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2020 (3) TMI 1138 - AT - Income TaxCorporate tax adjustment pursuant to denial of deduction u/s 10B - assessee had been claiming deduction u/s 80HHE of the Act upto to Assessment Year 1998-99 i.e. upto the 7th year from the establishment of the company - HELD THAT - As decided in own case 2014 (4) TMI 929 - ITAT DELHI and 2014 (1) TMI 1637 - ITAT DELHI Assessing Officer ignored this fact that the assessee's 100% EOU was established in AY 1997- 98 related to AY 1998-99. AO denied exemption on surmises and conjectures by taking hyper technical approach. Since the assessee was entitled to exemption u/s 10B of the Act, then the period cannot be said to be exhausted in the year under consideration, hence we uphold the findings of the Commissioner of Income Tax(A) in the impugned order. Accordingly, ground no.2 of the revenue is dismissed. Transfer Pricing adjustments - Comparable selection - HELD THAT - Appellant company was established as a back-end software services company and works mainly for its parent Infogain, USA. The appellant company is also registered under the STP Scheme and has been claiming tax u/s 10B of the Act, thus companies functionally dissimilar with that of assessee need to be deselected from final list.
Issues Involved:
1. Corporate tax adjustment pursuant to denial of deduction under Section 10B of the Income Tax Act. 2. Transfer Pricing (TP) adjustment. Comprehensive, Issue-Wise Detailed Analysis: 1. Corporate Tax Adjustment: Underlying Facts: The assessee had claimed deduction under Section 80HHE of the Income Tax Act up to Assessment Year (AY) 1998-99. With the introduction of sub-section 1B to Section 80HHE by the Finance Act, 2000, and amendments to Section 10A, the assessee switched to claiming deductions under Section 10B/10A. Assessing Officer's (AO) Position: The AO believed that the switch was made to claim excess deductions and avoid taxes. Citing past disallowances in AYs 2005-06 and 2006-07, the AO disallowed the deduction claim under Section 10B. Dispute Resolution Panel (DRP): The DRP dismissed the assessee's objections, noting that similar disputes existed in prior years, with appeals pending before the Tribunal. Tribunal's Findings: The Tribunal found merit in the assessee's contentions, referencing its own decisions in the assessee's favor for AYs 2005-06 and 2006-07. The Tribunal observed that the AO's disallowance was based on erroneous interpretations and hyper-technical approaches. The Tribunal upheld that the assessee was entitled to the deduction under Section 10B, following precedents set by the Hon'ble High Court of Delhi and other judicial decisions. Conclusion: The Tribunal directed the AO to allow the deduction under Section 10B, deleting the addition of ?7,54,85,392. 2. Transfer Pricing (TP) Adjustment: Underlying Facts: The assessee, a back-end software services company, reported international transactions with its parent company. The TP study report characterized the assessee as providing software development services, using the Transactional Net Margin Method (TNMM) to determine that its transactions were at arm's length. TPO's Analysis: The Transfer Pricing Officer (TPO) rejected the assessee's comparables, selecting 21 new comparables and computing the Arm's Length Price (ALP), resulting in a TP adjustment of ?5,92,11,870. Assessee's Objections: The assessee argued that the TPO's comparables included giant companies with high brand value and functional dissimilarities, such as Infosys Technologies Ltd. and WIPRO Ltd., and companies with extraordinary events like mergers and acquisitions. Tribunal's Findings: The Tribunal agreed with the assessee, noting that companies like Infosys and WIPRO, with high brand value and significant R&D activities, were not suitable comparables. The Tribunal cited judicial precedents, including decisions by the Hon'ble High Court of Delhi and the Hon'ble Supreme Court, to exclude these companies from the final set of comparables. Exclusion of Specific Comparables: - Infosys Technologies Ltd. and WIPRO Ltd.: Excluded due to high brand value and functional dissimilarities. - TATA Elxsi Ltd.: Excluded due to its segmented services not comparable to the assessee. - Megasoft Ltd.: Excluded due to acquisitions and lack of segmental details. - Persistent Systems: Excluded due to acquisitions and sale of software products. - Sasken Communication Technologies Ltd.: Excluded due to involvement in software products and technology licensing. - Celestial Labs Ltd.: Excluded due to engagement in biopharma and biotech manufacturing. - Flextronics Software Systems Ltd.: Excluded due to involvement in product sales. - Thirdware Solutions Ltd.: Excluded due to diversified revenue sources and lack of segmental information. - KALS Information Systems Ltd.: Excluded due to involvement in training and software products. - E-zest Solutions Ltd.: Excluded due to rendering KPO services. - Avani Cimcon Technologies Ltd.: Excluded due to revenue from software products without segmental details. - Helios Matheson Information Technology Ltd.: Excluded due to engagement in ITES BPO services. - Ishir Infotech Ltd.: Excluded due to heavy outsourcing activities and different business model. Conclusion: The Tribunal directed the AO/TPO to exclude the aforementioned companies from the final set of comparables, allowing the assessee's appeal on TP adjustments. Final Order: The appeal of the assessee was allowed, with the Tribunal directing the AO to make necessary adjustments and deletions as per the findings. Pronouncement: The order was pronounced in the open court on 17.03.2020.
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