Tribunal directs exclusion of companies, adjustments to deduction computation under Section 10A, and recalculation of interest.

The Tribunal partly allowed the appeal, directing the AO to exclude specific companies from the final list of comparables, verify the arithmetic mean, and adjust the computation of the deduction under Section 10A as per the High Court's judgment. The interest under Section 234B was to be recalculated based on the final assessment.

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Issues Involved:
1. Transfer Pricing Adjustment
2. Exclusion of Certain Companies from Comparables
3. Reduction of Telecommunication and Traveling Expenses from Export Turnover
4. Charging of Interest under Section 234B

Detailed Analysis:

1. Transfer Pricing Adjustment:
The appeal concerns the assessment year 2006-07 and challenges the order of the Assessing Officer (AO) under Section 143(3) read with Section 144C(13) of the Income-tax Act, 1961. The AO observed that the assessee had entered into international transactions with its Associated Enterprises (AE) for providing software development services amounting to Rs. 18,27,80,431. The Transfer Pricing Officer (TPO) was involved to determine the Arm's Length Price (ALP) under Section 92CA of the Act. The TPO accepted the Transactional Net Margin Method (TNMM) chosen by the assessee but rejected the comparables adopted by the assessee, instead selecting 20 other companies as comparables, resulting in a transfer pricing adjustment of Rs. 1,26,15,950.

2. Exclusion of Certain Companies from Comparables:
The assessee contested the inclusion of certain companies as comparables by the TPO on grounds of turnover filter, Related Party Transactions (RPT) filter, and functional dissimilarity. The Tribunal referenced the decision in M/s. Ariba Technologies India Pvt. Ltd. for assessment year 2006-07, noting similarities between the two cases.

- Turnover Filter: The Tribunal upheld the exclusion of companies with a turnover exceeding Rs. 200 crores, citing decisions in Trilogy E-Business Software India (P) Ltd. and other cases. Consequently, companies like Infosys Ltd., Flextronics Software Systems Ltd., iGate Global Solutions Ltd., Mindtree Consulting Ltd., Persistent Systems Ltd., and Sasken Communication Ltd. were excluded.

- Functional Dissimilarity: Companies such as KALS Info Systems Ltd., Accel Transmatics Ltd. (segment), and Tata Elxsi Ltd. (segment) were excluded due to their involvement in non-comparable activities like software products and hardware design, as supported by previous Tribunal decisions.

- RPT Filter: Companies like Mega Soft Ltd., Aztec Software Ltd., and Geometric Software Ltd. (segment) with RPT exceeding 15% were excluded, following precedents set in similar cases.

3. Reduction of Telecommunication and Traveling Expenses from Export Turnover:
The assessee sought the exclusion of telecommunication and traveling expenses incurred in foreign currency from both the export turnover and total turnover while computing the deduction under Section 10A. The Tribunal referenced the judgment of the Karnataka High Court in CIT vs. Tata Elxsi (349 ITR 98), which supports the exclusion of such expenses from both export and total turnover.

4. Charging of Interest under Section 234B:
The issue of charging interest under Section 234B was deemed consequential. The AO was directed to provide consequential relief, if any, to the assessee.

Conclusion:
The Tribunal concluded by partly allowing the assessee's appeal, directing the AO to exclude specific companies from the final list of comparables, verify the arithmetic mean, and adjust the computation of the deduction under Section 10A as per the High Court's judgment. The interest under Section 234B was to be recalculated based on the final assessment.

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