TaxTMI 
TaxTMI 
2009 (12) TMI 668
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....nafter referred as 'the Act') is bad in law and on the facts and circumstances of the case. 2. The ld. CIT(A), as well as ld. Assessing Officer/TPO have erred in law as well as facts of the case in not accepting the Arm's Length Price (hereinafter referred as 'ALP') determined by the appellant. 3. The ld. CIT(A), as well as ld. Assessing Officer/TPO have erred in law as well as facts of the case by passing an order in a mechanical manner by ignoring the fact that the appellant is entitled to deduction under section 10A of the Act and there is not incentive for it to manipulate the price of International Transaction. 4. The ld. CIT(A), as well as ld. Assessing Officer/TPO have ignored the factual position that the associated enterprise of the appellant, i.e., RCS Centre Corpn., has incurred losses and as such, there is no transfer of profits by the appellant to its associated enterprise. 5. The ld. CIT(A), as well as ld. Assessing Officer/TPO have erred in determining the ALP by taking the appellant as the tested party and by rejecting the submission of the appellant that RCS Centre Corpn. (now known as Global Vantedge Inc.) has to be considered a....
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....ssessee and its AE from third party independent clients." 5. In the light of the grounds of appeal raised by the assessee and by the revenue, it is seen that the grounds raised by the assessee and revenue revolved around the issue regarding the determination of the Arm's Length Price in respect of transactions entered into by the assessee with related parties. 6. Under the business profile, the TPO mentioned that the assessee is subsidiary of Global Vantedge, Mauritius and which in turn is a wholly-owned subsidiary of Global Vantedge, Bermuda. The assessee is engaged in rendering IT enabled services in the field of credit collection and telemarketing services and is eligible for deduction under section 10A of the Act as a STPI unit. The RCS Centre Corpn., a Delaware Corporation, is wholly-owned subsidiary of Global Vantedge, Bermuda. As the assessee and RCS have the common shareholder of Global Vantedge, Bermuda, which holds more than 26 per cent shares (directly and indirectly), they are associated enterprise by virtue of provisions of section 92A(2)(b) of the Act. RCS is engaged in the business of contracting with clients located in USA, to provide them debt collection and ....
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....t of Rs. 22,46,97,971, the TPO proposed the adjustment to the extent of Rs. 14,70,10,071. 9. On the basis of the TPO's report, the Assessing Officer made an adjustment of Rs. 14,70,10,071 while making the assessment under section 143(3) of the Act. 10. Being aggrieved with the Assessing Officer's order, the assessee preferred an appeal before the ld. CIT(A) raising as much as 25 grounds of appeal which have been reproduced by the ld. CIT(A) in his order. After considering the various grounds raised by the assessee and submission of the assessee, the following issues were framed by the ld. CIT(A) for his consideration :- "1. Whether Assessing Officer/TPO have erred while determining the ALP by taking appellant as the tested party as opposed to the analysis carried out by the appellant in which RCS was accepted as the tested party? 2. Can the ALP of the international transaction between the appellant and its associated enterprise exceed the total amount of revenue earned from clients by the appellant and RCS together? 3. Whether Assessing Officer/TPO erred in rejecting the ALP determined by the appellant? 4. In case the ALP determined by eith....
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....n entity is unable to earn adequate profits on account of legitimate business exigencies and not due to manipulation of transactions undertaken by the associated enterprises, such entity cannot be penalized. 5.2.2 In the case of a revenue sharing model between two entities (say A & B), it may be contended that the amount of revenue received by an entity (say entity A, is lower than the fair amount of revenue receivable by it is due to the other entity (say entity B) receiving a larger share. Such unfairness may be mitigated by requiring the entity B to retain only its fair share and give up the balance amount in favour of entity A. In the worst case, entity B may be required to give up its entire share of revenue which would result in entity A receiving 100 per cent of the revenue. However, it cannot be logical to say that the fair amount of revenue to be received by entity A is more than 100 per cent of the total revenue earned by both A and B. Under such circumstances, entity B will have to pay the additional amount from its internal sources which in addition to being a highly absurd proposition, may also lead to the bankruptcy of B since this cannot be sustained over a ....
