Assessee can exclude selected comparables with reasons; s.10A export forex excluded; software gets 60% depreciation; interest taxable as other income

ITAT Bangalore - AT held that the assessee could seek exclusion of selected comparables once proper reasons were shown and admitted additional grounds; functionally dissimilar companies were to be deselected. The tribunal upheld exclusion of foreign-currency expenditure from export turnover under s.10A but directed AO/TPO to similarly exclude those amounts from total turnover when computing the deduction. Deduction under s.10A must be computed independently without setting off losses of other undertakings. Computer software treated as part of computer qualified for depreciation at 60%. Interest income lacked nexus with business and therefore remained taxable as income from other sources.

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Issues Involved:
1. Admission of additional grounds for exclusion of certain comparables.
2. Exclusion of specific comparables in the software development and maintenance segment.
3. Exclusion of specific comparables in the ITES segment.
4. Computation of deduction under Section 10A of the Income Tax Act.
5. Treatment of cost of computer software and hardware.
6. Classification of interest income.

Issue-Wise Analysis:

1. Admission of Additional Grounds for Exclusion of Certain Comparables:
The assessee filed additional grounds seeking the exclusion of specific comparables. The Tribunal admitted these additional grounds, referencing the decision in DCIT v. Quark Systems P. Ltd, which allows for the evolving nature of transfer pricing issues. The Tribunal held that the assessee could not be restricted from seeking exclusion of comparables that appeared in its own list if proper reasons were provided.

2. Exclusion of Specific Comparables in the Software Development and Maintenance Segment:
The Tribunal examined the comparability of several companies, including Accel Transmatics Ltd (seg), Quintegra Solutions Ltd, and Tata Elxsi Ltd (seg), among others. The Tribunal referred to prior decisions, such as NXP Semiconductors India P. Ltd v. ACIT and Motorola Solutions (India) P. Ltd v. ACIT, to exclude several companies based on functional dissimilarity, extraordinary events, and other factors. Specific companies like Accel Transmatics Ltd, Quintegra Solutions Ltd, and Tata Elxsi Ltd were remitted back to the AO/TPO for fresh consideration due to their inclusion in the assessee's own TP study. The Tribunal directed the AO/TPO to rework the average PLI of the comparables and decide on the ALP adjustment accordingly.

3. Exclusion of Specific Comparables in the ITES Segment:
The Tribunal addressed the exclusion of comparables in the ITES segment, such as Accentia Technologies Ltd, Asit C Mehta Financial Services Ltd, and Informed Technologies India Ltd, based on the employee cost filter. The Tribunal remitted the issue back to the AO/TPO for fresh consideration. The Tribunal also excluded Bodhtree Consulting Ltd (seg) due to its fluctuating margins and functional dissimilarity. The comparability of Eclerx Services Ltd, Infosys BPO Ltd, and Mold-Tek Technologies Ltd was remitted back for further analysis. Companies like Maple Esolutions Ltd and Triton Corp Ltd were excluded due to involvement in frauds, with Maple Esolutions Ltd remitted back for fresh consideration. Companies with different financial years, such as Caliber Point Business Solutions Ltd, HCL Comnet Systems & Services Ltd (seg), and R Systems International Ltd (seg), were excluded.

4. Computation of Deduction Under Section 10A of the Income Tax Act:
The Tribunal directed the AO to exclude foreign currency expenditure from both the export turnover and the total turnover while computing the deduction under Section 10A, following the decision in CIT v. Tata Elxsi Ltd. The Tribunal also held that the deduction under Section 10A should be considered independently without setting off losses from other undertakings, in line with the judgment in CIT (LTU) v. Yokogawa India Ltd.

5. Treatment of Cost of Computer Software and Hardware:
The Tribunal held that the cost of computer software and hardware, which provided enduring benefits, should be treated as capital assets. However, the assessee was eligible for depreciation at 60%.

6. Classification of Interest Income:
The Tribunal upheld the classification of interest income as "income from other sources" due to the lack of demonstrated nexus with the assessee's business activities. The Tribunal did not find any reason to interfere with the lower authorities' orders on this issue.

Conclusion:
The appeal was partly allowed for statistical purposes, with several issues remitted back to the AO/TPO for fresh consideration and reworking of the comparables' average PLI. The Tribunal provided specific directions on the treatment of foreign currency expenditure, computation of Section 10A deduction, and classification of interest income.

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