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2016 (6) TMI 1374 - AT - Income TaxTransfer Pricing Adjustment - assessee is engaged in the business of providing software services related to back office operations on contract basis to overseas Siemens Group companies - RPT filter at 15% - HELD THAT:- In normal circumstances when there is no difficulty in selecting the comparables, the RPT filter should not exceed 15% of the sale/revenue. In the case on hand, the TPO has selected as many as 27 comparables which shows that there was no difficulty in finding the comparable companies and therefore we are of the considered opinion that the RPT filter shall not exceed 15% of the total sale instead of 25% filter applied by the TPO. Only in the exceptional cases where the comparable companies are not easily available and only few companies are found during the search then the tolerance range of RPT can be relaxed to the maximum limit of 25%. Since the case on hand is not an exceptional case therefore in our view the extreme limit of 25% of RPT filter cannot be applied in this case. In view of the above facts, we admit the additional grounds raised by the assessee regarding the RPT filter at 15%. Application of employee cost filter at 25% - HELD THAT:- We agree with the contention of the learned Authorised Representative that the employee cost filter should be applied at 25% however even if it is applied to 1 or 2% less or more will not cause any substantial effect or would be prejudicial to the interest of either of the party. We are of the view that the ITES sector is employee intensive and therefore the cost of the employees cannot be ignored for selecting the comparable companies. If in a particular case of company, the employee cost is less than the average cost previaling in the industry then it is necessary to find out the reasons of such a low employee cost which is against the normal business practice in this industry. Accordingly we admit the additional ground raised by the assessee with a rider that the TPO has to apply a proper filter of employee cost and then apply the same on all the comparable companies in the set of comparables. A low employee cost shows a different business model and it appears that these companies are outsourcing their business however since the TPO has not examined this issue therefore we set aside this issue to the record of the TPO/A.O for limited purpose of verification of the reasons for such a low employee cost and if it is found that low employee cost is due to a different business model then these companies shall be excluded from the list of comparables. Software development segment cannot be compared with ITES segment and hence this company cannot be compared with the assessee's ITES segment. Assessing Officer himself has applied the employee cost filter at 25% and this company is having employee cost of 22.69%. However, in the case of the assessee as we have discussed in the foregoing paras neither the assessee nor the TPO has applied any employee cost filter. While deciding the additioal ground we have set aside this issue to the record of the TPO/A.O to apply an appropriate employee cost filter. Accordingly, the comparability of this company has been set aside to the record of the TPO/A.O for reconsideration and adjudication. Revenue from software products and also enjoy the benefit of huge intangible asset apart from brand value and leader in the market. Since the employee cost is only 7.16% and further the revenue form ITES is only 8.21% therefore by any yardstick this company cannot be considered as functionally comparable having a different business model of low employee cost and low revenue from the ITES segment. Accordingly, we direct the A.O./TPO to verify the alleged fact and if it is found correct, this company shall be excluded from the list of comparables. Since we have directed the A.O./TPO to exclude certain comparables and also re-examine certain issues therefore the ALP has to be recomputed after exclusion of the companies from the list of comparables as directed by us as well as re-examination of the comparability of certain companies. Needless to say that the benefit of the proviso to Section 92C also be considered if the ALP is within the tolerance range of + or – 5%. Foreign currency from the export turnover for computation of deduction under Section 10A - HELD THAT:- The Hon’ble Karnataka High Court in the case of CIT v M/s Tata Elxsi Ltd. & Others [2011 (8) TMI 782 - KARNATAKA HIGH COURT] had held that while computing the exemption u/s 10A, if the export turnover in the numerator is to be arrived at after excluding certain expenses, the same should also be excluded from the total turnover in the denominator - we direct the AO to exclude the above mentioned expenses both from the export turnover as well as from the total turnover while calculating deduction u/s 10A
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