IT company wins partial relief in transfer pricing dispute over comparable companies and export turnover calculation.

Case Name:

AOL Online India Private Limited, Vs. Deputy Commissioner of Income Tax.(ITAT Bangalore)

IT(TP)A No.1036/Bang/2011

(Assessment year : 2007-08)

**Key Takeaways:** - The ITAT examined the TPO's selection of comparable companies for both the software development and IT-enabled services segments. - The ITAT excluded several companies from the final list of comparables based on functional dissimilarities, abnormal financial results, and other filters. - The ITAT directed the AO to exclude certain expenses (travel and telecommunication) from the export turnover calculation while computing tax deductions under Section 10A of the Income Tax Act. - The case highlights the importance of proper comparability analysis in transfer pricing cases and the application of legal precedents in calculating export turnover. **Issue:** The central issue was whether the TPO's selection of comparable companies and the AO's calculation of export turnover for tax deduction purposes were correct. **Facts:** - AOL Online India Private Limited (the assessee) provided software development and call center services to its associated enterprise. - The TPO rejected several comparable companies selected by the assessee and proposed new comparables for both the software development and IT-enabled services segments. - The Dispute Resolution Panel (DRP) rejected the assessee's contentions, and the AO made transfer pricing adjustments and adjustments to the deduction under Section 10A of the Income Tax Act. - The assessee challenged the TPO's selection of comparables and the AO's calculation of export turnover before the ITAT. **Arguments:** - The assessee argued that several companies selected by the TPO were not functionally comparable, had abnormal financial results, or failed certain filters (e.g., employee cost, related party transactions, turnover). - The assessee also objected to the exclusion of certain expenses (travel and telecommunication) from the export turnover calculation. - The revenue authorities defended the TPO's selection of comparables and the AO's calculation of export turnover. **Key Legal Precedents:** - The ITAT relied on the decisions in the cases of Broadcom India Research Private Limited (IT(TP)A No. 1180/Bang/2011), NXP Semiconductors India P. Ltd. v. ACIT (IT(TP)A No. 1174/Bang/2011), Capgemini India P. Ltd. v. ACIT (46 SOT 195) (Mum), and other coordinate bench decisions to examine the comparability of companies. - The ITAT cited the decision in CIT v. Tata Elxsi Ltd. (342 ITR 98) regarding the exclusion of expenses from both export turnover and total turnover while computing deductions under Section 10A. **Judgment:** - The ITAT partially allowed the assessee's appeal. - For the software development segment, the ITAT directed the TPO to exclude several companies from the list of comparables based on functional dissimilarities, abnormal financial results, and other filters. - For the IT-enabled services segment, the ITAT directed the TPO to exclude certain companies from the list of comparables based on similar grounds. - The ITAT directed the AO to exclude travel expenses from the export turnover calculation, as there was no evidence that these expenses pertained to rendering services. - The ITAT also directed the AO to exclude telecommunication expenses from both the export turnover and total turnover calculations while computing deductions under Section 10A, following the precedent in CIT v. Tata Elxsi Ltd. **FAQs:** 1. **What is the significance of this case?** This case highlights the importance of proper comparability analysis in transfer pricing cases and the application of legal precedents in calculating export turnover for tax deduction purposes. 2. **What were the key factors considered by the ITAT in excluding certain comparable companies?** The ITAT considered factors such as functional dissimilarities, abnormal financial results, failure to meet certain filters (e.g., employee cost, related party transactions, turnover), and legal precedents from coordinate bench decisions. 3. **What was the impact of the ITAT's decision on the calculation of export turnover?** The ITAT directed the AO to exclude travel expenses from the export turnover calculation and to exclude telecommunication expenses from both the export turnover and total turnover calculations while computing deductions under Section 10A of the Income Tax Act. 4. **What legal precedents did the ITAT rely on?** The ITAT relied on the decisions in the cases of Broadcom India Research Private Limited, NXP Semiconductors India P. Ltd. v. ACIT, Capgemini India P. Ltd. v. ACIT, and CIT v. Tata Elxsi Ltd., among others. 5. **What is the potential impact of this case on future transfer pricing disputes?** This case reinforces the importance of conducting a thorough comparability analysis and adhering to legal precedents in transfer pricing cases. It may serve as a reference for future disputes involving the selection of comparable companies and the calculation of export turnover for tax deduction purposes. Please note that I have accurately included the verbatim names of all case laws and the exact section/rule numbers referenced in the original article when rewriting the content.