2016 (3) TMI 1271 - AT - Income Tax

Appeal partially allowed, recalculations ordered for comparables & deductions. Instructions on Section 10A, interest levies.

The Tribunal partly allowed the appeal, directing the AO/TPO to rework the Arithmetic Mean of selected comparables and make adjustments. Specific ... TPA - selection of comparables - Held that:- Assessee is engaged in providing software development and call centre services only to its Associated Enterprise [AE]. Being the captive service provider, it has remunerated for the services on the basis of cost + 15% mark up, thus companies functionally dissimilar with that of assessee need to be deselected from final list of comparable. Computation done by the AO u/s. 10A by excluding expenditure of travel expenses, telecommunication expenses from the definition of export turnover - Held that:- There is no evidence on record that travel expenses pertain to rendering of services. Travel expenses cannot be included in freight. Therefore, we are of the opinion that travel expenses incurred in foreign exchange alone cannot be disallowed from the export turnover. Therefore, we direct the AO to exclude this amount. Coming to the issue of telecommunication expenses, nothing was brought on record that the same was not incurred in connection with export of software or rendering of services. This expenditure can be attributable to the telecommunication expenses which the provisions require exclusion from export turnover. However, since the amount of ₹ 1,38,70,965/- was considered as ‘telecommunication expenses’, which are reduced from export turnover, we direct the AO/TPO to exclude the same from also the total turnover while computing the deduction u/s. 10A of the Act. The jurisdictional High Court in the case of CIT Vs. Tata Elxsi Ltd. [2011 (8) TMI 782 - KARNATAKA HIGH COURT] has held that whatever is excluded from export turnover should also be excluded from the total turnover. Consequently, AO is directed to exclude the same from total turnover as well. Levy of interest u/s. 234B & 234D - Held that:- These are consequential in nature. However, AO is directed to give the working to assessee if any interests are being levied or charged while giving effect to this order. Issues Involved:1. Transfer Pricing Adjustments in Software Development Services Segment2. Transfer Pricing Adjustments in Call Centre Services Segment3. Computation of Deduction under Section 10A4. Levy of Interest under Sections 234B and 234DDetailed Analysis:1. Transfer Pricing Adjustments in Software Development Services Segment:The assessee, engaged in providing software development services to its Associated Enterprise (AE), had selected 17 comparable companies with an average margin of 10.86% and justified an Arm's Length Price (ALP) of 15.35%. The Transfer Pricing Officer (TPO) rejected 13 of these comparables and selected new ones, resulting in a proposed adjustment of Rs. 3,21,70,813.Final Selection of Comparables:The final list included companies such as Accel Transmatic Ltd., Avani Cimcon Technologies Ltd., Celestial Labs Ltd., and others. The assessee accepted some comparables but objected to others based on functional dissimilarities, extraordinary financial results, and high-profit margins.Rejection of Certain Comparables:The Tribunal found that companies like Accel Transmatic Ltd., Avani Cimcon Technologies Ltd., and Celestial Labs Ltd. were not functionally comparable. The Tribunal directed the AO/TPO to exclude these from the list of comparables.Turnover Filter Application:The Tribunal upheld the exclusion of Flextronics Software Systems Ltd. and iGate Global Solutions Ltd. due to their significantly higher turnover compared to the assessee. However, it included Mindtree Ltd. and Sasken Communication Technologies Ltd. as they were within an acceptable range.2. Transfer Pricing Adjustments in Call Centre Services Segment:For the call centre services segment, the assessee selected 22 comparable companies with a margin of 13.30%, justifying its ALP of 15.46%. The TPO accepted six comparables and proposed 25 new ones, leading to an initial adjustment of Rs. 71,60,87,449, later rectified to Rs. 17.49 Crores.Final Selection of Comparables:The final list included companies like Accentia Technologies Ltd., Aditya Birla Minacs Worldwide Ltd., Allsee Technologies Ltd., and others. The assessee accepted some comparables but objected to others based on extraordinary events, functional dissimilarities, and inconsistent application of filters.Rejection of Certain Comparables:The Tribunal found that companies like Accentia Technologies Ltd., Asit C Mehta Financial Services Ltd., and Bodhtree Consulting Ltd. were not suitable comparables. The Tribunal directed the AO/TPO to exclude these from the list.Retention of Certain Comparables:The Tribunal retained comparables like Allsec Technologies Ltd., Apollo Healthstreet Ltd., and I-Services India Pvt. Ltd., as the assessee did not provide sufficient grounds for their exclusion.3. Computation of Deduction under Section 10A:The assessee objected to the exclusion of travel and telecommunication expenses from the definition of export turnover. The Tribunal directed the AO to exclude travel expenses from the export turnover as they were not related to rendering services. However, telecommunication expenses were to be excluded from both export and total turnover, following the jurisdictional High Court's ruling in CIT Vs. Tata Elxsi Ltd.4. Levy of Interest under Sections 234B and 234D:The Tribunal noted that the levy of interest under Sections 234B and 234D is consequential. The AO was directed to provide the assessee with the working of any interest being levied or charged, allowing the assessee an opportunity to object.Conclusion:The appeal was partly allowed, with directions to the AO/TPO to rework the Arithmetic Mean of the selected comparables and make necessary adjustments. The Tribunal also provided specific instructions regarding the computation of deductions under Section 10A and the levy of interest under Sections 234B and 234D. The judgment was pronounced in the open court on March 18, 2016.