2017 (1) TMI 1491 - AT - Income Tax

Tribunal ruling on comparables, forex gains, deductions under Sections 10A and 10AA, disallowance issue remitted.

The tribunal allowed the assessee's appeal regarding the exclusion of certain comparables and the inclusion of foreign exchange gains/losses as operating ... TPA - comparable selection criteria - Held that:- Assessee is a captive service provider engaged in the business of rendering software development services to its Associated Enterprise ('AE') at cost plus 15% mark-up., thus companies functionally dissimilar with that of assessee need to be deselected from final list. Foreign exchange fluctuations considered as non-operating in nature - Its foreign exchange gain should be considered as operating in nature - CIT (A) has, inter alia, directed the TPO to accept the assessee’s claim, on which, the Revenue is on appeal - Held that:- We have considered the rival contentions. This issue is remitted back to the TPO to examine whether the foreign exchange loss/gain is out of current years’s transactions or not. If that gain/loss arises out of current year’s transactions, then, it should be treated as operating in nature. To that extent Revenue’s claim is allowed. Restricted the working Capital adjustment to 1.98% - Held that:- As this Tribunal in Moong Controls India P Ltd [2015 (11) TMI 1719 - ITAT BANGALORE] wherein this Tribunal directed the TPO to allow actual adjustment towards the differences in the of working capital position between the assessee and the entrepreneurial companies selected as comparable. We direct the TPO to follow this decision. To this extent, the assessee’s appeal ground is allowed. Computation of deductions u/s 10A & 10AA - data communication, voice communication and cell phone expenses incurred in foreign currency should be excluded from the export turn over as well from total turnover on the basis of the Jurisdictional High Court decision in CIT v Tata Elxsi [2011 (8) TMI 782 - KARNATAKA HIGH COURT]. Thus the Revenue’s appeal grounds are dismissed. Issues Involved:1. Transfer Pricing adjustments and selection of comparables.2. Disallowance under Section 40(a)(i) for non-deduction of TDS on reimbursement of expenses.3. Computation of deductions under Section 10A and 10AA.Detailed Analysis:1. Transfer Pricing Adjustments and Selection of Comparables:The assessee, Cerner Healthcare Solutions Private Limited, engaged in software development services, disputed the Transfer Pricing Officer's (TPO) selection of comparables and adjustments. The TPO had rejected 10 of the assessee's comparables, retained 5, and added 6 new comparables, leading to an adjusted arithmetic mean of 20.73%. The TPO also used single-year data, restricted working capital adjustment to 1.98%, and considered foreign exchange gains/losses as non-operating.The CIT(A) upheld the turnover filter of Rs. 1 to Rs. 200 crores, excluding companies with turnovers exceeding Rs. 200 crores, and directed the TPO to:- Exclude Infosys Ltd, Larsen & Toubro Infotech Ltd, Mindtree Ltd (seg), Persistent Systems Ltd, Sasken Communication Technologies, and Tata Elxsi Ltd (seg).- Rectify errors in the margin computation of Kals Information Systems Ltd and in the computation of receivables and payables for working capital.- Include foreign exchange gains/losses as part of operating revenue.The tribunal confirmed the exclusion of the above companies based on functional dissimilarity and turnover criteria, citing various case laws. It also directed the TPO to exclude ICRA Techno Analytics Ltd (seg), KALS Information Systems Ltd, Persistent Systems Ltd, and Tata Elxsi Ltd due to their functional differences and lack of segmental data.2. Disallowance under Section 40(a)(i) for Non-Deduction of TDS on Reimbursement of Expenses:The Assessing Officer (AO) disallowed Rs. 2,59,96,977 under Section 40(a)(i) for non-deduction of TDS on reimbursements to Cerner Corporation, USA, treating them as fees for technical services. The CIT(A) upheld this disallowance following his previous decision for AY 2009-10.The tribunal found that the CIT(A) had wrongly adjudicated on the reimbursement of salaries, which was not an appeal matter before him, and had not addressed specific grounds raised by the assessee. The tribunal set aside these matters to the CIT(A) for fresh adjudication, emphasizing the need to follow the tribunal's decision in the assessee's own case for AY 2006-07, which held that reimbursement of expenses is not liable to tax.3. Computation of Deductions under Section 10A and 10AA:The AO excluded data communication, voice communication, and cell phone expenses incurred in foreign currency from the export turnover while computing deductions under Section 10A and 10AA. The CIT(A), relying on the Jurisdictional High Court decision in CIT v Tata Elxsi 349 ITR 98, directed that these expenses should be excluded from both export turnover and total turnover.The tribunal upheld the CIT(A)'s decision, finding no infirmity, and confirmed that such expenses should be excluded from both export and total turnover for computing deductions under Section 10A and 10AA.Conclusion:The tribunal allowed the assessee's appeal regarding the exclusion of certain comparables and the inclusion of foreign exchange gains/losses as operating revenue. It remitted the issue of disallowance under Section 40(a)(i) back to the CIT(A) for fresh adjudication. The tribunal upheld the CIT(A)'s decision on the computation of deductions under Section 10A and 10AA, dismissing the Revenue's appeal on this ground.