Tribunal adjusts comparables, sets ALP for interest, excludes communication expenses

The Tribunal partially allowed the Assessee's appeal, directing adjustments by the TPO/AO regarding disputed comparables in the ITES and software development segments. The Tribunal also determined the Arm's Length Price (ALP) for interest on loans in favor of the Assessee, rejecting the junk bond rate in favor of LIBOR plus 1.57%. Additionally, the Tribunal instructed the AO to exclude communication expenses from the total turnover for Section 10A deductions. The appeal outcome was pronounced on 29th November 2013.

---

---

Issues Involved:
1. Transfer Pricing Adjustments in ITES Segment.
2. Transfer Pricing Adjustments in Software Development Segment.
3. Determination of ALP for Interest on Loan to AEs.
4. Exclusion of Communication Expenses from Export Turnover under Section 10A.

Detailed Analysis:

1. Transfer Pricing Adjustments in ITES Segment:
The Assessee challenged the comparables selected by the TPO for the ITES segment. The TPO had adopted 13 comparables, some of which were contested by the Assessee on various grounds such as involvement in fraud, different functionalities, super-normal profits, and mergers affecting financials. The Tribunal upheld the Assessee's objections, directing the TPO/AO to exclude these disputed companies and recalculate the arithmetic mean of the Profit Level Indicator (PLI). The specific companies excluded were Maple eSolutions Ltd., Vishal Information Technologies Ltd., Asit C. Mehta Financial Services Ltd., Spanco Ltd., Goldstone Infratech Ltd., Allsec Technologies Ltd., Datamatics Financial Services Ltd., Apex Knowledge Solutions P. Ltd., and Transworks Information Services Ltd.

2. Transfer Pricing Adjustments in Software Development Segment:
The Assessee objected to certain comparables selected by the TPO for the software development segment, citing reasons such as differences in business models, super-normal profits, and significant acquisitions. The Tribunal accepted the Assessee's objections and directed the TPO to exclude the disputed companies, including Infosys Ltd., Flextronics Software Systems Ltd., Persistent Systems Ltd., KALS Info Systems Ltd., Accel Transmatics Ltd., and Megasoft Ltd. The TPO was instructed to rework the arithmetic mean of the PLI after excluding these companies.

3. Determination of ALP for Interest on Loan to AEs:
The Assessee had received interest on a loan to its AE at LIBOR plus 1.57%. The TPO had benchmarked the interest at 14% based on the junk bond rate, leading to an adjustment. The DRP majority opinion favored benchmarking the interest rate at LIBOR plus certain basis points, which was not implemented by the AO. The Tribunal agreed with the DRP's majority opinion, rejecting the junk bond rate and accepting LIBOR plus 1.57% as the ALP. The Tribunal cited precedents from coordinate benches supporting the use of LIBOR for international transactions.

4. Exclusion of Communication Expenses from Export Turnover under Section 10A:
The AO had excluded communication expenses from the export turnover but not from the total turnover while calculating the deduction under Section 10A. The Assessee argued that these expenses should also be excluded from the total turnover. The Tribunal upheld the Assessee's contention, directing the AO to exclude the communication expenses from the total turnover as well, in line with decisions from the Special Bench of the ITAT and other coordinate benches.

Conclusion:
The Tribunal allowed the Assessee's appeal partly, directing necessary adjustments and recalculations by the TPO/AO in line with the Tribunal's findings on the disputed comparables and the determination of ALP for interest on loans. The Tribunal also directed the AO to exclude communication expenses from the total turnover for Section 10A deductions. The appeal was pronounced in the open court on 29th November 2013.

---