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2015 (7) TMI 491 - AT - Income TaxTransfer pricing adjustment - selection of comparable - Held that - We direct the AO to exclude Infosys Ltd., from the final list of comparables both on the ground of size and diversity of activities as well as turnover of more than ₹ 200 crores. Exclusion of Flextronics Software Systems Ltd., iGate Global Solutions Ltd. (segment), Mindtree Consulting Ltd., Persistant Systems Ltd., and Sasken Communication Ltd., from the final list of comparables on the ground that their turnover is more than ₹ 200 crore. Exclusion of KALS Info Systems Ltd., Accel Transmatics Ltd. (segment), Tata Elxsi Ltd. (segment) from the final list of comparables on the ground of functional dissimilarity. If the above companies are excluded from the final list of comparables, the average arithmetical mean of the remaining companies would be 11% and after working capital adjustment it would come be 8.11%, whereas the assessee s operating margin on cost was 10.48% and therefore, the international transaction is at arms length price being within or -5 of the average arithmetical mean of the comparable companies. The working of the said computation is filed before us. We direct the AO to verify the same and if found to be correct, then no adjustment is called for. - Decided in favour of assessee for statistical purposes. Reduction of telecommunication expenses and traveling expenditure incurred in foreign currency from the export turnover only while computing the deduction u/s 10A - Held that - This issue is covered in favour of the assessee in the case of CIT vs. Tata Elxsi (2011 (8) TMI 782 - KARNATAKA HIGH COURT) and respectfully following the same, we direct the AO to exclude telecommunication expenses as well as travelling expenditure incurred in foreign currency both from export turnover as well as total turnover for the purpose of computing deduction u/s 10A of the Act. - Decided in favour of assessee.
Issues Involved:
1. Transfer Pricing Adjustment 2. Exclusion of Certain Companies from Comparables 3. Reduction of Telecommunication and Traveling Expenses from Export Turnover 4. Charging of Interest under Section 234B Detailed Analysis: 1. Transfer Pricing Adjustment: The appeal concerns the assessment year 2006-07 and challenges the order of the Assessing Officer (AO) under Section 143(3) read with Section 144C(13) of the Income-tax Act, 1961. The AO observed that the assessee had entered into international transactions with its Associated Enterprises (AE) for providing software development services amounting to Rs. 18,27,80,431. The Transfer Pricing Officer (TPO) was involved to determine the Arm's Length Price (ALP) under Section 92CA of the Act. The TPO accepted the Transactional Net Margin Method (TNMM) chosen by the assessee but rejected the comparables adopted by the assessee, instead selecting 20 other companies as comparables, resulting in a transfer pricing adjustment of Rs. 1,26,15,950. 2. Exclusion of Certain Companies from Comparables: The assessee contested the inclusion of certain companies as comparables by the TPO on grounds of turnover filter, Related Party Transactions (RPT) filter, and functional dissimilarity. The Tribunal referenced the decision in M/s. Ariba Technologies India Pvt. Ltd. for assessment year 2006-07, noting similarities between the two cases. - Turnover Filter: The Tribunal upheld the exclusion of companies with a turnover exceeding Rs. 200 crores, citing decisions in Trilogy E-Business Software India (P) Ltd. and other cases. Consequently, companies like Infosys Ltd., Flextronics Software Systems Ltd., iGate Global Solutions Ltd., Mindtree Consulting Ltd., Persistent Systems Ltd., and Sasken Communication Ltd. were excluded. - Functional Dissimilarity: Companies such as KALS Info Systems Ltd., Accel Transmatics Ltd. (segment), and Tata Elxsi Ltd. (segment) were excluded due to their involvement in non-comparable activities like software products and hardware design, as supported by previous Tribunal decisions. - RPT Filter: Companies like Mega Soft Ltd., Aztec Software Ltd., and Geometric Software Ltd. (segment) with RPT exceeding 15% were excluded, following precedents set in similar cases. 3. Reduction of Telecommunication and Traveling Expenses from Export Turnover: The assessee sought the exclusion of telecommunication and traveling expenses incurred in foreign currency from both the export turnover and total turnover while computing the deduction under Section 10A. The Tribunal referenced the judgment of the Karnataka High Court in CIT vs. Tata Elxsi (349 ITR 98), which supports the exclusion of such expenses from both export and total turnover. 4. Charging of Interest under Section 234B: The issue of charging interest under Section 234B was deemed consequential. The AO was directed to provide consequential relief, if any, to the assessee. Conclusion: The Tribunal concluded by partly allowing the assessee's appeal, directing the AO to exclude specific companies from the final list of comparables, verify the arithmetic mean, and adjust the computation of the deduction under Section 10A as per the High Court's judgment. The interest under Section 234B was to be recalculated based on the final assessment.
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