2014 (2) TMI 229 - AT - Income Tax

Deduction u/s 10A of the Act Reduction of Communication expenses and foreign currency expenses from export turnover Held that - The decision in CIT v. Tata Elxsi Ltd. 2011 (8) TMI 782 - KARNATAKA HIGH COURT followed - while computing the deduction under section 10A, if the export turnover in the numerator is to be arrived at after excluding certain expenses, then the same should also be excluded from the total turnover in the denominator thus, the Assessing Officer is directed to exclude the expenses on communication and travel incurred in foreign currency both from export turnover as well as from the total turnover while calculating the eligible deduction under section 10A of the Act. Transfer pricing Adjustment Rejection of Transfer Pricing study - Computation of ALP - Selection of comparables Held that - The TPO has included the company in the final set of comparables only on the basis of information obtained under section 133(6) of the Act - it was the duty of the TPO to have necessarily furnished the information so gathered to the assessee and taken its submissions thereon into consideration before deciding to include this company in its final list of comparables - Non-furnishing the information obtained under section 133(6) of the Act to the assessee has vitiated the selection of this company as a comparable the matter remitted back to the AO for fresh adjudication - The TPO is directed to make available to the assessee information obtained under section 133(6) of the Act. The TPO in his order has not given any reasoning for treating foreign exchange gain / loss as a non-operating item of income / expense - In the remand report submitted to the DRP, the TPO has merely stated that the exchange loss / gain could be on account of hedging / speculative activity owing to which it has been treated as non-operating in nature - In a rejoinder to the remand report, the assessee had submitted that the assessee receives remuneration from its AEs for rendering of services in foreign currency - The foreign exchange gain / loss relates entirely to the rendering of services and there is no speculative hedging activity. The foreign exchange gain should be considered as an operating income while computing the operating margins of the assessee and the comparable companies - the TPO has considered the foreign exchange income as non-operating income based on assumptions and surmises the foreign exchange gain is to be treated as operating income in the view of the facts in the case on hand and the margins are to be computed accordingly. The TPO has not allowed any adjustment by observing that this has been considered and discussed in detail in the order for earlier years The decision in We find that on similar facts, different co-ordinate benches of this Tribunal in the case of Intellinet Technologies India Ltd. v. ITO 2012 (6) TMI 237 - ITAT BANGALORE followed - the TPO ought to have given risk adjustment to the margins of the comparables for bringing them on par with the assessee and remanded the issue back to the file of the TPO the issue of market risk adjustment remitted back to the AO for fresh adjudication Decided partly in favour of Assessee.

Summary

Issues Involved:
1. Reducing communication and foreign travel expenses from export turnover while computing the deduction under section 10A of the Income Tax Act.
2. Transfer Pricing adjustments and comparability of companies.
3. Foreign Exchange Gain/Loss as part of operating income.
4. Working Capital and Risk Adjustments.
5. Interest under sections 234B and 234C.
6. Initiation of penalty proceedings under section 271(1)(c).

Detailed Analysis:

1. Reducing Communication and Foreign Travel Expenses from Export Turnover:
The assessee contended that if communication and foreign travel expenses are excluded from export turnover, they should also be excluded from total turnover. The Tribunal referenced the Karnataka High Court decision in CIT v. Tata Elxsi Ltd., which held that if certain expenses are excluded from export turnover, they should also be excluded from total turnover. The Tribunal directed the Assessing Officer to exclude these expenses from both export and total turnover while calculating the deduction under section 10A.

2. Transfer Pricing Adjustments and Comparability of Companies:
General Grounds:
The Tribunal noted that general grounds related to the TPO's rejection of the assessee's TP study and the use of single-year data were not pressed by the assessee. The Tribunal dismissed these grounds, citing Rule 10B(4) of the IT Rules, 1962, which mandates the use of current financial year data.

Specific Comparables:
- Avani Cimcon Technologies Ltd.: The Tribunal remanded the issue back to the TPO, directing the TPO to share information obtained under section 133(6) with the assessee and reconsider the comparability.
- Celestial Biolabs Ltd.: The Tribunal found this company functionally dissimilar and excluded it from the list of comparables, referencing the decision in Trilogy E-Business Software India (P.) Ltd.
- KALS Information Systems Ltd.: The Tribunal excluded this company, citing functional dissimilarity and reliance on the decision in Trilogy E-Business Software India (P.) Ltd.
- Infosys Technologies Ltd.: The Tribunal excluded this company due to functional dissimilarity, significant intangibles, and lack of segmental information.
- Wipro Limited: The Tribunal excluded this company, noting it owns significant intangibles and the TPO's inappropriate use of consolidated financials.
- Tata Elxsi Ltd.: The Tribunal excluded this company, referencing the decision in Telcordia Technologies India (P.) Ltd. and noting its engagement in product design services.

Rejected by TPO:
- Indian Software (India) Ltd. and VMF Softech Limited: The Tribunal remanded these issues back to the TPO to reconsider the export revenue filter.
- KPIT Cummins Infosystems Ltd.: The Tribunal directed the TPO to recompute the RPT filter on a standalone basis.

Additional Companies:
- Aztec Software & Technology Ltd. and Larsen & Toubro Infotech Ltd.: The Tribunal remanded these issues back to the TPO for reconsideration of the export revenue and RPT filters, respectively.
- SIP Technologies Exports Ltd.: The Tribunal remanded the issue back to the TPO to reconsider the impact of investment on margins.

3. Foreign Exchange Gain/Loss:
The Tribunal held that foreign exchange gain/loss arising in the normal course of business should be considered as operating income, referencing decisions in Sap Labs India (P.) Ltd. v. Asstt. CIT and Four Soft Ltd. v. Dy. CIT.

4. Working Capital and Risk Adjustments:
The Tribunal directed the TPO to rework the working capital adjustment based on the resultant set of comparables. For risk adjustment, the Tribunal remanded the issue back to the TPO to examine in light of decisions in Intellinet Technologies India Ltd. v. ITO and Bearing Point Business Consulting (P.) Ltd. v. Dy. CIT.

5. Interest under sections 234B and 234C:
The Tribunal upheld the Assessing Officer's action in charging interest under sections 234B and 234C, noting it is consequential and mandatory.

6. Initiation of Penalty Proceedings under section 271(1)(c):
The Tribunal dismissed the ground challenging the initiation of penalty proceedings under section 271(1)(c), noting no grievance is caused by the initiation itself.

Conclusion:
The appeal was partly allowed, with several issues remanded back to the TPO for reconsideration and recalculations. The Tribunal provided specific directions on the treatment of expenses, comparability of companies, and adjustments, ensuring compliance with judicial precedents and statutory provisions.