TaxTMI 
TaxTMI 
2017 (10) TMI 1384
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....ort Service. 2. That on the facts and circumstances of the case and in law, the impugned assessment is bad in law, being completed in an arbitrary manner disregarding the details and submissions filed during the course of the assessment and without affording an adequate opportunity of being heard. 3. That on the facts and circumstances of the case and in law, the AO, erred in reducing the deduction under section 10A of the Act by Rs. 70,33,19,220 by invoking the provisions of section 10A(7) read with section 80IA(10) of the Act, alleging that the Appellant earned more than "ordinary profits' with respect to provision of engineering services to its associated enterprise ('AE') and the DRP erred in affirming said addition. 4. That on the facts and circumstances of the case and in law, the DRP/ AO failed to appreciate that once the arm's length price in respect of the provision of engineering services has been determined by the TPO under section 92CA(3) of the Act, and the prices charged by the appellant have been found to be at arm's length, the provisions of section 10A(7) read with section 80IA(10) of the Act could not be invoked on the premise that appell....
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....dditional companies as comparables without taking into cognizance the functional differences highlighted by the appellant. Rejecting companies which are loss-making while adding companies earning abnormal profit margins to the comparable set at the same time. 11. That on the facts and circumstances of the case and in law the DRP/AO/TPO have erred in not accepting the economic analysis undertaken by the appellant in accordance with the provisions of the Act read with the Income-tax Rules, 1962 ("Rules") for the determination of the arm's length price in relation to Customer Support Service and making modifications to this analysis in a subjective, arbitrary and inconsistent manner. 12. That on the facts and circumstances of the case and in law, TPO erred in applying ad-hoc / subjective additional quantitative filters, while selecting the comparables and rejecting the comparables of the appellant without providing any basis thereof. 13. That on the facts and circumstances of the case and in law, DRP / AO /TPO erred in considering single year data and disregarding multiple year data used by the appellant for determination of the arm's length price for the provision of ....
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....assessment year 2007-08. He further referred to the proceedings under section 263 of the Act in assessee's own case relating to assessment year 2006-07 and pointed out that the Tribunal vide order dated 24.03.2017 in ITA No.1148/PUN/2012 had quashed 263 proceedings, where the Commissioner had curtailed the deduction claimed under section 10A of the Act. The year under appeal is assessment year 2008-09. The learned Authorized Representative for the assessee pointed out that in the division of Engineering Design Services, RV Man Hour rates were computed on the basis of CUP which was also applied by the Transfer Pricing Officer (TPO) and no adjustment was made in Engineering Design Division. He further pointed out that profit margins of assessee were high i.e. net profit margins were 68.02% as against OP/OC of 205%. Our attention was drawn to the order of TPO at page 2, wherein the method applied for benchmarking the international transactions was CUP by the assessee and the same was accepted by the TPO. He further referred to the order of Assessing Officer in para 9 at page 6 of the assessment order, wherein the Assessing Officer alleges that the profit margins were higher. He furthe....
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....claimed the deduction under section 10A of the Act in relation to two eligible units. For the year under consideration, the assessee had furnished the return of income declaring total income of Rs. 10,26,30,321/- which was revised and the assessee had declared income of Rs. 10,30,58,820/-. The Assessing Officer made a reference to the TPO under section 92CA(1) of the Act. The TPO vide order passed under section 92CA(3) of the Act accepted the international transactions relating to Engineering Design Services to be at arm's length. However, in respect of international transactions pertaining to Customer Support Services, the TPO made an upward adjustment amounting to Rs. 1,23,58,027/-. The Assessing Officer in the draft assessment order passed under section 143(3) r.w.s. 144C of the Act restricted the deduction to be allowed under section 10A of the Act i.e. against the claim of assessee at Rs. 75,39,88,612/-, the deduction under section 10A of the Act was allowed at Rs. 5,06,69,392/-. The assessee filed objections before the DRP against the draft assessment order of the Assessing Officer in respect of both the additions. The DRP rejected the claim of assessee and upheld the app....
