2019 (10) TMI 1189 - AT - Income Tax

TP Adjustment - MAM - Cost Plus Method ( CPM ) OR Transactional Net Margin Method ( TNMM ) - Comparable selection - TPO/DRP did not accept the stand taken by the assessee and it considered engineering segment also as part of ITeS, despite a separate TP analysis having been carried out by the assessee in engineering services and ITeS - HELD THAT - Engineering services segment should be considered as distinct from ITeS and comparable companies chosen accordingly. We hold and direct accordingly and set aside the orders of the DRP and remand the issue for fresh consideration by the TPO/AO in accordance with the above observations and in accordance with law, after affording opportunity of being heard to the assessee. Deduction u/s 10A - Exclusion of certain items of expenditure incurred in foreign exchange from the total turnover without excluding the same from the export turnover - HELD THAT - Taking into consideration the decision rendered by the Hon ble High Court of Karnataka in the case of CIT v. Tata Elxsi Ltd . 2011 (8) TMI 782 - KARNATAKA HIGH COURT we are of the view that expenditure incurred in foreign currency should be excluded both from export turnover and total turnover. We are of the view that as of today, law declared by the Hon'ble High Court of Karnataka which is the jurisdictional High Court is binding on us. Also upheld by HCL TECHNOLOGIES LTD. 2018 (5) TMI 357 - SUPREME COURT

Summary

Issues Involved:
1. Transfer Pricing (Contract Manufacturing Segment, Software Services Segment, Engineering Services and ITES Segments)
2. Corporate Tax (Re-computation of deduction under section 10A, Disallowance of expenses under section 14A)

Comprehensive, Issue-wise Detailed Analysis:

1. Transfer Pricing
Contract Manufacturing Segment:
The TPO adopted the Cost Plus Method (CPM) as the Most Appropriate Method (MAM) for determining the Arm's Length Price (ALP) for the contract manufacturing segment. The TPO computed the ALP by applying a mean gross margin of 34.63% on cost, resulting in an adjustment of ?66,13,52,874/-. The assessee objected, citing the Tribunal’s decision for AY 2006-07, which favored the Transactional Net Margin Method (TNMM). However, since the DRP deleted the addition and the revenue did not appeal, the Tribunal dismissed the grounds as academic.

Software Services Segment:
The TPO determined the ALP by selecting 26 comparable companies and computing an arithmetic mean PLI of 23.20%, resulting in a transfer pricing adjustment of ?7,14,70,061/-. The assessee argued for the application of turnover filters and consistency with the Tribunal’s decision for AY 2006-07. The Tribunal remanded the issue to the AO/TPO for fresh consideration, directing them to apply the turnover filter and follow the Tribunal’s earlier directions.

Engineering Services and ITES Segments:
The TPO combined the financials of both segments, treating engineering services as ITES, and selected 27 comparable companies, resulting in an adjustment of ?23,02,03,182/-. The assessee argued that engineering services should be treated separately from ITES, citing prior years’ acceptance of this distinction. The Tribunal agreed, applying the rule of consistency and remanded the issue for fresh consideration, directing the TPO/AO to treat engineering services and ITES as distinct segments.

2. Corporate Tax
Re-computation of Deduction under Section 10A:
The AO excluded expenses incurred in foreign exchange from the export turnover without excluding them from the total turnover, reducing the deduction claimed under section 10A. The Tribunal, following the Karnataka High Court’s decision in CIT v. Tata Elxsi Ltd. and the Supreme Court’s decision in CIT v. HCL Technologies Ltd., held that such expenses should be excluded from both export turnover and total turnover, allowing the assessee’s claim.

Disallowance of Expenses under Section 14A:
This ground was not pressed by the assessee and thus was dismissed as not pressed.

Separate Judgments:
The Tribunal issued separate judgments for AY 2007-08 and AY 2008-09, remanding the issues related to transfer pricing for fresh consideration by the AO/TPO and directing the exclusion of foreign exchange expenses from both export turnover and total turnover for the computation of the section 10A deduction.

Conclusion:
The appeals were partly allowed, with the Tribunal remanding the transfer pricing issues for fresh consideration and allowing the claim for re-computation of the section 10A deduction, while dismissing the disallowance under section 14A as not pressed.