Tribunal upholds deductions for telecommunication & travel expenses, Transfer Pricing adjustments, & eligibility under sec 10AA

The Tribunal dismissed the revenue's appeal and partly allowed the assessee's appeal. It upheld the Ld DRP's directions on various issues, including allowing the deduction of telecommunication and foreign travel expenses under section 10A/10AA, excluding certain comparable companies for Transfer Pricing, correcting working capital adjustment, including foreign exchange gain as operating income, applying the export filter in the ITES segment, and confirming eligibility for deduction under section 10AA on voluntary Transfer Pricing adjustment.

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Issues Involved:

1. Deduction of telecommunication expenses and foreign travel expenses from Total turnover while computing deduction u/s 10A/10AA.
2. Exclusion of certain comparable companies for Transfer Pricing.
3. Working capital adjustment.
4. Inclusion of foreign exchange gain as operating income.
5. Application of export filter in ITES segment.
6. Eligibility for deduction u/s 10AA on voluntary Transfer Pricing adjustment.

Issue-wise Detailed Analysis:

1. Deduction of Telecommunication and Foreign Travel Expenses:
The Ld DRP directed the AO to allow the deduction of telecommunication and foreign travel expenses from Total turnover while computing deduction u/s 10A/10AA. The DRP followed the binding decision of the Hon’ble jurisdictional High Court in Tata Elxsi Ltd (2011)(247 CTR 334)(Kar.). Since the Ld DRP adhered to the jurisdictional High Court's decision, the Tribunal found no reason to interfere with this direction.

2. Exclusion of Comparable Companies:
- M/s E-Clerx Services Ltd: The Ld DRP excluded this company based on the Special bench of the Tribunal and co-ordinate bench decisions in the cases of Maersk Global Centres (India) Private Limited and Symphony Marketing Solutions India P Ltd. It was found that M/s E-Clerx Services Ltd provided high-end KPO services, which are not comparable to the low-end ITES services provided by the assessee.

- M/s Acropetal Technologies Ltd: The Ld DRP excluded this company applying "on site filter" and "employee cost" filter. The co-ordinate benches consistently held that M/s Acropetal Technologies Ltd is functionally different and not comparable to ITES companies. The Tribunal upheld the DRP's decision based on consistent precedents and the nature of services provided by the company.

3. Working Capital Adjustment:
The Ld DRP directed the TPO to correct the working capital adjustment mistake, if any, from 0.23% to 0.64%. Since this direction was for correcting an error, the Tribunal found no infirmity in the direction given by the Ld DRP.

4. Inclusion of Foreign Exchange Gain as Operating Income:
The Ld DRP included foreign exchange gain as part of operating income, following the decision in SAP Labs India (P) Ltd vs. ACIT (2011)(44 SOT 156)(bang.). The Tribunal, agreeing with the Ld DRP and consistent decisions of co-ordinate benches, found no reason to interfere with this direction.

5. Application of Export Filter in ITES Segment:
The Ld DRP applied the export filter on all comparables, leading to the exclusion of M/s Sundaram Business Services Ltd. The Tribunal held that applying the export filter did not amount to setting aside the draft order and upheld the Ld DRP's action.

6. Eligibility for Deduction u/s 10AA on Voluntary Transfer Pricing Adjustment:
The Ld DRP disallowed the deduction u/s 10AA on the voluntary Transfer Pricing adjustment, stating the assessee did not furnish details on how the amount was worked out and did not bring the amount in foreign exchange as required. The Tribunal, however, referred to the Pune bench's decision in Apoorva Systems (P) Ltd and the Karnataka High Court's decision in iGate Global Solutions Ltd, which allowed such deductions. The Tribunal held that the assessee is eligible for deduction u/s 10AA on the voluntary Transfer Pricing adjustment and directed accordingly.

Conclusion:
The appeal of the revenue was dismissed, and the appeal of the assessee was partly allowed. The Tribunal upheld the directions of the Ld DRP on various issues and directed that the assessee is eligible for deduction u/s 10AA on the voluntary Transfer Pricing adjustment.

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