2021 (4) TMI 1080 - AT - Income Tax

Computing deduction u/s 10A - not considering the plea of the assessee that communication expenses should not be excluded from the export turnover for the purpose of computing deduction - HELD THAT - we are of the opinion that this issue came up for consideration before the Hon ble Karnataka High Court in the case of CIT v. Tata Elxsi Limited 2011 (8) TMI 782 - KARNATAKA HIGH COURT wherein held that for the purpose of computing exemption u/s 10A of the Act, when export turnover in the numerator is to be arrived after excluding telecommunication expenses, the same should also be excluded in computing the export turnover as a component of total turnover in the denominator. Methodology adopted by the assessee in allocating the common / indirect costs among its various segments - apportionment adopted by Cisco India a reasonable basis of allocation of common expenses incurred - HELD THAT - This method of apportionment has also been consistently adopted by Cisco India on a year on year basis. It was further submitted that the Bangalore Bench of the Tribunal in assessee s own case for A.Y. 2008-09 following the decision of the Hon ble Delhi High Court in the case of CIT v. EHPT India (P) Ltd. 2011 (12) TMI 49 - DELHI HIGH COURT and for A.Y. 2009-2010 2014 (11) TMI 849 - ITAT BANGALORE has upheld the method of allocation of the common expenses adopted by the assessee and held that where two basis of apportionment of common costs are available, any one of the basis should be consistently followed. Thus, since Cisco India has been following headcount basis for allocation from past 8 years the same basis should be followed for A.Y. 2008-2009 as well. Further, the headcount basis of allocation of common expenses should be followed for A.Y. 2010-2011 as well. Disallowance of deduction claimed in respect of forex fluctuation which is capital in nature - assessee failed to furnish the details with regard to the foreign exchange gain / or loss along with evidences to support the same - HELD THAT - As decided in own case 2014 (11) TMI 849 - ITAT BANGALORE the foreign exchange gain from software development services has to be considered as part of the income from software development services while computing the margin of the assessee and accordingly the margin of 12.67% computed by the assessee is directed to be adopted - Being so, we remit the issue to the files of the AO /TPO with a direction to the assessee to furnish the details of foreign exchange gain or loss. We also direct the A.O. to decide the issue in the light of the above order of the Tribunal in assessee s own case above. TP Adjustment - comparable selection - HELD THAT - Companies functionally dissimilar with that of assessee need to be deselected from final list. Not making suitable adjustments to account for differences in the risk profile of the assessee vis - vis the comparables - Taking the consistent view, we direct the AO/TPO to give proper risk adjustment as discussed in own case 2014 (11) TMI 849 - ITAT BANGALORE Computing the operating margin of Cyber Media Research Limited at 19.52% as against 12.88% computed by the assessee - HELD THAT - This issue is remitted to the AO/TPO to re-compute the correct margin of operating margin of Cyber Media Research Limited, in accordance with law. Accordingly, this ground of the assessee is partly allowed for statistical purposes.

Summary

Issues Involved:
1. Communication expenses exclusion from export turnover for Section 10A/10B deduction.
2. Methodology for allocating common/indirect costs among business segments.
3. Deduction for forex fluctuation considered capital in nature.
4. Selection and rejection of comparables for transfer pricing analysis.
5. Risk adjustment in transfer pricing.
6. Computation of operating margin for Cyber Media Research Limited.

Detailed Analysis:

1. Communication Expenses Exclusion from Export Turnover:
The assessee argued that communication expenses should not be reduced from export turnover for computing deductions under Section 10A and 10B. The tribunal referenced the Karnataka High Court decision in CIT v. Tata Elxsi Limited, which mandates that if telecommunication expenses are excluded from export turnover, they must also be excluded from total turnover. This principle was applied consistently, and the tribunal allowed this ground in favor of the assessee.

2. Methodology for Allocating Common/Indirect Costs:
The assessee used the headcount method to allocate common expenses among various segments. The tribunal noted that this method was consistently applied in previous years and upheld by the tribunal in ITA No.1510/Bang/2012 and the Karnataka High Court. Despite the DRP's observations of discrepancies in profit margins across segments, the tribunal directed to follow the headcount method consistently and remanded the issue for verification of employee numbers and allocated expenses.

3. Deduction for Forex Fluctuation Considered Capital in Nature:
The DRP observed inconsistencies in the assessee's treatment of forex fluctuation losses as non-operating for the current year, unlike the previous year. The tribunal noted the need for detailed information on forex gains/losses and remanded the issue to the AO/TPO for verification, directing them to follow the tribunal's previous order in IT(TP)A 271/Bang/2014.

4. Selection and Rejection of Comparables for Transfer Pricing Analysis:
The tribunal reviewed the inclusion/exclusion of several comparables for software development and technical support services segments:
- ICRA Techno Analytics Limited, Infosys Limited, KALS Information Systems Limited, Persistent Systems Limited, Tata Elxsi Limited: Excluded due to functional dissimilarities and lack of segmental information.
- Acropetal Technologies Limited, Eclerx Services Limited, ICRA Online Limited, Infosys BPO Limited: Excluded for reasons such as high onsite revenue, KPO services, and significant brand value.
- Sundaram Business Services Limited: Included as there was no objection from the assessee.
- Asian Business Exhibition and Conferences Limited: Excluded due to functional differences in organizing exhibitions and conferences.

5. Risk Adjustment in Transfer Pricing:
The tribunal directed the AO/TPO to consider the risk adjustment claimed by the assessee, referencing the methodology used in previous cases such as Philips Software Centre Private Limited and Sony India Pvt Ltd. The tribunal emphasized the need for reasonably accurate adjustments to account for differences in risk profiles.

6. Computation of Operating Margin for Cyber Media Research Limited:
The tribunal remanded the issue to the AO/TPO to re-compute the correct operating margin for Cyber Media Research Limited, directing them to ensure accuracy in the computation.

Conclusion:
The tribunal's decision addressed various issues related to corporate tax and transfer pricing matters, emphasizing consistency with previous rulings and the need for detailed verification of facts. The appeals were partly allowed for statistical purposes, and specific directions were given for re-computation and verification by the AO/TPO.