2016 (8) TMI 1265 - AT - Income Tax

Tribunal ruling on IT Act deductions and comparables in software development segment.

The Tribunal partly allowed the revenue's appeal, permitting the inclusion of R.S. Software Ltd. as a comparable in the Software Development segment. The ... TPA - comparability analysis - selection procedure - Held that:- Assessee is rendering engineering services in the nature of software development services, thus companies functionally dissimilar with that of assessee need to be deselected from final list of comparability. Allowability of deduction u/s 10A - total turnover - Held that:- This issue is covered in favour of the assessee by the judgment of Hon’ble Karnataka High Court rendered in the case of M/s Tata Elxsi Ltd., [2011 (8) TMI 782 - KARNATAKA HIGH COURT] wherein it was held that the total turnover is sum total of export turnover and domestic turnover and therefore, if some amount is reduced from the export turnover then the total turnover also goes down automatically by the same amount.The issues raised by the assessee in its cross objection are held to be of academic interest only and we make no adjudication on the same. Issues Involved:1. Exclusion of certain companies from the list of comparables in the Software Development segment.2. Application of the onsite filter on the Software Development segment.3. Reduction of telecommunication and foreign currency expenses from export turnover for computing deduction under Section 10A of the IT Act.4. Allowance of appropriate adjustments to comparable companies.5. Non-allowance of sub-contracting charges as pass-through costs.Detailed Analysis:1. Exclusion of Certain Companies from the List of Comparables in the Software Development Segment:The revenue challenged the exclusion of companies such as ICRA Techno Analytics Ltd., KALS Information Systems Ltd., Persistent Systems Ltd., Tata Elxsi Ltd., Infosys Ltd., and Persistent Systems & Solutions Ltd. The Dispute Resolution Panel (DRP) directed the Assessing Officer (AO) to exclude these companies on grounds of functional dissimilarity. The Tribunal upheld the DRP's decision, noting that these companies were engaged in diversified activities and had significant brand value and intangible assets, making them incomparable to the assessee, which provided pure software development services. The Tribunal referenced the case of DCIT Vs M/s Electronics for Imaging India (P) Ltd., where similar exclusions were upheld.2. Application of the Onsite Filter on the Software Development Segment:The revenue objected to the DRP's direction to apply the onsite filter and exclude R.S. Software (India) Ltd. The Tribunal allowed this ground, agreeing with the revenue that R.S. Software Ltd. was a valid comparable. The assessee did not object to this inclusion.3. Reduction of Telecommunication and Foreign Currency Expenses from Export Turnover for Computing Deduction under Section 10A:The DRP directed the AO to exclude telecommunication expenses and foreign currency expenses from the export turnover while computing the deduction under Section 10A. The Tribunal upheld this direction, citing the Karnataka High Court's judgment in the case of M/s Tata Elxsi Ltd., which held that if an amount is reduced from the export turnover, it should also be reduced from the total turnover.4. Allowance of Appropriate Adjustments to Comparable Companies:The assessee argued that the AO and TPO failed to make appropriate adjustments for differences in marketing expenditure, research and development expenditure, and risk profiles. The Tribunal did not specifically adjudicate this issue, as it was rendered academic by the resolution of other issues.5. Non-Allowance of Sub-Contracting Charges as Pass-Through Costs:The assessee contended that sub-contracting charges should be considered pass-through costs. The Tribunal did not specifically address this issue, as it was rendered academic by the resolution of other issues.Conclusion:The Tribunal partly allowed the revenue's appeal, specifically allowing the inclusion of R.S. Software Ltd. as a comparable. The Tribunal dismissed the assessee's cross-objection as academic. The Tribunal upheld the DRP's exclusion of certain companies from the list of comparables and the reduction of telecommunication and foreign currency expenses from the export turnover for computing deductions under Section 10A.