2014 (4) TMI 997 - ITAT BANGALORE

Transfer pricing adjustment – Computation of ALP – Software development business - Selection of comparables – Turnover filter - Held that:- T he decision in Trilogy E-Business Software India Private Limited v. DCIT [2013 (1) TMI 672 - ITAT BANGALORE] followed - The TPO had while selecting the above 26 comparables, applied a lower turnover filter of Rs.1 crore but preferred not to apply any upper turnover limit - The size of the comparable is an important factor in comparability - The ICAI TP guidance note has observed that the transaction entered into by a Rs.1000 crores company cannot be compared with the transaction entered into by a Rs.10 crores company and the two most obvious reasons are the size of the two companies and related economies of scale under which they operate - The TPO’s range had resulted in selection of companies as comparable such as Infosys which was 277 times bigger than that of the assessee - the turnover filter is an important criteria in choosing the comparables companies having turnover of more than 200 crores have to be eliminated from the list of comparables – thus, those companies have to be eliminated from the list of comparables – Decided in favour of Assessee.

Functionally different Companies – Held that:- The decision in Trilogy E-Business Software India Private Limited v. DCIT [2013 (1) TMI 672 - ITAT BANGALORE] followed - The company was not comparable in the case of the assessees engaged in software development services business - Neither the TPO nor the DRP have noticed that there is bound to be a difference between the Assessee and Megasoft and the profit arising to the Megasoft as a result of the existence of the software product segment and no finding has been given that reasonably accurate adjustments can be made to eliminate the material effects of such differences - the TPO was justified in selecting M/s. Megasoft Ltd as comparable - the AO/TPO is directed to take segmental margins of 23.11% for comparability - Decided in favour of Assessee.

Forex gain/loss impact – Held that:- The decision in Trilogy E-Business Software India Private Limited v. DCIT [2013 (1) TMI 672 - ITAT BANGALORE] followed - foreign exchange gain/loss being considered as not forming part of the operating cost, the reasoning of the revenue is that such loss or gain cannot be said to be one realized from international transaction though they may form part of the gain/loss of the enterprise - they should be excluded while determining operating cost - the AO/TPO is directed to consider the foreign exchange gain or loss as part of the operating cost or revenue - Decided in favour of Assessee.

Working capital adjustment – Held that:- If the contention of the assessee is to be taken into account, the revised working capital adjustment comes to 2.04% instead of -1.27% arrived by the TPO - the issue is factual which requires verification at the AO/TPO’s level, thus, the matter is remitted back to the AO/TPO for fresh adjudication Decided in favour of Assessee.

Risk adjustment – Held that:- The AO/TPO is directed to work out the ALP of the assessee in accordance with directions - It is the claim of the assessee its margin after considering foreign exchange loss is at 14.14%, where margin of the comparable after work capital adjustment is 15.89% and after risk adjustment, the adjusted average margin of comparable is 15.16% - the AO/TPO is directed to verify the working/computation and if found that the differential in the margin of the assessee and the comparables is beyond 5% bandwidth recognized in proviso to s. 92C (2) of the Act, then adjustment is required to be made to the reported value of the assessee’s transaction with its AE - Decided in favour of Assessee.

Deduction u/s 10A of the Act – Reduction from the export turnover - Held that:- Following CIT v M/s Tata Elxsi Ltd. & Others [2011 (8) TMI 782 - KARNATAKA HIGH COURT] - when the expenses are reduced from the export turnover while computing deduction u/s 10A of the Act, it should also be reduced from the total turnover in order to maintain parity between the numerator and the denominator – thus, the AO is directed to reduce a sum of Rs.69,45,076/- from the export turnover as well as from the total turnover while computing deduction under section 10A of the Act – Decided in favour of Assessee.

Prior period expenses – Held that:- The assessee is following the mercantile system of accounting and it was required to make deduction/provision for expenses in the respective assessment years as and when it occurs - the expenses are not pertaining to the concerned assessment year - the expenses pertaining to assessment year 2006-07 cannot be claimed as deduction in the present assessment year – Decided in favour of Assessee.