 10th Jan., 2020.