Appeal allowed for Transfer Pricing adjustments & computation exclusions, pending final decision on leave encashment disallowance.

The Tribunal allowed the appeal of the assessee by directing the Transfer Pricing Officer to exclude certain comparables for Transfer Pricing adjustments and re-evaluate others. In terms of computation under Section 10A, the Assessing Officer was instructed to exclude specific expenses from both export turnover and total turnover. The issue of disallowance of leave encashment under Section 43B(f) was remitted back to the AO pending the Supreme Court's final decision.

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Issues Involved:
1. Rejection of comparables for Transfer Pricing (TP) adjustments.
2. Adjustments made in respect of computation under Section 10A.
3. Disallowance of leave encashment under Section 43B(f).

Issue-wise Detailed Analysis:

1. Rejection of Comparables for Transfer Pricing (TP) Adjustments:
The assessee contested the inclusion of certain companies as comparables for TP adjustments, arguing that they were not functionally similar and had peculiar circumstances or unreliable financials. The Tribunal admitted additional grounds of appeal to reject the following companies as comparables:

- Maple eSolutions Limited: Rejected due to unreliable financials and extraordinary events during the year, including acquisition by Triton Corporation Limited.
- Triton Corp Limited: Rejected on grounds of unreliable financials and extraordinary events.
- Accurate Data Converters Private Limited: Excluded due to failure to meet the employee cost filter.
- Infosys BPO Limited: Rejected due to functional dissimilarity and the presence of peculiar business circumstances.

The Tribunal relied on previous decisions in Magma Design Automation India P. Ltd and AOL Online India P. Ltd, which established that these companies should not be considered as comparables for benchmarking IT-enabled services (ITeS) businesses. The Tribunal directed the Transfer Pricing Officer (TPO) to exclude these companies from the list of comparables and to re-evaluate the comparability of M/s I Services India P Ltd and Accurate Data Converters Ltd after obtaining necessary annual reports and affording due opportunity to the assessee.

2. Adjustments Made in Respect of Computation under Section 10A:
The Assessing Officer (AO) excluded Rs. 20,51,19,242 incurred in foreign currency on travel from the export turnover for computing the deduction under Section 10A. The assessee argued that since it is rendering BPO services and ITES, this expenditure should not be excluded from the export turnover. Additionally, the AO reduced Rs. 2,62,94,302 towards foreign exchange loss from the export turnover alone, which the assessee contended should also be reduced from the total turnover.

The Tribunal referred to its previous decision in the assessee's own case for A.Y. 2008-09 and the Karnataka High Court ruling in CIT v Tata Elxsi Ltd, which held that if expenses are excluded from the export turnover, they should also be excluded from the total turnover. Consequently, the AO was directed to exclude the aforementioned expenses from both export turnover and total turnover while computing the deduction under Section 10A.

3. Disallowance of Leave Encashment under Section 43B(f):
The AO disallowed Rs. 6,83,81,220 towards leave encashment, which remained outstanding as of the last day of the previous year, under Section 43B(f). The assessee argued that this disallowance was arbitrary and referred to the Calcutta High Court decision in Exide Industries Ltd and another v. UOI & others, which struck down Section 43B(f). However, the Supreme Court, in its interim order, allowed the department to recover the amount while the civil appeal was pending.

The Tribunal remitted this issue back to the AO to decide based on the outcome of the Supreme Court's final decision in the Exide Industries Ltd case.

Conclusion:
The Tribunal allowed the appeal of the assessee, directing the TPO to exclude certain comparables for TP adjustments and to re-evaluate others. For the computation under Section 10A, the AO was instructed to exclude specific expenses from both export turnover and total turnover. The issue of leave encashment disallowance was remitted back to the AO pending the Supreme Court's decision.

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