Tribunal grants partial relief in Transfer Pricing appeal, approves 'Loyalty Rewards', dismisses Revenue's challenge

The Tribunal allowed the assessee's appeal in part, directing the exclusion of certain comparable companies for Transfer Pricing adjustments and permitting 'Loyalty Rewards' expenditure. The Tribunal remitted the issue of copyright infringement settlement expenses for further verification. The inclusion of specific companies as comparables was also remitted for reconsideration. The Tribunal upheld the reduction of telecommunication charges for Section 10A computation. The Revenue's appeal was dismissed.

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Issues Involved:
1. Exclusion and inclusion of comparable companies for Transfer Pricing adjustments.
2. Consideration of copyright infringement settlement expenses as non-operating and extraordinary expenditure.
3. Inclusion of specific companies as comparables.
4. Disallowance of 'Loyalty Rewards' expenditure.
5. Consideration of 'Advertisement Board penalty charges' as allowable expenditure.
6. Application of Arm's Length Price (ALP) to reimbursement of expenses.
7. Reduction of telecommunication charges from both export turnover and total turnover for section 10A computation.

Issue-wise Detailed Analysis:

1. Exclusion and Inclusion of Comparable Companies for Transfer Pricing Adjustments:
The common ground for both parties was the inclusion and exclusion of certain companies in the Transfer Pricing (TP) study. The Tribunal noted that the TPO had selected 11 comparable companies, but the assessee objected to five of them: Accentia Technologies Ltd., Eclerx Services Ltd., Infosys BPO Ltd., TCS e-Serve Limited, and TCS e-Serve International Ltd. The DRP directed the exclusion of four companies based on factors like high turnover, brand value, and extraordinary events like mergers. The Tribunal upheld the DRP's decision and also directed the exclusion of TCS e-Serve International Ltd., citing similar reasons.

2. Consideration of Copyright Infringement Settlement Expenses as Non-operating and Extraordinary Expenditure:
The assessee argued that the copyright infringement settlement expenses paid to its AE should be treated as non-operating and extraordinary. The Tribunal found that the facts needed verification to determine if these expenses were part of the operating expenditure. The issue was remitted to the TPO for re-determination with directions to provide a fair hearing to the assessee.

3. Inclusion of Specific Companies as Comparables:
The assessee sought the inclusion of ICRA Online Ltd. and Vishwa Vikas Services Ltd. as comparables. The Tribunal noted inconsistencies in the TPO's findings and remitted the issue for reconsideration, directing the TPO to verify the details and take a decision in accordance with the law.

4. Disallowance of 'Loyalty Rewards' Expenditure:
The assessee contended that 'Loyalty Rewards' paid to employees should not be equated with bonus or commission under section 36(1)(ii). The Tribunal agreed, citing the Delhi High Court's judgment in Shri Ram Pistons & Rings Ltd. vs. CIT, and directed the AO to allow this expenditure.

5. Consideration of 'Advertisement Board Penalty Charges' as Allowable Expenditure:
The assessee did not pursue this ground during the hearing, and it was dismissed as not pressed.

6. Application of Arm's Length Price (ALP) to Reimbursement of Expenses:
The Tribunal noted that the TPO had applied an ALP of 29.25% to the reimbursement of expenses, where the adjusted ALP arrived at was 29.11%. The Tribunal did not provide a specific ruling on this issue, implying that the TPO's application was accepted.

7. Reduction of Telecommunication Charges from Both Export Turnover and Total Turnover for Section 10A Computation:
The Tribunal upheld the DRP's direction to reduce telecommunication charges from both export turnover and total turnover, citing the Karnataka High Court's decision in CIT & another vs. Tata Elxsi. The Tribunal found no reason to interfere with the final assessment order on this issue.

Conclusion:
The Tribunal allowed the assessee's appeal partly for statistical purposes and dismissed the Revenue's appeal. The order was pronounced in the open court on 20.01.2016.

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