ITAT Upholds Assessee's Appeal on Deductions & Transfer Pricing Adjustment

The ITAT dismissed the Revenue's appeal and allowed the assessee's appeal. It upheld the CIT(A)'s decisions on deductions under Section 10A for service charges, deputation charges, and unbilled software income. Regarding the transfer pricing adjustment for redemption of preference shares, the ITAT applied safe harbor rules, accepting the redemption price as the arm's length price.

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Issues Involved:
1. Deduction under Section 10A for service charges recovered from a 100% subsidiary.
2. Deduction under Section 10A for deputation charges.
3. Deduction under Section 10A for unbilled software income.
4. Transfer pricing adjustment for redemption of preference shares of an associated enterprise.

Issue-wise Detailed Analysis:

1. Deduction under Section 10A for Service Charges Recovered from a 100% Subsidiary:
The Revenue argued that the service charges recovered from the assessee's 100% subsidiary were not eligible for deduction under Section 10A. The ITAT noted that this issue had been previously decided in favor of the assessee by both the ITAT and the Hon'ble High Court. The ITAT upheld the CIT(A)'s decision allowing the deduction, referencing the precedent in the assessee's own case for earlier assessment years. The ITAT found no infirmity in the CIT(A)'s order and dismissed the Revenue's appeal on this ground.

2. Deduction under Section 10A for Deputation Charges:
The Revenue contended that deputation charges received from the assessee's 100% subsidiary were not eligible for deduction under Section 10A. The ITAT did not separately address this issue, implying that it was covered under the same reasoning and precedent as the service charges issue. Consequently, the ITAT upheld the CIT(A)'s decision, allowing the deduction for deputation charges as well.

3. Deduction under Section 10A for Unbilled Software Income:
The Revenue challenged the CIT(A)'s decision to delete the addition made on account of unbilled software income, arguing it was not eligible for deduction under Section 10A. The ITAT did not provide a separate analysis for this issue, suggesting it was also resolved based on the same precedent as the service charges and deputation charges issues. The ITAT upheld the CIT(A)'s decision, allowing the deduction for unbilled software income.

4. Transfer Pricing Adjustment for Redemption of Preference Shares of an Associated Enterprise:
The assessee appealed against the CIT(A)'s decision to uphold the Transfer Pricing Officer's (TPO) adjustment of Rs. 57,82,500 for the arm's length price of redemption of preference shares. The TPO had determined the arm's length price based on a valuation report, which valued the shares at $1.05 each, whereas the assessee redeemed them at $1. The CIT(A) upheld the TPO's adjustment, stating that the second proviso to Section 92C(2) did not apply as only one price was considered.

The ITAT, however, found merit in the assessee's argument that the safe harbour rules (+/- 5% variation) should apply. The ITAT referenced several decisions where the benefit of the 5% variation was granted even when a single rate was used for benchmarking. The ITAT concluded that the distinction made by the CIT(A) was not supported by the statute. Therefore, the ITAT allowed the assessee's appeal, granting the benefit of the safe harbour rules and accepting the redemption price of $1 as the arm's length price.

Conclusion:
The ITAT dismissed the Revenue's appeal and allowed the assessee's appeal. The ITAT upheld the CIT(A)'s decisions on the eligibility of deductions under Section 10A for service charges, deputation charges, and unbilled software income. Additionally, the ITAT granted the assessee's appeal regarding the transfer pricing adjustment for the redemption of preference shares, applying the safe harbour rules to accept the redemption price as the arm's length price. The order was pronounced in the open court on January 21, 2020.

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