2014 (5) TMI 889 - AT - Income Tax

Transfer pricing adjustment Selection of comparables -Avani Cincom Technologies Ltd. KALS Information Systems Ltd. Held that - The TPO has included this company in the final set of comparables only on the basis of information obtained u/s 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 u/s 133(6) of the Act to the assessee has vitiated the selection of this company as a comparable thus, the matter is remitted back to the AO/TPO for fresh adjudication. Infosys Technologies Ltd. Held that - The assessee has brought on record sufficient evidence to establish that this company is functionally dis-similar and different from the assessee and hence is not comparable - it owns significant intangible and has huge revenues from software products - the breakup of revenue from software services and software products is not available - the company ought to be omitted from the set of comparable companies. Tata Elxsi Ltd. Held that - This, company is predominantly engaged in product designing services and not purely software development services - The details in the Annual Report show that the segment software development services relates to design services and are not similar to software development services performed by the assessee - Tata Elxsi Ltd. is not a software development service provider and therefore it is not functionally comparable the company is not to be considered for inclusion in the set of comparables. Wipro Limited Held that - The company is engaged both in software development and product development services - There is no information on the segmental bifurcation of revenue from sale of product and software services - The TPO appears to have adopted this company as a comparable without demonstrating how the company satisfies the software development sales 75% of the total revenue filter adopted by him - Another major flaw in the comparability analysis carried out by the TPO is that he adopted comparison of the consolidated financial statements of Wipro with the stand alone financials of the assessee which is not an appropriate comparison. Corporate Tax - Deduction u/s 10B of the Act Held that - Following CIT v. Tata Elxsi Ltd. 2011 (8) TMI 782 - KARNATAKA HIGH COURT - while computing the deduction u/s 10A/10B of the Act, 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 the AO is directed to exclude the above mentioned 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 u/s 10B of the Act Decided in favour of Assessee.

Summary

Issues Involved:
1. Validity of the reference made to the TPO under section 92CA.
2. Pecuniary jurisdiction of the ITO.
3. Justification for rejecting the assessee's Transfer Pricing (TP) study.
4. Justification for invoking the provisions of section 92C(3).
5. Comparability of individual companies chosen by the TPO as comparables.
6. Exclusion of certain expenses from export turnover for deduction under section 10B.

Detailed Analysis:

1. Validity of the Reference Made to the TPO under Section 92CA:
The assessee contended that the reference to the TPO was invalid as it was made by the DCIT, Circle 11(1), instead of the ITO, Ward 12(2). However, this ground was not pressed by the assessee during the appellate hearings and was dismissed as infructuous.

2. Pecuniary Jurisdiction of the ITO:
The assessee argued that the ITO lacked pecuniary jurisdiction over the case under section 120. This ground was also not pressed during the hearings and was dismissed as infructuous.

3. Justification for Rejecting the Assessee's TP Study:
The assessee raised several grounds challenging the TPO's rejection of its TP study and the selection of comparable companies. These grounds (1 to 12) were not pressed during the hearings and were dismissed as infructuous.

4. Justification for Invoking the Provisions of Section 92C(3):
The assessee argued that the TPO invoked section 92C(3) without satisfying the conditions laid out therein. This ground was not pressed and dismissed as infructuous.

5. Comparability of Individual Companies Chosen by the TPO as Comparables:
The assessee contested the inclusion and exclusion of specific companies by the TPO. The Tribunal examined each company in detail:

- Avani Cincom Technologies Ltd.: The Tribunal found that the TPO included this company based on information obtained under section 133(6) without sharing it with the assessee. The matter was remanded back to the TPO for fresh examination.

- Celestial Biolabs Ltd.: The Tribunal agreed with the assessee that this company is functionally different as it is involved in bio-informatics and product development. The company was excluded from the list of comparables.

- Infosys Technologies Ltd.: The Tribunal found that Infosys is not comparable due to its significant intangibles, R&D activities, and revenue from software products. It was excluded from the list of comparables.

- KALS Information Systems Ltd.: The Tribunal held that KALS is involved in software products and development services, making it functionally different from the assessee. It was excluded from the list of comparables.

- Tata Elxsi Ltd.: The Tribunal found that Tata Elxsi is engaged in product design services and not purely software development services. It was excluded from the list of comparables.

- Wipro Ltd.: The Tribunal excluded Wipro from the list of comparables due to its significant intangibles, consolidated financial statements, and lack of segmental information.

- P.S.I. Data Systems: The Tribunal directed the TPO to include this company in the final list of comparables as it was initially accepted by the TPO but omitted in the final list.

- Quinnox Consultancy Services Ltd.: The Tribunal remanded the issue back to the TPO for fresh examination as there were contrasting claims about the availability of current year data.

6. Exclusion of Certain Expenses from Export Turnover for Deduction under Section 10B:
The assessee argued that if telecommunication expenses, foreign travel expenses, and forex losses are excluded from export turnover, they should also be excluded from total turnover. The Tribunal agreed, citing the Karnataka High Court's decision in Tata Elxsi Ltd., and directed the AO to exclude these expenses from both export and total turnover while computing the deduction under section 10B.

Conclusion:
The appeal was partly allowed, with directions to the TPO to re-examine certain comparables and to the AO to adjust the computation of the deduction under section 10B as per the Tribunal's findings.