Appeal partially allowed with remittance for fresh consideration; exclusion of communication charges from export turnover upheld.

The assessee's appeal was partly allowed for statistical purposes, with several issues remitted back to the AO/TPO for fresh consideration. The department's appeal was dismissed, upholding the DRP's direction on the exclusion of communication charges from export turnover for Section 10A deduction.

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Issues Involved:
1. Transfer Pricing Adjustments
2. Selection of Comparables
3. Deferred Revenue Expenditure
4. Employee Cost Adjustment
5. Risk and Working Capital Adjustments
6. Exclusion of Communication Charges from Export Turnover for Section 10A Deduction

Detailed Analysis:

1. Transfer Pricing Adjustments:
The appeals pertain to the assessment year (AY) 2009-10, involving the determination of the arm's length price (ALP) for international transactions between the assessee, an Indian subsidiary of Planet Soft Inc., USA, and its Associated Enterprises (AE). The Transfer Pricing Officer (TPO) accepted the Transaction Net Margin Method (TNMM) but rejected the assessee's Transfer Pricing (TP) report, citing defects such as the use of multiple year data and inappropriate filters. The TPO selected 17 comparables, resulting in a TP adjustment of Rs. 6,88,46,979.

2. Selection of Comparables:
The assessee objected to the selection of certain comparables by the TPO. The ITAT examined each comparable and provided detailed reasons for exclusion or inclusion:
- Bodhtree Consulting Ltd.: Excluded as it is engaged in software products.
- Infosys Ltd.: Excluded due to functional dissimilarity and ownership of significant intangibles.
- KALS Information Systems Ltd.: Excluded for being functionally different.
- Tata Elxsi Ltd.: Excluded for functional dissimilarity and lack of segment revenue.
- Persistent Systems Pvt. Ltd.: Excluded due to engagement in product development and lack of segmental data.
- R Systems International Ltd.: Excluded for having a different financial year ending.
- Thinksoft Global Services Ltd.: Excluded for providing testing services, not software development.
- Thirdware Solutions Ltd.: Excluded due to involvement in product development and lack of segmental expenditure details.
- Igate Global Solutions Ltd.: Remitted for fresh examination due to high turnover and potential product development.
- Zylog Systems Ltd.: Excluded due to acquisitions affecting revenue.
- Sasken Communication Technologies Ltd.: Remitted for fresh adjudication due to involvement in product development and lack of segmental cost details.

3. Deferred Revenue Expenditure:
The assessee claimed that amortization of deferred revenue expenditure should not be considered operational. The TPO and DRP rejected this claim. The ITAT remitted the issue back to the AO/TPO for fresh examination, directing the assessee to demonstrate that such expenditure was not claimed in preceding years.

4. Employee Cost Adjustment:
The assessee argued for the exclusion of excess employee costs from operating costs. The DRP rejected this claim, stating that maintaining excess staff is common practice. The ITAT remitted the issue back to the AO/TPO for re-examination, directing verification of the cause for the quantum jump in salary.

5. Risk and Working Capital Adjustments:
The TPO did not allow any risk adjustment, and made a negative working capital adjustment of (-)3.64%. The ITAT remitted the issue back to the AO/TPO for fresh consideration, directing the assessee to provide a scientific basis for risk adjustment and to examine the working capital adjustment.

6. Exclusion of Communication Charges from Export Turnover for Section 10A Deduction:
The DRP directed the AO to reduce communication charges from both export turnover and total turnover while computing the deduction under Section 10A. The ITAT upheld the DRP's direction, dismissing the department's appeal on this issue.

Conclusion:
- The assessee's appeal was partly allowed for statistical purposes, with several issues remitted back to the AO/TPO for fresh consideration.
- The department's appeal was dismissed, upholding the DRP's direction on the exclusion of communication charges from export turnover for Section 10A deduction.

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