TaxTMI 
TaxTMI 
2013 (1) TMI 794
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....ted in Form No.3CEB) for software development services and Call Centre amounting to Rs. 15,37,95,126/-. Based on this information in Form No.3CEB, the Assessing Officer referred the matter under section 92CA of the Act to the Transfer Pricing Officer (TPO) to determine the arm's length price in relation to the international transaction made by the assessee with its AE. On receiving the reference from the AO, the TPO passed an order under section 92CA on 10/10/2010 determining the adjustment to the arm's length price of Rs. 1,79,47,930/- in respect of software development services segment. However, no adjustment was suggested in respect of providing of IT enable services (Call Centre). A copy of the TPO's order as well as Draft Assessment Order was provided to the assessee. The assessee raised various objections before the DRP. The DRP, after going through the TPO's order, the draft assessment order and after considering the assessee's submission, upheld the TPO's adjustments. The Assessing Officer, has, accordingly, incorporated the TPO's adjustments while determining the total income. 2.1 Aggrieved by the assessment order, the assessee is in appeal before us. 2.2 The assesse....
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....the proposed action of the TPO (the assessee's reply at page 80 to 646 of the paper book-1 filed by the assessee). 3.2.1 The TPO however rejected the assessee's objections and selected 26 external companies as comparables. The arithmetical mean was determined at 25.14%. After factoring working capital adjustment of 02.38%, the adjusted arithmetical mean was determined at 22.76%. The TPO determined the transfer pricing adjustment at Rs. 1,79,47,930/-. While computing the arm's length price, the TPO had aggregated the AE and non- AE transactions. The computation of arm's length price in the TPO's order is detailed below:- "13.6 Computation of Arms Length Price: The arithmetic mean of the Profit Level indicators is taken as the arms length margin. (Please see Annexure B for details of computation of PLI of the comparables). Based on this, the arms length price of the software development services rendered by the taxpayer to its AE(s) is computed as under: Arithmetic mean PLI : 25.14% Less: Working capital adjustment (Annexure C) : 2.38% Adj. Arithmetic mean PLI : 22.76% Arm's length price: Operating cost Rs.13,95,83,579 Arms Length Margin 22.76% ....
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....es rendered to AE were as follows: Particulars Amount in INR Genisys UK 8,04,58,101 Genisys USA 3,73,97,465 Wentworth Computer Holding, UK 61,01,985 Unbilled Revenue (1,09,220) Foreign exchange gain 2,69,707 Total 12,41,18,038 The details of exports to third parties (Non-AE) are as follows: Name of the Company Amount Harley Street Services Ltd. 10,55,538 HP Globalsoft Ltd. (UK) 49,27,218 Ing Vysya - Asia Pacific Team 85,997 Marlabs Software Pvt. Ltd 151,232 Meridio Limited 1,46,10,721 Systems Logic Solutions Ltd 69,29,664 Wipro Technologies 13,19,651 Roxburghe Ltd 143,174 Foreign exchange gain 63,640 Total 2,92,86,834 In the case of software services rendered by the appellant to its associated enterprises, the functions performed by the appellant were the same as those performed in the course of provision of software development services to unrelated parties (Non-AEs). Further, the appellant had adequate data so as to enable it determine the net margins for services rendered to its AE as well as Non-AE. Accordingly, "internal" TNMM was selected as the most appropriate m....
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....and non-AE transactions. All the queries raised by the TPO were adequately addressed (pages 86 to 95 of PB-I Part 1). In this regard, the appellant submitted agreements, time sheet details, invoices and billing rates relating to AE and Non AE segment on a sample basis for the months of April, October and December (In the Paper Book attached on sample basis due to the voluminous nature). The appellant detailed the functional similarity as well as the methodology of apportionment of expenses. In the transfer pricing order, there is no discussion about internal TNMM, on the basis of which the appellant had stated that its international transactions were at arm's length. There is no reason why the internal comparables have not been adopted. The learned TPO has adopted external TNMM and computed the arm's length price. Large portions of the order u/s 92CA are "borrowed" or "copied" from the orders passed for other software companies (various such examples are detailed on page 657 & 658 of the PB-I Part 2). In the TP Order, the TPO has proceeded as if the appellant had selected external TNMM (refer page of 5 of the TP Order) and had performed a search on Prowess and Capital-line da....
