Tribunal rejects revenue's appeal, excludes Acropetal from comparables, affirms section 10B deduction.

The Tribunal dismissed the revenue's appeal and the assessee's cross-objection. It upheld the exclusion of Acropetal Technologies Ltd. from the list of comparables and affirmed the decision regarding the deduction under section 10B. The Tribunal found that the comparables selected by the Transfer Pricing Officer were not appropriate, and the deduction under section 10B should be made independently. The decision was pronounced on October 31, 2018.

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Issues Involved:
1. Determination of the arm’s length price (ALP) in respect of an international transaction of rendering IT enabled services (ITes) by the assessee to its Associated Enterprise (AE).
2. Exclusion of Acropetal Technologies Ltd. from the list of comparable companies.
3. Deduction under section 10B of the Income-Tax Act, 1961 before computing the gross total income.

Issue-wise Detailed Analysis:

1. Determination of the Arm's Length Price (ALP):
The primary issue raised by the revenue (Ground Nos. 1 to 10) pertains to the determination of the ALP for the international transaction of rendering IT enabled services (ITes) by the assessee to its Associated Enterprise (AE). The assessee, a subsidiary of Flextronics International Asia Pacific Ltd., Mauritius, provided various back-office services to its affiliates worldwide. The price received for these services was Rs. 12,32,60,290. To support its claim that the price was at arm’s length, the assessee adopted the Transactional Net Margin Method (TNMM) and selected a set of 10 comparable companies. However, the Transfer Pricing Officer (TPO) rejected all but one comparable company chosen by the assessee and selected 9 additional companies. The TPO computed the ALP based on these comparables and made an addition to the total income. The Dispute Resolution Panel (DRP) excluded 8 out of the 10 comparables chosen by the TPO, leaving only ICRA Online Ltd. and Jindal Telecom, whose profit margins were at arm’s length when compared with the assessee's margins after providing for working capital adjustment.

2. Exclusion of Acropetal Technologies Ltd.:
The revenue challenged the exclusion of Acropetal Technologies Ltd. by the DRP. The DRP excluded this company on the grounds that its major source of income was from providing engineering design services, which are considered high-end services requiring high skill, unlike the low-end ITES functions performed by the assessee. The Tribunal upheld the DRP's exclusion of Acropetal Technologies Ltd., noting that the engineering design services provided by Acropetal were not comparable to the ITES provided by the assessee. The Tribunal cited previous decisions where Acropetal Technologies Ltd. was excluded as a comparable for similar reasons.

3. Deduction under Section 10B:
The revenue also challenged the DRP's decision regarding the deduction under section 10B of the Income-Tax Act, 1961. The issue was whether the deduction under section 10B should be deducted from the income of the eligible unit before computing the gross total income. The Tribunal referred to the Hon’ble Supreme Court's decision in the case of Yokogawa India Ltd., which held that the deduction under section 10A (similar to section 10B) should be made independently and immediately after determining the profits and gains of the eligible undertaking, without reference to the other eligible or non-eligible units of the assessee. Consequently, the Tribunal found no merit in the revenue's ground and upheld the DRP's decision.

Conclusion:
In conclusion, the Tribunal dismissed the revenue's appeal and the assessee's cross-objection. The Tribunal upheld the DRP's exclusion of Acropetal Technologies Ltd. from the list of comparables and affirmed the DRP's decision regarding the deduction under section 10B. The Tribunal's decision was pronounced in the open court on October 31, 2018.

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