Transfer Pricing Appeal Partly Allowed; Section 10A Deductions and Loss Set-Off Clarified

ITAT Hyderabad partly allowed the assessee's appeal in a transfer pricing matter. The tribunal excluded Infosys BPO Ltd., Genesys International Ltd., Eclerx Services Ltd., Cosmic Global Ltd., Acropetal Technologies Ltd., and Accentia Technologies Ltd. as comparables due to functional dissimilarity, different business strategies, or segmental differences. Crossdomain Solutions Pvt. Ltd. was held functionally comparable, and the AO/TPO was directed to verify revenue variations. Regarding deduction under section 10A, communication expenses were to be excluded from both export and total turnover for computation. On brought forward business losses, the AO was directed to allow the assessee to demonstrate entitlement to set off losses notionally against current income before any disallowance. The decision was thus partly in favour of the assessee.

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Issues Involved:
1. Transfer Pricing Adjustments
2. Exclusion of Internet Expenses from Export Turnover for S.10A Deduction
3. Setting Off of Brought Forward Business Losses for S.10A Deduction

Detailed Analysis:

1. Transfer Pricing Adjustments:
The primary issue in this appeal is the Transfer Pricing (TP) adjustments made by the Assessing Officer (AO)/Transfer Pricing Officer (TPO). The assessee's arguments focused on the selection of comparables used by the TPO in the TP order. The TPO had included twelve companies as comparables, determining an Arithmetic Mean Profit Level Indicator (PLI) of 27.42%, which was later adjusted to 25.37% after a working capital adjustment. This resulted in a suggested TP adjustment of Rs. 4,85,12,912 under S.92CA. The assessee objected to seven of these comparables, arguing functional dissimilarity and other factors.

(1) Infosys BPO Ltd.:
The assessee contended that Infosys BPO Ltd. is a giant in its field with a significant brand value and a turnover of Rs. 1016 crores compared to the assessee's Rs. 42.06 crores. The Tribunal agreed, citing functional dissimilarity and the company's significant brand value, and directed the exclusion of Infosys BPO Ltd. as a comparable.

(2) Genesys International Ltd.:
The assessee argued that Genesys International Ltd. operates in geospatial services, which are highly technical and not comparable to the assessee's services. The Tribunal, referencing a similar case (M/s. Mercer Consulting (India) Ltd.), agreed that there is a vast functional difference and directed the exclusion of Genesys International Ltd.

(3) Eclerx Services Ltd.:
The assessee claimed Eclerx Services Ltd. is involved in consultancy and advisory services, which are functionally dissimilar to the assessee's ITES services. The Tribunal agreed, noting the diverse nature of services provided by Eclerx and the lack of segmental data, and directed its exclusion.

(4) Cosmic Global Ltd.:
The assessee objected to Cosmic Global Ltd. due to its significant outsourcing costs and low employee costs. The Tribunal, referencing the Mercer Consulting case, agreed that the low revenue from the relevant segment and high outsourcing costs rendered it incomparable, and directed its exclusion.

(5) Acropetal Technologies Ltd. (Seg.):
The assessee argued that Acropetal Technologies Ltd. is involved in high-end engineering design services and has products in its inventory, making it functionally dissimilar. The Tribunal agreed, noting the company's involvement in high-end services and lack of proper segmental data, and directed its exclusion.

(6) Accentia Technologies Limited:
The assessee contended that Accentia Technologies Limited's profits were influenced by extraordinary events, such as acquisitions. The Tribunal agreed, noting the impact of inorganic growth strategies on profits, and directed its exclusion.

(7) Crossdomain Solutions P. Ltd.:
The assessee raised objections based on the principles of natural justice and discrepancies in revenue figures. The Tribunal found the company functionally similar but directed the AO/TPO to re-examine the revenue figures and work out the PLI after giving the assessee an opportunity to present its objections.

2. Exclusion of Internet Expenses from Export Turnover for S.10A Deduction:
The assessee argued that internet expenses should not be excluded from export turnover for S.10A deduction purposes. The Tribunal, referencing the Bombay High Court's decision in Gemplus Jewellery and the Special Bench's decision in Sak Soft Ltd., agreed that communication expenses should be excluded from both export turnover and total turnover. The AO was directed to recompute the deduction accordingly.

3. Setting Off of Brought Forward Business Losses for S.10A Deduction:
The assessee contended that the AO should not have set off brought forward business losses before allowing the S.10A deduction. The Tribunal noted that as per law, brought forward losses of the unit claiming S.10A deduction must be set off before arriving at the deduction. The AO was directed to examine the brought forward losses issue after giving the assessee an opportunity to present its contentions.

Conclusion:
The Tribunal partly allowed the assessee's appeal, directing the exclusion of certain comparables for TP adjustments, the recomputation of S.10A deduction after excluding communication expenses from both export and total turnover, and the re-examination of the brought forward business losses issue.

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