2017 (11) TMI 1895 - AT - Income Tax

TP Adjustment - Comparable selection - HELD THAT - Onsite filter has to be applied but since it was applied by the DRP to only one comparable, all the comparables should be examined in the light of this filter and thereafter, the list of comparables should be finalized. We want to mention that in respect of those comparables which are passing through this filter i.e. onsite filter, the DRP should examine the applicability of all other relevant filters also and all other objections such as functional similarity / dissimilarity etc. also to decide about inclusion or exclusion of such comparables after providing adequate opportunity of being heard to both sides. Hence the entire TP matter is restored back to the file of DRP for fresh decision. Computing of deduction u/s. 10A - Reducing the expenditure incurred in foreign currency both from export turnover as well as total turnover - HELD THAT - This issue is squarely covered in favour of the assessee by the judgment of Hon'ble Karnataka High Court rendered in the case of CIT v. Tata Elxsi Ltd. 2011 (8) TMI 782 - KARNATAKA HIGH COURT held that total turnover is sum total of export turnover and domestic turnover and therefore, if an amount is reduced from export turnover then total turnover also goes down by the same amount. Respectfully following this judgment of Hon'ble Karnataka High Court, we decline to interfere in the order of DRP on this issue. Ground nos. 2 and 3 of revenue's appeal are rejected.

Summary

Issues:
1. Transfer Pricing adjustments in software development segment.
2. Dispute regarding the exclusion of certain companies as comparables.
3. Application of new filters by the Dispute Resolution Panel.
4. Treatment of expenditure incurred in foreign currency for deduction u/s 10A.
5. Onsite filter application in TP study.
6. Reduction of expenditure from export turnover for computing deduction u/s 10A.

Transfer Pricing adjustments in software development segment:
The appeals filed by both the revenue and assessee were directed against the assessment order passed under the Income Tax Act. The assessee raised objections regarding the adjustment to the Arm's Length Price (ALP) of international transactions in the software development segment. Various errors were highlighted, including the rejection of Transfer Pricing (TP) documentation and benchmarking analysis. The Dispute Resolution Panel (DRP) was criticized for upholding the actions of the Transfer Pricing Officer (TPO) in modifying filters, selecting comparables, and computing operating margins. The Tribunal emphasized the need for consistency in applying new filters to all comparables and remanded the matter back to the DRP for a fresh decision.

Dispute regarding the exclusion of certain companies as comparables:
The revenue challenged the exclusion of specific companies as comparables by the DRP. The Tribunal noted that the exclusion of companies like M/s. RS Software India Ltd. was based on significant onsite software development expenses, rendering them incomparable. While the assessee objected to the exclusion of certain comparables, the Tribunal upheld the application of the onsite filter, emphasizing its relevance in TP studies. The matter was remanded to the DRP for a comprehensive review of all comparables based on the new filter and other relevant criteria.

Application of new filters by the Dispute Resolution Panel:
The Tribunal addressed the issue of applying new filters, specifically the onsite filter, in TP studies. While the revenue contested the application of this filter selectively, the Tribunal emphasized its importance and directed a holistic review of all comparables in light of the new filter. The DRP was instructed to consider functional similarities, dissimilarities, and other objections before finalizing the list of comparables.

Treatment of expenditure incurred in foreign currency for deduction u/s 10A:
A corporate tax issue arose concerning the treatment of expenditure in foreign currency for computing deductions under section 10A of the Income Tax Act. The Tribunal referred to a judgment by the Karnataka High Court, which clarified that reducing amounts from export turnover also impacts total turnover. Following this precedent, the Tribunal declined to interfere with the DRP's decision on this matter.

Onsite filter application in TP study:
The Tribunal upheld the application of the onsite filter in TP studies, emphasizing its relevance and importance. While the revenue raised concerns about selective application, the Tribunal deemed the filter essential and directed a comprehensive review of all comparables in light of this filter.

Reduction of expenditure from export turnover for computing deduction u/s 10A:
The Tribunal referred to the judgment of the Karnataka High Court to support the treatment of reducing expenditure from export turnover for computing deductions under section 10A. Following this precedent, the Tribunal rejected the revenue's appeal on this issue.

In conclusion, the Tribunal allowed the assessee's appeal for statistical purposes and partly allowed the revenue's appeal for the same. The detailed analysis provided insights into the complex transfer pricing issues, application of filters, and tax treatment of expenditures, ensuring a comprehensive understanding of the judgment.