Assessee granted deduction under section 10A for specific undertaking, Tribunal directs adjustments.

The Tribunal allowed the assessee's claim for deduction under section 10A of the Act, emphasizing that the relief is specific to the undertaking and not the owner. The Tribunal directed the AO to exclude foreign currency expenses for computing the deduction and granted the deduction u/s 10A. Regarding transfer pricing adjustments, the Tribunal directed the AO to recompute the ALP for software development and pre-sales services based on specified adjustments and verifications, partly allowing the appeal and restoring the issue for fresh examination.

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Issues Involved:
1. Deduction u/s 10A of the Act
2. Transfer Pricing Adjustment for Software Research and Development
3. Transfer Pricing Adjustment for Pre-Sales and Marketing Services

Detailed Analysis:

I. Deduction u/s 10A of the Act:
The assessee company claimed a deduction of Rs. 15,88,47,365/- u/s 10A of the Act for profits from its STPI Unit. The AO rejected this claim, arguing that the undertaking was formed by transferring previously used machinery from the Branch Office of the Holding Company, which violates the conditions of sub-section (2) of section 10A. The AO cited that the old plant and machinery constituted 48% of the assets, thus failing to meet the requirement that the undertaking must be formed by new machinery or plant.

The assessee contended that the unit was transferred on a going-concern basis and had been claiming relief u/s 10A since the financial year 2003-04. The Tribunal, referencing the case of LG Soft India (P.) Ltd and the jurisdictional High Court's ruling in Yokogawa India Ltd., concluded that the relief under section 10A is specific to the undertaking and not the owner. The Tribunal also noted the CBDT Circular No.01/2013, which clarified that tax benefits under sections 10A, 10AA, and 10B would continue despite a change in ownership, provided there is no splitting or reconstruction of the business.

The Tribunal directed the AO to exclude foreign currency expenses from both the export turnover and the total turnover for computing the deduction u/s 10A, in line with the Tata Elxsi Ltd. ruling. Consequently, the Tribunal allowed the assessee's claim for deduction u/s 10A.

II. Transfer Pricing Adjustment:

(A) Software Research and Development:
The assessee had international transactions for software development services with its AE, adopting TNMM and selecting 19 comparables with an average margin of 14.49%. The TPO, however, selected 26 comparables with an adjusted arithmetical profit level indicator of 22.89%, resulting in an adjustment of Rs. 6,83,39,400/-.

The Tribunal noted the similarity between the assessee's case and the Trilogy E-Business Software India (P.) Ltd. case, where certain companies were rejected based on turnover filter and functional dissimilarity. The Tribunal excluded eight companies from the TPO's list due to their high turnover and two companies (Avani Cimcom Technologies Ltd. and Celestial Labs. Ltd.) due to functional dissimilarity. The Tribunal also directed the AO to use the segmental margin of 23.11% for Megasoft Ltd. instead of the entity level margin.

After these adjustments, the Tribunal directed the AO to recompute the ALP and determine if the difference falls within the permissible 5% range. If so, no adjustment would be required.

(B) Pre-Sales and Marketing Services:
The assessee rendered pre-sales and marketing support services to its AE, adopting TNMM with four comparables showing an average margin of 6.32%. The TPO selected different comparables with an average margin of 32.77%, leading to an adjustment.

The Tribunal found that the TPO incorrectly categorized the services as commission agency services and noted that the assessee had no authority to conclude contracts on behalf of its AE. The Tribunal also highlighted that the assessee's transactions for the subsequent year (AY 2008-09) were accepted without adjustments, referencing the Lenovo (India) (P.) Ltd. case for continuity in the Revenue's approach.

The Tribunal directed the AO to verify if similar transactions were accepted for AY 2008-09 and, if so, to adopt the same TP analysis for the current year. The Tribunal restored the issue to the AO/TPO for fresh examination.

Conclusion:
The appeal was partly allowed, with the Tribunal granting the deduction u/s 10A and directing the AO to recompute the ALP for software development services and pre-sales and marketing services based on the specified adjustments and verifications.

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