2015 (12) TMI 1675 - AT - Income Tax

Assessee's Appeal Partially Allowed, Exclusions and Adjustments Made

The Tribunal partially allowed the assessee's appeal, directing the Assessing Officer/Transfer Pricing Officer to reconsider certain adjustments. The ... Exclusion of internet expenses from the export turnover treating it as incurred for delivery of software outside India for the purpose of computation of deduction under section 10A - Held that:- Following the case of CIT v M/s Tata Elxsi Ltd. & Others [2011 (8) TMI 782 - KARNATAKA HIGH COURT] we are inclined to accept the alternative contention of the assessee that if this expenditure is excluded from the export turnover, then the same should also be excluded from the total turnover for the purposes of computation of deduction under section 10A of the I.T. Act. T.P. adjustment - Held that:- Assessee is a 100% captive service provider and is engaged in the business of providing software development services to it’s A.E., thus companies functionally dissimilar with tat of assessee need to be de-selected from final list of comparable. Issues Involved:1. Transfer Pricing (T.P.) adjustment.2. Exclusion of internet expenses from export turnover for deduction under section 10A.3. Levy of interest under section 234B.4. Negative working capital adjustment.5. Inclusion of provision for bad and doubtful debts as operating cost.Detailed Analysis:1. Transfer Pricing (T.P.) Adjustment:The primary issue under ground No.2 was the T.P. adjustment made by the Assessing Officer (A.O.) based on the T.P. order under section 92CA of the I.T. Act. The assessee contested the inclusion of certain companies as comparables. The Tribunal reviewed the financial results of the taxpayer and the list of comparables chosen by the TPO, which included companies like Avani Cincom Technologies, Bodhtree Consulting Ltd, Infosys, and others. The Tribunal found that many of these companies were functionally different from the assessee, which was a software development service provider. The Tribunal cited various decisions, including those in the cases of NTT Data India Enterprise Application Services P. Ltd. and 3DPLM Software Solutions P. Ltd., to exclude these companies from the list of comparables. The Tribunal directed the A.O. to reconsider the inclusion of companies like CGVAK and SIP Technologies Ltd., based on the factual inconsistencies highlighted by the assessee.2. Exclusion of Internet Expenses from Export Turnover:Ground No.3 addressed the exclusion of internet expenses from the export turnover for the purpose of computing the deduction under section 10A of the I.T. Act. The Tribunal accepted the alternative contention of the assessee that if internet expenses are excluded from the export turnover, they should also be excluded from the total turnover. This decision was based on the precedent set by the Hon'ble Karnataka High Court in the case of CIT vs. M/s. Tata Elxsi Ltd. The A.O. was directed to compute the deduction under section 10A by excluding the internet expenses from both the export turnover and the total turnover.3. Levy of Interest under Section 234B:Ground No.4 related to the levy of interest under section 234B of the I.T. Act. The Tribunal found that this issue was consequential in nature and directed the A.O./TPO to give consequential relief to the assessee in accordance with the law.4. Negative Working Capital Adjustment:The assessee raised an additional ground regarding the negative working capital adjustment of -3.84% made by the TPO while computing the adjustment under section 92CA. The Tribunal referred to the decision in the case of Adaptec India P. Ltd., which held that negative working capital adjustment should not be made for captive service providers. The issue was remitted to the TPO for reconsideration in line with judicial precedents.5. Inclusion of Provision for Bad and Doubtful Debts as Operating Cost:The assessee argued that the provision for bad and doubtful debts should be considered as part of the operating cost. However, the Tribunal noted that no ground of appeal related to this issue was raised in Form No.36 and thus rejected this argument.Conclusion:The Tribunal's order resulted in the partial allowance of the assessee's appeal for statistical purposes, with specific directions for the A.O./TPO to reconsider certain adjustments and exclusions based on established judicial precedents.