Tribunal Adjusts Transfer Pricing and Deductions for Infosys and Wipro

The Tribunal allowed the appeal in part by excluding Infosys Technologies Ltd and Wipro Ltd from comparables for transfer pricing, reducing communication charges from export and total turnover for section 10A deduction, and including the reversal of interest accrued in business profit for section 10A deduction. The Tribunal directed the Assessing Officer to recompute the deductions accordingly.

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Issues Involved:
1. Transfer Pricing Issue
2. Reduction of Communication Charges from Export Turnover
3. Reduction of Reversal of Interest Accrued from Business Profit

Detailed Analysis:

1. Transfer Pricing Issue:

The assessee, engaged in software development services for its Associated Enterprise (AE), filed its return for the assessment year 2008-09 declaring a total income of Rs.16,83,925/-. The assessee used the Transaction Net Margin Method (TNMM) to establish the Arm's Length Price (ALP) for international transactions with its AE, selecting 28 comparable companies with a weighted average arithmetic mean of 14.53%. The TPO accepted TNMM but rejected the TP study, citing the use of multiple-year data and improper comparability analysis. The TPO conducted a fresh search, selecting 19 comparables with an average margin of 26.20%, resulting in a transfer pricing adjustment of Rs.1,82,73,532/-.

The assessee contested the inclusion of Infosys Technologies Ltd and Wipro Ltd as comparables due to their significantly higher turnover and different business dynamics. The Tribunal agreed, noting that the TPO's exclusion of companies with turnover less than Rs.1 crore should logically extend to excluding companies with extraordinarily high turnover. The Tribunal cited previous decisions supporting this view, including the assessee's own case for the assessment year 2007-08 and the Delhi High Court's judgment in CIT v. Agnity India Technologies (P.) Ltd. Consequently, the Tribunal directed the exclusion of Infosys and Wipro from the comparables and ordered a recomputation of the ALP.

2. Reduction of Communication Charges from Export Turnover:

The assessee challenged the reduction of communication charges from export turnover without a corresponding reduction from total turnover when computing the deduction under section 10A of the Act. The Tribunal referenced the Bombay High Court's decision in CIT v. Gem Plus Jewellery India Ltd. and the ITAT Chennai Bench's decision in ITO v. Sak Soft Ltd., which established that communication charges reduced from export turnover should also be reduced from total turnover. The Tribunal directed the Assessing Officer to follow this principle and recompute the deduction under section 10A accordingly.

3. Reduction of Reversal of Interest Accrued from Business Profit:

The assessee contested the reduction of Rs.27,20,088/- (reversal of interest accrued) from business profit while computing the deduction under section 10A. The DRP had accepted that the reversal of interest accrued should be considered as part of the business profit under section 41(1) of the Act. The Tribunal noted that the Assessing Officer must conform to the DRP's directions and include the reversal of interest accrued in the business profit when computing the deduction under section 10A. The Tribunal directed the Assessing Officer to recompute the deduction without excluding the amount of Rs.27,20,088/- from the business profit.

Conclusion:

The appeal was allowed in part, with the Tribunal directing the exclusion of Infosys Technologies Ltd and Wipro Ltd from the comparables for transfer pricing purposes, the reduction of communication charges from both export and total turnover for section 10A deduction, and the inclusion of the reversal of interest accrued in the business profit for section 10A deduction.

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