2012 (6) TMI 572 - AT - Income Tax

Computation of deduction u/s 10A - assessee submitted that the AO excluded communication charges from the export turnover without reducing from the same from the total turnover Held that - As decided in Commissioner of Income-tax Versus Tata Elxsi Ltd. 2011 (8) TMI 782 (HC) that when certain expenses incurred towards telecommunication charges attributable to the delivery of the computer software outside India are reduced from the export turnover, then they are to be reduced from the total turnover also - in favour of assessee. Transfer pricing adjustment - the assessee s case handed to the TPO for the determination of Arm s Length Price (ALP) - assessee contested that TPO has not adopted a uniform and consistent policy for adopting or rejecting the comparable for both the software services and the IT enabled services - Held that - In the case of some of the comparable, TPO has stated to be in the business activity of software development, but they have not given any details or any bifurcation of their development and trading activities separately - if the activity of product development would be compared with the software development services offered by the assessee which are both functionally different grave injustice would be done - TPO cannot adopt or pick and choose different methodology or different filters for analyzing the transfer pricing adjustment for the same or similar type of activities - remand the issue to the file of the AO/TPO to reconsider the ALP adjustment in the light of these observations. If any information is sought to be used against the assessee, the same has to be furnished to the assessee and thereafter, taking into consideration the assessee s objections, if any, only then can the TPO proceed to take a decision. If the assessee seeks an opportunity to cross examine the party, the assessee shall be provided such an opportunity. standard deduction of plus or minus 5% to be given to the assessee, while making the transfer pricing adjustment - in favour of assessee for statistical purpose.

Summary

Issues Involved:
1. Transfer pricing adjustment.
2. Computation of deduction under Section 10A of the IT Act.

Issue-wise Detailed Analysis:

1. Transfer Pricing Adjustment:
The assessee company, engaged in providing Software Development services and IT-enabled services to its associated enterprises outside India, was subject to transfer pricing adjustments. The TPO determined the Arm's Length Price (ALP) using the Transactional Net Margin Method (TNMM) and selected comparables from the database, rejecting some of the assessee's comparables. The assessee objected, arguing that the TPO did not adopt a consistent policy for selecting comparables for both software services and IT-enabled services. Specifically, the TPO used different filters inconsistently, such as rejecting comparables based on employee cost for software services but accepting them for IT-enabled services.

The Tribunal found that the TPO must use standard comparison filters for similar activities and cannot adopt different methodologies for similar types of activities. The Tribunal emphasized that comparables with diminishing revenue should not be rejected without considering the reasons for the revenue decline and making necessary adjustments. The Tribunal remanded the issue to the AO/TPO to reconsider the ALP adjustment, ensuring consistency in the selection of comparables and addressing the assessee's objections.

The Tribunal also addressed the issue of the TPO using information obtained under Section 133(6) of the IT Act without giving the assessee an opportunity to rebut the material. The Tribunal directed that all information used against the assessee must be furnished to the assessee, and the assessee should be given an opportunity to cross-examine the parties if necessary. The Tribunal also directed the TPO to consider the operating revenue and cost of transactions related to associated enterprises only, apply a turnover filter of Rs. 1 crore to 200 crores, and provide a standard deduction of 5% under the proviso to Section 92C(2) of the IT Act.

2. Computation of Deduction under Section 10A:
The assessee contested the exclusion of communication charges from the export turnover without reducing the same from the total turnover for the purpose of deduction under Section 10A of the IT Act. The Tribunal noted that the issue was covered in favor of the assessee by the decision of the Karnataka High Court in Tata Elxsi Ltd. v. Dy. CIT, which held that when expenses attributable to the delivery of computer software outside India are reduced from the export turnover, they must also be reduced from the total turnover. Respectfully following this decision, the Tribunal allowed this ground of appeal.

Conclusion:
The appeal filed by the assessee was allowed for statistical purposes, with directions to the AO/TPO to reconsider the transfer pricing adjustments and the computation of deduction under Section 10A in light of the Tribunal's observations and guidelines. The assessee was to be given a fair opportunity of hearing during the reconsideration process.