2020 (9) TMI 454 - AT - Income Tax

Deduction u/s.10A - exclusion of telecommunication expenses, insurance charges and foreign exchange loss both from the export turnover and total turnover for the purpose of computation of deduction u/s. 10A - HELD THAT - It is not in dispute before us that the Hon ble High Court of Karnataka in the case of CIT v. Tata Elxsi Ltd 2011 (8) TMI 782 - KARNATAKA HIGH COURT has held that charges/expenses relating to telecommunication, insurance charges and foreign exchange loss should be excluded both from export turnover and total turnover while computing deduction u/s.10A of the Act i.e., whatever is removed from the numerator should also be excluded from the denominator while working total turnover and export turnover for allowing deduction u/s.10A of the Act. The aforesaid decision of the jurisdictional High Court has been upheld in the case of CIT v. HCL Technologies 2018 (5) TMI 357 - SUPREME COURT . TP Adjustment - Application of turnover filter in choosing comparable companies - whether companies having turnover more than 200 crores upto 500 crores has to be regarded as one category and those companies cannot be regarded as comparables with companies having turnover of less than 200 crores - HELD THAT - No infirmity in the directions of the DRP in excluding the companies having turnover more than ₹ 200 crores. Consequently ground No.4 raised by the revenue is dismissed. Grant of risk adjustment @ 1% by DRP - HELD THAT - DRP has not directed the AO to allow risk adjustment @ 1%, but has only directed the AO to decide the percentage of risk adjustment to be calculated and to take guidance from the decision of Hellosoft Pvt. Ltd. 2013 (10) TMI 747 - ITAT HYDERABAD . Hence we are of the view that the ground projected by the revenue does not arise out of the directions of the DRP. Application of RPT filter between 15% and 25% - HELD THAT - DRP, however, following the decision of the ITAT Delhi Bench in the case of Mentor Graphics P. Ltd. 2007 (11) TMI 339 - ITAT DELHI-H took the view that there should be Nil RPT for a company to be taken as a comparable company. The department is in appeal on the above conclusion of the DRP. Inclusion of Thinksoft Global Services Ltd., and Persistent Systems Solutions Ltd. - DR s objection was that the assessee not having challenged the inclusion of Persistent Systems Solutions Ltd. and Thinksoft Global Ltd. before the DRP, cannot seek to take advantage of the DRP s direction of RPT filter and seek exclusion of these two companies. As far as ICRA techno analytics Ld., is concerned, the Assessee challenged the inclusion of this company on functional comparability but not on application of RPT filter. As far as application of RPT filter is concerned, this Tribunal has been taking a consistent view that the threshold limit for application of RPT filter should be 15% and in cases where the available samples are less, then the threshold limit can be fixed at 25%. Therefore, we are of the view that the directions of the DRP fixing the threshold limit as 0% for application of RPT filter is not correct. We direct the TPO to adopt the RPT filter @ 15% and decide the comparability of all the companies that remain for comparability as per the directions in this order. KALS Information Systems Ltd. on the ground that it is not functionally comparable with SWD service provider such as the assessee. Disallowance of lease rentals claimed as revenue expenditure - HELD THAT - From the order of AO and DRP as well as the submissions made by the assessee before us, it is not clear as to what is the break-up of the fit-outs that was provided in the lease premises. A copy of the lease agreement between the assessee and owner of the property is at and this agreement does not contain any description of the nature of fit-outs. Without the details and nature of fit-outs, it is not possible to conclude whether the expenditure is capital or revenue in nature. In the circumstances, we deem it fit and proper to set aside the order of AO and remand the question for consideration de novo by the AO with a direction to ascertain the nature of fit-outs and the manner of adjustment of cost of fit-outs between the assessee and the owner of the premises who provided the fit-outs. Ground No.10 is accordingly decided. Disallowance of contribution to approved gratuity fund - HELD THAT - Since before passing the final order of assessment, opportunity is not given to the assessee, the assessee could not point out the evidence already filed before the AO. We are therefore of the view that this issue should also be set aside to the AO for verification of proof of payment. If necessary evidence is available on record, the AO is directed to allow deduction and if some additional evidence is required, the AO should afford opportunity to assessee to produce the same to substantiate its claim for deduction. We hold and direct accordingly. Error in computation of deduction under section 10A - Incorrect amount of export turnover considered for computation of section 10A deduction - HELD THAT - At the time of hearing, both the parties agreed that the aforesaid incorrect computation requires verification by the AO and for this purpose this has to be sent back to the AO. Accordingly the AO is directed to consider the plea of the assessee and rectify the error in the computation of deduction u/s. 10A.

