Tribunal upholds transfer pricing adjustment and travel expense reduction for Section 10A deduction

The Tribunal dismissed the assessee's appeal, upholding the transfer pricing adjustment made by the Transfer Pricing Officer. The selection of comparable companies was adjusted multiple times, with exclusions and inclusions based on turnover filters and functionality. Certain companies were excluded from the comparables list due to functional differences. Additionally, the Tribunal upheld the reduction of travel expenses from both export and total turnover for Section 10A deduction, following a precedent set by the Karnataka High Court.

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Issues Involved:

1. Transfer Pricing Adjustment
2. Selection of Comparable Companies
3. Application of Filters for Comparable Companies
4. Exclusion of Certain Companies on Functional Grounds
5. Reduction of Travel Expenditure from Export Turnover for Section 10A Deduction

Detailed Analysis:

1. Transfer Pricing Adjustment:

The primary issue was whether the consideration received for international transactions with the Associate Enterprises (AE) was at Arm's Length Pricing (ALP). The assessee company used the Transactional Net Margin Method (TNMM) and claimed its profit level indicator (PLI) was within ±5% of the arithmetic mean of comparable entities. The Transfer Pricing Officer (TPO) computed a transfer pricing adjustment of Rs. 3,24,55,435/-, rejecting the assessee's transfer pricing study report and identifying a different set of comparable companies.

2. Selection of Comparable Companies:

The TPO accepted the TNMM but rejected the assessee's comparables, selecting 20 new comparables with an average profit margin of 23.65%. The CIT(A) directed the exclusion of certain companies based on turnover filters and functionality, and included others rejected by the TPO. The final list of comparables was adjusted multiple times, with the CIT(A) issuing a rectification order to exclude Helios & Matheson Information Technology Ltd. and adjust VMF Softech Ltd.'s margin.

3. Application of Filters for Comparable Companies:

The TPO applied several filters, including revenue thresholds, related party transactions, export sales, onsite revenue, employee cost, and functional dissimilarity. The CIT(A) upheld some filters but directed the exclusion of companies based on turnover and functionality. The Tribunal held that turnover was not a relevant criterion but excluded companies like Infosys, Tata Elxsi, and Wipro on functional grounds due to high brand value and intangible assets.

4. Exclusion of Certain Companies on Functional Grounds:

The CIT(A) excluded Bodhtree Consulting Ltd., Celestial Biolabs, and Lucid Software Ltd. from the comparables list due to functional differences. The Tribunal upheld these exclusions, noting that Bodhtree was engaged in both ITeS and software development without segmental details, Celestial Biolabs was involved in clinical research and bio-products, and Lucid Software was engaged in product development rather than services.

5. Reduction of Travel Expenditure from Export Turnover for Section 10A Deduction:

The CIT(A) directed the AO to reduce travel and other expenses incurred in foreign currency from both export turnover and total turnover for computing the deduction under Section 10A. The Tribunal upheld this direction, following the Karnataka High Court's decision in CIT v. Tata Elxsi Ltd., which mandated the reduction of such expenses from both export and total turnover.

Conclusion:

The Tribunal dismissed the assessee's appeal, finding that the final arithmetic mean margin of comparable entities was within the acceptable range. The revenue's appeal was partly allowed for statistical purposes, with the Tribunal upholding the exclusion of certain companies on functional grounds and the reduction of travel expenses from both export and total turnover for Section 10A deduction.

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