2014 (9) TMI 309 - AT - Income Tax

Transfer pricing adjustment Selection of comparables Exensys Software Solutions Ltd. Extraordinary event in the company because of merger - Held that - There is a merger of Holool India Ltd. and in the director s report there is a clear mention that the company s income is possible with the amalgamation of Holool India Ltd. - Assessee company has got benefit by advanced latest technical expertise on various technology domains of the transferor company - This was clearly stated in Notes that claim was with reference to the AS-14 and also due to amalgamation of two companies - out of gross assets, Brands alone consist of ₹ 5 crores, therefore, intangible assets comprising of substantial part of this company s assets - Not only in the correspondence with the TPO that Assessee expressed its inability to furnish separate accounts for two amalgamated companies but also further it has clearly mentioned vide letter dated 26-04-2007 to the TPO that there is a gap in the expenditure expected to incur and actual expenditure incurred which made the company record high operating margin on cost - These factors indeed support assessee s contention that this exceptional profit with the fact of amalgamation effected operating profit of the company and this cannot be taken as comparable relying upon Intoto Software India (P.) Ltd. Versus Assistant Commissioner of Income-tax, Circle -2(1), Hyderabad 2013 (10) TMI 599 - ITAT HYDERABAD - there is an extra-ordinary event which resulted in high operating margin of that company - the case of Exensys Software Solutions Ltd. cannot be taken as comparable - the other cases, Third ware Solutions Ltd., Infosys, Sankhya Infotech Ltd., etc, are also to be excluded - The AO is directed to exclude the comparable and re-work out the arm s length margin Decided in favour of assessee. Matter pending before AO u/s 154 - Exclusion of export turnover Computation of deduction u/s 10A Held that - There is no need for adjudication of this ground when the matter is pending before the AO u/s 154 - AO is directed to examine the issue and consider necessary relief to Assessee regarding the amounts received within 12 months as per the directions of RBI vide its General Circular dated 01-11-2004 issue Decided in favour of assessee.

Summary

Issues Involved:
1. Addition under Transfer Pricing provisions.
2. Claim of deduction under Section 10A of the IT Act.
3. Exclusion of an amount from export turnover for Section 10A deduction.
4. Charging of interest under Sections 234B and 234D.

Detailed Analysis:

1. Addition under Transfer Pricing Provisions:
The Assessee, engaged in software development, filed its return for AY 2005-06. The AO noticed international transactions exceeding Rs. 5,00,00,000/- and referred the case to the TPO. The TPO determined the arm's length price (ALP) at Rs. 93,63,69,863/- against Rs. 86,51,06,000/- shown by the Assessee, suggesting an adjustment of Rs. 7,12,63,863/-. The AO made this addition to the Assessee's income.

The Assessee objected to the inclusion of seven comparables selected by the TPO, arguing they were functionally different or had exceptional circumstances affecting their margins. The Tribunal examined the objections and agreed with the Assessee, specifically noting that Exensys Software Solutions Ltd. had an amalgamation affecting its financial results, making it non-comparable. The Tribunal directed the AO to exclude Exensys and other disputed comparables, reworking the arm's length margin accordingly.

2. Claim of Deduction under Section 10A of the IT Act:
During assessment, the AO asked the Assessee to produce Foreign Inward Remittance Certificates (FIRCs) to support its export turnover claim. The Assessee provided FIRCs for Rs. 104,78,38,893/-, which the AO accepted and computed the allowable deduction under Section 10A at Rs. 16,49,46,331/-. The Tribunal did not find any error in the AO's computation based on the FIRCs provided.

3. Exclusion of Amount from Export Turnover for Section 10A Deduction:
The AO excluded Rs. 2,65,83,392/- from the export turnover, reasoning it was not realized within the stipulated time. The CIT(A) confirmed this exclusion. The Assessee submitted an application under Section 154 to the AO, requesting a review of this exclusion. The Tribunal directed the AO to examine the application and provide necessary relief based on RBI guidelines and permissions, allowing the Assessee to explain and substantiate its claims.

4. Charging of Interest under Sections 234B and 234D:
The Assessee contested the interest charged under Sections 234B and 234D. The Tribunal noted that the charging of interest is consequential and does not require separate adjudication.

Conclusion:
The Tribunal allowed the Assessee's appeal for statistical purposes, directing the AO to rework the arm's length margin excluding certain comparables and to review the Section 10A deduction claim based on the Assessee's application under Section 154. The interest charged under Sections 234B and 234D was deemed consequential.