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....igures (9.40 per cent and 4.40 per cent - 1.40 per cent), a reference to it can usefully be made to understand a general magnitude of the item involved vis-a-vis other expenses. It is pertinent to mention here that the average selling/marketing expenses incurred by the comparables finally selected in the later part of this order, also comes to 1.64 per cent of turnover. Hence, the industry average shown by ICRA report for the financial year 2003 at 1.40 per cent is very much reliable and authentic figure. Keeping in view the functional profile of the two entities (appellant and RCS) including the FAR analysis and also keeping in view the fact that as per rule 10B(4) on data for the current year to be used. As in the financial year 2002-03, the average expenditure on selling expenses in the software industry were in the range of 1.4 per cent accordingly I am of the view that a share of 1.40 per cent of the revenue is adequate to compensate RCS for its activities. Thus, as per this hypothesis, the ALP determined cannot exceed 98.60 per cent of the revenue earned by the Global Vantedge Group as a whole, i.e., the ALP 98.60 per cent of the revenue earned by the Global Vantedge....
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....appellant. Though there is merit in the appellant's argument that there is no tax benefit being obtained by the appellant though shifting of profits. It cannot be the only basis to accept appellant's contentions in this regard. It is well understood that one associated enterprise can try to use its influence to determine the transaction in a manner prejudicial to the interest of the other associated enterprise because of several reasons. 5.4.2 As regards contention of the appellant that transaction of the appellant with independent clients, should not be benchmarked under TNMN I agree that when TNMN is used as the Most Appropriate Method to determine the Arm's Length Price, the TNMN, as the name itself suggests, evaluates profitability of transactions rather than profitability of an enterprise. Transaction of different nature cannot be aggregated for the purpose of comparison under TNMN. In practice though the profitability of comparable entities is used to benchmark the international transactions of taxpayers, however, in such a scenario an underlying assumption overrides the analysis for the lack of data. The acting assumption in such a scenario is that due to a well des....
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....neously used the data for financial year 2000-02 while determining the ALP. Thus, this company is also not considered to be comparable entity of the appellant due to lack of sufficient data. 5.4.4 Proceeding to the next issue, regarding claim of appellant for giving suitable adjustment on account of idle capacity and that they were in start up phase, I have considered the submissions of the appellant and looking to the fact that the remaining 6 comparables were established entities, accordingly adjustment needs to be made while doing the comparability analysis. Normally wherever an entity is established it always carried some surplus capacity vis-a-vis present/projected business operations. Looking into the IT industries which were in booming stage I hold that a surplus capacity to the extent of 1/3rd of the existing capacity is treated as normal in this industry in anticipation of future growth in business. Hence, an adjustment to the profitability of the comparables should be made to the extent of 33.33 per cent. This is also in accordance with the provision of rule 10B(2) which states that condition prevailing in the market in which the tested party and comparables oper....
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....erating Cost (B)=(A)* -38.11% -7,00,98,680 Arm's Length Value of the International Transaction under- taken by the appellant (C)=(A) + (B) 11,38,39,079 Value at which international transaction between the appellant and RCS took place (D) 8,32,66,596 Maximum Additions that can be made to the taxable income of the appellant (E)=(C) - (D) 3.05,72,483 Thus, the ALP determined on the basis of above working comes to Rs. 11,38,39,079 which exceeds the total revenue earned by the group as a whole. In view of the adjudication made for ISSUE 2, the ALP cannot exceed Rs. 9,16,55,231, therefore, the ALP is determined to be Rs. 9,16,55,231. Hence, additions to the income of the appellant is confirmed at Rs. 83,88,625 (i.e., Rs. 9,16,55,231 - i.e., the maximum ALP less Rs. 8,32,66,596, i.e., the actual value of the international transaction)." 17. With regard to the assessee's claim that there should be an adjustment to the extent of +/- 5 per cent under the proviso to section 92C(2) of the Act, the ld. CIT(A) has decided the point by observing and holding as under :- "Adjustment of +/- 5 per cent under proviso to section 92....
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....on about the benefit of adjustment of +/- 5 per cent to be given while determining the Arm's Length Price, the ld. counsel for the assessee has not been point out as to how and in what manner, the order of ld. CIT(A) in rejecting this claim of the assessee is improper and unjustified. Since both the parties have not been able to controvert the findings recorded by the ld. CIT(A) or point out any material to enable us to take a view other than view taken by the ld. CIT(A), we are inclined to uphold the order of ld. CIT(A) on the point of determination of Arm's Length Price in respect of the transactions entered into by the assessee with its associate enterprises, namely, RCS Centre Corpn. Therefore, the order of ld. CIT(A) is upheld, and the grounds raised by the assessee as well as by the revenue on this issue are rejected. 20. Similarly, in the assessment year 2004-05, an identical issue about the determination of Arm's Length Price is involved and in that year, the ld. CIT(A) determined the Arm's Length Price in the same manner or basis as done in the assessment year 2003-04. The Arm's Length Price determined by the ld. CIT(A) is as under :- "8. Re-computation of ALP ....
