2015 (5) TMI 1108 - AT - Income Tax

Tribunal adjusts Transfer Pricing and Deduction computations, benefiting Assessee

Sonus Networks India Private Limited Versus Assistant Commissioner of Income Tax, Circle 12 (3), Bangalore

The Tribunal directed the Transfer Pricing Officer to recompute the Arm's Length Price by excluding 12 companies deemed not comparable. Additionally, the ... TPA - Adjustment to ALP to an international transaction carried out by the assessee u/s. 92CA - selection of comparable - Held that:- Assessee is a company as rendered software development Services to its Associated Enterprise(AE) thus companies with functional dissimilarity need to be deselected from final list of comparable. Deduction u/s.10A computation - Held that:- Taking into consideration the decision rendered by the Hon’ble High Court of Karnataka in the case of CIT v. Tata Elxsi Ltd [2011 (8) TMI 782 - KARNATAKA HIGH COURT ] we are of the view that it would be just and appropriate to direct the Assessing Officer to exclude telecommunication charges and traveling expenses incurred in foreign currency both from export turnover and total turnover, as has been prayed for in the alternative by the assessee Issues Involved:1. Addition to the total income by way of adjustment to the Arm's Length Price (ALP) for international transactions.2. Inclusion of certain companies as comparables for determining the ALP.3. Method of computation of deduction under section 10A of the Income Tax Act.Detailed Analysis:1. Addition to the Total Income by Way of Adjustment to the Arm's Length Price (ALP):The Assessee challenged the adjustment made by the Assessing Officer (AO) and the Dispute Resolution Panel (DRP) to the ALP of international transactions under section 92CA of the Income Tax Act, 1961. The Assessee provided software development services to its Associated Enterprise (AE) and claimed that the price charged was at arm's length, supported by a report filed under section 92E in Form 3EB using the Transaction Net Margin Method (TNMM). The Transfer Pricing Officer (TPO) selected 20 comparable companies and arrived at an arithmetic mean of 23.65%, leading to an adjustment of Rs. 2,96,70,775 to the Assessee's income.2. Inclusion of Certain Companies as Comparables for Determining the ALP:The Assessee objected to the inclusion of 12 companies selected by the TPO, arguing they were not comparable. The Tribunal reviewed the functional profiles and found these companies to be functionally dissimilar to the Assessee, which provided software development services. The companies excluded were:- Avani Cincom Technologies Ltd.- Bodhtree Consulting Ltd.- Celestial Biolabs Ltd.- E-Zest Ltd.- Infosys Technologies Ltd.- Persistent Systems Ltd.- Quintegra Solutions Ltd.- Tata Elxsi Ltd.- Thirdware Solutions Ltd.- Wipro Ltd.- Softsol India Ltd.- Lucid Software Ltd.The Tribunal relied on previous decisions, including Trilogy E-Business Software India Pvt. Ltd., and found that these companies either engaged in software products, had significant intangibles, or had other functional differences.3. Method of Computation of Deduction Under Section 10A:The Assessee contested the AO's exclusion of certain expenses from export turnover while computing the deduction under section 10A. The Tribunal directed the AO to exclude telecommunication charges and traveling expenses incurred in foreign currency from both export turnover and total turnover, aligning with the Karnataka High Court decision in CIT v. Tata Elxsi Ltd. This decision ensures that whatever is excluded from export turnover should also be excluded from total turnover for computing the deduction under section 10A.Conclusion:The Tribunal concluded that the TPO should recompute the ALP after excluding the 12 companies deemed not comparable. Additionally, the AO was directed to adjust the computation of the section 10A deduction by excluding specific expenses from both export turnover and total turnover. The appeal by the Assessee was partly allowed, ensuring a fair assessment aligned with judicial precedents.