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2013 (11) TMI 216
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....n up for scrutiny by issue of notice u/s.143(2) of the Act. As there were international transactions, in excess of Rs. 5 Crores entered into by the assessee, in the period under consideration, a reference was made by the Assessing Officer to the Transfer Pricing Officer (TPO) u/s. 92CA(1) of the Act for determination of the Arm's Length Price ('ALP' in short) of those transactions. The details of the international transactions in the relevant period are as under : (i) Back office Expenses : Rs. 11,86,41,555 (ii) Expenses reimbursed by AE : Rs. 1,06,13,403 (iii) Expenses reimbursed to AE : Rs. 1,49,88,146 The TPO after examination of the international transactions passed an order u/s.92CA of the Act vide order dt.15.12.2006 proposing an adjustment of Rs. 2,03,04,850 in respect of the international transactions pertaining to the assessee's BPO services render....
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....ction allowable under section 10A of IT Act, 1961 after reducing the telecommunication expenses amounting to Rs. 56,40,267 both from the export turnover and the total turnover, without appreciating the facts and circumstances of the case. 3. The learned CIT (Appeals) has erred in not appreciating that there is no provision in section 10A, which requires telecommunication expenses reduced from the export turnover as per clause (iv) of Explanation 2 to section 10A, to be reduced from the total turnover also. 4. The learned CIT (Appeals) was not justified in allowing relief of Rs. 53,25,814 out of the adjustment made by the Assessing Officer under section 92CA of the IT Act, 1961 by directing the Assessing Officer to adopt the mean PLI of 34.335% as reduced by 5% i.e. At 29.335%, without appreciating the facts and circumstances under which the adjustment was made by the Assessing Officer based on the TPO's order. 5. The learned CIT (Appeals) was not justified in holding that the assessee was entitled to a standard deduction of 5% from the arithmetical mean of the profit margin of the comparables under ....
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....ased on the 8 (eight) comparables selected by the TPO, whereas, the working capital adjustment was required to be recomputed in consequence of the CIT(A) direction to exclude 2 (two) of the comparables selected by the TPO. 12. For these and such other grounds that maybe urged at the time of hearing, it is humbly prayed that the order of the CIT (Appeals) be reversed in so far as the above mentioned issues are concerned and that of the Assessing Officer be restored. 13. The appellant craves leave to add, to alter, to amend or to delete any of the grounds that may be urged at the time of hearing of the appeal." Assessee's appeal in ITA No.661/Bang/2011 - Assessment Year 2004-05 4.0 Transfer Pricing Issues 4.1 The approach of the assessee and the TPO In the relevant period, the international transactions entered into by the assessee were as under : (i) Back office Expenses : Rs. 11,86,41,555 (ii) Expenses reimbursed by AE &nb....
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....ompanies from the set of comparables, on the ground that these two companies are outliners and have abnormal profit / loss and hence need to be removed from the set of comparable companies. The learned CIT(A) also granted the assessee standard deduction of 5% from the arithmetic mean of the profit margin of comparables and also granted an adhoc working capital adjustment of 3.2% as against 2% granted by the TPO. Transfer Pricing Adjustment 5.1 In ground No.1, the assessee has challenged the order of the learned CIT(A) in computing the cost plus mark up of the assessee at 29.33%, thereby partially sustaining a transfer pricing adjustment of Rs. 1,49,75,036 as against the T.P. Adjustment of Rs. 2,03,04,850 made by the TPO. At the outset the learned A.R. submitted that the facts of this case are similar to the case of 24/7 Customer.Com (P.) Ltd. v. Dy. CIT [2013] 140 ITD 344 wherein the co-ordinate Bench of the Bangalore ITAT rendered its order in and also that the comparables selected by the TPO in the case on hand is the same as those in the cited case. The learned A.R. submitted that the only issue of contention is the issue of selection of the correct comparable companies fo....
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....the set of comparables as it is functionally different since it is outsourcing most of its work and not comparable with a pure ITES company, like the assessee. In support of this argument, the learned A.R. placed reliance on the decision of the Mumbai Tribunal in the case of Asstt. CIT v. Maersk Global Services Center (India) (P.) Ltd. [2011] 133 ITD 543 which held that since VITL is outsourcing most of its work it has to be excluded from the list of comparables whereas the assessee in the cited case was carrying out the work by itself. This, the learned AR submitted that view was followed by co-ordinate benches of the Bangalore Tribunal in the cases of - (i) Netlink India (P.) Ltd. [IT Appeal No. 454 (Bang.) of 2011, dated 19-10-2012] and (ii) 24/7 Customer Com. (P.) Ltd. (supra) wherein was held that VITL needs to be excluded from the list of comparables. 5.4.2 We have heard both parties and have perused and carefully considered the material on record. We find from the cited cases that, there is a clear finding that, in the period under consideration, VITL was outsourcing most of its work whereas the assessee therein w....