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....ection 92C(2) in the same manner as have been decided by him in the assessment year 2003-04. 22. Thus, in the light of the decision, we have taken in assessment year 2003-04, the identical ground about the determination of Arm's Length Price raised by the revenue as well by the assessee in the assessment year 2004-05 are rejected. 23. In the assessment year 2004-05, the assessee has taken one more ground contending that the authorities below have erred in not considering the interest from fixed deposit placed with bank for bank guarantees and the interest in fixed deposit kept as lien in favour of IBM for the purpose of obtaining computers on lease as business income for the purpose of calculating the deduction under section 10A of the Act. The assessee has also taken a ground for authorities below have erred in excluding the miscellaneous income while computing the deduction under section 10A of the Act. 24. We have heard both the parties and have carefully gone through the orders of the authorities below. 25. Section 10A provides for a deduction of such profits and gains as are derived by an undertaking from the export of articles or things or computer software from t....
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.... profits of an eligible business. Such profits are computed as if such eligible business is the only source of income of the assessee. Therefore, devices adopted to reduce or inflate the profits of the eligible business have to be rejected in view of the overriding provisions of section 80-IA(5). Sections 80-I, 80-IA and 80-IB provide for incentives in the form of deductions which are linked to profits and not investment. On analysis of sections 80-IA and 80-IB it becomes clear that any industrial undertaking which becomes eligible on satisfying sub-section (2) would be entitled to deduction under sub-section (1) only to the extent of profits derived from such industrial undertaking after the specified date. Apart from eligibility, sub-section (1) purports to restrict the quantum of deduction to a specified percentage of the profits. This is the importance of the words "derived from an industrial undertaking" as against "profits attributable to an industrial undertaking." DEPB/Duty drawback are incentives which flow from the schemes framed by the Central Government or from section 75 of the Customs Act, 1962. Incentive profits are not profits derived from eligible....
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....d its business operation in the financial year 2001-02 relevant to the assessment year 2002-03. In the assessment year 2002-03, the assessee was assessed at business loss of Rs. 3,72,77,332 and also had unabsorbed depreciation to the extent of Rs. 89,08,926. In the assessment year 2003-04, the assessee's total income was initially assessed at Rs. 2,89,84,301. Thereafter, the assessee filed an application under section 154 of the Act stating that brought forward loss of Rs. 3,72,77,332 and unabsorbed depreciation of Rs. 89,08,926 pertaining to the assessment year 2002-03 is to be set off against the total income determined for the assessment year 2003-04. On an application under section 154 of the Act, made by the assessee, the Assessing Officer passed an order under section 154 of the Act dated 12-6-2006 whereby he set off the brought forward loss of assessment year 2002-03 to the extent the total income of Rs. 2,89,84,301 determined for the assessment year 2003-04 and, thus, arrived at the total income of Rs. Nil. After set off of the loss of assessment year 2002-03, the business loss and unabsorbed depreciation pertaining to that assessment year 2002-03 still remained to be set o....
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....ia during such year : Provided that in the case of a person not ordinarily resident in India within the meaning of sub-section (6) of section 6, the income which accrues or arises to him outside India shall not be so included unless it is derived from a business controlled in or a profession set up in India. 12. Chapter III provides for incomes which do not form part of total income. 13. Chapter IV provides for computation of total income. 14. Section 32 of the Income-tax Act provides for deduction on depreciation. Section 32(2) provides for adjustment for subsequent years. If we see section 10B, it provides for exemption of payment of tax with reference to profits and gains derived by 100 per cent export-oriented undertakings. To arrive at a profit and gain, one has to necessarily take into consideration the total income in terms of the Act. To arrive at the income one has to take into consideration, the various additions and deletions in terms of the Act. In fact, the petitioner knowing fully well has chosen to take into consideration the allowability of depreciation for the purpose of calculating of total income. But curiously an argu....
