2021 (3) TMI 877 - AT - Income Tax

TP Adjustment - comparable selection - HELD THAT - Assessee stated to be having following functions under software development service segment Arriba supplies network, platform/infrastructure, Arriba sourcing, Arriba buyer, technical solution centres. Under ITES segment assessee provides technical support services, Data enrichment services, strategic sales and delivery support shared services. Law laid doen in GENISYS INTEGRATING SYSTEMS (INDIA) (P.) LTD. VERSUS DEPUTY COMMISSIONER OF INCOME-TAX 2011 (8) TMI 952 - ITAT BANGALORE has to be followed. We uphold exclusion of Infosys Technologies Ltd., Kals Information Systems Ltd. and Tata Elxsi Ltd., from the final list of comparable under software development service segment. Under ITES segment exclusion of Eclerx services Ltd. and Infosys BPO Ltd. are upheld. Accordingly these grounds raised by revenue stands dismissed. Deduction u/s 10A - HELD THAT - CIT(A) directed Ld. AO to compute the deduction under section 10A in accordance with the decision of Hon'ble Karnataka High Court in case of Tata Elxsi Ltd. 2011 (8) TMI 782 - KARNATAKA HIGH COURT . We do not find any infirmity in such view taken by Ld. CIT(A) and the same is upheld.

Issues Involved:

1. Exclusion of expenses incurred in foreign currency from total turnover for Section 10A deduction.
2. Comparability analysis for Transfer Pricing adjustments in Software Development (SWD) and IT Enabled Services (ITES) segments.
3. Rejection of Transfer Pricing documentation and comparability analysis by the assessee.
4. Application of filters by Transfer Pricing Officer (TPO) for selecting comparables.
5. Exclusion of certain comparables for functional dissimilarities and high turnover.

Detailed Analysis:

1. Exclusion of Expenses Incurred in Foreign Currency from Total Turnover for Section 10A Deduction:

The revenue contested the exclusion of expenses incurred in foreign currency on travel and communication charges from the total turnover for computing the deduction allowable under Section 10A. The CIT(A) directed the AO to exclude these expenses following the Karnataka High Court's decision in Tata Elxsi Limited (2012) 349 ITR 98 (Kar). The revenue argued that there is no provision in Section 10A for such exclusion from the total turnover. However, the Tribunal upheld the CIT(A)’s decision, aligning with the Karnataka High Court's ruling, affirming that the exclusion was justified.

2. Comparability Analysis for Transfer Pricing Adjustments:

The CIT(A) excluded Infosys Technologies Ltd., Kals Information Systems Ltd., and Tata Elxsi Ltd. from the final list of comparables under the SWD segment, and Eclerx Services Ltd. and Infosys BPO Ltd. under the ITES segment due to functional dissimilarities. The revenue argued that these companies should be included as they satisfy the qualitative and quantitative filters applied by the TPO. The Tribunal upheld the CIT(A)'s decision, noting that these companies were not functionally similar to the assessee, which does not own significant intangibles or brand value and operates on a cost-plus model.

3. Rejection of Transfer Pricing Documentation and Comparability Analysis by the Assessee:

The CIT(A) upheld the TPO's approach in rejecting the Transfer Pricing documentation maintained by the assessee. The TPO had used data available at the time of assessment proceedings rather than at the time of preparing the TP documentation. The Tribunal did not find any specific direction provided by the CIT(A) in this regard and upheld the rejection of the comparability analysis conducted by the assessee.

4. Application of Filters by TPO for Selecting Comparables:

The TPO applied various filters to reject most of the comparables selected by the assessee, including companies with diminishing revenues, persistent losses, or different financial year endings. The Tribunal found the application of these filters to be appropriate and upheld the TPO's selection of comparables.

5. Exclusion of Certain Comparables for Functional Dissimilarities and High Turnover:

The Tribunal upheld the exclusion of Infosys Technologies Ltd., Kals Information Systems Ltd., and Tata Elxsi Ltd. from the SWD segment, and Eclerx Services Ltd. and Infosys BPO Ltd. from the ITES segment, due to functional dissimilarities and high turnover. The Tribunal referred to the decision in Genesis Integrating Systems vs. DCIT (2012) 20 taxmann.com 715, which suggested categorizing companies by size and excluding those with high turnovers.

Conclusion:

The Tribunal dismissed the revenue's appeal, affirming the CIT(A)'s decisions on all grounds. The Tribunal upheld the exclusion of certain expenses from the total turnover for Section 10A deduction, the rejection of certain comparables for Transfer Pricing adjustments, and the application of filters by the TPO. Consequently, the assessee's cross-objection became infructuous, and both the revenue's appeal and the assessee's cross-objection were dismissed.

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