2020 (4) TMI 619 - AT - Income Tax

TP Adjustment - comparable selection - HELD THAT - M/S.Bodhtree Consulting Ltd's profit margin fluctuates significantly on a year-on-year basis, with the result that it cannot be considered as comparable to the Assessee. Apart from the above Bodhtree is also engaged in the provision of software solutions developed in-house, like MIDAS, ShareTree, TeleTree, SecureTree, AppsScale. Assessee is only a captive software development service provider that does not design/develop/sell software products and does not own IPs - we direct exclusion of this company from the list of comparable companies. Computation of deduction u/s 10A - Assessee also made an alternate prayer that expenses that are reduced from the export turnover should also be reduced from the total turnover - HELD THAT - Taking into consideration the decision rendered by the Hon ble High Court of Karnataka in the case of CIT v. Tata Elxsi Ltd 2011 (8) TMI 782 - KARNATAKA HIGH COURT we are of the view that there is no merit in ground raised by the Revenue. It would be just and appropriate to direct the Assessing Officer to exclude the charges both from export turnover and total turnover, as has been prayed for by the assessee in the alternative. In view of the acceptance of the alternative prayer, we are of the view that no adjudication is required on the ground whether the aforesaid sums are required to be excluded from the export turnover. Moreover, the order of the Hon ble Karnataka High Court has been upheld in HCL TECHNOLOGIES LTD. 2018 (5) TMI 357 - SUPREME COURT

Summary

Issues Involved:
1. Determination of Arm’s Length Price (ALP) for international transactions.
2. Exclusion of certain comparable companies based on turnover.
3. Inclusion of Bodhtree Consulting Ltd. as a comparable company.
4. Computation of deduction under Section 10A of the Income Tax Act.

Detailed Analysis:

1. Determination of Arm’s Length Price (ALP) for International Transactions:
The Assessee, engaged in Software Development Services, provided services to its Associated Enterprises during the financial year 2008-09. As per Section 92 of the Income Tax Act, 1961, income from international transactions must be determined with regard to the Arm’s Length Price (ALP). Both the Assessee and the Revenue agreed that the Transaction Net Margin Method (TNMM) was the Most Appropriate Method (MAM) for determining ALP, using Operating Profit to Total Cost (OP/TC) as the Profit Level Indicator (PLI).

2. Exclusion of Certain Comparable Companies Based on Turnover:
The Assessee had selected five comparable companies with an average profit margin of 12.92%. Since the Assessee's profit margin of 12.00% was within the permissible range of (+) (-) 5% as per the second proviso to Section 92C(2), the Assessee claimed its pricing was at Arm’s Length. The Transfer Pricing Officer (TPO) accepted some comparables and added more, arriving at an arithmetic mean of 24.32% from 11 companies. The CIT(A) excluded seven companies with turnovers significantly higher than the Assessee’s, applying a turnover filter. The Tribunal upheld this exclusion, citing the Karnataka High Court's decision in Acusis Software (I) P. Ltd. v. ITO, which stated that companies with turnovers more than 10 times that of the Assessee should not be considered comparable.

3. Inclusion of Bodhtree Consulting Ltd. as a Comparable Company:
The Assessee contested the inclusion of Bodhtree Consulting Ltd. as a comparable, arguing that Bodhtree followed a different revenue recognition method and engaged in developing in-house software solutions, unlike the Assessee, which provided only captive software development services. The Tribunal agreed with the Assessee, referencing previous Tribunal decisions in similar cases, and directed the exclusion of Bodhtree from the list of comparables.

4. Computation of Deduction under Section 10A of the Income Tax Act:
The Revenue challenged the CIT(A)’s decision to exclude communication expenses and expenses incurred in foreign currency from both the export turnover and total turnover while computing the deduction under Section 10A. The Tribunal upheld the CIT(A)’s decision, referencing the Karnataka High Court’s ruling in CIT v. Tata Elxsi Ltd., which mandated that such expenses should be excluded from both export and total turnover. This decision was further supported by the Supreme Court in CIT v. HCL Technologies Ltd.

Conclusion:
The Tribunal dismissed the Revenue's appeal and partly allowed the Assessee's appeal. The TPO was directed to recompute the ALP following the Tribunal's directions and provide the Assessee an opportunity to be heard. The Tribunal also upheld the CIT(A)’s methodology for computing the Section 10A deduction, aligning with judicial precedents.