2020 (10) TMI 188 - AT - Income Tax

Deduction u/s 10A - Rejection of assessee claim holding that the undertaking of the assessee has been formed by splitting up or reconstruction of a business already in existence - HELD THAT - Whether the undertaking of the assessee has been formed by splitting up or reconstruction of existing business was examined by the coordinate bench in the assessee s own case 2010 (8) TMI 1014 - ITAT BANGALORE allowed the deduction u/s 10A of the Act to the assessee. Since the Ld. CIT(A) has followed the decision rendered by the coordinate bench on this issue, which has since been upheld by Hon ble Karnataka High Court M/S. GXS TECHNOLOGY CENTRE PVT. LTD 2018 (11) TMI 1799 - KARNATAKA HIGH COURT we do not find any infirmity in this order. Accordingly, the appeal of the revenue is dismissed. TP Adjustment - comparable selection - HELD THAT - The assessee is primarily engaged in providing design and development of software services to its parent company. Thus companies functionally dissimilar and earning abnormally high profits need to be deselected from final list of comparable. Also companies showing RPT% in excess of 15% need to be excluded.

Issues Involved:
1. Deduction under Section 10A of the Income-tax Act.
2. Transfer Pricing Adjustments.

Detailed Analysis:

1. Deduction under Section 10A of the Income-tax Act:

The primary issue was whether the assessee's undertaking was formed by splitting up or reconstruction of an existing business, which would disqualify it from claiming deduction under Section 10A of the Income-tax Act. The assessee is a captive software development service provider to its associated enterprise. The assessing officer (AO) rejected the deduction claim by holding that the undertaking was formed by splitting up or reconstruction of a business already in existence. However, the CIT(A) allowed the deduction following a prior ITAT decision in the assessee's favor.

The Tribunal noted that this issue had already been examined in the assessee's own case in ITA No.616/Bang/2009, where it was determined that the undertaking had not been formed by splitting up or reconstruction of an existing business. The Tribunal's decision was upheld by the Hon’ble High Court of Karnataka. Consequently, the Tribunal found no infirmity in the CIT(A)'s order allowing the deduction under Section 10A and dismissed the revenue's appeal on this issue.

2. Transfer Pricing Adjustments:

The second issue involved the transfer pricing adjustments made by the Transfer Pricing Officer (TPO). The assessee, a 100% export-oriented unit, used the Transactional Net Margin Method (TNMM) to determine the arm's length price of its international transactions, selecting Operating profit by Total cost (OP/TC) as the Profit Level Indicator (PLI). The TPO rejected the assessee's transfer pricing study and selected 17 comparable companies, leading to a transfer pricing adjustment of ?3,09,56,816/-.

The CIT(A) provided partial relief by excluding five companies with turnovers exceeding ?200 crores based on the decision in Genisys Integrating Systems Vs. DCIT. The assessee sought further exclusion of seven companies, arguing they were not comparable.

The Tribunal considered the assessee's appeal for exclusion of the following seven companies:
1. Bodhtree Consulting Limited
2. Exensys Software Solutions Limited
3. Sankhya Infotech Limited
4. Four Soft Limited
5. Thirdware Solutions Ltd.
6. Geometric Software Solutions Ltd.
7. Tata Elxsi Limited (Seg.)

The Tribunal referred to a prior decision in Autodesk India (P) Ltd. Vs. DCIT, which held that these companies were not good comparables for a captive software development service provider. The Tribunal provided detailed reasons for the exclusion of each company, such as functional dissimilarity, abnormal profit margins due to extraordinary events, and high related party transactions (RPT).

Specific Findings:
- Bodhtree Consulting Limited and Tata Elxsi Limited: Excluded due to functional dissimilarity and involvement in both software development services and IT-enabled services without proper segmental data.
- Exensys Software Solutions Limited: Excluded due to abnormal profit margins resulting from the amalgamation with Holool India Ltd.
- Sankhya Infotech Limited: Excluded due to functional dissimilarity and lack of proper segmental details.
- Geometric Software Solutions Co. Ltd. and Four Soft Ltd.: Excluded due to high RPT percentages exceeding 15%.
- Thirdware Solutions Ltd.: Remanded to the AO/TPO for fresh examination due to diverse activities without proper segmental data.

The Tribunal directed the exclusion of six companies and remanded the case of Thirdware Solutions Ltd. for further examination. Consequently, the appeal of the revenue was dismissed, and the appeal of the assessee was treated as allowed.

Conclusion:
The Tribunal upheld the CIT(A)'s decision to allow the deduction under Section 10A and provided further relief to the assessee by excluding certain companies from the list of comparables for transfer pricing adjustments. The order was pronounced in the open court on 18th Sept 2020.

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