Tribunal grants relief to assessee by excluding comparables, allowing deductions, and permitting education cess.

The Tribunal partly allowed the appeal, providing relief to the assessee by directing the exclusion of certain comparables in the transfer pricing adjustment, allowing deductions under section 10A for interest income and foreign exchange gain, and permitting the deduction of education cess paid on income-tax.

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Issues Involved:

1. Transfer pricing adjustment.
2. Disallowance of deduction under section 10A for interest income and foreign exchange gain.
3. Deduction of education cess paid on income-tax.

Detailed Analysis:

Transfer Pricing Adjustment:

The assessee, a resident company providing IT-enabled services (ITES) to its overseas associated enterprises (AE), adopted the transactional net margin method (TNMM) for benchmarking international transactions. The Transfer Pricing Officer (TPO) rejected most of the comparables selected by the assessee and treated the company as a knowledge process outsourcing (KPO) service provider, selecting six new comparables. This resulted in a proposed adjustment of Rs. 95,59,64,000. The assessee contested the inclusion of two comparables, Acropetal Technologies Ltd and eClerx Services Ltd, citing a prior Tribunal decision for the assessment year 2008-09, which excluded these comparables. The Tribunal agreed with the assessee, directing the exclusion of these two comparables, which brought the assessee's margin within the acceptable range, rendering other grounds on transfer pricing adjustment moot.

Disallowance of Deduction under Section 10A:

The assessee claimed deductions under section 10A for interest income and foreign exchange gain. The assessing officer disallowed these claims, categorizing interest income as "Income from other sources" and foreign exchange gain as not directly connected to the export activity. The Tribunal found that the interest income from bank guarantees and temporary parking of surplus funds was connected to the business activity, thus eligible for deduction under section 10A. This view was supported by the Karnataka High Court's decision in CIT vs Hewlett Packard Global Soft Ltd. Regarding the foreign exchange gain, the Tribunal noted the difference in language between sections 80HHC and 10A, with the latter providing a broader scope for deduction. Citing the Karnataka High Court's decision in CIT vs Motorola India Electronics (P) Ltd, the Tribunal allowed the deduction for foreign exchange gain, as it was considered income from the business of the undertaking.

Deduction of Education Cess:

The assessee raised an additional ground for the deduction of education cess paid on income-tax. The Tribunal referred to the jurisdictional High Court's decision in Sesa Goa Ltd vs JCIT, which allowed such a deduction. Consequently, the Tribunal directed the assessing officer to allow the deduction of education cess while computing the income under the head "Profits and gains of business or profession."

Conclusion:

The appeal was partly allowed, with the Tribunal providing relief on the transfer pricing adjustment and deductions under section 10A for interest income and foreign exchange gain, as well as the deduction of education cess.

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