2017 (11) TMI 1057 - AT - Income Tax

Transfer pricing adjustment - Held that - The issue of transfer pricing is required to be restored back to the Commissioner of Income-tax (Appeals) with a direction that he should decide the issue afresh by applying the RPT filter of 25 per cent. or 15 per cent. as the case may be and examine the aspect of high profit margin and high turnover in the light of the judgment of the hon ble Delhi High Court rendered in the case of Chryscapital Investment Advisers India P. Ltd. (2015 (4) TMI 949 - DELHI HIGH COURT). Computation of deduction 10A - Held that - In view of section 10A, freight charges, telecommunication charges and insurance charges which are attributable to export of computer software are not required to be taken into account for export turnover. Since the assessee has not been able to demonstrate that the entire insurance cover is relatable to export turnover for computer software, therefore, we deem it appropriate to remand this issue back to the file of the Commissioner of Income-tax (Appeals) for fresh examination on this aspect of insurance charges i.e., how much of insurance charges were attributable to export of computer software. The Commissioner of Income-tax (Appeals) is directed to adjudicate this issue afresh after affording opportunity of hearing to the assessee as well as the Assessing Officer. This ground is allowed for statistical purposes.

Issues Involved:
1. Arm's Length Principle and Transfer Pricing Adjustments.
2. Application of Turnover and Related Party Transaction (RPT) Filters.
3. Deduction under Section 10A of the Income-tax Act.
4. Exclusion of Insurance, Telecommunication, and Travel Expenses from Export Turnover.
5. Inclusion/Exclusion of Comparable Companies in Transfer Pricing Analysis.
6. Risk Adjustments and Salary Filter.
7. Super Profits Filter and Functionality Filter.

Issue-wise Detailed Analysis:

1. Arm's Length Principle and Transfer Pricing Adjustments:
The assessee contended that their international transactions for the assessment year 2005-06 complied with the arm's length principles as per Chapter X of the Income-tax Act. The Commissioner of Income-tax (Appeals) (CIT(A)) had partly granted relief to the assessee. However, the Tribunal restored the matter back to the Assessing Officer (AO)/Transfer Pricing Officer (TPO) for fresh adjudication, emphasizing the need to apply the RPT filter of 25% or 15% and to consider high profit margins and high turnover in light of the Delhi High Court's judgment in Chryscapital Investment Advisors (India) P. Ltd.

2. Application of Turnover and Related Party Transaction (RPT) Filters:
The Tribunal highlighted that the application of turnover filters and RPT filters should be revisited. They noted that applying a 25% RPT filter instead of a 0% RPT filter could result in the inclusion of several comparables previously excluded. The Tribunal directed the CIT(A) to re-examine these aspects, ensuring the comparables are analyzed based on Functional, Asset, and Risk (FAR) analysis.

3. Deduction under Section 10A of the Income-tax Act:
The assessee argued that expenditure incurred in foreign currency should not be reduced from export proceeds when computing deductions under section 10A, as it pertains to the export of computer software. The Tribunal remanded this issue back to the CIT(A) to decide afresh, referencing the jurisdictional High Court's decision in CIT v. Infosys Technologies Ltd., which supported the assessee's claim.

4. Exclusion of Insurance, Telecommunication, and Travel Expenses from Export Turnover:
The Revenue's appeal included the exclusion of insurance expenses, telecommunication expenses, and travel expenses incurred in foreign currency from export turnover. The Tribunal remanded these issues back to the CIT(A) for fresh examination, directing that the CIT(A) should determine the extent to which these expenses are attributable to the export of computer software.

5. Inclusion/Exclusion of Comparable Companies in Transfer Pricing Analysis:
The Tribunal addressed the inclusion/exclusion of Flextronics Software Systems Ltd. as a comparable company. Given that transfer pricing issues were being remanded back for fresh adjudication, the Tribunal included this issue as part of the overall transfer pricing analysis to be reconsidered by the CIT(A).

6. Risk Adjustments and Salary Filter:
The assessee had raised grounds regarding risk adjustments and the salary filter applied by the TPO. The Tribunal did not provide a specific ruling on these grounds but indicated that all transfer pricing issues, including these, should be re-examined by the CIT(A) during the fresh adjudication process.

7. Super Profits Filter and Functionality Filter:
The Tribunal acknowledged that the CIT(A) had not adequately addressed the assessee's submissions regarding the super profits filter and functionality filter applied to certain comparable companies. These issues were also remanded back to the CIT(A) for a thorough review and fresh decision.

Conclusion:
The appeals by both the assessee and the Revenue were partly allowed for statistical purposes. The Tribunal directed the CIT(A) to re-examine the transfer pricing issues, application of filters, and specific deductions under section 10A, ensuring compliance with relevant judicial precedents and a comprehensive FAR analysis. The order was pronounced in the open court on September 13, 2017.

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