TaxTMI 
TaxTMI 
2012 (10) TMI 364
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....ngth Price in respect of international transactions entered with Associated Enterprises. 3. The relevant facts are that assessee is a wholly own subsidiary of Genesys Enterprises Inc. It provides Onsite IT Consultancy Services as well as GIS. Its non-trading branch office located at Denver in USA is engaged in marketing activities for its head office. Genesys India has production facilities in Denver (Aerial film Scanning/Image processing), Bangalore (photogrammetry/Remote Sensign) and Mumbai (AMFM/GIS Mapping, IT). Broadly the services provided are as under: (i) IT Solutions. It provides technical solutions client needs like solutions for improving profitability enhanced customer relationship and running the business efficiently. It provides application development, implementation services and technical support in client/server and web based environment. (ii) Geospatial Services. It offers depth and breadth of expertise in Photogrammetry, Remote sensing, Data Conversion, and IT programming consulting. 4. The assessee filed its return of income declaring total loss of Rs. 2,92,83,328. The AO made a reference under section 92CA(1)of the Act for computation of....
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....n was evident from the Capitaline Software. TPO selected fresh list of comparable based on one year average i.e. F.Y. 2003-04 and arrived at average margin of 13.3 per cent as against assessee's margin of Arm's Length Price of 8.85 per cent details of which are given in para 4.3 of TPO's order. Accordingly, TPO made an adjustment of Rs. 66,75,078 as per calculation made in para 4.4 of his order. 6. iv Consequently, AO while passing the assessment order made adjustment of an amount of Rs. 66,75,078 to the total income of the assessee. Being aggrieved, assessee filed appeal before the first appellate authority. 7. On behalf of assessee, it was contended that assessee has in actual practice followed CUP method in arriving at ALP even though it had in its return of income filed as well as in its submissions made before the TPO stated that it followed TNMM method. It was contended that assessee during the period 1.4.2003 to 31.3.2004, provided services to its AEs in USA and UK and similar services were provided to third parties in the same geographical region. It was contended that for determining the arm's length charge received from AE, assessee had documented th....
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.... 24. 31.1.04 Maps 9.52 25. 30.9.03 Maps 6.25 26. 31.10.03 Maps 6.00 27. 31.10.03 Maps 6.25 28. 30.11.03 Maps 6.25 29. 30.11.03 Maps 4.65 30. 30.11.03 Maps 6.00 31. 31.12.03 Maps 6.25 32. 31.12.03 Maps 4.65 33. 31.1.04 Maps 6.25 34. 29.2.04 Maps 6.25 35. 31.3.04 Maps 6.25 IT SERVICES: Sales made to: Subsidiary Third party US UK Normal projects 9,410,635 0 14,262.463 Total IT sales invoiced (incl. exchange gain/loss) 9,410,635 0 14,262,463 Production hours Total hours 12,066 0 19,462 Total No. of production hou....
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....a fact that assessee has in actual practice adopted CUP method to benchmark its related party transactions and demonstrate its Arm's Length Price. However, at the time of TP Audit before the TPO, it needlessly tried to make out a case that the prices charged by it to AE's are justifiable under the TNMM method. Ld CIT(A) relying on the decision of ITAT in the case of MSS India Pvt. Ltd (supra) held that AO/TPO has not made out any case let alone a proper case for disregarding the CUP method which was adopted by the assessee. Ld CIT(A) has stated that the OECD guidelines also tend to put more emphasis on comparison of conditions or facts and circumstances obtained in comparable uncontrolled transaction and not the outcome or the financial results. If an entity is unable to earn adequate profits on account of legitimate business exigencies and not due to manipulation of transaction by the AEs then such an entity cannot be penalized. Ld CIT(A) has stated that assessee has demonstrated that the losses are due to start up in the Pune Unit which is in nascent stage with large idle capacity. Moreover, there are no transactions with AEs from Pune Unit of the assessee which could hav....
