2014 (12) TMI 134 - AT - Income Tax

Transfer Pricing Adjustment - International transactions with Virtusa, U.K - software development services rendered to its overseas associated enterprises - Held that - CIT(A) cannot be blamed for having dismissed assessee s ground on TP adjustment - the MAP resolution, which is under the Indo-US DTAA is in respect of international transactions with Virtusa, USA involving operation cost attributable to US entity of ₹ 78,30,10,895 out of the total operating cost of ₹ 84,32,16,557, which works out to 92.86% - MAP resolution is in respect of 92.86% of the operating cost which relate to transactions with Virtusa, USA, thereby giving credence to the fact that balance 7.14% of the operating cost relates to international transaction with other entities i.e. Virtusa, UK - assessee also filed a petition u/s 154 of the Act before the CIT(A) seeking rectification of the order which is still pending - the matter needs to be examined by CIT(A) on the issue of TP adjustment of ₹ 63,91,764, which as claimed by assessee, relates to transactions with Virtusa, UK thus, the matter is remitted back to the CIT(A) for fresh consideration Decided in favour of assessee. Computation of export turnover - Exclusion of communication expenses and insurance charges Held that - Following the decision in CIT Vs. Gem Plus Jewellery India Ltd. 2010 (6) TMI 65 - BOMBAY HIGH COURT wherein it was held that communication expenses and insurance charges have to be reduced both from the export turnover as well as total turnover while computing deduction u/s 10A of the Act thus, the order of the CIT(A) is upheld Decided against revenue. Treatment of disallowance u/s 40(a)(ia) and 43B Loss on sale of fixed assets, provision for gratuity Held that - As decided in assessee s own case for the earlier assessment year, wherein it has been held that disallowances made u/s 40(a)(ia) and 43B, since, enhances the profit of the assessee, have to be treated as part of the eligible business profits for computation of deduction u/s 10A the order of the CIT(A) is upheld Decided against revenue.

Summary

Issues Involved:

1. Transfer Pricing (TP) Adjustment of Rs. 63,91,764 relating to international transactions with Virtusa, U.K.
2. Selection of comparables by the Transfer Pricing Officer (TPO).
3. Exclusion of communication expenses and insurance charges from export turnover and total turnover.
4. Treatment of disallowances made under sections 40(a)(ia) and 43B as part of business profit for computing deduction under section 10A.

Issue-wise Detailed Analysis:

1. TP Adjustment of Rs. 63,91,764 relating to international transactions with Virtusa, U.K.:

The assessee, a wholly-owned subsidiary of Virtusa Inc., USA, engaged in software development services, filed its return declaring 'NIL' income after claiming deduction under section 10A. The TPO, after examining the TP documentation, rejected the same and selected 17 comparables, resulting in a TP adjustment of Rs. 8,95,20,495. The CIT(A) dismissed the ground relating to TP adjustment as the assessee had agreed to the MAP resolution for transactions with Virtusa, USA, but the assessee contended that the TP adjustment relating to Virtusa, UK, amounting to Rs. 63,91,764 was not withdrawn and needed adjudication. The Tribunal remitted the issue back to the CIT(A) for fresh consideration, specifically addressing the TP adjustment relating to Virtusa, UK, and the selection of comparables.

2. Selection of comparables by TPO:

The assessee objected to seven out of the 17 comparables selected by the TPO, arguing that these comparables were not similar to a software development services provider. The Tribunal directed the CIT(A) to reconsider the selection of comparables, taking into account the decisions of the ITAT in similar cases, including the assessee's own case for AY 2007-08 and the case of Invensys Development Centre Pvt. Ltd.

3. Exclusion of communication expenses and insurance charges from export turnover and total turnover:

The CIT(A) directed the AO to exclude communication expenses and insurance charges from both export turnover and total turnover while computing the deduction under section 10A. This decision was upheld by the Tribunal, referencing the decisions of the Hon'ble Bombay High Court in CIT Vs. Gem Plus Jewellery India Ltd. and the ITAT, Chennai Special Bench in ITO Vs. Saksoft Ltd., which support the exclusion of such expenses from both export turnover and total turnover.

4. Treatment of disallowances made under sections 40(a)(ia) and 43B as part of business profit for computing deduction under section 10A:

The CIT(A) directed the AO to treat disallowances made under sections 40(a)(ia) and 43B as part of the business profit for computing the deduction under section 10A. The Tribunal upheld this decision, referencing a coordinate bench decision in the assessee's own case for AY 2007-08, which held that such disallowances enhance the profit of the assessee and should be treated as part of the eligible business profits for deduction under section 10A.

Conclusion:

The assessee's appeal was partly allowed for statistical purposes, specifically remanding the issue of TP adjustment relating to Virtusa, UK, and the selection of comparables back to the CIT(A) for fresh consideration. The revenue's appeal was dismissed, upholding the CIT(A)'s decisions on excluding communication expenses and insurance charges from both export and total turnover, and treating disallowances under sections 40(a)(ia) and 43B as part of business profit for deduction under section 10A.