Tribunal upholds decisions on comparables, revenue filter, expenses, and losses.

The Tribunal upheld the Dispute Resolution Panel's decisions, including the exclusion of certain comparables due to functional dissimilarities and onsite revenues, application of the "on-site revenue filter," exclusion of communication expenses for turnover calculations, and exclusion of losses from non-eligible units. The assessee's cross objections were dismissed, and the revenue's appeal was rejected. The order was issued on 29th October 2020.

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Issues Involved:
1. Exclusion of certain comparables by the Dispute Resolution Panel (DRP).
2. Application of the "on-site revenue filter" by the DRP.
3. Exclusion of communication expenses for computing total turnover and export turnover.
4. Exclusion of loss earned from non-eligible unit for purposes of 10A deduction.
5. Cross objections by the assessee regarding the exclusion and inclusion of comparables.

Detailed Analysis:

Issue 1: Exclusion of Certain Comparables by the DRP
The DRP directed the exclusion of several comparables such as Acropetal Technologies Ltd., L&T Infotech Ltd., E-Infochips Ltd., ICRA Techno Analytics Ltd., E-Zhest Solutions Ltd., Infosys Technologies Ltd., and Tata Elxsi Ltd. The DRP's rationale was based on functional dissimilarities, lack of segmental information, and the presence of significant onsite revenues. The Tribunal upheld the DRP's decision, noting that these companies were functionally different from the assessee, a low-risk bearing contract service provider. The Tribunal referenced multiple cases, including DCIT vs. CGI Information Systems & Management Consultation (P.) Ltd., to support its decision.

Issue 2: Application of the "On-Site Revenue Filter" by the DRP
The revenue argued that the DRP applied the "on-site revenue filter" selectively, which was not considered by the Transfer Pricing Officer (TPO) during the analysis. The Tribunal agreed that a filter should not be applied after the TPO's analysis is concluded. However, it upheld the DRP's exclusion of Acropetal Technologies Ltd. and L&T Infotech Ltd. based on functional dissimilarities and lack of segmental information, referencing the case of Electronics for Imaging India Pvt. Ltd. vs. DCIT.

Issue 3: Exclusion of Communication Expenses for Computing Total Turnover and Export Turnover
The DRP followed the decision of the Hon'ble Karnataka High Court in the case of CIT v. Tata Elxsi Ltd., which held that if any expenditure is excluded from export turnover, it should also be excluded from total turnover. The Tribunal found no infirmity in the DRP's decision and upheld the exclusion of communication expenses from both export turnover and total turnover for computing the deduction under section 10A of the Income-tax Act, 1961.

Issue 4: Exclusion of Loss Earned from Non-Eligible Unit for Purposes of 10A Deduction
The DRP relied on the decision of the Hon'ble Karnataka High Court in CIT v. Yokogava India Ltd., which held that losses from non-eligible units should not be set off against the eligible profits when computing the deduction under section 10A. The Tribunal upheld the DRP's decision, finding it consistent with the jurisdictional High Court's ratio.

Issue 5: Cross Objections by the Assessee Regarding the Exclusion and Inclusion of Comparables
The assessee challenged the exclusion of certain comparables like LGS Global Ltd., R Systems International Ltd., Akshay Software Technologies Ltd., Hellios and Matheson Technology Ltd., and CG-VAK Software & Exports Ltd. The Tribunal restricted its observations to the selected comparables and upheld the DRP's decision to exclude these companies based on functional dissimilarities and failure to meet the employee cost filter. The Tribunal also upheld the inclusion of Persistent Systems and Solutions Ltd. and Persistent Systems Ltd., as they met the relevant filters.

Conclusion:
The Tribunal dismissed the revenue's appeal and upheld the DRP's decisions on all counts, including the exclusion of certain comparables, application of the "on-site revenue filter," exclusion of communication expenses, and exclusion of losses from non-eligible units. Consequently, the cross objections filed by the assessee were rendered infructuous and dismissed. The order was pronounced in the open court on 29th October 2020.

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