2017 (3) TMI 1322 - AT - Income Tax

Disallowance of deduction u/s 10A - reduce communication charges insurance & professional charges both from the Export turnover as well as total turnover - Held that - Internet charges have to be excluded both from the export turnover as well as from the total turnover while computing deduction u/s 10A of the Act. The Hon ble Bombay High Court in case of CIT vs. Gem Plus Jewellery (2010 (6) TMI 65 - BOMBAY HIGH COURT ) held that communication charges attributable directly to the export of article or thing outside India has to be excluded both from export turnover as well as total turnover while computing exemption u/s 10A of the Act. In view of the above we uphold the order of the CIT(A) and dismiss the ground raised by the revenue. TP adjustment - selection of comparable - Held that - As the revenue is objecting to exclusion of these 8 companies as comparables while the assessee is insisting to inclusion of four companies as comparables we revert this issue back to the file of the TPO to re-do the issue after considering the submissions of the assessee and the assessee may be given opportunity of being heard in the matter. Accordingly ground allowed for statistical purposes.

Summary

Issues Involved:
1. Disallowance of deduction u/s 10A
2. Treatment of communication charges, insurance, and professional charges in export turnover
3. Selection of comparables for Transfer Pricing adjustment

Issue 1: Disallowance of deduction u/s 10A
The assessee claimed a deduction u/s 10A for AY 2007-08, but the AO disallowed it, stating that the undertaking was not new. The CIT(A) referred the issue back to the AO, who later accepted the claim for AY 2008-09 based on additional evidence. The CIT(A) relied on precedents to direct the AO to exclude expenses like freight and telecommunication charges from both export and total turnover for computing the deduction u/s 10A. The Tribunal upheld this decision, citing consistent precedents that such charges must be excluded for deduction u/s 10A.

Issue 2: Treatment of communication charges, insurance, and professional charges in export turnover
The Tribunal upheld the CIT(A)'s decision to exclude communication charges from both export and total turnover for calculating the deduction u/s 10A. Citing various precedents, including the Bombay High Court and ITAT decisions, it emphasized the exclusion of charges directly related to export activities. The Tribunal dismissed the revenue's appeal on this ground.

Issue 3: Selection of comparables for Transfer Pricing adjustment
The TPO accepted two comparables from the assessee's documentation but considered only the profit margin for the FY 2006-07. The CIT(A) upheld this decision based on relevant case law, emphasizing the relevance of the current year's data unless influenced by prior years. The TPO selected additional comparables, but the CIT(A) rejected 24 companies, following ITAT decisions on similar cases. The Tribunal, considering the objections raised by both parties, remanded the issue back to the TPO for reconsideration, allowing the appeal for statistical purposes.

In conclusion, the Tribunal partly allowed the revenue's appeal for statistical purposes, emphasizing the importance of consistent application of legal principles in determining deductions and Transfer Pricing adjustments.