Software company wins transfer pricing relief as tribunal excludes multiple comparables for functional differences

The ITAT Chennai ruled on transfer pricing adjustments for a software solutions provider. The tribunal directed exclusion of several comparables: Kals Information Systems Ltd due to functional and segmental differences, Infosys Technology Ltd for incomparable size exceeding 10 times turnover threshold, Bodh Tree Consulting Ltd for revenue source differences, and Sonata Software Ltd for failing the 25% related party transaction filter. The tribunal granted working capital adjustment entitlement and restored computation issues to AO/TPO. Regarding Section 14A disallowance, the tribunal confirmed disallowance but directed verification of interest-free funds availability. Section 10A deduction computation issues were restored to AO/DRP for fact verification, and refund interest charging under Section 234D was remanded for AO verification.

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Issues Involved:

1. Limitation period for filing the appeal.
2. Exclusion of certain comparables for transfer pricing.
3. Grant of economic adjustments.
4. Disallowance of expenses under Section 14A related to exempt income.
5. Exclusion of foreign currency expenditure from export turnover under Section 10A.
6. Non-exclusion of foreign inward remittances from total turnover.
7. Refund and interest under Section 234D.

Detailed Analysis:

1. Limitation Period for Filing the Appeal:
The appeal was initially barred by limitation by 2421 days. However, the High Court of Madras, in its order dated 14.10.2020, allowed the assessee to file an appeal before the appropriate authority, specifying that the limitation period would commence from the date the certified copy of the order was ready. The appeal was filed within 60 days from this date, thus within the limitation period as per the High Court's judgment.

2. Exclusion of Certain Comparables for Transfer Pricing:
- Kals Information Systems Ltd.: The Tribunal directed exclusion due to functional dissimilarity, as it was engaged in software products and services, unlike the assessee, which was solely into software development services.
- Infosys Technologies Ltd.: Excluded due to its incomparable size and scale, with turnover significantly larger than the assessee's, aligning with precedents that exclude entities with turnover more than 10 times that of the assessee.
- Bodh Tree Consulting Ltd.: Excluded because it had revenue from diversified services and products, not solely from software development services as the assessee.
- Sonata Software Ltd.: Excluded due to failing the Related Party Transaction (RPT) filter, with RPT exceeding 25% of its revenues.

3. Grant of Economic Adjustments:
The Tribunal acknowledged the assessee's entitlement to economic adjustments, including working capital adjustments, provided the necessary data is verified. The AO/TPO was directed to verify the numerical data and grant suitable adjustments.

4. Disallowance of Expenses Under Section 14A Related to Exempt Income:
- Interest Expenses (Rule 8D(2)(ii)): The Tribunal directed the AO to verify if interest-free funds were available for investments in instruments yielding exempt income. If so, no disallowance should be made.
- Administrative Expenses (Rule 8D(2)(iii)): The Tribunal upheld the disallowance but directed the AO to ensure it applies only to investments generating exempt income, following the Special Bench decision in Vireet Investments.

5. Exclusion of Foreign Currency Expenditure from Export Turnover Under Section 10A:
The Tribunal restored the issue back to the AO for proper adjudication, as neither the AO nor the DRP had addressed it adequately. The AO was directed to verify facts and follow the Tribunal's decision in the assessee's own case for the assessment year 2010-11.

6. Non-Exclusion of Foreign Inward Remittances from Total Turnover:
Similar to the previous issue, this was also restored to the AO for verification and proper adjudication in line with the Tribunal's earlier decision.

7. Refund and Interest Under Section 234D:
The Tribunal noted the assessee's claim that no refund was issued, yet interest under Section 234D was charged. The issue was remitted to the AO for verification of refund issuance and corresponding interest charge, with instructions to rectify if necessary.

Conclusion:
The appeal was partly allowed and partly remanded for statistical purposes, with directions for the AO to verify facts and apply legal principles as discussed.

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