Tribunal excludes expenses, companies from export turnover calculation, Revenue's appeal partly allowed

The Tribunal upheld the CIT(A)'s decision to exclude certain expenditures under 'Telecommunication Charges' from the export turnover for computing deduction under Section 10A. It also supported the exclusion of companies as comparables based on turnover, abnormal profit, and diminishing revenue filters. However, the Tribunal excluded a company with different financial year data and a company rejected by the Transfer Pricing Officer from the comparables list. The Revenue's appeal was partly allowed, and the assessee's cross-objection was dismissed.

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Issues Involved:
1. Computation of deduction under Section 10A of the Income Tax Act.
2. Exclusion of certain companies as comparables based on various filters.
3. Inclusion of a company with different financial year data.
4. Inclusion of a company rejected by the Transfer Pricing Officer (TPO).

Detailed Analysis:

1. Computation of Deduction under Section 10A of the Income Tax Act:
The Assessing Officer (AO) excluded certain expenditures under 'Telecommunication Charges' from the export turnover while computing the deduction under Section 10A. The Commissioner of Income Tax (Appeals) [CIT(A)] accepted the assessee's contention that these expenditures should also be excluded from the total turnover. This issue was covered in favor of the assessee by the jurisdictional High Court in the case of Tata Elxsi Ltd. Vs. CIT [349 ITR 98 (Kar)], which held that whatever is excluded from export turnover should also be excluded from total turnover for computing the deduction under Section 10A. The Tribunal upheld the CIT(A)'s order, rejecting the Revenue's grounds.

2. Exclusion of Certain Companies as Comparables Based on Various Filters:
The CIT(A) excluded several companies from the list of comparables based on various filters such as size, turnover, abnormal profit, and diminishing revenue:
- Turnover Filter: The CIT(A) applied the turnover filter objectively for both low and high turnover companies, relying on decisions from the jurisdictional ITAT and other cases. Companies with turnovers outside the range of Rs. 1 to Rs. 200 Crores and those with abnormally high profits (>50%) were excluded.
- Abnormal Profit Filter: Though not separately adjudicated, companies like Exensys Software Solutions Ltd and Thirdware Solutions Ltd were excluded on turnover and functionality filters.
- Diminishing Revenue Filter: The CIT(A) found merit in the assessee's argument that revenue is not a true indicator of performance and upheld the exclusion of companies with diminishing revenues, except for M/s. Melstar Information Technology Ltd., which had a negative operating margin.

The Tribunal concurred with the CIT(A)'s adoption of these filters, rejecting the Revenue's contentions.

3. Inclusion of a Company with Different Financial Year Data:
The TPO excluded M/s. Quintegra Solutions Ltd. due to its different financial year data, which the CIT(A) included based on the assessee's contention that consolidation of accounts is permitted within a six-month time frame as per AS 21 and Section 212 of the Companies Act. The Tribunal, however, upheld the TPO's exclusion, stating that public data available for a different financial year cannot be adjusted to match the assessee's financial year, as it may give a distorted picture. The Tribunal directed the exclusion of this company from the list of comparables.

4. Inclusion of a Company Rejected by the TPO:
The CIT(A) included M/s. VJIL Consulting Ltd., rejecting the TPO's conclusion that the company did not satisfy the qualitative filters due to VAT payments indicating product sales. The Tribunal found that there was no clarity on why VAT was paid, whether in the UK or India, and noted that this company was rejected in other similar cases. Consequently, the Tribunal ordered the exclusion of this company from the comparables list.

Cross-Objection by the Assessee:
The assessee's cross-objection, mainly supporting the CIT(A)'s order and raising certain academic issues, was dismissed as the issues were already considered by the CIT(A) based on coordinate bench decisions.

Conclusion:
The Tribunal partly allowed the Revenue's appeal and rejected the assessee's cross-objection, pronouncing the judgment on March 18, 2016.

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