Tribunal upholds DRP's decision on deduction; Assessee's appeals partly allowed addressing Transfer Pricing, TDS Credit, and more.

The Revenue's appeal for A.Y 2009-10 was dismissed as the Tribunal upheld the DRP's decision regarding deduction u/s 10A. The assessee's appeals for A.Y 2009-10 & 2010-11 were partly allowed, with various issues such as Transfer Pricing Adjustments, Reimbursement of Expenses, Corporate Guarantee, TDS Credit, Bad Debts, and Penalty Proceedings being addressed and decided accordingly. The order was pronounced on 30th November, 2017.

---

---

Issues Involved: Deduction u/s 10A, Transfer Pricing (TP) Adjustments, Reimbursement of Expenses, Corporate Guarantee, TDS Credit, Bad Debts, Penalty Proceedings.

Issue-wise Detailed Analysis:

1. Deduction u/s 10A:
The Revenue's appeal contested the DRP's direction to delete the addition made by the AO by reducing implementation expenditure and internet connectivity charges from the export turnover for the purpose of deduction u/s 10A. The Tribunal upheld the DRP's decision, referencing the Karnataka High Court's ruling in Commissioner Of Income-Tax And Another vs. Tata Elxsi Ltd and the jurisdictional High Court's decision in BA Continuum. It was affirmed that if any expenditure is excluded from the export turnover, it should also be excluded from the total turnover while computing the deduction u/s 10A. Consequently, the Revenue's appeal was dismissed.

2. Transfer Pricing (TP) Adjustments:
The assessee's appeal involved multiple grounds related to TP adjustments. The primary issue was the rejection of the internal TNMM by the TPO, which was used by the assessee to determine the ALP for transactions with its AEs. The Tribunal referred to its previous decisions in the assessee's own case for earlier A.Ys, where it was held that internal TNMM cannot be ignored. The Tribunal directed the AO to consider only the segmental results of AE transactions and the internal TNMM for benchmarking the assessee’s transactions of software development services. Grounds related to TP adjustments were remanded to the AO for reconsideration.

3. Reimbursement of Expenses:
Regarding the reimbursement of expenses on a cost-to-cost basis, the Tribunal found that this issue was covered in favor of the assessee by previous decisions. It was held that such reimbursements do not require any markup and should not be treated as a separate international transaction. Consequently, the adjustment on account of such transactions was deleted.

4. Corporate Guarantee:
The assessee argued that corporate guarantees should not be considered an international transaction as per section 92B of the Act for the relevant period. The Tribunal agreed, referencing decisions from various benches and specifically the case of Rain Cements, which held that the amended provision is applicable only from A.Y 2013-14. Therefore, the addition/adjustment made on account of corporate guarantee fee was deleted.

5. TDS Credit:
The assessee's ground regarding the allowance of TDS credit was remitted to the AO with a direction to allow the same in accordance with law after verification of the assessee’s claim.

6. Bad Debts:
The AO had excluded the net income from the sale of third-party licenses from the profit eligible for deduction u/s 10A. The Tribunal noted that the exclusion was made from both the export and total turnover, resulting in no prejudice to the assessee. Therefore, the assessee’s ground of appeal was rejected. For A.Y 2010-11, there was a discrepancy in the figure of bad debts written off. The Tribunal remanded the issue to the AO for verification and adjudication in accordance with law.

7. Penalty Proceedings:
The grounds related to the initiation of penalty proceedings u/s 271(1)(c), 271AA, and 271BA were dismissed as premature.

Summary of Judgments:
- Revenue’s Appeal for A.Y 2009-10: Dismissed.
- Assessee’s Appeals for A.Y 2009-10 & 2010-11: Partly allowed.

Order Pronounced: The order was pronounced in the Open Court on 30th November, 2017.

---