ITAT decision: Assessee wins on export turnover exclusion, remand on classification issue

The ITAT partially allowed the appeal by the assessee, remitting the classification issue back to the TPO for reconsideration based on evidence provided. The selection of comparable companies was also remitted pending the final classification determination. The ITAT dismissed the claim for pre-operating expenditure but directed the exclusion of communication charges from export turnover for deduction purposes under section 10A of the Act, ruling in favor of the assessee on this issue.

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Issues:
1. Classification of the assessee as an ITES company by the TPO and DRP.
2. Selection of comparable companies by the TPO and DRP.
3. Disallowance of pre-operating expenditure as part of operating cost.
4. Exclusion of communication charges from export turnover only while computing deduction u/s 10A of the Act.

Issue 1: Classification of the assessee as an ITES company
The TPO classified the assessee as an ITES company, considering data processing services under back office operations. The assessee contested this classification, presenting evidence of being registered as a 100% EOU for providing both IT and ITES services. The ITAT remitted the issue back to the TPO for a fresh consideration based on the assessee's submissions and supporting documents.

Issue 2: Selection of comparable companies
The ITAT remitted the issue of selecting comparable companies to the TPO, pending the final classification of the assessee as an IT or ITES company. The decision on classification would impact the selection of comparables, necessitating a fresh assessment by the TPO.

Issue 3: Disallowance of pre-operating expenditure
The assessee claimed pre-operating expenditure as part of the operating cost, citing expenses incurred during the gestation period for establishing new premises. However, the ITAT dismissed the claim, noting the company's commencement of operations from 1st April 2007 and lack of specific objections raised before the DRP.

Issue 4: Exclusion of communication charges from export turnover
The ITAT directed the Assessing Officer to recompute the deduction claimed u/s 10A of the Act, instructing the reduction of communication charges from both export turnover and total turnover. Relying on relevant case law, the ITAT ruled in favor of the assessee on this issue.

In conclusion, the ITAT partially allowed the appeal by the assessee, addressing key issues related to classification, selection of comparables, expenditure disallowance, and turnover calculation for deduction purposes under section 10A of the Act.

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