2021 (10) TMI 1098 - AT - Income Tax

TP Adjustment - comparable selection - turnover of the companies sought for exclusion is more than 200 crores - HELD THAT - As considering 10 times to 1/10 of the turnover the alleged comparable is much more than the turnover of assessee. We note that, assessee in Acusis Software India Pvt.Ltd 2018 (8) TMI 1885 - KARNATAKA HIGH COURT AND Autodesk India Pvt.Ltd 2018 (7) TMI 1862 - ITAT BANGALORE were captive service provider like assessee before us. Respectfully following the same we direct the Ld.TPO to exclude the comparable s alleged hereinabove for exclusion. Computing deduction under section 10AA - As reduced communication expenses and travelling and conveyance expenses incurred from the export turnover - HELD THAT - We respectfully following the view taken by Hon ble Supreme Court direct the Ld.AO to recompute deduction under section 10AA of the Act in accordance with the principles laid down in case of CIT vs HCL Technologies 2018 (5) TMI 357 - SUPREME COURT

Summary

Issues Involved:
1. Exclusion of certain companies from the list of comparables based on turnover filter.
2. Exclusion of communication and travel expenses from export turnover without reducing the same from total turnover for computation of deduction under section 10AA.

Issue-wise Detailed Analysis:

1. Exclusion of Certain Companies from the List of Comparables Based on Turnover Filter:

The assessee argued for the exclusion of Larsen & Toubro Infotech Ltd, Mindtree Ltd. (SEG.), and Persistent Systems Ltd from the list of comparables, asserting they fail the turnover filter. The assessee's turnover was ?94.5 crores, placing it within the range of ?1 crore to ?200 crores. The turnover of the companies sought for exclusion exceeded ?200 crores, making them unsuitable comparables. The assessee supported this argument with the decision of the Tribunal in Autodesk India Pvt. Ltd vs. DCIT (2018) 96 taxman.com 263.

The Tribunal noted that the coordinate bench in Evolving Systems Network (I) Pvt. Ltd vs. ACIT (2021) 130 taxman.com 212 upheld the exclusion of companies based on turnover, following the principle that companies with turnover exceeding ?200 crores cannot be compared with those having less than ?200 crores. This decision was supported by the Hon'ble Bombay High Court in CIT v. Pentair Water India Pvt. Ltd, which emphasized the relevance of turnover in choosing comparables for determining the arm's-length price.

The Tribunal also referenced the Karnataka High Court's decision in Acusis Software India Pvt. Ltd vs. ITO (2018) 98 taxman.com 183, which upheld the application of a turnover tolerance range of 10 times on either side of the assessee's turnover. This further validated the exclusion of companies with significantly higher turnover.

Respecting these precedents, the Tribunal directed the TPO to exclude Larsen & Toubro Infotech Ltd, Mindtree Ltd. (SEG.), and Persistent Systems Ltd from the list of comparables, thereby allowing Ground No.4 raised by the assessee.

2. Exclusion of Communication and Travel Expenses from Export Turnover Without Reducing the Same from Total Turnover for Computation of Deduction Under Section 10AA:

The assessee contested the AO's reduction of communication charges and travel and conveyance expenses from the export turnover without making corresponding reductions from the total turnover while computing the deduction under section 10AA. The assessee cited the Supreme Court's ruling in CIT vs HCL Technologies (2018) 93 taxman.com 83, which established that expenses excluded from export turnover must also be excluded from total turnover to accurately compute profits from export business.

The Tribunal, acknowledging the Supreme Court's stance, directed the AO to recompute the deduction under section 10AA in line with the principles laid down in CIT vs HCL Technologies. Consequently, Ground No.5 raised by the assessee was allowed.

Conclusion:

The appeal filed by the assessee was partly allowed. The Tribunal excluded the specified companies from the list of comparables based on the turnover filter and directed the AO to recompute the deduction under section 10AA by excluding communication and travel expenses from both export and total turnover.