2015 (7) TMI 772 - AT - Income Tax

Transfer pricing adjustment -DRP and AO/TPO rejecting the detailed benchmarking analysis conducted by the appellant and embarking on a fresh search for comparables - adopting the financial data for a single year(i.e the financial year 2007-08) of the comparable as against multiple year data considered by the appellant - Held that - Eclerx Services Ltd - Having regard to the nature of the services provided by the assessee to its group concern in comparison to the nature of services provided by eClerx Service Ltd., to its client we do not find any reason to take a different view that of the Special Bench in case of M/s Maersk Global India Pvt.Ltd. 2014 (3) TMI 891 - ITAT MUMBAI we hold that eClerx Services Ltd is functionally dissimilar to that of the assessee in sofar as the ITES segment is concerned and therefore, the said Co. cannot be compared with the assessee Co. for the purpose of determining ALP in respect of international transactions of providing ITES to its associated enterprise. Accordingly, we direct the AO/TPO to exclude eClerx Services Ltd., from the set of comparables selected by the TPO. Mold Tex Technologies Ltd. - nature of the functions performed by the Mold Tek which have been examined by the Special Bench in M/s Maersk Global India Pvt.Ltd. supra and found is not compared with the low end ITES service provider Co. we hold that this Co. is functionally not comparable with that of the assessee. Accordingly, we direct the AO/TPO to exclude Mold Tek from the list of comparables. In view of the statement and plea of the learned AR we direct the AO/TPO to re-compute the ALP after excluding the above two Co. namely M/s Eclerx and M/s Mold Tek (Supra) and then determine the adjustment, if any after giving the benefit of tolerance range of 5%. Exclusion of communication expenses/lease line charges from export turnover for the purpose of computation of deduction u/s 10A - Held that - if the communication expenses are excluded from the export turnover then, the same should also be excluded from the total turnover in view of the judgment of jurisdictional High Court in the case of M/s Tata Elxsi Ltd. reported in 2011 (8) TMI 782 - KARNATAKA HIGH COURT - Decided in favour of assessee.

Summary

Issues Involved:
1. Transfer pricing adjustments.
2. Exclusion of communication expenses from export turnover for Section 10A deduction.

Detailed Analysis:

Transfer Pricing Adjustments:

Ground No. 5:
The core issue pertains to the transfer pricing adjustment made by the Transfer Pricing Officer (TPO) and confirmed by the Dispute Resolution Panel (DRP). The assessee, engaged in the export of software development services and ITES, challenged the comparables selected by the TPO for determining the Arm's Length Price (ALP) for international transactions in the ITES segment. The TPO rejected 8 out of 13 comparables selected by the assessee and added 15 more, resulting in a set of 20 comparables. The average margin of these comparables was determined at 24.75%. The TPO allowed a working capital adjustment of 0.74% and proposed an adjustment of Rs. 30,27,18,666/-.

The assessee contested the inclusion of two specific companies, Eclerx Services Ltd. and Mold Tek Technologies Ltd., arguing they were functionally dissimilar. Eclerx was deemed a high-end Knowledge Process Outsourcing (KPO) service provider, specializing in data analytics and consultancy, while Mold Tek was involved in structural engineering services and had undergone an extraordinary event of demerger and amalgamation. The Tribunal agreed with the assessee, citing precedents from Maersk Global Centres India Pvt. Ltd. and Lionbridge Technologies Pvt. Ltd., and directed the exclusion of these two companies from the comparables.

Grounds No. 15 & 16:
These grounds concern the exclusion of communication expenses (lease line charges) from the export turnover for computing the deduction under Section 10A of the IT Act. The assessee argued that if such expenses are excluded from the export turnover, they should also be excluded from the total turnover. The Tribunal, referencing the jurisdictional High Court's decision in Tata Elxsi Ltd., agreed that there should be uniformity in the treatment of these expenses in both the numerator and denominator of the formula for computing the deduction. Therefore, the Tribunal ruled in favor of the assessee, directing that communication expenses be excluded from both export turnover and total turnover.

Conclusion:
The Tribunal partly allowed the appeal, directing the exclusion of Eclerx Services Ltd. and Mold Tek Technologies Ltd. from the set of comparables for transfer pricing and ruling in favor of the assessee on the issue of excluding communication expenses from the total turnover for Section 10A deduction.