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....d being similar, Tricom India Ltd. should be excluded. 5.5.2 We have heard both parties at length and have perused and carefully considered the material on record. There is no dispute to the fact that the assessee providing business process outsourcing services to its AEs and operating in the ITES sector has no software product intangibles, whereas, in the case of Tricom India Ltd., it is on record that it owns software product intangibles by which it provides niche services to its customers. The issue of whether Tricom India Ltd., is to be taken as a comparable, for Assessment Year 2004-05, with ITES entities having no intangibles of their own was considered in detail by a co-ordinate bench of this Tribunal in the case of 24/7 Customer.Com (P.) Ltd. (supra) at paras 15.0 to 15.3.3 thereof. At para 15.3.3 of this order, the Tribunal held that this company, Tricom India Ltd., requires to be excluded from the list of comparables observing that :- "......... On appraisal of the submissions and the material on record, it would certainly stand to reason that a company having unique software developed in house which also renders specialized services in its ....
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....cluded as a comparable. 5.6.2 We have heard both parties and carefully perused and considered the material on record. There is no dispute in respect of the fact that the assessee is operating purely in the ITES sector providing services to its AEs, whereas fortune Infotech Ltd. has developed and owns web based unique software "Finetran", etc. by which it provides niche services to its customers. The issue of whether Fortune Infotech Limited is to be taken as a comparable for Asst. Year 2004- 05 with ITES entities having no intangibles of their own was considered in detail by the co- ordinate bench of this Tribunal in the case of 24/7 Customer.Com (P.) Ltd. (supra) at paras 15.0 to 15.3.4 thereof. At para 15.3.4 of this order, the Tribunal held that this company; Fortune Infotech Limited requires to be excluded from the list of comparables observing that - "...On perusal of the details furnished and submissions made, it is seen that this company has developed its own software called "Finetran" and "image index" for performing specialized services in medical transcription and patient record management. On appraisal of the same, we are of the opinion tha....
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....co-ordinate bench of this Tribunal in the case of 24/7 Customer.Com (P.) Ltd. (supra) has held for the reasons stated above, that this company is to be retained as a comparable. Respectfully following the aforesaid decision, we direct that M/s. Spanco Telesystems & Solutions Ltd. be retained as a comparable in the assessee's case for Asst. Year 2004-05. 5.8.1 Ultramarine Pigments Limited The learned A.R. vehemently argued for exclusion of this company from the list of comparables for the following reasons : (i) The assessee is engaged in a host of services such as Laundry and Allied Services, packaging products and others besides ITES; (ii) The TPO has considered the segmental margins for call centre activities which constitute only 16% of total margin while determining the comparability with the assessee / taxpayer. (iii) The company has earned a margin of 63.27% and has been rejected as an outlier by the learned CIT(A) in the appellate order for A.Y. 2004-05 which is the subject matter of this appeal. (iv) Comparable companies using segmental financials are to be ....
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....nbsp; "We have carefully considered the submissions made seeking the exclusion of this company as a comparable for the reason that it has high profits of 63.27% and that it has various segmental apart from ITES and that there were a catera of decisions in support of the assessee's proposition. A similar matter of' Super Profits' was considered by a co-ordinate bench of this Tribunal in the case of M/s. Netlink India Pvt Ltd (ITA No.454/Bang/2011) to which both of us were a party. In that order, it was held that the word 'super' is a superlative word which denotes something extraordinary and noted that in al the cases / decisions where these super profit making companies were directed to be excluded, the TPO was comparing cases like Infosys, Wipro, etc. where the turnover was more than 10 times that of the assessee or the profit margin was abnormally high. In the case of Exxon Mobile Company India Pvt Ltd v. DCIT (ITA No.8311/Mum/2010 dt.10.6.2011), the ITAT, Mumbai held that : "A comparable cannot be eliminated just because it is a loss making unit. Similarly, a higher profit making unit cannot also be automaticall....
