2021 (3) TMI 928 - AT - Income Tax

TP Adjustment - comparability of R Systems International Limited - HELD THAT - R Systems International Ltd. is following the calendar year i.e. 1st Jan. to 31st Dec for maintaining their accounts, whereas the assessee follows 1st Apr. to 31st March, still it could be a comparable to the assessee s case and be included as a comparable in the list of comparables as decided by the Tribunal in the case of Indecomm Global Services India Pvt. Ltd. 2019 (12) TMI 78 - ITAT BANGALORE . Accordingly, we remit the matter of comparability of this company to the file of AO/TPO to examine and decide it afresh in the light of the directions contained in the order of Tribunal in Indecomm Global Services India Pvt. Ltd. (supra). This ground of assessee is allowed for statistical purposes. As in the case of Tesco Hindustan Service Centre (P.) Ltd., 2017 (1) TMI 1673 - ITAT BANGALORE we hold and direct that Accentia Technologies Ltd., be excluded from the list of comparable companies on grounds of functional dissimilarity. Fortune Infotech Ltd has been excluded as a comparable by the coordinate Bench of the Tribunal in the case of Outsource Partners International P. Ltd 2017 (2) TMI 1410 - ITAT BENGALURU . Jeevan Scientific Technology Ltd is to be excluded from final list. Disallowance under section 40(a)(i) for software expenses - HELD THAT - We find that that this issue came up for consideration before in the case of Engineering Analysis Centre of Excellence (P.) Ltd. v. CIT, . 2021 (3) TMI 138 - SUPREME COURT wherein it was held that transaction relating to software are in the nature of sale and not license, no copyright or part of any copyright is licensed to the assessee. The non-resident owner continues to have proprietary rights in the software and use of software by the Indian company is limited to making back-up copy and redistribution. So payment received for sale of computer software is business income. As such, software purchased is in the nature of purchase and sale of product and no TDS is deductible. Being so, it is allowable as expenditure and there is no question of deduction of any TDS. Short credit or Tax Deducted at Source ('TDS') - HELD THAT - We remit the issue to the AO and direct to give correct TDS credit after examination. MAT credit to be carried forward which is consequential to additions made in the assessment order. Comparability - Companies functionally dissimilar with that of assessee need to be deselected from final list. Compute the mean of working capital adjustment in respect of comparables retained after giving effect to this order of the Tribunal. Deduction u/s 10A computation - HELD THAT - As decided in Yokogawa India Ltd. 2016 (12) TMI 881 - SUPREME COURT incomes under other heads and the provisions for set off and carry forward contained in sections 70, 72 and 74 would be premature for application. The deductions under section 10A therefore would be prior to the commencement of the exercise to be undertaken under Chapter VI for arriving at the total income of the assessee from the gross total income. The somewhat discordant use of the expression 'total income of the assessee' in section 10A has already been dealt with earlier and in the overall scenario unfolded by the provisions of section 10A the aforesaid discord can be reconciled by understanding the expression total income of the assessee in section 10A as 'total income of the undertaking. Though section 10A, as amended, is a provision for deduction, the stage of deduction would be while computing the gross total income of the eligible undertaking under Chapter IV and' not at the stage of computation of the total income under Chapter VI. Exclude telecommunication expenses from the export turnover while computing the deduction u/s 10A - HELD THAT - This issue is decided in favour of assessee in view of the DRP following the judgment of the Hon ble High Court of Karnataka in CIT v. Tata Elxsi Ltd. 2011 (8) TMI 782 - KARNATAKA HIGH COURT which is confirmed by the Hon ble Supreme Court in the case of CIT v. HCL Technologies Ltd. 2018 (5) TMI 357 - SUPREME COURT

Summary

Issues Involved:
1. Inclusion and exclusion of comparable companies in Transfer Pricing analysis.
2. Disallowance under section 40(a)(i) for software expenses.
3. Short credit of Tax Deducted at Source (TDS).
4. Reduction in MAT credit carried forward.
5. Application of employee cost filter and export earning filter.
6. Working capital adjustment.
7. Deduction under section 10A without setting off brought forward business loss.
8. Exclusion of telecommunication expenses from the export turnover while computing deduction under section 10A.

Detailed Analysis:

1. Inclusion and Exclusion of Comparable Companies in Transfer Pricing Analysis:
- R Systems International Ltd.: The Tribunal remanded the matter back to the AO/TPO to examine the comparability in light of the decision of the Hon’ble Punjab and Haryana High Court in Mercer Consulting (P.) Ltd., which held that a company with a different financial year can be considered comparable if financial data for the relevant period is available.
- Accentia Technologies Ltd.: Excluded from the list of comparables due to functional dissimilarity, as it provides high-end services involving specialized knowledge.
- Fortune Infotech Ltd.: Excluded as it developed unique software, making it functionally dissimilar to the assessee.
- Jeevan Scientific Technology Ltd.: Excluded due to failing the employee cost filter and functional dissimilarity.
- Acropetal Technologies Ltd.: The Tribunal remanded the issue to the AO/TPO to apply the employee cost filter and on-site filter uniformly to all comparables.
- ICRA Online Ltd.: Remanded back to AO/TPO to apply the 75% export earning filter uniformly.
- Sundaram Business Services Ltd.: Remanded back to AO/TPO for fresh consideration applying the 75% export earning filter uniformly.
- Eclerx Services Ltd.: Excluded due to functional dissimilarity as it provides high-end KPO services.
- Infosys Ltd.: Excluded due to functional dissimilarity and significant brand value, making it incomparable to the assessee.

2. Disallowance Under Section 40(a)(i) for Software Expenses:
The Tribunal allowed the assessee’s claim, referencing the Supreme Court judgment in Engineering Analysis Centre of Excellence (P.) Ltd. v. CIT, which held that payments for software are business income and not royalties, thus not requiring TDS deduction.

3. Short Credit of Tax Deducted at Source (TDS):
The Tribunal remitted the issue to the AO to examine and provide the correct TDS credit.

4. Reduction in MAT Credit Carried Forward:
The AO was directed to give MAT credit in accordance with the law.

5. Application of Employee Cost Filter and Export Earning Filter:
- Employee Cost Filter: The Tribunal remanded the issue to the AO/TPO to apply the employee cost filter uniformly across all comparables.
- Export Earning Filter: The Tribunal remanded the issue to the AO/TPO to apply the 75% export earning filter uniformly across all comparables.

6. Working Capital Adjustment:
The Tribunal upheld the DRP’s direction to compute the mean of working capital adjustment in respect of comparables retained after giving effect to the Tribunal’s order.

7. Deduction Under Section 10A Without Setting Off Brought Forward Business Loss:
The Tribunal followed the Supreme Court judgment in Yokogawa India Ltd., which held that the deduction under section 10A should be computed independently of other units and without setting off brought forward business losses.

8. Exclusion of Telecommunication Expenses from the Export Turnover While Computing Deduction Under Section 10A:
The Tribunal upheld the DRP’s direction to exclude telecommunication expenses from the export turnover, following the Karnataka High Court’s decision in Tata Elxsi Ltd., confirmed by the Supreme Court in HCL Technologies Ltd.

Conclusion:
Both the appeals by the revenue and the assessee were partly allowed, with several issues remanded back to the AO/TPO for fresh consideration and directions to follow the principles laid down by higher judicial authorities. The Tribunal's decision emphasized the importance of functional comparability and uniform application of filters in Transfer Pricing analysis.