Assessee's Appeal Allowed, Revenue's Appeal Dismissed

The assessee's appeal was allowed, leading to the exclusion of certain comparables and no addition on account of Transfer Pricing Adjustment. The Revenue's appeal was dismissed, confirming the exclusion of communication costs from the total turnover for computing the deduction under Section 10A. The order was pronounced on 31st October 2014.

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Issues Involved:
1. Addition of Rs. 2,17,81,312 on account of Transfer Pricing Adjustment.
2. Inclusion/exclusion of communication costs from the total turnover while computing the deduction under S.10A.

Issue-wise Detailed Analysis:

1. Addition of Rs. 2,17,81,312 on account of Transfer Pricing Adjustment:

The assessee, a company providing call center and web-based services, filed its return of income for the relevant year, declaring a total income of Rs. 9,27,600 after claiming an exemption under S.10A of the Income Tax Act. The Assessing Officer (AO) noticed that the assessee provided call center services to its Associated Enterprise (AE), Knoah Solutions Inc., USA, and charged Rs. 32,13,75,110 for these services. To determine the Arm's Length Price (ALP) of these international transactions, the AO referred the matter to the Transfer Pricing Officer (TPO).

The assessee applied the Transactional Net Margin Method (TNMM) using Operating Profit to Operating Cost (OP/OC) as the Price Level Indicator (PLI). The Arithmetic Mean of OP/OC of seventeen comparables selected by the assessee was 11.91%, against the assessee's OP/OC of 17.50%. The TPO, however, found defects in the method adopted by the assessee and selected twelve comparables with an Arithmetic Mean of OP/OC at 27.42%. After allowing a working capital adjustment of -1.35%, the TPO adjusted the Arm's Length Margin to 28.77% and determined the ALP at Rs. 39,01,81,878, resulting in a TP adjustment of Rs. 6,33,28,057.

The Dispute Resolution Panel (DRP) partly sustained the assessee's objections and directed the inclusion of Datamatics Financial Services P. Ltd. in the comparables list and the application of the Arm's Length Margin only to the cost related to international transactions with AE. Consequently, the AO/TPO recomputed the ALP, resulting in an addition of Rs. 2,70,81,312.

The assessee appealed, disputing the addition on several grounds, including the exclusion/inclusion of certain comparables. The Tribunal examined the issues and found:

- Ground No.2: Axis IT & T Ltd. could not be included due to the lack of reliable segmental details.
- Ground No.3: Genesys International Corporation Ltd. was excluded as it was functionally different, providing geographical information services.
- Ground No.4: eClerx Services Ltd. was excluded as it was a KPO providing data analysis and data process solutions, unlike the assessee's BPO services.
- Ground No.5: Cosmic Global Ltd. was excluded due to its different business model, outsourcing substantial work.

With the exclusion of these comparables, the Arithmetic Mean Margin of the remaining nine comparables was 17.33%, within the permissible range of the assessee's margin. Thus, no addition on account of TP adjustment was required, and the assessee's appeal was allowed.

2. Inclusion/exclusion of communication costs from the total turnover while computing the deduction under S.10A:

The Revenue's appeal involved the inclusion/exclusion of communication costs from the total turnover for computing the deduction under S.10A. Both parties agreed that the issue was covered by the Hon'ble Bombay High Court's decision in the case of Gem Plus Jewellery Ltd. (330 ITR 175). The court held that items excluded from export turnover should also be excluded from total turnover for computing deductions under S.10A. Respectfully following this precedent, the Tribunal found no merit in the Revenue's appeal, which was accordingly dismissed.

Conclusion:

In conclusion, the assessee's appeal was allowed, resulting in the exclusion of certain comparables and no addition on account of TP adjustment. The Revenue's appeal was dismissed, affirming the exclusion of communication costs from the total turnover for computing the deduction under S.10A. The order was pronounced on 31st October 2014.

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