2017 (1) TMI 1673 - AT - Income Tax

Tribunal Ruling: Turnover Filter Removed, Expenses Excluded, Transfer Pricing Adjusted

Dy. Commissioner of Income Tax, Circle 5 (1) (1), Bangalore  Versus  M/s. Tesco Hindustan Service Centre Pvt. Ltd.,

The Tribunal decided in favor of the revenue regarding the application of the turnover filter, allowing the removal of the turnover filter. It upheld the ... TP Adjustment - comparable selection - turnover filter applied by the DRP - HELD THAT:- Assessee has no objection if no turnover filter is applied for the purpose of deciding the functional comparability of these companies however the issue of functional comparability has been raised by the assessee in its appeal. AR has submitted that the assessee has no objections if the directions of the DRP is reversed and no turnover filter is applied. Accordingly, in view of no objection of the assessee's counsel, we decide this ground in favour of the revenue and set aside the directions of the DRP so far as applying the turnover filter. Deduction u/s 10A - exclusion of reduction of expenses on telecommunications, freight and insurance incurred in foreign currency from export turnover as well as total turnover - HELD THAT:- On perusal thereof we find that the issue before us for adjudication i.e. if expenditure incurred on telecommunication, insurance and freight charges and on travel in foreign currency attributable to the delivery of computer software abroad is reduced from export turnover an equal amount should also be reduced from total turnover while computing the deduction u/s 10A is covered in favour of the assessee by the decision in the case of Tata Elxsi Ltd. [2011 (8) TMI 782 - KARNATAKA HIGH COURT]. Exclusion of 7 companies from the set of 10 comparables selected by the TPO - HELD THAT:- Exclusion of Functionally dissimilar /indifferent companies not comparable with a captive service provider as that of assessee. Companies also excluded as not satisfying the tolerance range of 15% RPT filter. E-clerx Services Limited - As discussed by the Special Bench in the case of Maersk Global Centres (India ) (P) Ltd [2015 (1) TMI 917 - ITAT MUMBAI] this company provides data analysis, operating management, audits, reconciliation, metrics management and operating services. It has two business verticals – financial services, retail and manufacturing. It was found to have being providing complete business solutions in the nature of high end services. The nature and different field of services provided by this company clearly show that it is not functionally comparable with the ITES. Accordingly, we direct the TPO/AO to exclude this company from the set of comparables. Infosys BPO Ltd. - Annual Report of this company to submit that this company commands substantial brand value, owns intellectual property rights and is a market leader with brand value, whereas the assessee is merely an ITES operating its business in India and does not possess either any brand value or own any intangible or intellectual property rights (IPRs). Disallowance of lease rentals - HELD THAT:- Tribunal has decided this issue by following the decision of Hon'ble Supreme Court in the case of ITDS Vs. CIT [2013 (1) TMI 344 - SUPREME COURT] as well as decision in the case of Rajshree Roadways Vs. Union of India [2003 (3) TMI 50 - RAJASTHAN HIGH COURT] . Following the decision of Hon'ble Gujarat High Court as well as Hon'ble Supreme Court (supra), we decide this issue in favour of the assessee and accordingly allow the claim of the assessee regarding lease rentals as an allowable revenue expenditure. It covers both the grounds of the assessee as well as revenue’s appeal. Consequently the Ground No.2 of the revenue’s appeal is dismissed and Ground II of the assessee's appeal is allowed. Issues Involved:1. Turnover Filter2. Reduction of Expenses on Telecommunications, Freight, and Insurance3. Transfer Pricing Adjustments4. Disallowance of Lease RentalsDetailed Analysis:1. Turnover Filter:Issue: The revenue challenged the Dispute Resolution Panel (DRP)'s application of the turnover filter, arguing that size, turnover, and brand of the company are deciding factors for treating a company as a comparable.Judgment: The assessee had no objection to the removal of the turnover filter. Consequently, the Tribunal decided in favor of the revenue, reversing the DRP's directions regarding the application of the turnover filter.2. Reduction of Expenses on Telecommunications, Freight, and Insurance:Issue: Whether expenses on telecommunications, freight, and insurance incurred in foreign currency should be excluded from both export turnover and total turnover for computing the deduction under Section 10A of the Income Tax Act.Judgment: The Tribunal upheld the DRP's directions, citing the Karnataka High Court's decision in Tata Elxsi Ltd., which mandates uniformity in the treatment of export turnover and total turnover. The Tribunal dismissed the revenue's appeal on this ground.3. Transfer Pricing Adjustments:Issue: The assessee challenged the Transfer Pricing Officer (TPO)'s rejection of its comparables and the inclusion of certain companies that do not satisfy the test of comparability.Judgment: The Tribunal addressed the functional comparability of several companies:- Accentia Technologies Ltd., Acropetal Technologies Ltd. (Seg.), Fortune Infotech Ltd., ICRA Online Ltd. (Seg.), Sundaram Business Services Ltd.: The Tribunal excluded these companies based on functional dissimilarity and related party transactions (RPT) exceeding 15%.- E-clerx Services Ltd.: Excluded due to its provision of high-end services involving specialized knowledge, making it functionally incomparable to the assessee's ITES.- Infosys BPO Ltd.: Excluded due to its substantial brand value, intellectual property rights, and market leadership, which made it functionally dissimilar to the assessee.The Tribunal directed the TPO to compute the Arm's Length Price (ALP) based on the remaining comparables.4. Disallowance of Lease Rentals:Issue: The DRP allowed the interest portion of vehicle lease rentals but disallowed the principal portion, leading to appeals from both the revenue and the assessee.Judgment: The Tribunal considered precedents, including the Gujarat High Court's decision in Sayaji Iron & Engg. Co. and the Supreme Court's decision in ICDS Ltd. v. CIT. It concluded that the entire lease rental payments, including both interest and principal, should be allowed as revenue expenditure. The Tribunal allowed the assessee's claim and dismissed the revenue's appeal on this issue.Conclusion:Both the assessee's appeal and the revenue's appeal were partly allowed. The Tribunal provided a detailed analysis of each issue, considering relevant case laws and functional comparability, ultimately directing appropriate adjustments and exclusions based on established legal principles.