2015 (3) TMI 883 - AT - Income Tax

Transfer pricing adjustment - selection of comparables - Held that - As relying on CISCO Systems (India) Pvt. Ltd. Vs. DCIT, Bangalore 2014 (11) TMI 849 - ITAT BANGALORE Infosys Ltd., Kals Information Systems Ltd. and Bodhtree Consulting Ltd. companies not to be comparable with a captive software development service provider. As far as Tata Elxsi Ltd. (segment) is concerned,on going through the segmental details of services provided as contained in annual report, we are of the view that unless proper analysis is made with regard to the functions of both the companies it cannot be said that services performed/provided by Tata Elxsi Ltd. is high end services whereas services provided by assessee are low end services. As the issue requires thorough examination in so far as it relates to exact nature of services rendered by both the companies, we remit the comparability of the aforesaid company to the file of AO/TPO for considering afresh after affording due opportunity of being heard to assessee. Non-consideration of provision for bad and doubtful debts as part of operating cost while computing margins of comparables - Held that - In principle we agree with the contention of ld. AR that provision for bad and doubtful debts and bad debts should form part of the operating expenditure. As relying on Kenexa Technologies (P.) Ltd. Versus Deputy Commissioner of Income-tax, Circle -2(1), Hyderabad 2014 (11) TMI 587 - ITAT HYDERABAD we remit this issue to the file of AO/TPO for considering afresh in the light of the said decision of the coordinate bench. - Decided in favour of assessee for statistical purposes. Excluding communication expenses from the export turnover while computing deduction u/s 10B - Held that - As relying on CIT Vs. Gemplus Jewellery 2010 (6) TMI 65 - BOMBAY HIGH COURT and ITO Vs Saksoft Ltd 2009 (3) TMI 243 - ITAT MADRAS-D we direct the AO to exclude the communication expenses from export turnover as well as total turnover while computing deduction u/s 10B of the Act.

Summary

Issues Involved:
1. Selection of comparables for Transfer Pricing.
2. Non-consideration of bad debt as part of the operating cost.
3. Exclusion of communication expenses from export turnover for computing deduction under section 10B.
4. Levy of interest under sections 234B and 234D.

Issue-wise Detailed Analysis:

1. Selection of Comparables for Transfer Pricing:
The assessee, an Indian subsidiary of a US company, provided software development and consulting services to its Associated Enterprises (AEs). The Transfer Pricing Officer (TPO) rejected the assessee's Transfer Pricing (TP) study, citing inappropriate filters, lack of industry-specific analysis, and the use of multiple-year data. The TPO selected 17 comparables, resulting in an adjustment of Rs. 2,28,17,229 under section 92CA(3). The assessee objected to four comparables: Infosys Ltd., Bodhtree Consulting Ltd., KALS Information Systems Ltd., and Tata Elxsi Ltd. The Tribunal excluded Infosys Ltd., Bodhtree Consulting Ltd., and KALS Information Systems Ltd. based on previous Tribunal decisions, noting their functional differences from the assessee. Tata Elxsi Ltd.'s comparability was remitted to the AO/TPO for further examination.

2. Non-consideration of Bad Debt as Part of the Operating Cost:
The assessee argued that the TPO excluded provisions for doubtful debts from operating costs. The Tribunal agreed with the assessee, citing the decision in Kenexa Technologies Pvt. Ltd. Vs. DCIT, which held that bad debts and provisions for doubtful debts should be considered as operating expenses. The issue was remitted to the AO/TPO for reconsideration in light of this decision.

3. Exclusion of Communication Expenses from Export Turnover for Computing Deduction under Section 10B:
The assessee challenged the AO's action of excluding communication expenses from export turnover while computing the deduction under section 10B. The Tribunal referred to the decisions in CIT Vs. Gemplus Jewellery and ITO Vs. Saksoft Ltd., directing the AO to exclude communication expenses from both export turnover and total turnover while computing the deduction.

4. Levy of Interest under Sections 234B and 234D:
The issue of interest levy under sections 234B and 234D was deemed consequential and not adjudicated at this stage.

Conclusion:
The appeal was partly allowed for statistical purposes, with directions for the AO/TPO to recompute the Arm's Length Price (ALP) and deductions as per the Tribunal's guidelines. The Tribunal emphasized the need for a thorough examination of functional comparability and proper inclusion of operating expenses in the TP analysis. The decision upheld the principles of fair and accurate assessment in transfer pricing and tax deductions.