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....ons of section 10A(7) r.w.s. 80IA(10) of the Act. The basic requirement for applying the said provisions of the Act is an arrangement between the parties to earn more than ordinary profits and in the absence of any arrangement being found, there is no merit in the curtailment of deduction claimed under section 10A of the Act. 9. We find that the Pune Bench of Tribunal in assessee's own case for assessment year 2006-07 had held that the onus was on the Department to prove that there existed an arrangement between the assessee and its associated enterprises to earn more than ordinary profits. The relevant observations of the Tribunal are in para 23, which read as under:- "23. Now coming to the facts of the present case where the assessee had shown profits from its Engineering Design & Development Services which was an STPI unit and had shown the net profit range of 72.98%, and the international transaction of the assessee with its Associated Enterprises had been accepted by the TPO in his report under section 92CA of the Act to be at Arm‟s Length and the Assessing Officer had adopted the said profit margins and after verification had allowed the claim of deduction under secti....
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....not comparable to the Engineering Design and Development Services, as vehemently argued by the assessee. The order of the Commissioner passed under section 263 of the Act in the above said circumstances lacks jurisdiction for not coming to a conclusion and directing the Assessing Officer to make enquiries and also carry out fresh search, if necessary. Under the garb of exercise of jurisdiction under section 263 of the Act the Commissioner cannot ask the Assessing Officer to make fishing and roving enquiries. In any case the basis for the exercise of jurisdiction under section 263 of the Act is the result shown by the Engineering Design and Development Services, i.e. operating profit margin to cost at 270%, which are to be applied while applying the TNM method. For the sake repetition it is again pointed out that the TPO has not applied TNM method but has applied CUP method. The information with regard to operating profit margin over cost was provided to the TPO during TP assessment proceedings but has not been applied by the TPO. In any case where the Engineering Design & Development Services were benchmarked on CUP method by the TPO, the same establishes the case of the assessee t....
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....higher profits. The Hon'ble High Court affirming the decision of the Tribunal held that extraordinary profits earned by the assessee could not lead to the conclusion that there was an arrangement between the assessee and its associated enterprises. The relevant extract of the decision of the Hon'ble Bombay High Court is as under:- "8. So far as question (a) & (b) are concerned, we find that the Tribunal has considered the entire evidence and on facts come to the conclusion that the profits earned by Kandla division of the respondent-assessee is not abnormally high due to any arrangement between the respondent-assessee and its German Principal. The Tribunal correctly held that extraordinary profits cannot lead to the conclusion that there is an arrangement between the parties. This would penalize efficient functioning. Further, the authorities have also recorded a finding that the industrial sewing machine needles imported and traded by the Mumbai division are different from those manufactured & exported by the Kandla division. Consequently, this also negatives any arrangement between the parties to show extraordinary profits in respect of its Kandla division so as to claim deduct....
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....y other reason, the course of the business is so arranged that the industrial undertaking set up in the free trade zone derives more than ordinary profits which may be expected to arise in that business. This provision has been made with a view to avoiding abuse of the new tax concessions by manipulation of profits between associate concerns or different units of the same concern." [underlined for emphasis by us] 23. Quite clearly, the provisions of section 10A(7) of the Act intend to plug abuse of tax concession by manipulation of profits between associated concerns or between different units of the same concern. The objective of the aforesaid Provision is that the tax concessions are not abused by manipulation of profits. In our considered opinion, the aforesaid explanation in the CBDT Circular (supra) signifies the legislative intent and it is also manifested in the language of section 10A(7) r.w.s. 80-IA(10) of the Act. We say so for the reason that the phraseology of section 80-IA(10) of the Act itself suggests that the profits and gains of an eligible business cannot be tinkered with by the Assessing Officer merely because they are more than the ordinary profits or that t....
