2020 (3) TMI 414 - AT - Income Tax

TP Adjustment - determination of Arm s Length Price (ALP) in respect of an international transaction between the Assessee and it s Associated Enterprise of rendering Software Development Services (SWD Services) - HELD THAT - Assessee company is engaged in providing SWD services to its affiliates, for which it received a consideration during the previous year relevant to the assessment year 2010-11. Since the transaction of provision of Software service by the Assessee was an international transaction, income from such international transaction has to be determined having regard to Arm s Length Price (ALP) thus companies functionally dissimilar with that of assessee need to be deselected. Computation of operating cost and operating margin - HELD THAT - We are of the view that foreign exchange gain/loss are operating in nature in case of export business. The Assessing Officer is directed to include the same as cost/income in case of assessee as well as comparables. Other items are extra-ordinory items and hence non-operating in nature. The other income, if not related to business operations, but interest on FDs etc, has rightly been excluded by the TPO from operating revenue. IT is directed accordingly. Operating profit margin in its TP study at 10.27% - TPO has considered employee s stock compensation and provision for service tax as non-operating cost. At the same time, the DRP has also given a direction that these items of expenditure are non-operating in nature. In the given facts and circumstances of the case, we are of the view that it would be just appropriate to set aside to remand the question of determination of operating profit margin of the assessee to the TPO for fresh consideration after analysis of the operating expenditure considered by the assessee while working out its operating profit margins in the TP analysis. Deduction under Section 10A - DRP is correct and is in accordance with the decisions of the Hon'ble High Court of Karnataka in CIT v. Tata Elxsi Ltd. 2011 (8) TMI 782 - KARNATAKA HIGH COURT which has since been affirmed by the Hon'ble Supreme Court in C/T v. HCL Technologies Ltd. 2018 (5) TMI 357 - SUPREME COURT . Direct the AO to grant the MAT credit to the extent available.

Summary

Issues Involved:
1. Determination of Arm's Length Price (ALP) for Software Development Services (SWD Services).
2. Exclusion and inclusion of certain companies as comparables.
3. Computation of operating margin and treatment of specific expenses.
4. Deduction under Section 10A of the Income Tax Act.
5. Granting of MAT credit under Section 115JAA.
6. Correct credit for advance tax paid.

Detailed Analysis:

1. Determination of Arm's Length Price (ALP) for SWD Services:
The Assessee, engaged in providing SWD services to its affiliates, filed a transfer pricing study using the Transaction Net Margin Method (TNMM) and chose Operating Profit/Operating Cost as the profit level indicator (PLI). The Assessee selected 16 companies as comparables and claimed that its profit margin was within the permissible range. The Transfer Pricing Officer (TPO), however, rejected this study and made a TP adjustment of ?4,77,69,560/-. The TPO selected 11 comparables and determined the ALP, leading to a shortfall added to the total income.

2. Exclusion and Inclusion of Certain Companies as Comparables:
The Dispute Resolution Panel (DRP) directed the exclusion of certain companies (ICRA Techno Analytics Ltd., Infosys Technologies Ltd., Tata Elxsi Ltd., Persistent Systems Ltd., Persistent Systems and Solutions Ltd., Thinksoft Global Services Ltd., and R S Software (India) Ltd.) and upheld the inclusion of KALS Information Systems Ltd. The Tribunal upheld the DRP's decision to exclude these companies based on functional dissimilarities and lack of segmental data. The Tribunal also agreed with the Assessee's contention to exclude KALS Information Systems Ltd. due to its involvement in software products and training services.

3. Computation of Operating Margin and Treatment of Specific Expenses:
The Assessee argued that certain expenses (employee stock compensation and provision for service tax) should not be included in the operating costs. The DRP directed these to be treated as non-operating costs. However, the TPO did not exclude these expenses in the final computation. The Tribunal remanded the issue back to the TPO for fresh consideration to determine the operating profit margin accurately.

4. Deduction under Section 10A of the Income Tax Act:
The AO reduced communication charges and travel expenditure from the export turnover but not from the total turnover, affecting the deduction under Section 10A. The DRP directed that these expenses should also be reduced from the total turnover, aligning with the Karnataka High Court's decision in CIT v. Tata Elxsi Ltd. The Tribunal upheld this direction, confirming it was consistent with the Supreme Court's affirmation in CIT v. HCL Technologies Ltd.

5. Granting of MAT Credit under Section 115JAA:
The Assessee was entitled to a brought forward MAT credit from AY 2008-09, which was not granted in the final assessment order. The Tribunal directed the AO to grant the MAT credit to the extent available.

6. Correct Credit for Advance Tax Paid:
The AO considered a lower amount of advance tax paid by the Assessee in the final assessment order compared to the draft assessment order. The Tribunal directed the AO to verify and provide the correct adjustment for the advance tax paid.

Conclusion:
The appeals by the Assessee and the Revenue were partly allowed. The Tribunal upheld the DRP's directions on the exclusion and inclusion of comparables, remanded the issue of operating margin computation back to the TPO, upheld the DRP's direction on Section 10A deductions, and directed the AO to grant the correct MAT credit and advance tax adjustments.