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....t the intention of the legislation. Legislation never wanted the entire income to be exempted by taking advantage of section 10B of the Act. The approach of the Tribunal to our mind is incorrect and, hence, we find substance in the argument of the revenue." 34. In the light of the aforesaid decision of Hon'ble Karnataka High Court in the case of Himatasingike Seide Ltd. (supra), which has been rendered in the context of provisions contained in section 10B, which is analogous to the provisions contained in section 10A of the Act, it is clear that to arrive at a profit and gain of eligible undertaking, one has to necessarily take into consideration the total income in terms of the provisions of the Income-tax Act, and section 10A cannot be read in isolation of other provision of the Income-tax Act pertaining to the manner of computation of profit for the purpose of determining total income under the Income-tax Act. The Hon'ble High Court has also held that calculation of deduction is to be made in terms of the provisions of Income-tax Act. Therefore, the assessee's contention that the definition of 'total income' given under section 2(45) of the Act cannot be imported into for the....
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.... the export of articles or things or computer software. This section does not refer that such profits and gains derived by undertaking from the export will not be included in the total income. Under section 10, the operative part of the section is that any income falling within the clause in section 10 shall not be included in computing the total income. From wording of sections 10 and 10A, it is clear that the Legislature was fully aware of the meaning of the words "amount not to be included and the deduction to be allowed". Hence, we are not inclined to accept the contention of the ld. AR that substituted section 10A should also be interpreted to mean that profits as mentioned under section 10A should not be included in the total income. 12. The ld. Calcutta High Court in the case of Royal Calcutta Turf Club v. CIT [1983] 144 ITR 709 observed at page 714 as under :- "In computing the total income, certain incomes are not included under section 10 of the Income-tax Act. It depends on the particular case where certain income, in respect of which the Act is made inapplicable to the scheme of the Act, and in such a case, the profit and loss resulting from s....
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....uter software. As already observed unabsorbed business losses of other units cannot be set off and, therefore, unabsorbed depreciation which is to be set off after unabsorbed business loss as per section 72(2) also cannot be set off for ascertaining the deduction under section 10A. 15. In the instant case, there is no unabsorbed depreciation or unabsorbed business loss in respect of software services division and, therefore, profits and gains of the software services division will be exempt under section 10A without setting off the loss of other division or the setting off of carry forward losses of other division. In view of above discussion, we hold that ld. CIT(A) was justified in directing the Assessing Officer to allow exemption under section 10A without setting off loss of non-section 10A unit and consequentially allowed carry forward of such losses and depreciation of non-section 10A unit. In the result, the appeal is dismissed." 36. From the said decision, it is clear that the assessee's contention that profit of the eligible unit, i.e., section 10A unit should not be included in the total income has been rejected by the Tribunal. After amendment made b....
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....ligible unit under section 10A of the Act. 37. In this view of the matter and applying the ratio decidendi of the above-mentioned decision of the Tribunal in the case of Yokogawa India Ltd. (supra) we hold that, on the facts of the present case, the aforesaid decision goes against the assessee rather than supporting the assessee's case. 38. Similarly, the decision of ITAT, Chennai Bench 'A' in the case of Changepond Technologies (P.) Ltd. v. Asstt. CIT [2008] 22 SOT 220 , the issue for consideration was whether CIT(A) erred in law in directing the Assessing Officer to allow deduction under section 10A without setting off of brought forward and current year losses of non-section 10A unit and not with regard to the setting off of brought forward business losses or unabsorbed depreciation of the section 10A unit against the profit of same section 10A unit. 39. In this decision, the Tribunal followed the decision of the Tribunal in the case of Yokogawa India Ltd. (supra) and has observed and hold as under :- "20. After considering the rival contentions, the materials on record and the legal propositions on the issue we note that a perusal of the provisions contained i....
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.... Act. Thus, this decision is also of no help to the assessee's case where the question involved is altogether different about setting off of unabsorbed losses or depreciation of eligible 10A unit against the profit of same eligible section 10A unit. 41. In the light of the aforesaid two decisions in the case of Yokogawa India Ltd. (supra) and Changepond Technologies (P.) Ltd. (supra), and in the light of decision of Hon'ble Karnataka High Court in the case of Himatasingike Seide Ltd. (supra), it is, thus, clear that the unabsorbed depreciation or unabsorbed business loss in respect of eligible section 10A unit or division or undertaking is to be set off against the profit of the same eligible section 10A unit or undertaking for the purpose of determining the amount of deduction available under section 10A of the Act. 42. With regard to the decision of ITAT, Bangalore Bench in the case of KPIT Cummins Infosytems (India) (P.) Ltd. (supra), we find that the same decision is rendered in favour of the assessee without applying the ratio of the decision of Hon'ble Karnataka High Court in the case of Himatasingike Seide Ltd. (supra). It is well-settled that the decision of High Cour....