2018 (8) TMI 201 - HC - Income Tax

TPA - comparable selection - ALP - substantial question of law or fact - Held that - The controversy involved herein is no more res integra in view of the decision of this Court in M/S. SOFTBRANDS INDIA P. LTD. 2018 (6) TMI 1327 - KARNATAKA HIGH COURT , wherein it has been observed that unless the finding of the Tribunal is found ex facie perverse, the Appeal u/s. 260-A of the Act, is not maintainable

Issues Involved:

1. Size and turnover of companies as deciding factors for comparability.
2. Application of decisions from other tribunal benches in rejecting comparables.
3. Consideration of specific facts by the Tribunal in rejecting comparables.
4. Fixing the RPT filter at 15% of total revenue.
5. Exclusion of telecommunication expenses and insurance charges from total turnover for Section 10A deduction.
6. Computation of deduction under Section 10A following jurisdictional High Court's judgment.

Issue-wise Detailed Analysis:

1. Size and Turnover of Companies as Deciding Factors for Comparability:

The Tribunal held that the size and turnover of companies are crucial for determining comparability. It was noted that the TPO applied a lower turnover filter of ?1 crore but did not set an upper limit, leading to the inclusion of companies like Infosys, which had a turnover 277 times larger than the assessee. The Tribunal referenced the Special Bench decision in DCIT v. Quark Systems Pvt. Ltd., which emphasized the necessity of reasonable classification, and the ICAI TP Guidelines, which state that transactions by vastly different-sized companies are not comparable. Consequently, companies with turnovers exceeding ?200 crores were excluded, including Flextronics Software Systems Ltd., iGate Global Solutions Ltd., Mindtree Ltd., Persistent Systems Ltd., Sasken Communication Technologies Ltd., Tata Elxsi Ltd., Wipro Ltd., and Infosys Ltd.

2. Application of Decisions from Other Tribunal Benches in Rejecting Comparables:

The Tribunal rejected several comparables based on decisions from other benches, emphasizing the functional differences and lack of segmental details. For instance, Avani Cimcon Technologies Ltd. was rejected due to its revenue from software products, as highlighted in the Telcordia Technologies Pvt. Ltd. case. Celestial Labs Ltd. was excluded for being primarily a research and development company, as supported by the Teva Pharma Private Ltd. case. KALS Information Systems Ltd. was rejected for having revenues from both software development and products, and Accel Transmatic Ltd. was excluded for not being a pure software development service company, as noted in Capgemini India Ltd. case.

3. Consideration of Specific Facts by the Tribunal in Rejecting Comparables:

The Tribunal found that the TPO did not adequately consider the specific facts brought on record by the assessee. For example, Megasoft Ltd. was only considered based on its segmental data, as per the Trilogy E-Business Software India Pvt. Ltd. case. The Tribunal emphasized that unless the Tribunal's findings are ex facie perverse, an appeal under Section 260-A is not maintainable, as established in the Softbrands India Pvt. Ltd. case.

4. Fixing the RPT Filter at 15% of Total Revenue:

The Tribunal fixed the Related Party Transaction (RPT) filter at 15% of total revenue, excluding companies like Ishir Infotech and Geometric Ltd. The Tribunal noted that decisions from other cases, including those from other benches, were superimposed without considering the specific facts of the assessee's case or providing a basis for the 15% cut-off.

5. Exclusion of Telecommunication Expenses and Insurance Charges from Total Turnover for Section 10A Deduction:

The Tribunal held that telecommunication expenses and insurance charges incurred in foreign currency should be excluded from both total turnover and export turnover for computing deductions under Section 10A. This decision follows the jurisdictional High Court's judgment in CIT v. Tata Elxsi Ltd., which was affirmed by the Supreme Court in Commissioner of Income-tax, Central – III v. HCL Technologies Ltd. The Supreme Court emphasized that excluding these expenses only from export turnover but not from total turnover would lead to an illogical result, contrary to legislative intent.

6. Computation of Deduction under Section 10A Following Jurisdictional High Court's Judgment:

The Tribunal followed the jurisdictional High Court's judgment in CIT v. Tata Elxsi Ltd. for computing deductions under Section 10A, despite the Revenue's pending SLPs before the Supreme Court. The High Court had ruled that expenses excluded from export turnover must also be excluded from total turnover to avoid an illogical and unjust result.

Conclusion:

The Tribunal's findings were upheld, and the appeal filed by the Revenue was dismissed, as no substantial question of law arose for consideration. The Tribunal's decisions on comparability, RPT filter, and computation of deductions under Section 10A were deemed appropriate and in line with existing legal precedents.

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