2015 (11) TMI 1308 - AT - Income Tax

Transfer pricing adjustment - adjustment to the Arms Length Price ( ALP ) to an international transaction - Held that - The turnover filter is an important criteria in choosing the comparables. The assessee s turnover is ₹ 47,46,66,638. It would therefore fall within the category of companies in the range of turnover between 1 crore and 200 crores (as laid down in the case of Genesis Integrating Systems (India) Pvt. Ltd. v. DCIT 2011 (8) TMI 952 - ITAT BANGALORE ) . Thus, companies having turnover of more than 200 crores have to be eliminated from the list of comparables KALS Information Systems Limited and Accel Transmission Limited companies was not comparable in the case of the assessees engaged in software development services business. Megasoft Ltd -segmental margins in so far as it relates to providing software services by Megasoft alone should be taken for the purpose of comparison. Lucid Software Limited, has to be excluded as functionally not comparable with that of the assessee Geometric Software Ltd. (Seg.) & Ishir Infotech Ltd.the related party transaction in the case of companies exceeds 15% ( 19.98 % in the case of Geometric Software Ltd. and 21.97% in the case of Ishir Infotech Ltd.) and in view of the decision of the Tribunal in the case of 24 X 7 Customer.Com Pvt. Ltd. 2013 (1) TMI 45 - ITAT BANGALORE followed by this Tribunal in the case of Logica Private Ltd. 2015 (3) TMI 401 - ITAT BANGALORE wherein it was held that where the RPT exceeds 15%, such companies should not be taken as comparable companies. Avani Cimcon Technologies Ltd. and Celestial Labs Ltd. not comparable to the software service provider companies. E-Zest Solutions Ltd. - With regard to the objection of the leaned DR that the functional profile of the company E-Zest Solutions Ltd. in AY 07-08 has to be compared with that in AY 08-09 decided by the Tribunal, we accept the said prayer and for this limited purpose direct the TPO/AO to examine as to whether there is any change in the profile of the said company so that it can be regarded as comparable with an Assessee rendering software development service such as the Assessee. Computing deduction under section 10A - Taking into consideration the decision rendered by the Hon ble High Court of Karnataka in the case of CIT v. Tata Elxsi Ltd 2011 (8) TMI 782 - KARNATAKA HIGH COURT we are of the view that it would be just and appropriate to direct the Assessing Officer to exclude expenses incurred in foreign currency towards travelling and expenses incurred towards communication both from export turnover and total turnover, as has been prayed for by the assessee Not granting set-off of current year unabsorbed depreciation against the adjustments made to the business income - Held that - The AO in his order computed total income treating income declared in the return as Nil . Despite specific objection by the Assessee in this regard before the DRP, the DRP did not consider the claim of the Assessee. We are of the view that it would just and appropriate to direct the AO to verify the claim of the Assessee for set off of current year unabsorbed depreciation against the adjustments made to the business income, if the claim of the Assessee is found to be correct, the AO shall give consequential relief to the Assessee.

Summary

Issues Involved:
1. Transfer Pricing Adjustment on account of determination of Arm's Length Price (ALP).
2. Exclusion of foreign currency expenses and communication charges from export turnover/total turnover.
3. Set-off of current year unabsorbed depreciation against the adjustment made to business income.

Issue 1: Transfer Pricing Adjustment on account of determination of ALP

The Assessee, engaged in software development services, reported a transaction with its Associated Enterprises (AE) and claimed the price charged was at arm's length. The Assessee used the Comparable Uncontrolled Price Method (CUP), which was rejected by the Transfer Pricing Officer (TPO) who adopted the Transactional Net Margin Method (TNMM). The TPO selected 26 comparables and calculated an arithmetic mean of 25.14%, resulting in a transfer pricing adjustment of Rs. 3,54,51,200.

The Tribunal considered the comparables and determined that certain companies with turnovers exceeding Rs. 200 crores should be excluded, following the precedent set in Trilogy E-Business Software India Pvt. Ltd. The Tribunal also excluded companies not functionally comparable, such as KALS Information Systems Limited and Accel Transmatic Limited, based on their involvement in software products and other services. Megasoft Ltd. was considered only for its software service segment, and Lucid Software Limited was excluded due to its involvement in product development. Companies with related party transactions exceeding 15% were also excluded.

The Tribunal directed the TPO to recompute the ALP after excluding the identified non-comparable companies.

Issue 2: Exclusion of foreign currency expenses and communication charges from export turnover/total turnover

The Assessee contested the exclusion of travel expenses in foreign currency and communication expenses from export turnover while computing the deduction under section 10A. The Tribunal, referencing the Karnataka High Court decision in CIT v. Tata Elxsi Ltd, directed the Assessing Officer to exclude these expenses from both export turnover and total turnover.

Issue 3: Set-off of current year unabsorbed depreciation against the adjustment made to business income

The Assessee claimed set-off of current year unabsorbed depreciation against the adjustments made to business income. The Tribunal directed the Assessing Officer to verify the Assessee's claim and provide consequential relief if the claim was found to be correct.

Conclusion:

The appeal was partly allowed, with directions to the Assessing Officer to recompute the ALP by excluding non-comparable companies, adjust export turnover and total turnover for foreign currency and communication expenses, and verify the set-off of unabsorbed depreciation.