Tribunal directs AO to reconsider royalty payment, adjust comparables, and include telecommunication expenses in Section 10A computation.

The Tribunal allowed the appeal filed by the assessee, directing the AO/TPO to reconsider the royalty payment issue with new evidence, exclude certain comparables for software development services, and include telecommunication expenses in the Section 10A computation. Consequential grounds related to interest were not separately adjudicated. The order was pronounced on June 7, 2019.

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Issues Involved:
1. Transfer Pricing Adjustment for Payment of License Fee (Royalty)
2. Transfer Pricing Adjustment for Provision of Technical Support Services (Software Development)
3. Exclusion of Telecommunication Expenses in Computing Deduction under Section 10A
4. Charging of Interest under Sections 234B and 234D

Detailed Analysis:

1. Transfer Pricing Adjustment for Payment of License Fee (Royalty):
The assessee contested the addition made by the Assessing Officer (AO) and Transfer Pricing Officer (TPO) regarding the arm's length price (ALP) of royalty payments to its associated enterprises (AE). The AO and TPO determined the ALP of the royalty to be NIL, concluding that the assessee did not receive any tangible economic benefit. The Tribunal noted that the assessee provided substantial evidence, including documents not previously considered by the authorities, to establish the receipt of technical know-how and the necessity of the royalty payments. The Tribunal set aside the issue back to the AO/TPO for a fresh determination in light of the new evidence, directing verification of the details and consideration of the claim as per law.

2. Transfer Pricing Adjustment for Provision of Technical Support Services (Software Development):
The assessee challenged the inclusion of certain comparables by the TPO in determining the ALP for software development services. The Tribunal analyzed the functional, asset, and risk (FAR) profile of the assessee, noting that it is a captive service provider with limited risks and no significant intangible assets. The Tribunal directed the exclusion of several comparables (Infosys Technologies Ltd, KALS Information Systems Ltd, Tata Elxi Ltd, Accel Transmatic Ltd, and Megasoft Ltd) from the final list, as they were functionally dissimilar, engaged in product development, or had significant intangible assets. The Tribunal allowed the assessee's grounds related to these comparables, noting that the exclusion brought the assessee within the acceptable arm's length margin.

3. Exclusion of Telecommunication Expenses in Computing Deduction under Section 10A:
The assessee argued that telecommunication expenses should be included while computing the deduction under Section 10A. The Tribunal referred to the Karnataka High Court decision in CIT vs Tata Elxsi Ltd, which held that telecommunication expenses are directly linked to earning income and should be included in the computation. The Tribunal directed the AO to include telecommunication expenses while computing the exempt income under Section 10A, thereby allowing the assessee's grounds.

4. Charging of Interest under Sections 234B and 234D:
The grounds related to the charging of interest under Sections 234B and 234D were deemed consequential and did not require separate adjudication.

Conclusion:
The Tribunal allowed the appeal filed by the assessee, directing the AO/TPO to reconsider the royalty payment issue with the new evidence, exclude certain comparables for software development services, and include telecommunication expenses in the Section 10A computation. The consequential grounds related to interest were not separately adjudicated. The order was pronounced on June 7, 2019.

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