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.... be preferred: 1. Abhishek Auto Industries Ltd v DCIT 2010-TII-54- ITAT-DEL-TP - held that internal CPM is better than external TNMM 2. ACIT v Schlafhorst Marketing Co Ltd 13 Taxmann.com 104 - held that internal TNMM to be adopted 3. ACIT v Birla Soft Ltd 12 Taxmann.com 31 - internal TNMM accepted 4. Destination of the World (Subcontinent) (P.) Ltd. v ACIT 12 Taxmann.com 310 - held that preference should be given to internal comparison. Based on all the above, the appellant submits that internal TNMM as applied by it deserves to be accepted". 3.4.1 The learned DR on the other hand had given written submissions on 4/7/2012. With regard to ground no.8, the objections raised by the revenue read as follows:- "Ground No.8 : "Rejecting internal comparables selected by the appellant and rejecting transfer pricing analysis of the appellant" In para-4 of the TP order, the TPO detailed for rejection of comparable selected by the assessee. In the selected comparables, the financial result for the year ending 31/03/2005, 31/03/2006 and 31/03/2007 were considered whereas the TPO applied financial data for F.Y.2006-07 only. Secondly, the companies engaged in software deve....
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....d v DCIT 2010-TII-54- ITAT-DEL-TP - held that internal CPM is better than external TNMM * ACIT v Schlafhorst Marketing Co Ltd 13 Taxmann.com 104 - held that internal TNMM to be adopted * ACIT v Birla Soft Ltd 12 Taxmann.com 31 - internal TNMM accepted * Destination of the World (Subcontinent) (P.) Ltd. v ACIT 12 Taxmann.com 310 - held that preference should be given to internal comparison. 3.6 In the latest order of the Mumbai Tribunal in the case of M/s Tecnimont ICB Private Limited (ITA No.4608/Mum/2010 vide order dated 17th July, 2012), the Hon'ble Third Member was considering the following issue on a difference of opinion:- "Whether in the facts and circumstances of the case, the net margin realized from a transaction with an Associated Enterprise (AE) found and accepted at Arm's Length Price (ALP) can be taken as a comparable being an internal comparable for computation of (sic-arm) ALP of an international transaction with another AE?" 3.6.1 The Hon'ble Third Member observed that the internal uncontrolled transaction/comparable is to be given preference to the external comparables. The relevant finding of the Hon'ble Tribunal at para 10 reads as follows:- ....
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....ilable showing profit margin of that enterprise itself from a third party, it is always safe and advisable to have recourse to such internal comparable case. The reason is patent that the various factors having bearing on the quality of output, assets employed, input cost etc. continue to remain by and large same in case of an internal comparable. The effect of difference due to such inherent factors on comparison made with the third parties, gets neutralized when comparison is made with internal comparable. Ex consequenti, it follows that an internal comparable uncontrolled transaction is more noteworthy vis-à-vis its counterpart i.e. external comparable". 3.6.2 In the instant case, the TPO, in his show-cause notice dated 21/6/2010, proposed to re-determine the arm's length price for software development services. The TPO had raised doubts about the apportionment of salary and other expenses between the AE and non AE segment. The TPO also raised doubts about the functional dissimilarity and billing models between the AE and non AE transactions. The relevant portion of TPO notice proposing to reject the internal TNMM applied by the assessee reads as follows: "3. ------....
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....e Tribunal and Rule 10B(1)(e)(ii), we direct the Assessing Officer/TPO to adopt the internal TNMM instead of external TNMM. However, the issue is restored to the file of the Assessing Officer/TPO to verify the cost allocation and the PLI and margin computation between the software services rendered by the assessee to its AE vis-à-vis the non-AE and to determine the operative profit/operating cost and the margin thereof and to conclude as to whether the international transaction with that of the AE is within the arm's length range profit under the TP regulation. It is ordered accordingly. 3.6.5. In the result, ground No.8 is allowed for statistical purposes. (II) Non-TP Issue Deduction under section 10A of the Act 4. During the year under consideration, the assessee company had computed the business loss at Rs. 77,58,532/- after claiming deduction of Rs. 61,39,512/- under section 10A of the Act. The Assessing Officer had held that deduction under section 10A is to be allowed from the total income computed after setting off of the loss of other units. After setting off of the loss of other units (non-10A unit), 10A deduction was considered as NIL. 4.1 It was sub....
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....h the said provision is inserted in Chapter III of the Act. Sub-section (4) of section 10A clarifies this position. It provides that the profits derived from export of articles or things from computer software shall be the amount which bears to the profits of the business of the undertaking, the same proportion as the export turnover in respect of such articles or things or computer software bears to the total turnover of the business carried on by the undertaking. Therefore, it is clear that though the assessee may be having more than one undertaking for the purpose of section 10A it is the profit derived from export of articles or things or computer software from the business of the undertaking alone that has to be taken into consideration and such profit is not to be included in the total income of the assessee. It is only after the deduction of the said profits and gains, the income of the assessee has to be computed. 30. 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 w....