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....tre segment and segmental results are available in the Annual Reports / audited financial statements of the company and we therefore find no merit in the contention of the assessee that this company cannot be a proper comparable merely because the ITES segment constitutes only 16% of its income. We also find that the TPO has allocated the unallocated expenses in the ratio of sales, which also cannot be faulted. Respectfully following the action of decision of the co-ordinate bench of the Tribunal in the case of 24/7 Customer.Com (P.) Ltd. (supra) as laid out above, we hold that the decision of the learned CIT (Appeals) in excluding Ultramarine Pigments Ltd as a comparable company on account of super profits is erroneous as it is not in keeping with the principle laid down and the finding of the co-ordinate bench of this Tribunal in the case of Netlink India (P.) Ltd. (supra) and in the case of 24/7 Customer.Com (P.) Ltd. (supra) on the issue of 'Super Profits'. We, therefore, reverse the decision of the learned CIT (Appeals) and direct that Ultramarine Pigments Ltd. be retained as a comparable for the assessee's case for Assessment Year 2004-05. In view of this finding, revenue's g....
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....his company be included in the list of comparables in the case on hand for Assessment Year 2004-05. It is ordered accordingly. In view of this finding of ours, revenue's grounds at S.Nos.8 to 10 are allowed. 6.0 We shall now deal with the objections raised by the assessee against the action of the TPO in excluding certain companies from the assessee's list of comparables. From the details on record, it is seen that the assessee has objected to the exclusion of the following companies : (i) Ace Software Exports Ltd. (ii) MCS Limited. (iii) Tata Share Registry Ltd. 6.1.1 Ace Software Exports Limited The learned Authorised Representative submitted that this company is engaged in providing CAD-CAM services which are in the nature of ITES and therefore ought to be accepted as a comparable. It was also submitted that the TPO had erred in rejecting this company as a comparable on the basis that it had entered into an agreement with Apex Data Services Inc., USA on buy back of 100% of production and for the reason that it supplies 100% of its services to a single enterprise. It is prayed that this company be in....
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....ter to the domestic market. We find that the TPO has given elaborate reasoning as to why companies catering significantly to domestic market would not be apt comparables for those assessees catering to the export market. We agree with the TPO that pricing and profitability in export and domestic market in ITES sector are not likely to be the same for the following reasons : (a) Conditions prevailing in the export and domestic market in which the respective parties to the transactions operate are different. (b) Geographical locations (domestic and export) are different. (c) Size of the markets (domestic and export) to which companies cater to are different. (d) Cost of labour and capital in the markets (domestic and export) are different. (e) Overall economic development and level of competition is different. (f) Government incentives like tax incentives etc are available only for exporters. (g) As the pricing for services differs in the domestic market vis-à-vis the export market, t....
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.... "(i) Whether the appellate authorities failed to take into consideration that the amendment to section 10A by the Finance Act of 2000 with effect from April 1, 2001, the deduction of profits and gains as earned by an undertaking from the export of articles or things or computer software is required to be allowed from the total income of the assessee and consequently the loss from the non-STP unit is required to be set off against the income of the other STP unit before allowing deduction under section 10A of the amended Act? (ii) Whether the Tribunal was correct in holding that the deduction under section 10A or section 10B of the Act during the current assessment year has to be allowed without setting off brought forward unabsorbed losses and the depreciation from earlier assessment year or current assessment year either in the case of non-STP units or in the case of the very same undertaking?" (Emphasis supplied) 7.4 The relevant findings of the Hon'ble High Court at paras 19, 20, 31 to 33 reads as follows:- "19. It is after the deduction under Chapter VI-A that the total income of an assessee a....
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....eduction of the said profits and gains, the income of the assessee has to be computed. 32. The provisions of this sub-section will apply even in the case where an assessee has opted out of section 10A by exercising his option under sub-section (8). As discussed, it is permissible for an assessee to opt in and opt out of section 10A. In the year when the assessee has opted out, the normal provisions of the Act would apply. The profits derived by him from the STP undertaking would suffer tax in the normal course subject to various provisions of the Act including those of Chapter VI-A. If in such a year, the assessee has suffered losses, such losses would be subject to inter source and inter head set off. The balance if any thereafter can be carried forward, for being set off against profits of the subsequent assessment years in the normal course. Unabsorbed depreciation also merits a similar treatment. 33. As the income of 10-A unit has to be excluded at source itself before arriving at the gross total income, the loss of non 10-A unit cannot be set off against the income of 10-A unit u/s 72. The loss incurred by the assessee un....
