2014 (5) TMI 923 - AT - Income Tax

Transfer pricing adjustment Selection of comparables - Software development services rendered to AE Claim of deduction u/s 10A of the Act Held that - As decided in assessee s own case as well as in Capital IQ Information Systems (India) (P.) Ltd. Versus Deputy Commissioner of Income-tax (International Taxation) 2014 (3) TMI 626 - ITAT HYDERABAD it has been held that the case of the assessee is not comparable with Infosys Technologies Ltd., the reason being that the company is giant in the area of development of software and it assumes all risks, leading to higher profit - On the other hand, the assessee is a captive unit of its parent company in the USA and it assumes only limited currency risk - the Infosys and the assessee are not comparable at all as seen from the financial data etc. of the two companies mentioned earlier in the order - big companies like Infosys Technologies Limited cannot be considered as comparable to small captive service providers - Infosys Technologies Limited and Wipro Limited cannot be considered as comparable to the assessee - the AO/TPO is directed to compute arms length price after excluding the two companies from the list of comparables Decided in favour of Assessee. Reduction of communication charges from export turnover Computation of deduction u/s 10A of the Act Held that - Following CIT v. Gem Plus Jewellery India Ltd. 2010 (6) TMI 65 - BOMBAY HIGH COURT - communication charges if reduced from the export turnover is also required to be reduced from the total turnover while computing the deduction u/s 10A of the Act thus, the AO is directed to reduce communication charges both from the export turnover as well as total turnover for computing deduction u/s 10A of the Act Decided in favour of Assessee. Reduction of business profits Reversal of interest accrued Held that - The DRP in principle has held the reversal of interest accrued as profit and gains of business and in fact has accepted that held that for the purpose of computing deduction u/s 10A, the profits of business would also include the element with regard to the reversal of interest expenses and has directed the AO to verify this and allow the benefit to the assessee thus, the AO was not correct in excluding the amount from the business profit for the purpose of computing deduction u/s 10A of the Act - as per section 144C(5) the AO has to pass the assessment order in conformity with the direction of the DRP the AO cannot take a contrary view and exclude the same for the purpose of computing deduction u/s 10A of the Act thus, the AO is directed to work out the deduction u/s 10A of the Act without excluding the amount from the profit of the assessee Decided in favour of Assessee.

Summary

Issues Involved:
1. Transfer Pricing Issue
2. Reduction of Communication Charges from Export Turnover
3. Reduction of Reversal of Interest Accrued from Business Profit

Detailed Analysis:

1. Transfer Pricing Issue:

The assessee, engaged in software development services for its Associated Enterprise (AE), filed its return for the assessment year 2008-09 declaring a total income of Rs.16,83,925/-. The assessee used the Transaction Net Margin Method (TNMM) to establish the Arm's Length Price (ALP) for international transactions with its AE, selecting 28 comparable companies with a weighted average arithmetic mean of 14.53%. The TPO accepted TNMM but rejected the TP study, citing the use of multiple-year data and improper comparability analysis. The TPO conducted a fresh search, selecting 19 comparables with an average margin of 26.20%, resulting in a transfer pricing adjustment of Rs.1,82,73,532/-.

The assessee contested the inclusion of Infosys Technologies Ltd and Wipro Ltd as comparables due to their significantly higher turnover and different business dynamics. The Tribunal agreed, noting that the TPO's exclusion of companies with turnover less than Rs.1 crore should logically extend to excluding companies with extraordinarily high turnover. The Tribunal cited previous decisions supporting this view, including the assessee's own case for the assessment year 2007-08 and the Delhi High Court's judgment in CIT v. Agnity India Technologies (P.) Ltd. Consequently, the Tribunal directed the exclusion of Infosys and Wipro from the comparables and ordered a recomputation of the ALP.

2. Reduction of Communication Charges from Export Turnover:

The assessee challenged the reduction of communication charges from export turnover without a corresponding reduction from total turnover when computing the deduction under section 10A of the Act. The Tribunal referenced the Bombay High Court's decision in CIT v. Gem Plus Jewellery India Ltd. and the ITAT Chennai Bench's decision in ITO v. Sak Soft Ltd., which established that communication charges reduced from export turnover should also be reduced from total turnover. The Tribunal directed the Assessing Officer to follow this principle and recompute the deduction under section 10A accordingly.

3. Reduction of Reversal of Interest Accrued from Business Profit:

The assessee contested the reduction of Rs.27,20,088/- (reversal of interest accrued) from business profit while computing the deduction under section 10A. The DRP had accepted that the reversal of interest accrued should be considered as part of the business profit under section 41(1) of the Act. The Tribunal noted that the Assessing Officer must conform to the DRP's directions and include the reversal of interest accrued in the business profit when computing the deduction under section 10A. The Tribunal directed the Assessing Officer to recompute the deduction without excluding the amount of Rs.27,20,088/- from the business profit.

Conclusion:

The appeal was allowed in part, with the Tribunal directing the exclusion of Infosys Technologies Ltd and Wipro Ltd from the comparables for transfer pricing purposes, the reduction of communication charges from both export and total turnover for section 10A deduction, and the inclusion of the reversal of interest accrued in the business profit for section 10A deduction.