2015 (11) TMI 431 - AT - Income Tax

Computation of deduction u/s.10A - profits derived from development and export of computer software - AO excluded telecommunication expenses and travelling expenses incurred in foreign currency - Held that - As decided by the Hon ble High Court of Karnataka in the case of Tata Elxsi (2011 (8) TMI 782 - KARNATAKA HIGH COURT) wherein it has been held that whatever is excluded from export turnover should also be excluded from the total turnover. Thus exclusion of the aforesaid items of expenditure both from the export turnover and also from the total turnover confirmed - Decided in favour of assessee. Set off loss of non-STPI units against the profits of the STPI units while computing deduction u/s.10A of the Act in respect of the profits of the STPI Units disallowed - Held that - Assessee is eligible for deduction u/s. 10A of the Act in respect of the profits of STPI units without setting off the loss of non-STPI units. The relevant grounds of appeal of the revenue are accordingly dismissed. See CIT Vs. Yokogawa India Ltd. 2011 (8) TMI 845 - Karnataka High Court - Decided in favour of assessee. Transfer pricing adjustment - Held that - Bodhtree Consulting Ltd cannot be regarded as a comparable. In this regards, the fact that the assessee had itself proposed this company as comparable, in our opinion, should not be the basis on which the said company should be retained as a comparable, when factually it is shown that the said company is a software product company and not a software development services company. See Nethawk Networks case 2013 (11) TMI 967 - ITAT MUMBAI Infosys Ltd be excluded from the list of comparable companies as it is not functionally comparable since it owns significant intangible and has huge revenues from software products. It is also seen that the break up of revenue from software services and software products is not available. KALS Information Systems Ltd. has been considered as not comparable to a pure software development services company, thus we hold that KALS Information Systems Ltd. should not be regarded as a comparable. Tata Elxsi Ltd. - in assessee s own case for the A.Y. 2007-08, this company was not regarded as a comparable in its software development services as are functionally different from that of the assessee and hence they deserve to be deleted Persistent Systems Ltd. be excluded from the final list of comparable companies chosen by the TPO. as it is in product designing services and into software product development. We direct the AO / TPO to correctly work out the PLI of the final comparables after giving due adjustment for the working capital on actual basis. Related ground of the assessee is therefore allowed. Infosys BPO Ltd be excluded as a comparable as it is an established player who is not only a market leader but also a company employing sheer breadth in terms of economies of scale and diversity and geographical dispersion of customers. Accentia Technologies Ltd is directed to be excluded from the list of comparables as pursuant to the scheme of amalgamation of the erstwhile Asscent Infoserve Private Limited (subsidiary of the company) with the company as approved by the shareholder in the court convened meeting held on the 25th day of April, 2009 and subsequently sanctioned by the honorable high court of Judicature at Mumbai vide order dt 21st August 2009 and Honorable high court of Karnataka at Bangalore vide order dt 6th February 2010, the assets and liabilities of the erstwhile company was transferred and vested in the company with effect from 1st Apr, 2008 and the scheme has been given effect to in the accounts of the year. Cosmic Global Ltd. - assessee prayed for exclusion of this company as a comparable on the ground that this company makes abnormal profits. He was however unable to furnish any evidence to substantiate his claim. Accordingly, the prayer for rejection of this company as a comparable is rejected. Eclerx Services Ltd. should be excluded from the final list of comparables as this company was functionally different and was accordingly engaged in providing high end services involving specialized knowledge and domain expertise in its field Disallowance of full credit in respect of TDS and foreign tax credit - Held that - If credit was not given for the reason that the same was not appearing in Form 26AS, than the CBDT Instruction No.5/2013 dated 8.7.2013 whereby it had directed all the Assessing Officers to verify the TDS certificate and not go only on the basis of entry in Form 26AS, will apply. We are of the view that it would be just and appropriate to direct the AO to verify the claim of assessee for credit of TDS and foreign tax paid in light of the CBDT Instruction referred to above. The AO will afford opportunity of being heard to the assessee in this regard.

Summary

Issues Involved:
1. Computation of deduction under Section 10A of the Income Tax Act.
2. Set off of losses of non-STPI units against profits of STPI units.
3. Selection of comparable companies for Transfer Pricing analysis in IT and ITES segments.
4. Granting of full credit in respect of TDS and foreign tax credit.

Detailed Analysis:

1. Computation of Deduction under Section 10A:
The primary issue raised by the Revenue was regarding the computation of deduction under Section 10A of the Income Tax Act. The assessee, engaged in the design and development of computer software, claimed deduction under Section 10A for profits derived from the export of computer software. The AO excluded telecommunication and traveling expenses incurred in foreign currency from the export turnover. The CIT(A) allowed the exclusion of these expenses from both export and total turnover, following the Karnataka High Court's decision in Tata Elxsi (349 ITR 98). The Tribunal upheld this view, dismissing the Revenue's appeal, stating that whatever is excluded from export turnover should also be excluded from total turnover.

2. Set off of Losses of Non-STPI Units against Profits of STPI Units:
The Revenue contested the CIT(A)'s direction to the AO not to set off losses of non-STPI units against the profits of STPI units while computing deduction under Section 10A. The CIT(A) followed the decision of the Karnataka High Court in CIT Vs. Yokogawa India Ltd. (341 ITR 385), which held that Section 10A is an exemption provision, not a deduction under Chapter VIA of the Act. Therefore, profits or losses of a Section 10A unit do not enter the computation of total income. The Tribunal agreed with this interpretation and dismissed the Revenue's appeal, emphasizing that the income of the STPI unit should be allowed without setting off the loss of the non-eligible unit.

3. Selection of Comparable Companies for Transfer Pricing Analysis:
The assessee challenged the TPO's selection of comparable companies for determining the Arm's Length Price (ALP) in the IT and ITES segments. The Tribunal addressed several specific companies:

- Infosys Ltd.: Excluded from the list of comparables due to its significant intangibles, brand value, and high revenue from software products, making it functionally different from the assessee.
- Persistent Systems Ltd.: Excluded as it was engaged in software product development, not comparable to the assessee's software development services.
- Bodhtree Consulting Ltd.: Excluded as it was found to be a software product company, not a software development service provider.
- KALS Information Systems Ltd.: Excluded due to its involvement in software products and training, making it functionally different.
- Tata Elxsi Ltd.: Excluded as it was engaged in embedded product design and other services, not purely software development services.

For the ITES segment, the Tribunal excluded companies like Infosys BPO Ltd., Accentia Technologies Ltd., and Eclerx Services Ltd., based on functional differences and extraordinary events affecting their financials.

The Tribunal directed the AO/TPO to recompute the arithmetic mean of the profit margins of the remaining comparables and compare it with the assessee's profit margin, allowing for working capital adjustments on an actual basis.

4. Granting of Full Credit in Respect of TDS and Foreign Tax Credit:
The assessee raised an issue regarding the non-granting of full credit for TDS and foreign tax paid. The Tribunal directed the AO to verify the claim in light of CBDT Instruction No. 5/2013, which mandates verification of TDS certificates beyond the entries in Form 26AS, ensuring the assessee is afforded an opportunity to present their case.

Conclusion:
The Tribunal dismissed the Revenue's appeal and partly allowed the assessee's appeal, providing detailed directions for the recomputation of ALP and verification of tax credits, ensuring adherence to judicial precedents and proper functional analysis in Transfer Pricing cases.