Tribunal adjusts transfer pricing, allows deductions under Section 80JJAA, and permits education cess as business expense.

The Tribunal partly allowed the assessee's appeal, directing the Transfer Pricing Officer to recompute the Arm's Length Price, the Assessing Officer to consider unit-wise deductions under Section 80JJAA, and allowing the deductibility of education cess as a business expense. The revenue's appeal was dismissed, upholding decisions on risk adjustment and exclusion of foreign currency expenses from total turnover.

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Issues Involved:
1. Transfer Pricing Adjustment
2. Deduction under Section 80JJAA
3. Exclusion of Expenses Incurred in Foreign Currency from Total Turnover and Export Turnover
4. Deductibility of Education Cess

Issue-wise Detailed Analysis:

1. Transfer Pricing Adjustment:
The primary issue in the assessee's appeal concerns the determination of the Arm’s Length Price (ALP) for the international transaction of rendering Software Development Services (SWD services) to its Associated Enterprises (AEs). The assessee used the Transaction Net Margin Method (TNMM) and selected Operating Profit/Operating Cost (OP/OC) as the Profit Level Indicator (PLI). The assessee's OP/OC was 5.08%, and it selected 16 comparable companies with an average profit margin of 9.90%. The Transfer Pricing Officer (TPO) accepted TNMM but chose 13 different comparable companies, resulting in an average profit margin of 24.82%. This led to an addition of Rs. 198,69,63,348 to the assessee's income.

The assessee sought exclusion of Persistent Systems Ltd. and Sasken Communication Technologies Ltd. and inclusion of FCS Software Solutions Ltd. based on the ITAT Bangalore Bench's decision in a similar case. The Tribunal upheld the exclusion of Persistent Systems Ltd. and Sasken Communication Technologies Ltd. and inclusion of FCS Software Solutions Ltd., directing the TPO to compute the ALP accordingly.

2. Deduction under Section 80JJAA:
The assessee claimed a deduction under Section 80JJAA amounting to Rs. 4,26,67,792, which was denied by the AO on two grounds: (1) software unit employees were not considered as workmen, and (2) deduction under Section 80JJAA could not be claimed for 10A units due to Section 80A(4). The DRP upheld the AO's decision, emphasizing the need for unit-wise computation. The Tribunal directed the AO to consider the deduction for each 10A unit separately, following the assessee's willingness to provide unit-wise details. The Tribunal also upheld the decision that software industry employees could not be regarded as workmen for Section 80JJAA purposes, based on a previous ruling.

3. Exclusion of Expenses Incurred in Foreign Currency from Total Turnover and Export Turnover:
The Tribunal addressed the issue of excluding expenses incurred in foreign currency from both total turnover and export turnover while computing the deduction under Section 10A. Citing the Karnataka High Court's decision in CIT v. Tata Elxsi Ltd. and the Supreme Court's affirmation in CIT v. HCL Technologies Ltd., the Tribunal upheld the exclusion of such expenses from both total and export turnover.

4. Deductibility of Education Cess:
The Tribunal considered the additional ground regarding the deductibility of education cess. Citing the ITAT Bangalore Bench's decision in Capten India Pvt. Ltd. and other precedents, the Tribunal held that education cess and secondary and higher education cess are deductible as business expenditures under Section 37(1). The additional ground of appeal was allowed.

Conclusion:
The assessee's appeal was partly allowed, with directions for the TPO to recompute the ALP, the AO to consider unit-wise deductions under Section 80JJAA, and the inclusion of education cess as a deductible expense. The revenue's appeal was dismissed, upholding the DRP's decisions on risk adjustment and exclusion of foreign currency expenses from total turnover.

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