Income Tax Act, 1961

--Transfer pricing --Computation of ALP Selection of comparables--Assessee, engaged in the business of software design, development and testing, rendered software development services to its associated enterprises. Assessee had chosen TNMM method for determining ALP of international transactions with its AE and selected 28 companies as comparables with weighted average arithmetic mean of 14.53 per cent. As the assessee's net margin from the provision of services to AE at 14.03 per cent was within the arm's length, no adjustment was made in the transfer pricing study. TPO rejected the transfer pricing study of the assessee and applied filters and rejected 26 companies as comparables having turnover of less than Rs. 1 crore. Assessee raised objection with regard to two of the comparables selected by the TPO on the ground that assessee was a service provider operating in a risk mitigated environment having a turnover of about Rs. 15 crores and as such could not be compared with those two companies having turnover of more than 900 times the turnover of the assessee. Assessee submitted that when the TPO had rejected the transfer pricing study and other comparables selected by assessee, he could not adopt a pick and choose method by selecting high profit companies as comparables. Held : Assessee was a service provider operating with limited or no risk at all, whereas comparables selected by TPO were considered as giants in the sector of software development assuming all the risks. It is accepted principle that more the risk more is the profit. When the TPO had applied the turnover filter by excluding companies having turnover of less than Rs. 1 crore, he should have applied the same logic to exclude the companies having extraordinary high turnover filter by excluding companies having turnover compared to the assessee. Therefore, assessing officer was directed to recompute the ALP after excluding those two companies as comparables.

Income Tax Act, 1961, Section 92C

Income Tax Act, 1961

--Deduction under section 10A--Undertaking in a free trade zone Computation of total turnover --In the draft assessment order while computing deduction under section 10A, the assessing officer reduced the communication charges from the export turnover without reducing it from the total turnover. The DRP upheld the action of assessing officer. Assessee challenged it. Held : While computing deduction under section 10A, communication charges had to be reduced from the export turnover as well as from total turnover. Therefore, assessing officer was directed to compute the deduction under section 10A after reducing communication charges from the export turnover as well as from the total turnover.