Summary

Issues Involved:
1. Determination of Arm's Length Price (ALP) for Software Development Services.
2. Exclusion of telecommunication expenses, insurance charges, and foreign exchange loss from export turnover and total turnover for Section 10A deduction.
3. Application of turnover filter in choosing comparable companies.
4. Grant of risk adjustment.
5. Application of Related Party Transaction (RPT) filter.
6. Disallowance of lease rentals claimed as revenue expenditure.
7. Disallowance of contribution to approved gratuity fund.
8. Incorrect computation of deduction under Section 10A.
9. Charging of interest under Section 234B.
10. Lease rentals treatment for AY 2012-13.

Detailed Analysis:

1. Determination of Arm's Length Price (ALP) for Software Development Services:
The Assessee provided Software Development Services to its holding company, an international transaction requiring ALP determination under Section 92 of the Income-tax Act. The Transaction Net Margin Method (TNMM) was chosen as the Most Appropriate Method (MAM) with Operating Profit/Total Cost (OP/TC) as the profit level indicator. The TPO accepted two out of thirteen comparables suggested by the Assessee and selected nine additional companies, leading to an adjustment of ?7,43,91,982. The Tribunal upheld the exclusion of KALS Information Systems Ltd. on functional grounds, following the ITAT decision in Logitech Engg. & Design (I) Pvt. Ltd.

2. Exclusion of Telecommunication Expenses, Insurance Charges, and Foreign Exchange Loss:
The Tribunal upheld the DRP's direction to exclude these expenses from both export turnover and total turnover for Section 10A deduction, following the Karnataka High Court's decision in CIT v. Tata Elxsi Ltd., which was affirmed by the Supreme Court in CIT v. HCL Technologies Ltd.

3. Application of Turnover Filter in Choosing Comparable Companies:
The Tribunal upheld the DRP's exclusion of companies with turnover exceeding ?200 crores, citing the ITAT decision in Autodesk India Pvt. Ltd. and the Bombay High Court's ruling in CIT Vs. Pentair Water India Pvt. Ltd., emphasizing that turnover is a relevant criterion for comparability.

4. Grant of Risk Adjustment:
The Tribunal found that the DRP did not direct a specific 1% risk adjustment but instructed the AO to determine the percentage based on ITAT Bangalore's decision in Hellosoft Pvt. Ltd. Hence, the revenue's ground on this issue was dismissed.

5. Application of Related Party Transaction (RPT) Filter:
The DRP directed a 0% RPT filter, which the Tribunal found incorrect, directing the TPO to adopt a 15% threshold for RPT filter. Consequently, the additional grounds by the revenue and ground No.4 by the Assessee were partly allowed.

6. Disallowance of Lease Rentals Claimed as Revenue Expenditure:
The Assessee claimed lease rentals for fit-outs as revenue expenditure. The AO treated it as capital expenditure, a view upheld by the DRP with an allowance for depreciation. The Tribunal remanded the issue to the AO to ascertain the nature of fit-outs and their cost adjustment.

7. Disallowance of Contribution to Approved Gratuity Fund:
The AO disallowed the Assessee's claim due to lack of evidence, a stance the DRP directed the AO to verify. The Tribunal remanded the issue for verification of proof of payment, directing the AO to allow the deduction if evidence is provided.

8. Incorrect Computation of Deduction Under Section 10A:
Both parties agreed that errors in computation required AO's verification. The Tribunal directed the AO to rectify the computation errors as claimed by the Assessee.

9. Charging of Interest Under Section 234B:
The Tribunal noted that this issue is consequential and directed the AO to grant relief accordingly.

10. Lease Rentals Treatment for AY 2012-13:
The issue was identical to the one raised for AY 2010-11. The Tribunal remanded it to the AO for fresh consideration in line with the directions for AY 2010-11.

Conclusion:
The Tribunal partly allowed the appeals by both the revenue and the Assessee, dismissing IT(TP)A No. 595/Bang/2015 as infructuous and allowing ITA No.332/Bang/2018 for statistical purposes. The AO was directed to recompute the ALP and rectify errors following the Tribunal's directions, ensuring the Assessee is given an opportunity to present evidence.