Tribunal decision: Exclusion of comparables, set off losses upheld. Department's appeal dismissed.

The Tribunal partly allowed the Assessee's appeal by directing the exclusion of certain comparables and reimbursement costs from operational costs. It upheld the DRP's direction on the set off of losses and exclusion of communication charges. The Department's appeal was dismissed.

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Issues Involved:
1. Transfer Pricing Issues
2. Inclusion of Reimbursement Transactions as Part of Operational Cost
3. Interest Charged under Section 234B
4. Set Off of Losses from Income Assessed
5. Exclusion of Communication Charges from Export and Total Turnover

Detailed Analysis:

1. Transfer Pricing Issues:
The primary TP issues revolved around the selection of comparables and the determination of the Arm's Length Price (ALP). The Assessee objected to five comparables selected by the TPO: Accentia Technologies Ltd., Acropetal Technologies Ltd. (seg.), Cosmic Global Ltd., Eclerx Services Ltd., and Genesys International Ltd. The Tribunal examined the functionality of these companies and found them not comparable to the Assessee, an ITE service provider. The Tribunal cited previous rulings, including Capital IQ Information Systems (India) Pvt. Ltd. and Hyundai Motor India Engineering P. Ltd., to support its decision. Consequently, the Tribunal directed the AO/TPO to exclude these companies from the list of comparables.

2. Inclusion of Reimbursement Transactions as Part of Operational Cost:
The Assessee argued that certain reimbursements for travel and stay expenses paid to AEs should not be included in the operational cost as they were reimbursed at cost without markup. The Tribunal agreed with the Assessee, referencing its own decision in the Assessee's case for AY 2008-09 and other rulings, and directed the AO/TPO to exclude reimbursement costs while working out the operating costs. The Tribunal instructed the AO/TPO to recompute the ALP afresh and make necessary adjustments if warranted.

3. Interest Charged under Section 234B:
The issue of interest charged under Section 234B was deemed premature to decide at this stage as it would depend on the outcome of the adjustment to be made to the ALP. Therefore, this ground was dismissed as infructuous.

4. Set Off of Losses from Income Assessed:
The Assessee incurred losses in its Gurgaon Unit and claimed 10A exemption for other STPI units. The AO set off losses relating to the Gurgaon Unit against profits of other 10A units before computing the deduction under Section 10A, contrary to the DRP's direction. The Tribunal upheld the Assessee's claim that income of Section 10A units should be excluded at source before arriving at the gross total income, thus not allowing the set off of losses against such profits. The Tribunal emphasized that the AO must comply with DRP directions as per Section 144C(10) and allowed the Assessee's claim.

5. Exclusion of Communication Charges from Export and Total Turnover:
The DRP directed the exclusion of communication charges from both export and total turnover while computing the exemption under Section 10A. The Tribunal upheld this direction, referencing decisions from various High Courts and the ITAT Chennai Special Bench in ITO Vs. Saksoft, and dismissed the Department's ground on this issue.

Conclusion:
The Tribunal partly allowed the Assessee's appeal, directing the exclusion of certain comparables and reimbursement costs from operational costs, and upheld the DRP's direction on the set off of losses and exclusion of communication charges. The Department's appeal was dismissed.

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