2020 (12) TMI 213 - AT - Income Tax

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 ... TP Adjustment - application of 'on-site revenue filter' and selectively rejecting certain comparables - HELD THAT:- Assessee engaged in the development of VLSI, software, embedded software and hardware design solutions to support broadband wireless access. We agree with contention raised by Ld. CIT. DR that a filter cannot be applied once TP analysis has been concluded by Ld. TPO However, on perusal of observations recorded by DRP, Acropetal Technologies Ltd., L&T Infotech Ltd., was primarily excluded on basis of functional dissimilarities and that segmental information not being available Acropetal Technologies has been held to be into products and that L&T Infotech Ltd. has observed that RPT is at 18.66% which is beyond the marginal limit of 15% for year under consideration, by this Tribunal, in case of Electronics for Imaging India Pvt. Ltd. [2017 (7) TMI 1335 - ITAT BANGALORE]. We therefore do not find any infirmity in the view taken by DRP as these comparables are even otherwise functionally not similar with assessee - we direct exclusion of Acropetal Technologies and L&T Infotech Ltd. Excluding M/s. E-Infochips, by DRP on the ground that it fails service income filter - This Tribunal consistently in various decisions for A.Y.: 2011-12 held that, this company does not satisfy service income filter being 75%. We therefore, do not see any reason to set aside this company to Ld. TPO. Therefore, respectfully following view taken by coordinate bench of this Tribunal in DCIT vs. M/s. CGI Information Systems and Management Consultations Pvt. Ltd. [2018 (4) TMI 567 - ITAT BANGALORE] we direct Ld. TPO to exclude this company. ICRA Techno Analytics Ltd., E-Zhest Solutions Ltd., M/s. Infosys Technologies Ltd. and M/s. Tata Elxsi Ltd., have been consistently excluded by this Tribunal in case of a captive service provider like assessee. Further Ld. CIT DR could not establish anything contrary to observations of this Tribunal reproduced hereinabove. Deduction u/s 10A - excluding communication expenses for computing total turnover and export turnover and excluding loss earned from non-eligible unit for purposes of 10 A deduction - HELD THAT:- DRP by following decision in the case of CIT v. Tata Elxsi Ltd. [2011 (8) TMI 782 - KARNATAKA HIGH COURT] held that, if any expenditure is excluded from export turnover, then the same needs to be excluded from total turnover as well, accordingly, directing Ld. AO to exclude expenses deducted from export turnover from total turnover for computing deduction u/s. 10A of the Income-tax Act, 1961. Further in respect of exclusion of loss earned from non-eligible unit for computing profits of eligible unit under section 10 A, DRP relied on decision of Hon'ble Karnataka High Court in case of and CIT v. Yokogava India Ltd. [2011 (8) TMI 845 - KARNATAKA HIGH COURT] - No infirmity in the view taken by DRP - Grounds raised by revenue stands dismissed. 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 DRPThe 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 DRPThe 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 TurnoverThe 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 DeductionThe 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 ComparablesThe 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.