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2020 (5) TMI 380 - AT - Income TaxDeduction u/s 10A - telecommunication expenses and other expenses incurred in foreign currency need to be excluded from “export turnover” as per clause (iv) of Explanation 2 - HELD THAT:- Expenses and other expenses incurred in foreign currency need to be excluded from “export turnover” as per clause (iv) of Explanation 2 to section 10A however, they are also required to be excluded from the “total turnover”. CIT(A) held that the same are to be excluded in turn relying on the decision of case of CIT vs Tata Elxsi Ltd. and others [2011 (8) TMI 782 - KARNATAKA HIGH COURT] Comparable selection - substantial transaction to the tune of more than 25 % with related parties were excluded - HELD THAT:- If the related party transactions do not have material effect on the overall profit margins then still that company can be considered as a comparable. The Act does not provide directly as to what percentage of related party transactions can have material effect on the overall margins. Guidance can be taken from definition of the Associated Enterprise from Section 92A(2)(e) where in it is prescribed that one enterprise holding 26% shares in the other enterprise can be considered as an associate enterprise. Similarly in the provisions of Section 40A(2)( b) the persons having substantial interest is described as a person carrying not less than 20% of voting power in that company. 20 % or 26% interest is considered as substantial interest. As the provisions of Section 92A(2 )( a) are from the transfer pricing chapter itself, a limit of 25 % is applied as the threshold limit for the related party transactions. If the limit is reduced further it would only result in eliminating more and more companies, on the other hand if the limit is relaxed then companies with predominantly related party transactions would get included which would not represent uncontrolled transactions. The companies having more than 25% related party transactions should therefore be rejected as comparables. We order that the decision of the ld. CIT (A) on the issue of RPT cannot be upheld. Accordingly, we direct the exclusion of concerns Accel Transmatic Ltd., Geometric Ltd., R.Systems International Ltd. and Ishir Infotech Ltd. in the software development segment of the appellant and Apollo Health Street Limited, Caliber, Point Business Solutions Ltd., HCL Comnet Systems and Services Ltd. and Informed Technologies Ltd. in the ITES segment. Regarding the KALS Information Systems Ltd., we find that the company has got significant revenue from software products and as no segmental are available this needs to be excluded. Similarly, with the case of Lucid Software Ltd. which is predominantly product Development Company, hence the same cannot be taken as a comparable. Similarly Tata Elxsi Ltd. is a product company and the same cannot be taken as a comparable. Regarding the Persistent Systems Ltd., the same is to be excluded owing to extra ordinary event with regard to restructuring during the relevant year wherein the subsidiary Control Net (India) Ltd. was merged with the comparable company. The assessee pleaded for inclusion of the concern Media Soft Solutions Ltd. The TPO had excluded the same because of the low margins. The case of the assessee is that the same merits to be included. However, we find no merit in the same. ITES segment wherein the assessee has chosen 15 comparables to benchmark its transaction - Accentia Technologies Ltd. is found to be functionally not comparable and also owing to the amalgamation of two companies namely, Iridium Technologies Ltd. and Geo Soft Technologies Ltd. Similarly, Bodhtree Consulting Ltd. is excluded; the comparable being mainly into software solutions. Similarly, we find Eclerx Services, Informed Technologies India Ltd. are KPO hence cannot be taken into consideration as a comparable. The concern Infosys BPO Ltd. is engaged in diversified activities and owns intangible and hence cannot be included as comparable. Owing to the reported fraud in the management Maple e-Solutions and Traton Corporation Ltd. cannot be considered as right comparables. The concern High Services Ltd. are providing high-end services and is engaged in web hosting which is not functionally comparable to the assessee. Similarly, Mold Tec Technologies Ltd. is to be excluded as it is providing KPO services. We find Vishal Information Technologies Ltd. has outsourced 43 % of the sales and owing to low employee cost to sales ratio of 2.2 this will not be a correct comparable. Accurate Data Convertor is a development services company and Wipro Ltd. has invested in R&D activities for development of IP, hence not meeting the criteria of FAR.
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