2021 (1) TMI 160 - AT - Income Tax

Tribunal directs computation of Arm's Length Price () for international transaction, upholds exclusion of foreign currency expenses.

The Tribunal partly allowed both the assessee's and revenue's appeals, directing the AO/TPO to compute the Arm's Length Price (ALP) of the international ... TP Adjustment - comparable selection - HELD THAT:- Assessee is providing software development services to its AE which includes developing software, configuration, testing activity. It also deputes its engineers on need basis for providing IT support. Though the assessee has entered into various types of international transactions with its AEs, we are concerned with Software development activity only, since the TPO has made transfer pricing adjustment in respect of software development services only, thus companies functionally dissimilar with that of assessee need to be deselected from final list. Computation of Deduction u/s 10A - Exclusion of expenses incurred in foreign currency from both export turnover and total turnover - HELD THAT:- As decided in case of HCL Technologies Ltd [2018 (5) TMI 357 - SUPREME COURT] when the object of the formula is to arrive at the profit from export business, expenses excluded from export turnover have to be excluded from total turnover also. Otherwise, any other interpretation makes the formula unworkable and absurd. Hence, we are satisfied that such deduction shall be allowed from the total turnover in same proportion as well. Issues Involved:1. Transfer Pricing Adjustment2. Exclusion of Expenses Incurred in Foreign Currency from Both Export Turnover and Total TurnoverDetailed Analysis:1. Transfer Pricing Adjustment:The assessee provided software development services to its Associated Enterprises (AEs) and adopted the Transactional Net Margin Method (TNMM) with an Operating Profit/Operating Cost (OP/OC) margin of 11.30%. The Transfer Pricing Officer (TPO) selected 13 comparable companies with an average margin of 24.82%, leading to a transfer pricing adjustment of Rs. 35.74 crores. The Dispute Resolution Panel (DRP) directed the exclusion of ten companies and upheld three. The assessee sought the exclusion of the three retained companies and the inclusion of five others. The Tribunal examined various precedents and directed the exclusion of the three retained companies and the inclusion of three others, while remanding the comparability of two companies back to the TPO for fresh examination.2. Exclusion of Expenses Incurred in Foreign Currency from Both Export Turnover and Total Turnover:The DRP directed the Assessing Officer (AO) to follow the Karnataka High Court's decision in the case of Tata Elxsi Ltd, which mandates the exclusion of expenses incurred in foreign currency from both export turnover and total turnover. The Tribunal upheld this direction, citing the Hon'ble Supreme Court's decision in CIT vs. HCL Technologies Ltd, which confirmed that such expenses must be excluded from total turnover to maintain the integrity of the formula used to calculate profits from export business.Transfer Pricing Adjustment:The assessee's software development services segment had a turnover of Rs. 333.12 crores with a declared margin of 11.30%. The TPO's selection of 13 comparable companies resulted in an average margin of 24.82%, leading to an adjustment of Rs. 35.74 crores. The DRP excluded ten companies from the TPO's list and upheld three. The Tribunal noted that the assessee accepted the inclusion of M/s R.S. Software (India) Ltd, M/s Evoke Technologies Ltd, and M/s Mindtree Ltd. The Tribunal confirmed the exclusion of seven companies based on precedents, remanding the comparability of E-Zest Solutions Ltd and LGS Global Ltd to the TPO for fresh examination. The Tribunal directed the exclusion of Persistent Systems & Solutions Ltd, Persistent Systems Ltd, and Sasken Communications Ltd, following the decisions in similar cases.Exclusion of Expenses Incurred in Foreign Currency from Both Export Turnover and Total Turnover:The Tribunal upheld the DRP's direction to follow the Karnataka High Court's decision in Tata Elxsi Ltd, which mandates the exclusion of expenses incurred in foreign currency from both export turnover and total turnover. The Tribunal cited the Hon'ble Supreme Court's decision in CIT vs. HCL Technologies Ltd, which confirmed that such expenses must be excluded from total turnover to maintain the integrity of the formula used to calculate profits from export business.Conclusion:The Tribunal partly allowed both the assessee's and revenue's appeals, directing the AO/TPO to compute the Arm's Length Price (ALP) of the international transaction in accordance with the Tribunal's directions, after affording the assessee an opportunity of being heard. The Tribunal upheld the DRP's direction regarding the exclusion of expenses incurred in foreign currency from both export turnover and total turnover, following the Hon'ble Supreme Court's decision.