2018 (4) TMI 567 - AT - Income Tax

Eligibility for deduction u/s.10A on profits and gains as are derived from the export of computer software - Held that - Taking into consideration the decision rendered in the case of CIT v. Tata Elxsi Ltd 2011 (8) TMI 782 - KARNATAKA HIGH COURT we are of the view that the order of the CIT(A) directing the AO to exclude communication charges and travelling and conveyance expenses both from export turnover and total turnover, is just and proper and calls for no interference. Addition made consequent to determination of Transfer Price by the Transfer Pricing Officer(TPO), which addition was deleted by the DRP in its directions on the adjustment to Arm s Length Price (ALP) - Held that - Assessee in into providing software development services by the Assessee to its AE thus companies functionally dissimilar with that of assessee need to be deselected from final list.

Issues Involved:

1. Deduction under Section 10A of the Income Tax Act, 1961.
2. Determination of Arm's Length Price (ALP) for international transactions.
3. Inclusion and exclusion of comparable companies for Transfer Pricing analysis.

Detailed Analysis:

1. Deduction under Section 10A of the Income Tax Act, 1961:

The assessee, a subsidiary of CGI Technology and Solutions Inc., USA, claimed a deduction under Section 10A of ?3,36,51,428 for AY 2011-12. The Assessee did not reduce telecommunication charges of ?68,91,773 and travel expenses of ?58,29,169 from its export turnover, arguing these were not attributable to the delivery of computer software outside India.

The AO recomputed the deduction by reducing these expenses from the export turnover without a corresponding reduction in the total turnover, resulting in a disallowance of ?6,45,161. The Assessee contended before the DRP that it was engaged in software development, not technical services, so these expenses should not be excluded from the export turnover. Alternatively, if excluded, they should also be reduced from the total turnover, citing the decision in CIT v. Tata Elxsi Ltd [2012] 349 ITR 98 (Karn).

The DRP accepted the alternative plea and directed the AO to reduce the expenses from both export and total turnover. The Tribunal upheld this decision, dismissing the Revenue's appeal, noting the binding nature of the Karnataka High Court's decision in Tata Elxsi.

2. Determination of Arm's Length Price (ALP) for international transactions:

The Assessee provided software development services to its AE at ?489,58,99,743. The TPO suggested an addition of ?40,43,13,002 to the Assessee's income based on the ALP determination.

The Assessee used the Transaction Net Margin Method (TNMM) and selected 16 comparables, with an average profit margin of 13%, lower than its 13.79%. The TPO accepted only two of these comparables and identified 11 others, resulting in an average profit margin of 24.82% (unadjusted) and 21.35% (adjusted).

The TPO computed the ALP at ?530,02,12,745, leading to a shortfall of ?40,43,13,002. The DRP directed the exclusion of several companies, including Acropetal Technologies Ltd., E-Infochips Ltd., ICRA Techno Analytics Ltd., Infosys Ltd., and Tata Elxsi Ltd., and included Persistent Systems Ltd. and Sasken Communication Technologies Ltd. The DRP also directed a full working capital adjustment.

The final list of comparables was e-Zest Solutions Ltd., Persistent Systems & Solutions Ltd., Persistent Systems Ltd., and Sasken Communication Technologies Ltd. The Tribunal upheld the DRP's directions, noting the proper application of filters and comparability criteria.

3. Inclusion and exclusion of comparable companies for Transfer Pricing analysis:

The Revenue challenged the DRP's exclusion of Acropetal Technologies Ltd., L&T Infotech Ltd., and RS Software (India) Ltd. The Tribunal upheld the exclusion of Acropetal Technologies Ltd. due to the lack of segmental information and substantial outsourcing. L&T Infotech Ltd. was excluded due to high onsite revenue and the inclusion of multiple segments in its profit margins.

RS Software (India) Ltd. was initially excluded by the DRP for onsite development, but the Tribunal included it as both the Revenue and Assessee agreed on its comparability.

The Revenue also challenged the DRP's application of the onsite revenue filter and the exclusion of E-Infochips Ltd. The Tribunal upheld the use of the onsite revenue filter and the exclusion of E-Infochips Ltd. due to its failure to meet the software service income filter and other grounds.

Conclusion:

The Tribunal partly allowed the Revenue's appeal by including RS Software (India) Ltd. as a comparable but dismissed the appeal in all other respects. The Assessee's cross-objection was dismissed as infructuous.

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