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2016 (6) TMI 1280 - AT - Income TaxDeduction u/s 10A computation - Held that - Both sides that these issues are covered in favour of the assessee by the judgment of the Hon ble Karnataka High Court rendered in the case of M/s. Tata Elxi Ltd. (2011 (8) TMI 782 - KARNATAKA HIGH COURT) held that the total turnover is sum total of export turnover and domestic turnover and therefore if any amount is reduced from the export turnover the total turnover is also to be reduced by the same amount as a consequence thereof. Under these facts we find no reason to interfere in the order of the ld. CIT(A) on this issue. Exclusion of comparables - Held that - Since the present assessee company is only providing software development services to the AE thus companies functinally dissimlar with that of assessee need to be deselected. After exclusion of 5 companies arithmetic mean of the remaining 6 companies (comparables) will be only 14.02% as against PLI of the tested party i.e. the assessee company 17.63% and as a result No. TP adjustment is called for after exclusion of these 5 comparables and therefore we do not go into the claim of the assessee regarding adoption of correct operating profit of two companies i.e. M/s. Sasken Communication and M/s. Larsen & Toubro Ltd. because the same is of academic interest only.
Issues Involved:
1. Transfer Pricing Adjustments 2. Exclusion of Comparable Companies 3. Computation of Working Capital Adjustment 4. Application of Filters in Comparability Analysis 5. Deduction under Section 10A of the Income Tax Act 6. CIT(A)'s Power to Restore Matters to AO Detailed Analysis: 1. Transfer Pricing Adjustments: The assessee challenged the adjustments made by the Transfer Pricing Officer (TPO) and upheld by the Commissioner of Income Tax (Appeals) [CIT(A)] regarding the arm's length price of international transactions. The CIT(A) erred in confirming the TPO's approach of rejecting the assessee's Transfer Pricing documentation and including companies in the comparability analysis that were different in functions, assets, and risk profile. 2. Exclusion of Comparable Companies: The Tribunal addressed the exclusion of specific companies from the list of comparables due to functional dissimilarity: - Kals Information Systems Ltd.: Excluded based on the Tribunal's previous decisions which highlighted its engagement in consultancy and general insurance sectors, unlike the assessee. - Bodhtree Consulting Ltd.: Excluded due to its involvement in software product development and web solutions, which are not comparable to the assessee's software development services. - Tata Elxsi Ltd.: Excluded because it operates in various segments including embedded product design services, making it functionally different from the assessee. - Persistent Systems Ltd.: Excluded as it was involved in product designing services and software product development, unlike the assessee. - Infosys Technologies Ltd.: Excluded based on the Hon'ble Delhi High Court's decision, recognizing it as a giant company with higher risk and profits, unlike the captive unit nature of the assessee. 3. Computation of Working Capital Adjustment: The CIT(A) upheld the TPO's computation of working capital adjustment, which the assessee contested. The Tribunal found errors in the computation and directed the AO/TPO to reconsider the correct operating costs, receivables, and payables. 4. Application of Filters in Comparability Analysis: The assessee contested the TPO's application of various filters, such as employee cost greater than 25% of total revenue and export earnings greater than 75% of sales. The Tribunal found that the CIT(A) erred in upholding these filters and directed a fresh analysis. 5. Deduction under Section 10A of the Income Tax Act: The revenue's appeal contested the CIT(A)'s direction to exclude internet charges and travel expenses from the total turnover while computing the deduction under Section 10A. The Tribunal upheld the CIT(A)'s decision, citing the Hon'ble Karnataka High Court's judgment in Tata Elxsi Ltd., which mandates that any amount reduced from export turnover should also be reduced from the total turnover. 6. CIT(A)'s Power to Restore Matters to AO: The revenue argued that the CIT(A) had no power to restore matters to the AO. The Tribunal agreed, stating that the CIT(A) should have decided the issues after obtaining a remand report from the AO if necessary. However, given the time elapsed, the Tribunal restored the matter back to the AO for fresh decision after providing a reasonable opportunity to the assessee. Conclusion: The Tribunal allowed the revenue's appeal for statistical purposes regarding the restoration of matters to the AO and upheld the CIT(A)'s decision on the deduction under Section 10A. The assessee's appeal was allowed, directing the exclusion of certain comparables and reconsideration of the working capital adjustment and application of filters in the comparability analysis. The Tribunal's directions ensure a fair reassessment consistent with legal precedents and functional similarities.
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