2016 (3) TMI 1205 - AT - Income Tax

Tribunal upholds CIT(A) directions on comparables, remands for further TPO analysis; revenue appeal partly allowed

Deputy Commissioner of Income-tax, Circle 11 (1), Bangalore Versus M/s. Akamai Technologies India Pvt. Ltd.

Deputy Commissioner of Income-tax, Circle 11 (1), Bangalore Versus M/s. Akamai Technologies India Pvt. Ltd. - TMI Issues Involved:1. Validity of CIT(A)'s direction to recompute deduction u/s 10A by reducing communication charges from total turnover.2. Exclusion of certain companies as comparables based on size, turnover, abnormal loss, and functional dissimilarities.3. Inclusion of specific companies as comparables despite objections regarding diminishing revenue and different accounting year filters.4. Exclusion of companies based on business reputation and alleged fraudulent activities.Detailed Analysis:1. Validity of CIT(A)'s direction to recompute deduction u/s 10A by reducing communication charges from total turnover:The revenue challenged the CIT(A)'s direction to the AO to recompute the deduction allowable u/s 10A by reducing communication charges from the total turnover. The CIT(A)'s direction was upheld as it was in consonance with the jurisdictional High Court's judgment in CIT vs Tata Elxsi (349 ITR 98). The fact that the revenue had filed an SLP before the Supreme Court did not detract from the precedential value of the High Court's decision. Therefore, the grounds of appeal raised by the revenue were dismissed.2. Exclusion of certain companies as comparables based on size, turnover, abnormal loss, and functional dissimilarities:- Wipro BPO Solution Ltd.: The CIT(A) directed the exclusion of Wipro BPO Solution Ltd. based on its high turnover and substantial brand value, supported by precedents from the Hyderabad and Mumbai benches of the Tribunal. The revenue's challenge was dismissed, affirming that Wipro BPO could not be considered a comparable entity.- Mercury Outsourcing Management Ltd. and Flextronics Software Systems Ltd.: Both companies were excluded by the TPO and CIT(A) due to persistent losses. The revenue's challenge was dismissed as it was not aggrieved by their exclusion.- Nucleus Netsoft & GIS Ltd.: Initially selected by the respondent-assessee, this company was later objected to on grounds of functional differences and supernormal profits. The CIT(A) directed its exclusion, but the Tribunal directed its inclusion, citing the absence of evidence supporting functional dissimilarity.3. Inclusion of specific companies as comparables despite objections regarding diminishing revenue and different accounting year filters:- Pentasoft Technologies Ltd.: The TPO rejected this company due to diminishing revenue, but the CIT(A) directed its inclusion, rejecting diminishing revenue as a valid filter. The Tribunal upheld the CIT(A)'s direction, noting that the company's net profit remained stable despite a fall in gross revenue.- Apex Advanced Technology Ltd.: The TPO mistakenly considered the financials of a different company. The CIT(A) directed its inclusion, but the Tribunal remanded the matter to the TPO for a fresh analysis of the company's functional, asset, and risk (FAR) profile.4. Exclusion of companies based on business reputation and alleged fraudulent activities:- Maple e Solution Ltd.: The CIT(A) excluded this company due to its group's alleged fraudulent activities and short operational period. However, the Tribunal reversed this decision, citing a Mumbai bench ruling that there were no allegations of fraud related to the company's business.Conclusion:The Tribunal upheld several of the CIT(A)'s directions regarding the exclusion and inclusion of comparables but remanded certain issues for further analysis by the TPO. The revenue's appeal was partly allowed, and the respondent-assessee's cross-objection was dismissed as infructuous.