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2014 (1) TMI 1815 - AT - Income TaxTPA - rejection/selection of comparables by TPO - selection criteria - Held that - Assessee is engaged in software development services. Assessee can be termed as a captive service provider thus companies functionally dissimilar with that of assessee need to be deselected from final list of comparability. Reduce the communication expenses attributable to delivery of software outside India both from the export turnover and total turnover for the purpose of computing deduction u/s 10A of the Act. See CIT vs. Gem Plus Jewellery India Ltd. (2010 (6) TMI 65 - BOMBAY HIGH COURT )
Issues Involved:
1. Rejection/Selection of comparables by TPO and sustained by CIT (A). 2. Adjustments to the deduction claimed under section 10A of the Act. Detailed Analysis: 1. Rejection/Selection of Comparables by TPO and Sustained by CIT (A): - Exensys Software Solutions Ltd.: The assessee objected to the inclusion of Exensys Software Solutions Ltd. as it is a product company involved in software development and had an extraordinary event of a merger with Holool India Ltd. during the relevant financial year. The ITAT, Hyderabad Bench in the case of Intoto Software India Pvt. Ltd. held that companies with extraordinary events affecting financial results should not be considered as comparables. Therefore, the issue was remitted back to the AO/TPO for fresh examination. - Sankhya Infotech Ltd. and Four Soft Ltd.: These companies were objected to on the grounds that they are engaged in the development of software products and have onsite income/expenses of more than 75%. The Tribunal directed the AO/TPO to examine these aspects and exclude them if the contentions were found to be correct. - Thirdware Solutions Ltd.: The assessee contended that this company is involved in product development and distribution activities. The Tribunal, following the decisions in cases like Intoto Software India Pvt. Ltd., directed the AO/TPO to exclude Thirdware Solutions Ltd. from the list of comparables. - Infosys Technologies Ltd.: The assessee argued that Infosys Technologies Ltd. should not be considered as a comparable due to its high turnover and significant brand value. The Tribunal, consistent with previous decisions, directed the AO/TPO to exclude Infosys Technologies Ltd. from the list of comparables. - Tata Elxsi Ltd.: The assessee cited a letter from Tata Elxsi Ltd. stating it cannot be compared with other software development companies due to its specialization in embedded software development. The Tribunal remitted the issue back to the AO/TPO for reconsideration. - Bodhtree Consulting Ltd.: The assessee objected to this company being treated as a comparable due to its related party transactions exceeding 25% of its revenue. The Tribunal directed the AO/TPO to examine this aspect and exclude the company if the contention was correct. - Birla Technologies Ltd.: The TPO rejected this company on the grounds of being a persistent loss-making company. However, the assessee contended that the company earned an operating profit for the financial year 2004-05. The Tribunal remitted the issue back to the AO/TPO for examination. - VJIL Consulting Ltd.: The TPO rejected this company based on VAT expenditure and alleged exceptional circumstances. The assessee argued that there were no exceptional circumstances in the relevant financial year. The Tribunal remitted the issue back to the AO/TPO for fresh examination. 2. Adjustments to the Deduction Claimed Under Section 10A of the Act: - Communication Expenses: The department appealed against the CIT (A)'s direction to reduce communication expenses from both export turnover and total turnover for computing the deduction under section 10A. The Tribunal upheld the CIT (A)'s decision, referencing the Bombay High Court's judgment in CIT vs. Gem Plus Jewellery India Ltd. and the ITAT Chennai Special Bench decision in ITO vs. Sak Soft Ltd. which held that communication charges must be excluded from both export and total turnover. Conclusion: - The assessee's appeal was partly allowed for statistical purposes, with several issues remitted back to the AO/TPO for fresh examination. - The department's appeal was dismissed, affirming the CIT (A)'s decision regarding the exclusion of communication expenses for the computation of the deduction under section 10A. Order Pronounced: - The judgment was pronounced on 24-01-2014.
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