2016 (1) TMI 1431 - AT - Income Tax

Transfer Pricing adjustments - comparability of the companies selected by the Transfer Pricing Officer (TPO) - Related Party Transactions (RPT) - HELD THAT - If the comparables of international transactions are easily available then this tolerance of RPT should be restricted to minimum. There is no specified tolerance range in the Act or Rules under the Transfer Pricing provisions however in due course of discussion and adjudication of this issue in a series of decisions of this Tribunal commonly accepted tolerance range of 5% to 25% of the total revenue from RPT has been considered as reasonable depending upon the facts and circumstances of each case. In the case on hand the availability of the comparables is abundant in number as the assessee selected 44 comparables whereas the TPO selected 20 comparables by applying the filter of 25% of revenue from related parties. Therefore in this case good number of comparables are available and there is no difficulty in searching the comparables. Accordingly in order to determine the ALP by considering the comparable uncontrolled transactions it should be kept in mind that the uncontrolled transactions should be least influenced by the RPT. Assessee is purely a software development service provider to its parent company thus companies functionally dissimilar with that of assessee need to be deselected from final list. Deduction under Section 10A - not allowing the deduction of telecommunication and conveyance charges incurred in foreign exchange outside India while computing the total turnover of the company - HELD THAT - This issue is covered in favour of the assessee by the decision of the Hon ble jurisdictional High Court of Karnataka in the case of CIT V Tata Elxsi Ltd Others 2011 (8) TMI 782 - KARNATAKA HIGH COURT wherein it has been 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. Not allowing deduction under Section 10A of the Act before set off of brought forward business losses - HELD THAT - By virtue of the amendment and substitution of provisions of sec.10A and 10B the incentive u/s 10A and 10B was no longer in the nature of exemption but it is in the nature of deduction. Accordingly by following the latest judgment of the Hon ble jurisdictional High Court based on the substituted/amended provisions of sec.10A/10B which are applicable in the case of the assessee as well as the decision of the Tribunal in case of Biocon 2014 (12) TMI 838 - ITAT BANGALORE we decide this issue in favour of the assessee and direct the AO to allow deduction u/s 10A without setting off the domestic losses.

Summary

Issues Involved:
1. Transfer Pricing Adjustments
2. Deduction under Section 10A
3. Interest Charging under Sections 234B and 234C
4. Credit for Self-Assessment Tax

Detailed Analysis:

1. Transfer Pricing Adjustments:
The assessee challenged the assessment order, particularly the transfer pricing adjustments made by the TPO. The key points of contention included the rejection of the assessee's TP documentation, the nature of services provided, the adjustment made by the TPO, and the selection of comparable companies.

Rejection of TP Documentation:
The assessee argued that the TP documentation was prepared in good faith and based on a detailed Functional Asset and Risk analysis. The TPO, however, rejected the documentation, leading to a dispute over the comparability analysis.

Risk Differential and Working Capital Adjustment:
The assessee contended that the limited risk nature of its services was ignored, and no adjustment for risk differential was made. Instead, the TPO made an adjustment for working capital differences between the assessee and comparable companies.

Selection of Comparables:
The TPO accepted only three of the 44 comparables selected by the assessee and added 17 more, resulting in a total of 20 comparables. The TPO applied various filters, including a 25% Related Party Transactions (RPT) filter, which the assessee contested, arguing for a 15% threshold. The Tribunal concurred with the assessee, directing the exclusion of companies with more than 15% RPT from the list of comparables.

Functional Comparability:
The Tribunal examined the functional comparability of several companies:
- Kals Infosystems Ltd.: Excluded due to its involvement in software product development and other activities.
- Tata Elxsi Ltd.: Excluded for its diversified activities, including hardware design and R&D.
- Infosys Technologies Ltd.: Excluded due to its brand value, intangible assets, and diversified operations.
- Accel Transmatics Ltd.: Excluded for its diversified business activities and product development.
- Flextronics Software System Ltd.: Referred back to the TPO for re-evaluation of functional dissimilarity.

2. Deduction under Section 10A:
The assessee argued that telecommunication and conveyance charges incurred outside India should be excluded from the total turnover for computing the deduction under Section 10A. The Tribunal, following the jurisdictional High Court's decision in CIT v. Tata Elxsi Ltd., agreed that such expenses should be excluded from both the export turnover and the total turnover.

Set-off of Brought Forward Business Losses:
The assessee contended that deduction under Section 10A should be allowed before setting off brought forward business losses. The Tribunal referred to the jurisdictional High Court's decision in CIT v. Yokogawa India Ltd., which held that the income of a 10A unit should be excluded before arriving at the gross total income of the assessee. Consequently, the Tribunal directed the AO to allow the deduction under Section 10A without setting off the domestic losses.

3. Interest Charging under Sections 234B and 234C:
The assessee challenged the charging of interest under Sections 234B and 234C. However, the Tribunal's decision on this issue is not detailed in the provided text.

4. Credit for Self-Assessment Tax:
The assessee claimed that the AO did not give credit for Self-Assessment Tax paid. The Tribunal's decision on this issue is not detailed in the provided text.

Conclusion:
The Tribunal partly allowed the appeal, directing the exclusion of certain comparables, re-computation of the ALP, and allowing the deduction under Section 10A before setting off brought forward business losses. The Tribunal's decisions were based on the principles of functional comparability, the jurisdictional High Court's rulings, and the specific facts of the case.