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2014 (4) TMI 997 - AT - Income TaxTransfer pricing adjustment Computation of ALP Software development business - Selection of comparables Turnover filter - Held that - T he decision in Trilogy E-Business Software India Private Limited v. DCIT 2013 (1) TMI 672 - ITAT BANGALORE followed - The TPO had while selecting the above 26 comparables, applied a lower turnover filter of Rs.1 crore but preferred not to apply any upper turnover limit - The size of the comparable is an important factor in comparability - The ICAI TP guidance note has observed that the transaction entered into by a Rs.1000 crores company cannot be compared with the transaction entered into by a Rs.10 crores company and the two most obvious reasons are the size of the two companies and related economies of scale under which they operate - The TPO s range had resulted in selection of companies as comparable such as Infosys which was 277 times bigger than that of the assessee - the turnover filter is an important criteria in choosing the comparables companies having turnover of more than 200 crores have to be eliminated from the list of comparables thus, those companies have to be eliminated from the list of comparables Decided in favour of Assessee. Functionally different Companies Held that - The decision in Trilogy E-Business Software India Private Limited v. DCIT 2013 (1) TMI 672 - ITAT BANGALORE followed - The company was not comparable in the case of the assessees engaged in software development services business - Neither the TPO nor the DRP have noticed that there is bound to be a difference between the Assessee and Megasoft and the profit arising to the Megasoft as a result of the existence of the software product segment and no finding has been given that reasonably accurate adjustments can be made to eliminate the material effects of such differences - the TPO was justified in selecting M/s. Megasoft Ltd as comparable - the AO/TPO is directed to take segmental margins of 23.11% for comparability - Decided in favour of Assessee. Forex gain/loss impact Held that - The decision in Trilogy E-Business Software India Private Limited v. DCIT 2013 (1) TMI 672 - ITAT BANGALORE followed - foreign exchange gain/loss being considered as not forming part of the operating cost, the reasoning of the revenue is that such loss or gain cannot be said to be one realized from international transaction though they may form part of the gain/loss of the enterprise - they should be excluded while determining operating cost - the AO/TPO is directed to consider the foreign exchange gain or loss as part of the operating cost or revenue - Decided in favour of Assessee. Working capital adjustment Held that - If the contention of the assessee is to be taken into account, the revised working capital adjustment comes to 2.04% instead of -1.27% arrived by the TPO - the issue is factual which requires verification at the AO/TPO s level, thus, the matter is remitted back to the AO/TPO for fresh adjudication Decided in favour of Assessee. Risk adjustment Held that - The AO/TPO is directed to work out the ALP of the assessee in accordance with directions - It is the claim of the assessee its margin after considering foreign exchange loss is at 14.14%, where margin of the comparable after work capital adjustment is 15.89% and after risk adjustment, the adjusted average margin of comparable is 15.16% - the AO/TPO is directed to verify the working/computation and if found that the differential in the margin of the assessee and the comparables is beyond 5% bandwidth recognized in proviso to s. 92C (2) of the Act, then adjustment is required to be made to the reported value of the assessee s transaction with its AE - Decided in favour of Assessee. Deduction u/s 10A of the Act Reduction from the export turnover - Held that - Following CIT v M/s Tata Elxsi Ltd. & Others 2011 (8) TMI 782 - KARNATAKA HIGH COURT - when the expenses are reduced from the export turnover while computing deduction u/s 10A of the Act, it should also be reduced from the total turnover in order to maintain parity between the numerator and the denominator thus, the AO is directed to reduce a sum of Rs.69,45,076/- from the export turnover as well as from the total turnover while computing deduction under section 10A of the Act Decided in favour of Assessee. Prior period expenses Held that - The assessee is following the mercantile system of accounting and it was required to make deduction/provision for expenses in the respective assessment years as and when it occurs - the expenses are not pertaining to the concerned assessment year - the expenses pertaining to assessment year 2006-07 cannot be claimed as deduction in the present assessment year Decided in favour of Assessee.
Issues Involved:
1. Transfer Pricing - Computation of Arm's Length Price (ALP) 2. Non-Transfer Pricing Issues - Computation of Deduction u/s 10A and Disallowance of Prior Period Expenses Detailed Analysis: I. Transfer Pricing - Computation of ALP: 1. Fresh Transfer Pricing Analysis and Filters: The assessing officer, along with the Transfer Pricing Officer (TPO) and Dispute Resolution Panel (DRP), performed a fresh transfer pricing analysis, adopting inappropriate filters. The Tribunal noted that the TPO applied a lower turnover filter of Rs.1 crore but failed to apply an upper turnover limit. The Tribunal emphasized the importance of size in comparability, referencing the ICAI TP guidance note and previous Tribunal decisions, concluding that a turnover range of Rs.1 crore to Rs.200 crores is appropriate. Consequently, companies like Infosys, with turnovers far exceeding this range, were excluded as comparables. 2. Selection of Comparables: The TPO's selection of 26 comparables was contested. The Tribunal excluded several companies, including Accel Transmatic Ltd, Avani Cimcon Technologies Ltd, Celestial Labs Ltd, and KALS Information Systems Ltd, citing functional dissimilarities and reliance on non-public information. The Tribunal retained 14 companies as comparables, aligning with previous decisions in similar cases. 3. Computation of Operating Margins: The Tribunal directed the TPO to consider foreign exchange gains or losses as part of the operating revenue or cost, referencing the decision in the case of Trilogy E-Business Software India Private Limited. The Tribunal also addressed the working capital adjustment, remanding the issue back to the TPO for verification and correct computation. 4. Risk Adjustment: The Tribunal acknowledged the assessee's lower risk environment compared to the comparables. It directed the TPO to compute a suitable risk adjustment, referencing the decision in the case of Intellinet Technologies India Pvt. Ltd. 5. Forex Gain/Loss and Working Capital Adjustment: The Tribunal directed the TPO to consider foreign exchange gains or losses as part of the operating revenue or cost and to verify the assessee's computation of revised margins. The working capital adjustment issue was remanded back to the TPO for verification and correct computation. 6. Benefit of 5% Range: The Tribunal acknowledged the assessee's claim for a standard deduction of 5% as provided under the proviso to section 92C(2) before making adjustments for the transfer price. II. Non-Transfer Pricing Issues: 1. Computation of Deduction u/s 10A: The Assessing Officer reduced Rs.69,45,076/- from the export turnover without reducing the same from the total turnover. The Tribunal directed the AO to reduce the same amount from both the export turnover and total turnover, referencing the judgment in the case of CIT v M/s Tata Elxsi Ltd. & Others. 2. Disallowance of Prior Period Expenses: The AO disallowed Rs.77,12,144/- on the grounds that it was prior period expenses. The Tribunal upheld this disallowance, stating that the expenses, not pertaining to the relevant assessment year, cannot be claimed as a deduction in the present assessment year. 3. Deduction u/s 10A on Disallowance: No arguments were put forth regarding the non-granting of deduction under section 10A on disallowances; hence, this ground was not adjudicated. Conclusion: The Tribunal partly allowed the assessee's appeal, directing the AO/TPO to recompute the ALP and deduction u/s 10A in accordance with its findings and the directions provided. The order was pronounced on December 21, 2012, in Bangalore.
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