2019 (6) TMI 1705 - AT - Income Tax

Tribunal allows appeal, directs exclusion of comparables, and orders reassessment of transfer pricing adjustments and deductions.

Sterling Commerce Solutions India Private Ltd., (Successor in interest to Telelogic India Pvt. Ltd.), C/o. IBM India Pvt. Ltd., Versus The Deputy Commissioner of Income Tax, Circle 12 (4), Bangalore.

The appeal by the Assessee was partly allowed by the Tribunal. The Tribunal directed the exclusion of certain companies from the list of comparables in ... TP Adjustment - comparable selection - HELD THAT:- Companies functionally dissimilar with that of assessee need to be deselected. Also where the RPT exceeds 15%, such companies should not be taken as comparable companies. Improper allocation of operating expenditure to ITES segment - TPO has increased the Operative revenue of the Assessee in ITES by adding reimbursements made by AE, which cannot be regarded as part of the operating revenue - TPO has also tampered with the operating expenditure by allocating the total cost of the entity on the basis of proportionate segment revenue of the ITES segment. While allowing deduction u/s.10A of the Act, the AO has accepted the segmental details as given by the Assessee for the SWD segment and the ITES segment. The question is, can the treatment be different when it comes to determining ALP. The issue requires reexamination by the TPO. The parties therefore agreed that the issue requires to be examined afresh by the TPO in the light of the submissions made by the Assessee before DRP extracted of this order. Set off of losses prior to relief under section 10A of the Act - HELD THAT:- As decided in M/S YOKOGAWA INDIA LTD. [2016 (12) TMI 881 - SUPREME COURT] Provision of set off and carry forward as contemplated under Chapter-VI of the Act would not be attracted and therefore intra head set off sought by seeking to rely on the provision of section 70(1) of the Act and seeking to restrict the deduction u/s 10A and 10AA of the Act to the extent of gross total income as contemplated u/s 80A(2) of the Act, cannot be sustained. We therefore hold that deduction u/s.10A of the Act has to be allowed without setting off losses of non-10A unit before allowing the deduction under section 10A of the Act. In view of the aforesaid decision of the Hon’ble Supreme Court, the AO is directed not to set off the losses of non-10A units against profits of 10A units before allowing deduction u/s. 10A of the Act. Grant of lower deduction u/s 10A - As taking into consideration the decision rendered in the case of Tata Elxsi Ltd [2011 (8) TMI 782 - KARNATAKA HIGH COURT] we are of the view that it would be just and appropriate to direct the Assessing Officer to exclude the charges referred to in Gr.No.10 referred to above both from export turnover and total turnover, as has been prayed for by the assessee in the alternative. In view of the acceptance of the alternative prayer, we are of the view that no adjudication is required on the ground whether the aforesaid sums are required to be excluded from the export turnover. Moreover, the order of the Hon’ble Karnataka High Court has been upheld by the Hon’ble Supreme Court in the case of CIT v. HCL Technologies Ltd.[2018 (5) TMI 357 - SUPREME COURT] Credit for tax deducted at source not having been allowed - We direct the AO to verify the certificates filed by the Assessee for TDS and allow credit after due verification and in accordance with law. Issues Involved:1. TP Adjustment Relating to IT Services (Software Development Services).2. Improper Selection of Comparables.3. TP Adjustment in the IT Enabled Services Transactions with AE.4. Mistakes Apparent from Record and Erroneous Computation of Net Cost Plus Margin by the AO/TPO.5. Set Off of Losses Prior to Relief Under Section 10A of the Act.6. Grant of Lower Deduction Under Section 10A of the Income-tax Act, 1961.7. Credit for Tax Deducted at Source Not Having Been Allowed.Detailed Analysis:1. TP Adjustment Relating to IT Services (Software Development Services):The Assessee, a subsidiary of Telelogic AB, engaged in software development services (SWD services) and IT enabled services (ITeS) to its Associated Enterprises (AE), faced an adjustment due to the determination of Arm’s Length Price (ALP) using the Transaction Net Margin Method (TNMM) and the Profit Level Indicator (PLI) of Operating Profit to Operating Cost (OP/OC). The TPO selected comparables and calculated an arithmetic mean of 20.68%, adjusted to 19.68% after factoring in a working capital adjustment. This resulted in a transfer pricing adjustment of Rs.42,99,788/-. The Assessee's objections were rejected by the DRP, leading to the present appeal. The Tribunal directed the exclusion of certain companies with turnovers above Rs.200 crores from the list of comparables, following established precedents.2. Improper Selection of Comparables:The Assessee contended that certain companies were not functionally comparable, specifically KALS Information Systems Limited and Accel Transmatic Limited. The Tribunal, referencing previous decisions, agreed and directed their exclusion. Additionally, Lucid Software Limited was excluded based on its involvement in product development, following the Tribunal's decision in Logica Private Ltd. The Tribunal also excluded companies with related party transactions exceeding 15%, such as Aztec Software Limited, Geometric Software Ltd., and Megasoft Ltd., and companies like Tata Elxsi Ltd. and Bodhtree Consulting Ltd., which were functionally different from the Assessee.3. TP Adjustment in the IT Enabled Services Transactions with AE:The TPO used TNMM and OP/OC for comparison in the ITeS segment, resulting in an arithmetic mean of 24.00%, adjusted to 23.00% after a working capital adjustment. This led to a transfer pricing adjustment of Rs.1,17,27,077/-. The Assessee's objections were rejected by the DRP. The Tribunal, referencing the Hyderabad Bench's decision in HSBC Electronic Data Processing India Ltd., directed the exclusion of certain companies from the list of comparables, such as Maple ESolution Ltd., Datamatics Financial Services Ltd., Vishal Information Technological Services Ltd., Asit C.Mehta Financial Services Ltd., and Gold Stone Infratech Ltd.4. Mistakes Apparent from Record and Erroneous Computation of Net Cost Plus Margin by the AO/TPO:The Assessee highlighted errors in the TPO's computation of operating expenditure and revenue in the ITES segment. The TPO had included reimbursements from AE as part of the operating revenue and allocated total costs based on segment revenue proportion. The Tribunal directed the TPO to reexamine the issue, considering the Assessee's submissions and the segmental details accepted for section 10A deduction.5. Set Off of Losses Prior to Relief Under Section 10A of the Act:The Assessee contested the set-off of losses of non-10A units against eligible profits of 10A units before allowing deduction under section 10A. The Tribunal, following the Supreme Court's decision in Yokogawa India Ltd., directed that deduction under section 10A should be allowed without setting off losses of non-10A units.6. Grant of Lower Deduction Under Section 10A of the Income-tax Act, 1961:The Assessee objected to the exclusion of certain expenses from the export turnover while computing deduction under section 10A. The Tribunal, following the Karnataka High Court's decision in CIT v. Tata Elxsi Ltd., directed the AO to exclude the expenses from both export turnover and total turnover.7. Credit for Tax Deducted at Source Not Having Been Allowed:The Tribunal directed the AO to verify the TDS certificates filed by the Assessee and allow credit after due verification.Conclusion:The appeal by the Assessee was partly allowed, with directions to the TPO and AO to reexamine and recompute certain adjustments and deductions as per the Tribunal's findings and established legal precedents.