2020 (11) TMI 471 - AT - Income Tax

TP Adjustment - comparable selection - HELD THAT - Exclusion of companies Non comparable on the basis of turnover filter and functionally dissimilar with that of assessee engaged in developing software solutions for its customers in USA. Deduction u/s 10A - CIT(A) directing deduction of Satellite link charges from Total turnover also while computing deduction - HELD THAT - HELD THAT - The Hon'ble Supreme Court has settled this issue in the case of CIT vs. HCL Technologies Ltd 2018 (5) TMI 357 - SUPREME COURT when the object of the formula is to arrive at the profit from export business, expenses excluded from export turnover have to be excluded from total turnover also. Otherwise, any other interpretation makes the formula unworkable and absurd. Hence, we are satisfied that such deduction shall be allowed from the total turnover in same proportion as well.On the issue of expenses on technical services provided outside, we have to follow the same principle of interpretation as followed in the case of expenses of freight, telecommunication etc., otherwise the formula of calculation would be futile.

Summary

Issues Involved:
1. Deduction of Satellite link charges from Total turnover while computing deduction u/s 10A of the Act.
2. Relief granted in respect of Transfer pricing adjustment.
3. Exclusion of certain companies as comparables based on turnover filter and functional dissimilarity.

Detailed Analysis:

1. Deduction of Satellite Link Charges:

The revenue contested the direction by the Ld CIT(A) to deduct Satellite link charges from Total turnover while computing deduction u/s 10A of the Act. The assessee also appealed against the deduction of Satellite link charges from Export turnover. The Hon'ble Supreme Court in CIT vs. HCL Technologies Ltd (TS – 218 – SC -2018) held that expenses excluded from export turnover must also be excluded from total turnover to avoid making the formula unworkable and absurd. Following this decision, the Tribunal upheld the Ld CIT(A)'s order to maintain parity in the deduction of Satellite link charges from both export and total turnover.

2. Transfer Pricing Adjustment:

The Transfer Pricing Officer (TPO) identified contradictions between the Transfer pricing report and the Audit report regarding international transactions. The TPO rejected the transfer pricing study and adopted the Transactional Net Margin Method (TNMM) with Operating Profit/Operating Revenue (OP/OR) as the Profit level indicator. The TPO selected 17 comparable companies and calculated an average margin of 26.59% (OP/TC) and 21% (OP/OR). The TPO's adjustment was based on AE transactions only. The assessee appealed against this adjustment, leading to the exclusion of five comparable companies by the Ld CIT(A) based on the turnover filter, following the decision in Genisys Integrating Systems Vs. DCIT (15 ITR (Trib) 475). The Tribunal upheld the Ld CIT(A)'s decision, noting the application of the turnover filter as justified.

3. Exclusion of Certain Companies as Comparables:

The assessee sought exclusion of four companies (Bodhtree Consulting Ltd, Tata Elxsi Ltd, Exensys Software Solutions Ltd, and Thirdware Solution Ltd) based on functional dissimilarity. The Tribunal referred to the Bangalore bench's decision in CGI Information Systems & Management Consultants (P) Ltd (IT(TP)A No.612/Bang/2013), which excluded these companies due to their functional differences from the assessee, a contract software service provider. The Tribunal directed the exclusion of these companies and ordered the AO/TPO to recompute the ALP of the international transactions accordingly.

Conclusion:

The Tribunal dismissed the revenue's appeal and allowed the assessee's appeal, upholding the Ld CIT(A)'s decisions on the application of the turnover filter, exclusion of functionally dissimilar companies, and parity in the deduction of Satellite link charges from both export and total turnover. The order was pronounced in the open court on 22nd Oct, 2020.