2020 (5) TMI 548 - AT - Income Tax

Deduction u/s 10A/10AA - direction of DRP to allow deduction of telecommunication expenses and foreign travel expenses from Total turnover also while computing deduction u/s 10A/10AA - HELD THAT - We notice that the Ld DRP has followed the binding decision rendered by the Hon ble jurisdictional High Court in the case of Tata Elxsi Ltd 2011 (8) TMI 782 - KARNATAKA HIGH COURT in giving the said direction. Since the Ld DRP has followed the decision rendered by the jurisdictional High Court in directing the AO to exclude telecommunication foreign travel expenses both from Export turnover and Total turnover while computing deduction u/s 10A/10AA of the Act, we do not find any reason to interfere with the said direction. TP Adjustment - exclusion of two comparable companies , viz., M/s E-Clerx Services Ltd and M/s Acropetal Technologies Ltd. - HELD THAT - M/s E-Clerx Services Ltd, as examined by the Special bench of the Tribunal in the case of M/s Maersk Global Centres (India) Private Limited vs. ACIT 2014 (3) TMI 1159 - ITAT MUMBAI and the Special bench has given a finding that the above said company is mainly engaged in providing high-end services involving specialised knowledge and domain expertise in the field and hence the same cannot be compared with a company engaged in providing low end services to the group concerns as like assessee in present case. M/s Acropetal Technologies Ltd company is engaged in the development of computer software. So it appears that the nature of engineering design services provided by the above said company is in the form of development computer software and it may be in the nature of high end services. However, the assessee herein is providing low end ITES services. We hold that this company cannot be considered to be a good comparable. Accordingly we uphold the decision rendered by Ld DRP on this company. Working capital adjustment - whether working capital adjustment could be given or not? - HELD THAT - As earlier noticed that the TPO has granted rebate towards working capital adjustment to the tune of 0.23%. The contention of the assessee before Ld DRP was that the TPO has actually worked out the working capital adjustment at 0.64%, but granted the rebate only to the tune of 0.23%. The Ld DRP, hence, directed the TPO to correct the mistake, if any. Since the direction given by Ld DRP relates to correction of mistake only, we do not find any infirmity in the direction so given. Revenue recognition - foreign exchange gain can be taken as operating income or not? - DRP held that the foreign exchange gain should be considered as part of operating income - HELD THAT - We notice that the Ld DRP has followed the decision rendered by the coordinate bench in the case of SAP labs India (P) Ltd 2010 (8) TMI 676 - ITAT, BANGALORE . Identical view has also been expressed by another co-ordinate bench in the case of CISCO Systems (India) Private Ltd 2014 (11) TMI 849 - ITAT BANGALORE . Accordingly, we do not find any infirmity in the direction given by Ld DRP on this issue. Direction given by DRP to apply export filter in ITES segment - contention of the revenue is that the said direction actually amounts to setting aside the draft order and hence the same is beyond the scope of the DRP - HELD THAT - DRP has applied the export filter on all the comparables and accordingly rendered its decision. Hence we are of the view that the said action will not amount to setting aside the draft order as contended by the revenue. Rejection of claim for deduction u/s 10AA on the amount of transfer pricing adjustment voluntarily made by the assessee - HELD THAT - Assessee is eligible for deduction u/s 10AA of the Act in respect of voluntary Transfer Pricing adjustment made by it. See A.T. KEARNEY INDIA PVT. LTD. VERSUS ACIT, CIRCLE 1 (1) , NEW DELHI. 2019 (6) TMI 1092 - ITAT DELHI

Issues Involved:

1. Deduction of telecommunication expenses and foreign travel expenses from Total turnover while computing deduction u/s 10A/10AA.
2. Exclusion of certain comparable companies for Transfer Pricing.
3. Working capital adjustment.
4. Inclusion of foreign exchange gain as operating income.
5. Application of export filter in ITES segment.
6. Eligibility for deduction u/s 10AA on voluntary Transfer Pricing adjustment.

Issue-wise Detailed Analysis:

1. Deduction of Telecommunication and Foreign Travel Expenses:
The Ld DRP directed the AO to allow the deduction of telecommunication and foreign travel expenses from Total turnover while computing deduction u/s 10A/10AA. The DRP followed the binding decision of the Hon’ble jurisdictional High Court in Tata Elxsi Ltd (2011)(247 CTR 334)(Kar.). Since the Ld DRP adhered to the jurisdictional High Court's decision, the Tribunal found no reason to interfere with this direction.

2. Exclusion of Comparable Companies:
- M/s E-Clerx Services Ltd: The Ld DRP excluded this company based on the Special bench of the Tribunal and co-ordinate bench decisions in the cases of Maersk Global Centres (India) Private Limited and Symphony Marketing Solutions India P Ltd. It was found that M/s E-Clerx Services Ltd provided high-end KPO services, which are not comparable to the low-end ITES services provided by the assessee.

- M/s Acropetal Technologies Ltd: The Ld DRP excluded this company applying "on site filter" and "employee cost" filter. The co-ordinate benches consistently held that M/s Acropetal Technologies Ltd is functionally different and not comparable to ITES companies. The Tribunal upheld the DRP's decision based on consistent precedents and the nature of services provided by the company.

3. Working Capital Adjustment:
The Ld DRP directed the TPO to correct the working capital adjustment mistake, if any, from 0.23% to 0.64%. Since this direction was for correcting an error, the Tribunal found no infirmity in the direction given by the Ld DRP.

4. Inclusion of Foreign Exchange Gain as Operating Income:
The Ld DRP included foreign exchange gain as part of operating income, following the decision in SAP Labs India (P) Ltd vs. ACIT (2011)(44 SOT 156)(bang.). The Tribunal, agreeing with the Ld DRP and consistent decisions of co-ordinate benches, found no reason to interfere with this direction.

5. Application of Export Filter in ITES Segment:
The Ld DRP applied the export filter on all comparables, leading to the exclusion of M/s Sundaram Business Services Ltd. The Tribunal held that applying the export filter did not amount to setting aside the draft order and upheld the Ld DRP's action.

6. Eligibility for Deduction u/s 10AA on Voluntary Transfer Pricing Adjustment:
The Ld DRP disallowed the deduction u/s 10AA on the voluntary Transfer Pricing adjustment, stating the assessee did not furnish details on how the amount was worked out and did not bring the amount in foreign exchange as required. The Tribunal, however, referred to the Pune bench's decision in Apoorva Systems (P) Ltd and the Karnataka High Court's decision in iGate Global Solutions Ltd, which allowed such deductions. The Tribunal held that the assessee is eligible for deduction u/s 10AA on the voluntary Transfer Pricing adjustment and directed accordingly.

Conclusion:
The appeal of the revenue was dismissed, and the appeal of the assessee was partly allowed. The Tribunal upheld the directions of the Ld DRP on various issues and directed that the assessee is eligible for deduction u/s 10AA on the voluntary Transfer Pricing adjustment.

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