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....ranged" has to be understood in the context of the abuse of tax concession which is sought to be plugged by the provisions of section 10A(7) r.w.s. 80-IA(10) of the Act. 24. On this aspect, the Ld. CIT-DR had vehemently argued, based on the judgment of the Hon‟ble Bombay High Court in the case of Bank of India Ltd. (supra) that the meaning of the word "arranged‟ in section 80-IA(10) of the Act has to be understood to mean an agreement or an understanding between the parties concerned. The relevant portion of the decision of the Hon‟ble Bombay High Court has been reproduced in the earlier part of this order, according to which, it is said that the term arrangement in plain language means any agreement or understanding between the parties concerned. On this basis, the Ld. CIT-DR submitted that undeniably there is an agreement between the assessee and the associated enterprises whereby the services have been provided by the assessee to them and therefore the same is to be understood as an "arrangement" within the meaning of section 10A(7) r.w.s. 80-IA(10) of the Act. Along with the aforesaid, it has also been emphasized, on the basis of the language of section 80-I....
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....assessment year 2006-07, order dated 09.12.2015. Further, we find support from the ratio laid down by the Pune Bench of Tribunal in the case of Spicer India Ltd. with lead order in ITA No.1112/PN/2012, relating to assessment year 2006-07, order dated 08.07.2015. 15. Applying the said principle to the facts of present case, we find that the assessee in its Engineering Design Development Services which was STPI unit shown net profit margin of 68.02%. The international transactions undertaken by the assessee with its associated enterprises in which PLI was 205% by taking OP/OC was accepted by the TPO to be at arm's length and no adjustment was made in the hands of assessee with regard to said division. The Assessing Officer however, was of the view that the assessee had earned more than ordinary profits in the Engineering Design Services division and consequently, curtailed the deduction claimed under section 10A of the Act. The question which is raised before us vide grounds of appeal No.3 to 8 is whether in such circumstances, the deduction claimed under section 10A of the Act can be curtailed. Where the Department has failed to prove that there existed an arrangement between a....
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....the assessee and selected fresh comparables and final set of comparables which were selected by the TPO were as under:- Sr. No. Company Operating profits on operating cost % (F.Y. 2007-2008) 1 Caliber Point Business Solutions Ltd. 19.80% (assessee‟s selection) 2 Accentia Technologies Ltd. 45.27% 3 Coral Hubs 51.79 4 Cosmic Global 23.30 5 E4e-health 19.38 6 Triton Corporation 25.26 (assessee‟s selection) 7 Informed Technologies India Ltd. 5.89 (assessee‟s selection) 8 Cross domain Solutions Pvt. Ltd. 27.59% Arithmetic mean (218.28/8) 27.28 Assessee‟s margin 13.79% 18. The arithmetic mean of margins of the comparables worked out to 27.28% as against the margins of assessee at 13.79% and hence, the adjustment of Rs. 1,23,58,027/- was proposed. The TPO did not allow the risk adjustment to the assessee. The Assessing Officer proposed the draft assessment order, against which the assessee filed objections before the DRP. However, the DRP upheld the final comparables selected by the TPO and also rejected the arguments of assessee in allowing risk adjustment. The Assessing Officer passed the order under section 143(3) ....
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.... Accential Technologies Ltd. is to be excluded from the final list of comparables in order to benchmark international transactions of assessee with its associated enterprises in the Customer Support Services Division. 24. We find similar issue has been decided by the Tribunal in the case of Vishay Components (P.) Ltd. Vs. ACIT (supra) and the said concern Accentia Technologies Ltd. was found to be not functionally comparable to the assessee therein, which was engaged in ITES services. The Tribunal in turn, had relied on the ratio laid down by the Tribunal in Cummins Turbo Technologies Ltd. Vs. Dy.DIT(IT) (2016) 68 taxmann.com 273 (Pune - Trib.). Accordingly, we hold that the said concern Accential Technologies Ltd. is to be excluded from the final list of comparables while benchmarking ITES segment. 25. The next concern which the assessee claims to be functionally different and is to be excluded from the final set of comparables is Coral Hubs Ltd., which was engaged in KPO services. In this regard, the learned Authorized Representative for the assessee placed reliance on the decision of the Hon'ble High Court of Delhi in Rampgreen Solutions Pvt. Ltd. Vs. CIT in ITA No.102/2015, j....