2015 (10) TMI 2645 - AT - Income Tax

Tribunal Partially Allows Appeal on Transfer Pricing & Deduction Issues for Megasoft Ltd.

M/s. Meritor LVS India (P) Ltd Versus Asst. Commissioner of Income-tax, Circle -12 (1), Bangalore

The Tribunal partly allowed the appeal by excluding specific comparables for Transfer Pricing issues, directing the TPO to rework the Profit Level ... TPA - selection of comparable - Held that:- Assessee being a software development services provider thus companies dissimilar with that of assessee need to be deselected from final list of comparable. Risk adjustment - Held that:- We of the opinion that the risk borne by the comparables as well as the assesee were of the very same nature and therefore the effect of the risk on the profitability already stood discounted in the operational results of the comparables. We therefore find no merit in this ground raised by the assessee. In the result, assessee’s ground relating to risk adjustment is dismissed. Deduction u/s.10A computation - Held that:- Travel expenditure and telecommunication expenditure incurred in foreign currency ought not have been excluded from export turnover. Alternately it says that if they were excluded from export turnover, similar exclusion was to be done in the total turnover also for working out deduction u/s.10A of the Act. In so far as the contention of the assessee that foreign currency expenditure should not be excluded from the export turnover, we are unable to appreciate in view of the definition of ‘export turnover’ given in Explanation 2 (iv) to Section 10A does not warrant such an interpretation. However in respect of parity between the export turnover and total turnover, in view of the decision of the Hon’ble jurisdictional High Court in the case of CIT v. Tata Elxsi Ltd [2011 (8) TMI 782 - KARNATAKA HIGH COURT], assessee has to succeed. We direct the AO / TPO to exclude what has been excluded from the export turnover from the total turnover also while computing deduction u/s.10A of the Act Direct that assessee be given deduction u/s.10A of the Act without setting off brought forward loss and unabsorbed depreciation of non-eligible units. Issues Involved:1. Non-grant of adjustment for risk and exclusion of certain comparables related to Transfer Pricing (TP) issues.2. Exclusion of travel and telecommunication expenditure from export turnover and total turnover for computing the deduction under Section 10A.3. Deduction under Section 10A without setting off brought forward losses and unabsorbed depreciation of non-eligible units.Issue-wise Detailed Analysis:1. Non-grant of adjustment for risk and exclusion of certain comparables related to Transfer Pricing (TP) issues:The assessee's primary contention was the non-grant of adjustment for risk and the exclusion of certain comparables selected by the Transfer Pricing Officer (TPO). The TPO had rejected most of the comparables selected by the assessee and included 26 comparables deemed functionally similar. The assessee sought the exclusion of 16 of these comparables, arguing they were functionally different.The Tribunal referred to the decision in the case of Hewlett-Packard (India) Globalsoft P. Ltd, which dealt with similar issues for the same assessment year. The Tribunal cited several reasons for excluding specific comparables, such as Celestial Labs Ltd., E-Zest Solutions Ltd., Infosys Technologies Ltd., KALS Information Systems Ltd., and others, based on their functional dissimilarity, involvement in software products, or lack of segmental data.For instance, Celestial Labs Ltd. was excluded because it was primarily a research and development company, not purely a software development service provider. Similarly, Infosys Technologies Ltd. was excluded due to its substantial revenues from software products and significant research and development expenditure, making it functionally dissimilar to the assessee.The Tribunal ordered the exclusion of the 16 comparables and directed the TPO to rework the Profit Level Indicator (PLI) of Megasoft Ltd. based on its software development services segment only.Regarding the risk adjustment, the TPO had concluded that the risks borne by the comparables and the assessee were similar, thus negating the need for any risk adjustment. The Tribunal upheld this finding, noting that the assessee did not provide sufficient evidence to counter the TPO's conclusions.2. Exclusion of travel and telecommunication expenditure from export turnover and total turnover for computing the deduction under Section 10A:The assessee argued that travel and telecommunication expenditure incurred in foreign currency should not be excluded from the export turnover. Alternatively, if excluded, the same should be excluded from the total turnover as well.The Tribunal referred to the definition of 'export turnover' in Explanation 2 (iv) to Section 10A and concluded that the exclusion of such expenses from export turnover was warranted. However, following the Hon'ble jurisdictional High Court's decision in CIT v. Tata Elxsi Ltd, the Tribunal directed that the excluded amounts from export turnover should also be excluded from total turnover while computing the deduction under Section 10A.3. Deduction under Section 10A without setting off brought forward losses and unabsorbed depreciation of non-eligible units:The assessee contended that the deduction under Section 10A should be allowed without setting off brought forward losses and unabsorbed depreciation of non-eligible units. The Tribunal referred to the Hon'ble jurisdictional High Court's decision in CIT (LTU) v. Yokogawa India Ltd, which supported the assessee's view. Consequently, the Tribunal directed that the deduction under Section 10A be granted without such set-off.Conclusion:The appeal was partly allowed, with the Tribunal ordering the exclusion of specific comparables, directing the TPO to rework the PLI for Megasoft Ltd., and granting the deduction under Section 10A without setting off brought forward losses and unabsorbed depreciation of non-eligible units. The Tribunal also directed the exclusion of travel and telecommunication expenses from both export turnover and total turnover for the deduction computation.