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...., 12 and 13 are general in nature and therefore no adjudication is called for thereon. CORPORATE TAX 11.1 In the grounds raised at S.Nos.2 and 3, revenue contends that the learned CIT (Appeals) erred in directing the Assessing Officer to recompute the allowable deduction under section 10A of the Act after reducing the telecommunication expenses amounting to Rs.56,40,267 both from export turnover and total turnover following the decision of the Chennai Special Bench of ITAT in the case of ITO v. Sak Soft Ltd. [2009] 30 SOT 55. The learned Departmental Representative supported the order of the Assessing Officer on this issue and sought reversal of the finding of the learned CIT (Appeals) on this issue. 11.2 The learned Authorised Representative supported the finding of the learned CIT (Appeals) in directing the Assessing Officer to recompute the deduction under section 10A of the Act by reducing telecommunication expenses from both the export turnover as well as the total turnover. The learned Authorised Representative submitted that this issue as held by the learned CIT (Appeals) is squarely covered in favour of the assessee by the decision of the Hon'ble jurisdictional Hig....
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....C, the export profit is to be derived from the total business income of the assessee, whereas in section 10-A, the export profit is to be derived from the total business of the undertaking. Even in the case of business of an undertaking, it may include export business and domestic business, in other words, export turnover and domestic turnover. To the extent of export turnover, there would be a commonality between the numerator and the denominator of the formula. If the export turnover in the numerator is to be arrived at after excluding certain expenses, the same should also be excluded in computing the export turnover as a component of total turnover in the denominator. The reason being the total turnover includes export turnover. The components of the export turnover in the numerator and the denominator cannot be different. Therefore, though there is no definition of the term 'total turnover' in section 10A, there is nothing in the said section to mandate that, what is excluded from the numerator that is export turnover would nevertheless form part of the denominator. When the statute prescribed a formula and in the said formula, 'export turnover' is defined, and when the 'total....
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....hile freight and insurance charges are liable to be excluded in computing export turnover, a similar exclusion has not been provided in regard to total turnover. The submission of the revenue, however, misses the point that the expression "total turnover" has not been defined at all by Parliament for the purposes of s.10A. However, the expression "export turnover" has been defined. The definition of "export turnover" excludes freight and insurance. Since export turnover has been defined by Parliament and there is a specific exclusion of freight and insurance, the expression "export turnover" cannot have a different meaning when it forms a constituent part of the total turnover for the purposes of the application of the formula. Undoubtedly, it was open to Parliament to make a provision which has been enunciated earlier must prevail as a matter of correct statutory interpretation. Any other interpretation would lead to an absurdity. If the contention of the Revenue were to be accepted, the same expression viz. 'export turnover' would have a different connotation in the application of the same formula. The submission of the Revenue would lead to a situation where freight and insuranc....
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....lculating deduction u/s 10A of the Act. 11.3.6 In the result, the Ground Nos.2 and 3 raised by the revenue are dismissed. Transfer Pricing Issues 12.1 In the grounds raised at S.Nos.4 to 7, revenue contends that the learned CIT (Appeals) erred in holding that the assessee was entitled to a standard deduction of 5% from the arithmetical mean of the profit margin of the comparables thereby directing the Assessing Officer to adopt the PLI of 34.33% at 29.335% as per the proviso to section 92C(2) of the Act while computing the ALP. This the learned Departmental Representative contends was done by the learned CIT (Appeals) without taking into account the amendment introduced in section 92CA of the Act brought by Finance (No.2) Act, 2009 with effect from 1.10.2009 and as per the amendment operating retrospectively from 1.4.2002 introduced in section 92C(2A) of the Act as per Finance Act, 2012. In view of these amendments, the learned Departmental Representative submitted that, the assessee was not entitled to the standard deduction of 5% from the arithmetic mean of the profit margin of the comparables and prayed that the same be withdrawn by allowing the grounds raised by revenu....
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.... and adjudicated upon at paras 5.8.1 to 5.8.3 and 5.9.1 to 5.9.2 of this order. Therein, we have reversed the orders of the learned CIT (Appeals) and included both these companies in the list of comparables in the case on hand for Assessment Year 2004-05 thereby allowing the grounds raised by revenue at S.Nos.8 to 10. 14.1 In the ground raised at S.No.11, revenue contends that the learned CIT (Appeals) erred in allowing the assessee working capital adjustment of 3.2% as against 2% allowed by the TPO. The learned Departmental Representative contends that while the TPO allowed working capital adjustment at 2% based on the list of 8 comparables taken whereas the learned CIT (Appeals)'s order allowing working capital adjustment 3.2% was both baseless and erroneous since the working capital adjustment was required to be recomputed only after taking into account the exclusion or inclusion of comparables pursuant to the orders of the appellate authorities. In this view of the matter, the learned Departmental Representative prayed that the order of the learned CIT (Appeals) allowing the assessee a working capital adjustment of 3.2% be set aside and the Assessing Officer be directed to r....