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.... not dispute to above submission of the assessee. 14. We have considered submissions of ld representatives of parties and orders of authorities below. Proviso to Section 92C(2) as applicable to assessment year 2004-05 reads as under: "Provided that where more than one price is determined by the most appropriate method, the arm's length price shall be taken to be the arithmetical mean of such prices, or, at the option of the assessee, a price which may vary from the arithmetical mean by an amount not exceeding five per cent of such arithmetical mean." 15. We observe that assessee has worked out its margin of 8.85 per cent and TPO has worked out the margin at 13.30 per cent, and as is evident from the proviso to Section 92C(2) of the Act that if the variation between the ALP and the actual transaction price does not exceed 5 per cent of the latter , the transaction price is to be accepted and no adjustment is required to be made. Since the difference in the Arm's length margin as determined by the TPO and the actual transaction price does not exceed five per cent, we hold that no adjustment is required to be made as it is within 5 per cent range of ALP. Therefore, or....
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....951 - Total GIS sales invoiced 32,792,705 2,194,951 119,632,035 Production hours Seepz 70,962 - 277,745 Engg 1,600 Bangalore 8,841 4,528 97,802 Total No. of Prod Hrs 79,803 4,528 377,147 Avg Rate / Hr-Rs 411 485 317 Avg Rate / Hr - $ $ 9.13 $ 10.77 $ 7.05 19 (i). TPO has stated that on perusal of above table, it is observed that ASL services have not been rendered to any third parties and, therefore, no CUP is available in respect theirof. He has further stated that as far as the normal projects are concerned, assessee has not explained whether third parties belong to the USA or some other geographical location. Further, assessee has benchmarked the manhour rate and not the services as such. It has not been able to illustrate as to how the services are rendered to all the parties were exactly the same. A CUP analysis cannot be made on averages. TPO stated that an activity employs a number of persons of different rank. The hourly rate of a senior executive/a senior technician may be....
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....; Op/Sales -0.19 -22.16 -1.68 Op/Op Cost -0.19 -18.14 -1.66 9. Considering that the majority of internal transactions are by way of rendering of services and it is the income part that requires benchmarking, OP/ Cost is taken to be the Profit Level Indicator. Since the PLI of assessee is lower than that of comparables, and adjustment will be made as under: REVENUE 164.060,835 210,689,939 AE 37,102,131 83,731,235 46,629,104 NON-AE 126,958,704 126,958,704 COST 164,378,059 164,378,059 OPERATING PROFIT -317,224 46,311,880 OP/TC -0.19 28.17 19. (iv) In view of above, TPO considered adjustment of Rs. 4,66,29,104, and stated that it i....
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.... US UK Normal projects 32,792,705 - 119,013,535 Engg 618,500 ASL - 2,194,951 Total GIS sales invoiced 32,792,705 2,194,951 119,632,035 Production hours Seepz 70,962 - 277,745 Engg 1,600 Bangalore 8,841 4,528 97,802 Total No. of Prod Hrs 79,803 4,528 377, 147 Avg Rate / Hr - Rs 411 485 317 Avg Rate / Hr - $ $9.13 $ 10.77 $ 7.05 * Exchange rate assumed at 145D - INR 45.2 20. (i). It was contended that it could be seen from above table that assessee has not charged its AEs a rate lesser than what it has charged to a third party for similar work type & size and more importantly in the same region. It was contended that the losses were only due to Pune Unit where there are no transactions with AEs. It was also contended that TPO has not given any instance where the assessee has charged its AE a rate less than the market rate. 21. Ld CIT(A) considered above submissions of assessee and stated that assessee has adopted CUP method to benchmark its related part....
