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2013 (11) TMI 190 - AT - Income TaxAdjustment to Arm s Length Price u/s 92A - Comparability of the Comparable relied upon by the TPO - Transfer pricing adjustments - selection of comparables - Held that - comparables of companies having turnover of less than ₹ 2000 crores and above ₹ 200 crores only need to be considered Companies having turnover of more than 200 crores have to be eliminated from the list of comparables - Turnover filter to be used as a guidelines for selection of companies as comparables in Transfer Pricing Relying upon Genisys Integrating Systems (India) (P.) Ltd. 2011 (8) TMI 952 - ITAT BANGALORE - for the purpose of classification of companies on the basis of net sales or turnover and also taking into consideration the Indian scenario, the classification made by Dun & Bradstreet is more suitable and reasonable. Computation of deduction u/s 10A of the Income Tax Act Interpretation of Total Turnover & Export Turnover under 10A - Held that - While computing deduction under section 10A of the Income Tax Act, 1961 expenditure incurred by the assessee, if excluded from the Export Turnover should also be excluded from the Total Turnover - Following CIT v. Tata Elxsi Ltd. 2011 (8) TMI 782 - KARNATAKA HIGH COURT There should be uniformity in the ingredients of both the numerator and the denominator of the formula, Section 10-A was a beneficial section - It was intended to provide incentives to promote exports - If the export turnover in the numerator was to be arrived at after excluding certain expenses, the same should also be excluded in computing the export turnover as a component of total turnover in the denominator - The reason being the total turnover included export turnover - The components of the export turnover in the numerator and the denominator cannot be different The grievance of the assessee projected in the aforesaid grounds would get redressed, if the AO was directed to reduce the communication and travel expenses from the export turnover as well as the total turnover, while computing deduction u/s. 10A of the Act.
Issues Involved:
1. Transfer Pricing Adjustment for Software Designing and Development Services. 2. Computation of Deduction under Section 10A of the Income Tax Act. Issue-wise Detailed Analysis: 1. Transfer Pricing Adjustment for Software Designing and Development Services: Facts and Methodology: The assessee, a wholly-owned subsidiary of Witness Systems Inc. (WSI), provided software designing and development services to its holding company. The assessee filed a transfer pricing analysis using the Transactional Net Margin Method (TNMM) with the net margin on cost as the Profit Level Indicator (PLI). The PLI was calculated at 12.21%. Comparables and Filters: The assessee selected 11 comparables with an arithmetic mean of 11.81% after applying specific filters. The TPO rejected some filters and selected 26 comparables, ultimately suggesting an addition of Rs. 2,05,82,039 based on an adjusted mean margin of 22.67%. Tribunal's Analysis and Decision: The Tribunal examined the comparability of the 26 companies chosen by the TPO, referencing previous decisions in similar cases. It was held that companies with a turnover exceeding Rs. 200 crores should be excluded, following the precedent set in Trilogy E-Business Software India (P.) Ltd. The Tribunal also excluded companies functionally different from the assessee or with significant related party transactions. Exclusions: - Companies with turnovers exceeding Rs. 200 crores, including Flextronics Software Systems Ltd., iGate Global Solutions Ltd., Mindtree Ltd., Persistent Systems Ltd., Sasken Communication Technologies Ltd., Tata Elxsi Ltd., Wipro Ltd., and Infosys Technologies Ltd. - Functionally different companies such as Avani Cimcon Technologies Ltd., Celestial Labs Ltd., KALS Information Systems Ltd., and Accel Transmatic Ltd. - Companies with related party transactions exceeding 15%, including Helio & Matheson Information Technology Ltd. and SIP Technologies & Exports Ltd. - Only the segmental data for software services of Megasoft Ltd. was considered. Final Comparables and Margin: After exclusions, 11 comparables remained, with an arithmetic mean margin of 15.01%. The Tribunal concluded that the assessee's net margin of 12.21% was within the +/- 5% range of the arithmetic mean, thus no TP adjustment was warranted. The addition made by the AO was directed to be deleted. 2. Computation of Deduction under Section 10A of the Income Tax Act: Facts and Computation Method: The assessee claimed a deduction under Section 10A without reducing telecommunication and travel expenses from the export turnover. The AO recomputed the deduction by reducing these expenses from the export turnover but not from the total turnover, resulting in a disallowance of Rs. 12,42,705. Tribunal's Analysis and Decision: The Tribunal referenced the Karnataka High Court's decision in CIT v. Tata Elxsi Ltd., which held that expenses excluded from export turnover should also be excluded from total turnover. The Tribunal directed the AO to reduce the telecommunication and travel expenses from both the export turnover and the total turnover while computing the deduction under Section 10A. Conclusion: The appeal was partly allowed. The Tribunal deleted the TP adjustment and directed the AO to recompute the Section 10A deduction by excluding the specified expenses from both export and total turnover.
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