2015 (6) TMI 801 - AT - Income Tax

Transfer pricing adjustment - adjustment of arm s length price - selection of comparable - Held that - Infosys Technologies Ltd.,Wipro Ltd. (Seg.), KALS Information Systems Ltd., (Seg.), Tata Elxsi Ltd., (Seg.), Avani Cimcon Technologies Ltd. and E-Zest Solutions Ltd. are to be excluded from the final list of comparable as functionally dissimilar and different from the software activity of assessee as relying on case of M/s. Invensys Development Centre India (P) Ltd., Hyderabad vs. ACIT, Circle 2(1), Hyderabad 2015 (1) TMI 920 - ITAT HYDERABAD Exclusion of communication charges from export turnover holding that they are not to be included in the Export turnover - Assessee contested the same stating that data link charges cannot be considered as attributable to export service, however, alternate plea was made that if the same was excluded from the export turnover, the same was also to be excluded from the total turnover while computing deduction under section 10A - Held that - Following the decision of ITO vs. Saksoft 2009 (3) TMI 243 - ITAT MADRAS-D , DRP should have given a direction to exclude communication charges from the total turnover as well. Since the issue is held in favour of assessee in the case of ITO vs. Sak Soft Limited supra and also as approved by Hon ble Bombay High Court in the case of CIT vs. Gemplus Jewellery Ltd., 2010 (6) TMI 65 - BOMBAY HIGH COURT , we direct the AO to exclude the communication charges from total turn over as well. - Decided in favour of assessee.

Issues Involved:
1. Transfer Pricing Adjustment
2. Exclusion of Communication Charges from Export Turnover
3. Disallowed Depreciation on Software
4. Addition of Unexplained Expenditure
5. Increase in Book Profit under Section 115JB

Detailed Analysis:

1. Transfer Pricing Adjustment:
The assessee objected to the inclusion of certain companies in the comparability analysis performed by the Transfer Pricing Officer (TPO) and the Assessing Officer (A.O.). The Dispute Resolution Panel (DRP) had accepted the exclusion of one company but retained others. The Tribunal referenced a similar case, M/s. Invensys Development Centre India (P) Ltd., and directed the A.O. to exclude six companies from the comparables list, namely Infosys Technologies Ltd., Wipro Ltd. (Seg.), KALS Information Systems Ltd. (Seg.), Tata Elxsi Ltd. (Seg.), Avani Cimcon Technologies Ltd., and E-Zest Solutions Ltd. The Tribunal found that these companies were not functionally comparable to the assessee due to differences in scale, brand value, and the nature of services provided.

2. Exclusion of Communication Charges from Export Turnover:
The A.O. had excluded communication charges from the export turnover without making a corresponding reduction from the total turnover, which affected the deduction under section 10A. The Tribunal directed that if communication charges are excluded from the export turnover, they must also be excluded from the total turnover. This decision was based on precedents such as CIT vs. Mentor Graphics (I) P. Ltd. and the Special Bench decision in ITO vs. Saksoft. The Tribunal allowed the assessee's ground on this issue.

3. Disallowed Depreciation on Software:
The A.O. had treated software as intangible assets and allowed depreciation at 25% instead of the 60% claimed by the assessee. The DRP accepted the assessee's objection and directed the deletion of this adjustment. The Tribunal did not need to further adjudicate this issue as it was already resolved in favor of the assessee by the DRP.

4. Addition of Unexplained Expenditure:
The A.O. had added an amount as unexplained expenditure under section 69C. The DRP accepted the assessee's objection and directed the deletion of this addition. The Tribunal did not need to further adjudicate this issue as it was already resolved in favor of the assessee by the DRP.

5. Increase in Book Profit under Section 115JB:
The A.O. had increased the book profit under section 115JB to the extent of the transfer pricing adjustment. The DRP accepted the assessee's objection and directed the deletion of this adjustment. The Tribunal did not need to further adjudicate this issue as it was already resolved in favor of the assessee by the DRP.

Conclusion:
The Tribunal directed the A.O. to exclude the six specified companies from the comparables list and rework the Arm's Length Price (ALP) accordingly. It also directed the A.O. to exclude communication charges from the total turnover while computing the deduction under section 10A. The appeal of the assessee was allowed. The order was pronounced in the open Court on 17.06.2015.

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