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....the basis of Transactional Profit Methods, but when traditional methods of ALP determination are being pressed into service, such considerations are wholly irrelevant." 22. Ld CIT(A) has further stated that assessee's AE's are in UK & USA and the third party too is in the same geographical region. Since the nature of services are also the same, there is a strong and viable case for CUP method as adopted by the assessee. He has stated that average hourly rate billing in Dollars is a standard practice in IT industry. In view of above, ld CIT(A) stated that AO/TPO has not made out any case let alone a proper case for disregarding the CUP method as adopted by the assessee. Ld CIT(A) also considered OECD guidelines and, accordingly, held that ALP as demonstrated by the assessee does not require any adjustment. Ld CIT(A) has further stated that ALP of international transaction of services to AEs has been arrived at by TPO by just adding the difference in the profit margin (on totality basis) to the total value of services to AEs without considering the fact that total service income is not to AEs and assessee has transactions with third parties is approximately 71.83% of the t....
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....s with Third Party which is approximately 71% of total turnover of the assessee. He further referred to para 9 of the order of ld CIT(A) and submitted that ld CIT(A) has accepted CUP method as adopted by the assessee and stated that other issues become academic. Ld A.R. referred page 5 of the order of ld CIT(A) and submitted that nature of services rendered by assessee to AEs as well as to Non-AEs were of similar nature in the same geographical region. He submitted that assessee also stated before TPO as well as before ld CIT(A) that it rendered similar kind of work and charging to AEs are at a higher rate than what it charged to third party for similar services. He referred page 9 of PB and submitted that assessee made a detailed working of the nature of transaction rendered and the rate charged and the same were furnished to the TPO. However, TPO without disputing the facts stated before him rejected the most appropriate method i.e. CUP and applied TNMM. Ld A.R. submitted that the order of ld CIT(A) is correct and the same should be confirmed. 26. We have considered submissions of ld representatives of parties and orders of authorities below. We observe that assessee in its tr....
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....ing two grounds: "1. The ld CIT(A) has erred in confirming ld AO's order of not allowing the appellant company to set off the loss of Rs. 1,01,69,294 from one of the 10A unit against the taxable profits from the other 10A units and non-10A unit. 2. Ld CIT(A) has erred in confirming AO's order of not allowing the appellant company to adjust the brought forward loss/unabsorbed depreciation of Rs. 1,89,43,596 from preceding year against the taxable profits of current year." 29. In respect of Ground No.1 of appeal, relevant facts are that assessee has three units/undertakings at Mumbai, Bangalore and Pune, all of which qualifies for deduction u/s.10A as separate undertakings. The assessee has profit from Mumbai and Bangalore Units and loss from Pune Units. The assessee set off the loss incurred in the Pune Unit from the income after deduction u/s.10A of Mumbai and Bangalore Units as well as its income from other sources. AO stated that the incomes to the extent exempt are not included in the total income of the assessee for computation of total income. Since the income of a unit eligible for deduction u/s.10A of the Act does not form part of total inc....
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....e Jurisdictional High Court in the case of Hindustan Unilever Ltd v. Dy. CIT, [2010] 325 ITR 102 which was followed by ITAT Pune in the case of Patni Computer Systems Ltd. v Dy. CIT, [2011] 16 ITR 533. He further submitted that Hon'ble Bombay High Court again considered the similar issue in the context of section 10A by its order dated 9.4.2012, (copy filed and is placed on record) in an appeal filed by department being Income-tax Appeal Lodging No.1237 of 2011 in the case of CIT v. Black & Veatch Consulting (P.) Ltd. 32.1 On the other hand, ld D.R. supported the orders of authorities below and submitted that section 10A after the amendment by Finance Act 2003, talks of deduction but AO has rightly interpreted it as exemption provision. Further, deduction allowed under section 10A is not 100% of the eligible unit. He submitted that all unit is an independent undertaking and, therefore, the loss of eligible undertaking whose income is exempt cannot be set off against the taxable income. He submitted that order of ld CIT(A) be confirmed. 33. We have considered submissions of ld representatives of parties and orders of authorities below. We observe that the issue involved is....