2017 (4) TMI 1610 - AT - Income Tax

Appeal partly allowed, remand for transfer pricing issues. Assessee's position upheld on setting off losses.

The appeal was partly allowed, with the tribunal remanding several transfer pricing adjustment issues to the Transfer Pricing Officer/Assessing Officer ... Transfer Pricing: selection of Most Appropriate Method (MAM) - Comparability and selection of comparable uncontrolled enterprises - Application of Transactional Net Margin Method (TNMM) as MAM in ITES/BPO services - Comparable Uncontrolled Price (CUP) method limitations where comparable data is incomplete - Determination of Arm's Length Price (ALP) - Functional comparability - Adjustment for working capital/receivable differences in benchmarked pricing - Deduction under Section 10A to be allowed prior to setting off losses of other unitsTransfer Pricing: selection of Most Appropriate Method (MAM) - Comparable Uncontrolled Price (CUP) method limitations where comparable data is incomplete - Application of Transactional Net Margin Method (TNMM) as MAM in ITES/BPO services - Adjustment for working capital/receivable differences in benchmarked pricing - Determination of Arm's Length Price (ALP) - Bench marking of call centre (customer care) international transactions and the appropriate transfer pricing method - HELD THAT: - The Tribunal found that the sole comparable accepted by the TPO had data only for nine months (July 2003-March 2004) while the assessee's transactions ran for the full year; the incompleteness of comparable data and the nature of ITES services led the Tribunal to conclude that CUP, in the facts of this case, was unsuitable as the MAM. The Tribunal also noted that no working capital/receivable adjustment was allowed by the TPO despite differences in credit periods relied upon by the assessee. For these reasons the Tribunal held that TNMM better accommodates minor variations and permits necessary adjustments for bench marking ITES services, and directed that the ALP determination be redone by the TPO/A.O. adopting TNMM as the MAM, permitting the assessee to submit comparables afresh. [Paras 7]Call centre pricing issue is set aside for fresh adjudication by the TPO/A.O. with ALP to be determined under TNMM and with liberty to the assessee to furnish comparables.Comparability and selection of comparable uncontrolled enterprises - Functional comparability - Determination of Arm's Length Price (ALP) - Bench marking of shared services segment and validity of the set of comparables selected by the TPO - HELD THAT: - The Tribunal observed that the TPO's selection and the functional comparability analysis had not been properly examined, particularly given this was the initial year of TP provisions; further, a co ordinate bench had previously found six of an identical set of comparables not functionally comparable. In the circumstances and in the interests of justice the Tribunal directed that the matter be remitted to the TPO/A.O. for fresh consideration of comparable selection and redetermination of ALP. [Paras 11]Issue remitted to the TPO/A.O. for de novo selection of comparables and determination of ALP.Functional comparability - Comparability and selection of comparable uncontrolled enterprises - Determination of Arm's Length Price (ALP) - Bench marking of offshore software development services and exclusion of specific comparables from the TPO's set - HELD THAT: - The Tribunal examined each of the seven companies relied on by the TPO and, on the basis of annual report disclosures and absence of segmental data, found five companies to be functionally dissimilar (product/R&D oriented, diversified revenue streams, or lack of segmental margins) and directed their exclusion from the comparable set. As only two comparables remained (with very low margins), the Tribunal set aside the matter to the TPO/A.O. for a fresh, de novo exercise to select appropriate comparables and to redetermine ALP. [Paras 14, 15, 16, 17, 18]Five of the seven comparables are excluded and the issue is remitted to the TPO/A.O. for fresh selection of comparables and recomputation of ALP.Deduction under Section 10A to be allowed prior to setting off losses of other units - Whether losses of one STPI unit can be set off against profits of another STPI unit before allowing deduction under Section 10A - HELD THAT: - Relying on the jurisdictional High Court and the Supreme Court decisions cited in the order, the Tribunal held that the deduction under Section 10A is to be computed for the eligible undertaking independently and prior to application of set off and carry forward provisions. The Tribunal accepted the reasoning in the referred authorities that Section 10A relief operates at the undertaking level and must be allowed before Chapter VI computations; accordingly, the Assessing Officer was directed to allow the Section 10A deduction before setting off losses of other units. [Paras 20]In favour of the assessee: Section 10A deduction to be allowed before setting off losses of other units; AO to give effect thereto.Final Conclusion: The appeal is partly allowed: transfer pricing adjustments in respect of call centre, shared services and offshore software development segments are set aside and remitted to the TPO/A.O. for fresh ALP determination (with TNMM to be adopted for the call centre segment and specified comparables excluded in the offshore segment), and the Assessing Officer is directed to allow the deduction under Section 10A prior to setting off losses of other units. Issues Involved:1. Transfer Pricing Adjustment for Call Centre Service Segment.2. Transfer Pricing Adjustment for Shared Services Segment.3. Transfer Pricing Adjustment for Off-shore Division – Software Development Services.4. Setting off losses of Hyderabad STPI Unit against profits of Bangalore STPI Unit before allowing deduction under Section 10A.Detailed Analysis:1. Transfer Pricing Adjustment for Call Centre Service Segment:The assessee, a 100% subsidiary of Dell International, USA, provides call centre, back office, and other support services to Dell Group companies. The TPO accepted the CUP method for the call centre service segment but proposed an adjustment based on a 9-month rate comparison. The assessee contended that the entire financial year's revenue should be considered, citing differences in contractual terms and credit periods. The TPO rejected this, stating Rule 10B does not allow adjustments to international transactions. The tribunal noted the incomplete data for the comparable company and concluded that the TNMM method should be adopted instead of CUP for ITES services. The issue was remanded to the TPO/A.O. for fresh adjudication using TNMM as the MAM.2. Transfer Pricing Adjustment for Shared Services Segment:The assessee earned revenue of Rs.27.12 Crores from back office services and used TNMM as the MAM. The TPO rejected the assessee's comparables and selected 8 new comparables with a mean margin of 36.4%, proposing an adjustment of Rs.7,82,43,749. The assessee argued that the services provided were low-end and not comparable to the selected companies. The tribunal found that the functional comparability and selection process were not properly examined by the authorities. The issue was remanded to the TPO/A.O. for fresh consideration of comparables and determination of ALP.3. Transfer Pricing Adjustment for Off-shore Division – Software Development Services:The assessee earned Rs.84.50 Crores from offshore development services, remunerated on a Cost + 10% basis. The TPO selected 7 comparables and proposed an adjustment of Rs.22.26 Crores, later revised to Rs.13,44,85,218 by the CIT (Appeals). The assessee sought exclusion of 5 companies, arguing functional dissimilarity and lack of segmental data. The tribunal directed the exclusion of these companies and remanded the issue to the TPO/A.O. for a de novo exercise of selecting comparables and determining ALP.4. Setting off losses of Hyderabad STPI Unit against profits of Bangalore STPI Unit before allowing deduction under Section 10A:The tribunal noted that the issue is covered by the decision of the Hon'ble Supreme Court in CIT Vs. Yokogawa India Ltd., which held that deductions under Section 10A should be made independently for each eligible undertaking before setting off losses of other units. The tribunal directed the Assessing Officer to allow the deduction under Section 10A before setting off losses of other units.Conclusion:The appeal was partly allowed, with the tribunal remanding several issues to the TPO/A.O. for fresh consideration and adjudication. The tribunal upheld the assessee's contention regarding the deduction under Section 10A, directing the Assessing Officer to follow the precedent set by the Hon'ble Supreme Court.