2018 (2) TMI 1282 - AT - Income Tax

Tribunal: Excludes Companies from Comparables, Adjusts Turnover for Deduction

M/s H & S Software Development And Knowledge Management Centre Pvt. Ltd. Versus Income Tax Officer, Ward-12 (4) And Deputy Commissioner of Income Tax, Circle-11 (1), New Delhi

The appeals were partly allowed. The Tribunal directed the exclusion of M/s Eclerx Services Ltd. and M/s TCS E-serve Ltd. from the set of comparables, and ... Addition on account of arm’s length price adjustment - selection of comparable - Held that:- The assessee is responsible for processing informations contained in the resumes according to the pre-set criteria developed by AEs and including it into Search Palace. The database of resumes and Search Palace are accessible by AE’s global operations. The assessee is also responsible for ensuring quality and consistency in data entry for Search Palace, database, minimize duplication of effort and reuse of information and to move into more proactive research work for business development. In addition to maintain data for the Search Palace database, the assessee also supports its AE’s in performing adhoc research work and news alerts, thus companies functinally dissimilar with that of assessee need to be deselected from final list. Deduction u/s 10A - action of the AO in excluding the foreign currency expenditure towards communication charges and database expenses - from the export turnover without reducing the same from the total turnover - Held that:- Respectfully following the aforesaid referred to order in the case of DCIT Vs Global Logic India (P) Ltd.[2012 (12) TMI 1018 - ITAT DELHI] we direct the AO to reduce the aforesaid expenses out of the export turnover as well as the total turnover while working out the deduction u/s 10A Issues Involved:1. Jurisdictional error in reference to Transfer Pricing Officer (TPO).2. Determination of Arm's Length Price (ALP) and addition to income.3. Exclusion of foreign currency expenditure from export turnover for section 10A deduction.4. Validity of initiation of penalty proceedings under section 271(1)(c).5. Charging of interest under sections 234B, 234C, and 234D.Detailed Analysis:1. Jurisdictional Error in Reference to TPO:The appellant argued that the Assessing Officer (AO) did not record any reasons in the assessment order to justify the reference to the TPO for computing the ALP, as required under section 92CA(1) of the Income Tax Act, 1961. This issue was raised for both assessment years 2009-10 and 2011-12.2. Determination of Arm's Length Price (ALP) and Addition to Income:For the assessment year 2009-10, the AO made an addition of Rs. 91,14,845 to the appellant's income due to ALP adjustment. The appellant challenged the inclusion of certain comparables by the TPO, particularly M/s Eclerx Services Ltd., arguing it was functionally dissimilar and involved in high-end services. The Tribunal directed the AO to exclude M/s Eclerx Services Ltd. from the set of comparables, following the precedent set in the appellant's case for the assessment year 2007-08.For the assessment year 2011-12, the AO made a transfer pricing adjustment of Rs. 2,03,88,463. The appellant contested the inclusion of M/s Eclerx Services Ltd. and M/s TCS E-serve Ltd. as comparables. The Tribunal directed the exclusion of both companies, citing functional dissimilarity and reliance on previous decisions by various benches of the ITAT.3. Exclusion of Foreign Currency Expenditure from Export Turnover for Section 10A Deduction:The appellant argued that the AO erred in excluding foreign currency expenditure on communication charges and database fees from the export turnover without reducing the same from the total turnover for computing the deduction under section 10A. The Tribunal agreed with the appellant, citing the judgment in CIT Vs Tata Elxsi Ltd. and the decision in DCIT Vs Global Logic India (P) Ltd., and directed the AO to reduce these expenses from both export turnover and total turnover.4. Validity of Initiation of Penalty Proceedings under Section 271(1)(c):The appellant raised the issue of the validity of initiation of penalty proceedings under section 271(1)(c). The Tribunal found this issue to be premature and did not require adjudication at this stage.5. Charging of Interest under Sections 234B, 234C, and 234D:The appellant contested the charging of interest under sections 234B, 234C, and 234D. The Tribunal noted that this issue is consequential in nature and directed accordingly.Conclusion:The appeals were partly allowed. The Tribunal directed the exclusion of M/s Eclerx Services Ltd. and M/s TCS E-serve Ltd. from the set of comparables, and the reduction of foreign currency expenditure from both export turnover and total turnover for section 10A deduction. The issue of penalty proceedings was deemed premature, and the charging of interest was considered consequential.