2016 (6) TMI 91 - AT - Income Tax

Computation of deduction u/s.10A - deduction of travelling expenses in foreign currency and certain other expenses - Held that - In view of Explanation 2(iv) to Section 10A of the Act, which defines export turnover , we are unable to accede to the contention of the Ld. AR that travelling expenditure had to be included in the export turnover for computation of deduction u/s.10A of the Act. However in so far as the claim that amounts which were excluded from export turnover has to be deducted from total turnover as well, we are inclined to agree in view of the law laid down in the case of Tata Elxsi Ltd (2011 (8) TMI 782 - KARNATAKA HIGH COURT ). Accordingly, we direct that such amounts which were excluded from export turnover be excluded from total turnover also while computing the deduction allowable u/s.10A - Decided partly in favour of assessee Adjustment of loss incurred in non-STP units with the profits earned in the STP units before granting deduction u/s.10A of the Act - Held that - Hon ble jurisdictional High Court in the case of Yokogawa India Ltd (2011 (8) TMI 845 - Karnataka High Court ) had held that profits eligible for relief u/s.10A of the Act was to be excluded from the total income before giving effect to set off mandated u/s.70 of the Act. . Accordingly, we hold that the claim of deduction u/s.10A of the Act has to be calculated without setting off the loss incurred by the assessee in its non- STP units - Decided in favour of assessee Transfer pricing adjustment - selection of comparable - Held that - Assessee has to succeed in its pleading for exclusion of the following companies - Avani cincom Technologies Ltd,Bodhtree Consulting Ltd,Celestial Biolabs,E-Zest Solutions Ltd,Infosys, Kals Information Systems Ltd (seg),Persistent Systems Ltd,Quintegra Solution Ltd,Tata Elxsi (seg),Thirdware Solution Ltd,Wipro Ltd (seg) and Lucid Software Ltd.6. We also find that the above mentioned companies were considered by the Tribunal in assessee s own case for A. Y. 2006-07 were directed for exclusion, due to functional incompatibility. Accordingly we direct exclusion of the above companies from the list of comparables. TPO is directed to rework the PLI of the comparables after excluding the above companies and considering the working capital adjustment and proceed in accordance with law

Issues Involved:

1. Deduction of travelling expenses in foreign currency from export turnover while computing deduction u/s.10A of the Income-tax Act.
2. Adjustment of loss incurred in non-STP units with profits earned in STP units before granting deduction u/s.10A.
3. Arms length pricing adjustment on international transactions with Associated Enterprise (AE).

Issue-Wise Detailed Analysis:

1. Deduction of Travelling Expenses in Foreign Currency:

The assessee challenged the deduction of travelling expenses amounting to ?19,34,938/- and other expenses totaling ?3,11,787/- from its export turnover while computing the deduction available u/s.10A of the Income-tax Act. The assessee argued that these expenses were not attributable to the export of services outside India and should not have been deducted from the export turnover. Additionally, even if excluded, the same amount should be deducted from the total turnover as per the judgment in CIT v. Tata Elxsi Ltd [349 ITR 98]. The tribunal, referencing Explanation 2(iv) to Section 10A, did not agree with the inclusion of travelling expenses in the export turnover but agreed that amounts excluded from export turnover should also be excluded from total turnover, as per Tata Elxsi Ltd. Consequently, grounds 2 to 6 were partly allowed.

2. Adjustment of Loss Incurred in Non-STP Units:

The assessee was aggrieved by the AO's adjustment of a loss of ?60,26,010/- incurred in non-STP units with the profits earned in STP units before granting deduction u/s.10A. The assessee relied on CIT (LTU) v. Yokogawa India Ltd [(2013) 341 ITR 0385], which held that profits eligible for relief u/s.10A should be excluded from total income before effecting set off mandated u/s.70. The tribunal found this judgment more appropriate than CIT v. Himatasingike Seide Ltd [286 ITR 255], which dealt with netting loss of 100% EOU from profits of other 100% EOUs. Hence, the tribunal ruled that deduction u/s.10A should be calculated without setting off the loss incurred in non-STP units, allowing grounds 7 to 9.

3. Arms Length Pricing Adjustment:

The assessee contested an arms length pricing adjustment of ?2,24,39,633/- u/s.92CA on its international transactions with its AE. The assessee confined arguments to the exclusion of twelve comparables selected by the TPO due to functional differences. The tribunal examined the comparability of these companies based on the assessee's arguments and previous tribunal decisions, particularly the case of 3DPLM Software Solutions Ltd v. DCIT [(2013) 37 CCH 0674]. The tribunal found the following companies functionally dissimilar and directed their exclusion from the list of comparables:

1. Avani Cincom Technologies Ltd,
2. Bodhtree Consulting Ltd,
3. Celestial Biolabs,
4. E-Zest Solutions Ltd,
5. Infosys Technologies Ltd,
6. Kals Information Systems Ltd (seg),
7. Persistent Systems Ltd,
8. Quintegra Solution Ltd,
9. Tata Elxsi (seg),
10. Thirdware Solution Ltd,
11. Wipro Ltd (seg),
12. Lucid Software Ltd.

The tribunal directed the TPO to rework the PLI of the comparables after excluding these companies and considering the working capital adjustment. Grounds 10 to 18 were partly allowed.

Conclusion:

The appeal of the assessee was treated as partly allowed, with specific directions for reworking the calculations based on the tribunal's findings and exclusions. The order was pronounced in the open court on April 29, 2016.

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