2016 (10) TMI 1144 - AT - Income Tax

Tribunal adjusts deductions under Section 10A, excludes comparables from TP analysis for fair assessment

The Tribunal partly allowed the appeal, directing the AO to re-calculate deductions under Section 10A by reducing both export and total turnover by the ... Deduction under Section 10A - total turnover and export turnover - re-computation of deduction - transfer pricing comparability analysis - exclusion of comparables - arm's length price - risk adjustment and +/-5% margin - opportunity of being heardDeduction under Section 10A - total turnover and export turnover - re-computation of deduction - opportunity of being heard - Whether reduction made from export turnover in respect of foreign currency expenses must equally reduce total turnover for computing deduction under Section 10A and the AO should re-calculate the deduction accordingly - HELD THAT: - The Tribunal held that the question is covered in favour of the assessee by the Karnataka High Court decision in M/s Tata Elxsi Ltd., which treats total turnover as the aggregate of domestic and export turnover so that any reduction from export turnover must correspondingly reduce total turnover. Applying that precedent respectfully, the Tribunal directed the AO to re-compute the deduction allowable under Section 10A by reducing total turnover by the same amount by which export turnover had been reduced on account of foreign currency expenses for technical services rendered outside India. The Tribunal also observed that the first (general) ground need not be separately adjudicated. The Tribunal allowed grounds 2 to 4 for statistical purposes and directed re-calculation by the AO, implicitly requiring the AO to provide opportunity of hearing where necessary in relation to adjustments such as unabsorbed depreciation before finalising the deduction. [Paras 6]Grounds 2 to 4 allowed; AO directed to re-calculate Section 10A deduction by reducing total turnover by the same amount as the reduction made from export turnover, following the Karnataka High Court precedent.Transfer pricing comparability analysis - exclusion of comparables - arm's length price - risk adjustment and +/-5% margin - opportunity of being heard - Whether certain comparable companies should be excluded and the manner in which the arm's length price is to be re-worked by the AO/TPO - HELD THAT: - The Tribunal examined the comparables considered by the TPO and, following earlier Tribunal precedents relied upon by the assessee, found merit in excluding specific groups of comparables for stated functional and quantitative reasons. It directed exclusion of three KPO-function comparables, three large-turnover comparables that exceed the 10-times turnover filter, and three companies failing the employees-cost filter; it also directed exclusion of two companies held to be unsuitable in earlier Tribunal orders. Overall, 11 of the 28 comparables were to be excluded. The AO was directed to compute the ALP on the basis of the remaining 17 comparables, allow appropriate risk adjustment and the benefit of +/-5% margin as per law, and determine whether any TP adjustment is required. The AO/TPO must allow the assessee sufficient opportunity of being heard before finalising any adjustment. [Paras 10, 11, 12, 13]Directed exclusion of 11 specified comparables; AO/TPO to compute ALP using the remaining 17 comparables, apply risk adjustment and +/-5% margin, and, after giving the assessee adequate hearing, make any transfer pricing adjustment as required by law.Final Conclusion: The appeal is partly allowed: corporate-tax grounds relating to computation of deduction under Section 10A are allowed (AO to re-compute total turnover and Section 10A deduction in accordance with precedent), and transfer-pricing issues are remitted for re-computation after exclusion of specified comparables, application of risk adjustment and +/-5% margin and after affording the assessee an opportunity of being heard. Issues Involved:1. Assessment of total income.2. Reduction of foreign currency expenses from 'export turnover'.3. Equal reduction from total turnover for computing deduction under Section 10A.4. Opportunity of being heard regarding reduction of unabsorbed depreciation.5. Transfer Pricing (TP) adjustments and comparability analysis.6. Exclusion of certain comparables.7. Use of financial year data for determining arm's length price.8. Penalty proceedings initiation under Section 271(1)(c).Detailed Analysis:1. Assessment of Total Income:The assessee contested the assessment of total income at Rs. 2,86,60,019 against a returned income of NIL. The Tribunal noted that this ground is general in nature and does not require separate adjudication.2. Reduction of Foreign Currency Expenses from 'Export Turnover':The assessee argued that foreign currency expenses should not be reduced from 'export turnover' while computing profits eligible for deduction under Section 10A. The Tribunal cited the Karnataka High Court judgment in M/s Tata Elxsi Ltd., which held that if an amount is reduced from export turnover, the total turnover must also be reduced by the same amount. The Tribunal directed the AO to re-calculate the deduction accordingly.3. Equal Reduction from Total Turnover for Computing Deduction under Section 10A:The Tribunal followed the same Karnataka High Court judgment, directing that both export turnover and total turnover should be reduced by the same amount of foreign currency expenses. This ensures a fair computation of deductions under Section 10A.4. Opportunity of Being Heard Regarding Reduction of Unabsorbed Depreciation:The assessee claimed that they were not given an opportunity to be heard regarding the reduction of unabsorbed depreciation before the deduction under Section 10A. The Tribunal did not provide a specific ruling on this issue, as it was implicitly covered under the broader application of the Karnataka High Court's judgment.5. Transfer Pricing Adjustments and Comparability Analysis:The assessee challenged the addition of Rs. 2,81,69,410 to the total income due to TP adjustments. They argued that the AO/TPO ignored the fact that the assessee was availing tax holidays under Section 10A, negating any intent to shift profits out of India. The Tribunal considered the assessee's request for the exclusion of certain comparables based on functional differences, turnover filters, and other criteria.6. Exclusion of Certain Comparables:The Tribunal examined the exclusion of 13 comparables divided into four groups:- Group 1: Bodhtree Consulting Ltd., Eclerx Services Ltd., Mold Tek Technologies Ltd. (functionally different as KPOs).- Group 2: Infosys BPO Ltd., Wipro Ltd. (Seg.), HCL Comnet Systems & Services Ltd. (turnover filter).- Group 3: Vishal Information Technologies Ltd., Informed Technologies India Ltd., Accentia Technologies Ltd. (Seg.), Spanco Ltd. (Seg.), Asit C Mehta Financial Services Ltd. (employees' cost filter).- Group 4: Maple E-Solutions Ltd., Triton Corp Ltd. (fraudulent financial statements).The Tribunal directed the AO/TPO to exclude 11 out of these 13 companies from the list of final comparables.7. Use of Financial Year Data for Determining Arm's Length Price:The Tribunal noted that the AO/TPO used only the financial year 2006-07 data, which was not available to the assessee at the time of compliance. The Tribunal did not provide a specific ruling on this issue but implied that the AO/TPO should ensure fairness in data usage.8. Penalty Proceedings Initiation under Section 271(1)(c):The assessee contested the initiation of penalty proceedings under Section 271(1)(c). The Tribunal did not specifically address this issue but indicated that the AO should follow the law and provide sufficient opportunity for the assessee to be heard.Conclusion:The Tribunal partly allowed the appeal, directing the AO to re-calculate deductions under Section 10A by reducing both export and total turnover by the same amount of foreign currency expenses. The Tribunal also directed the exclusion of 11 comparables from the TP analysis and instructed the AO to re-compute the arm's length price accordingly. The appeal was allowed for statistical purposes, ensuring that the AO follows proper legal procedures and provides the assessee with adequate opportunities to be heard.