TaxTMI 
TaxTMI 
2017 (10) TMI 1384
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....Pricing Officer ("TPO") in respect of Customer Support 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 sec....
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....nale thereof, thereby resorting to 'cherry picking approach'. In doing so, the TPO erred in: Selecting additional 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 conside....
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....s no dispute in allowing the claim of assessee under section 10A of the Act in assessment year 2005-06 and also in assessment year 2006-07 in the original round and further in 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 furt....
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....Services and Customer Support Services to its associated enterprises i.e. Eaton Corporation, US. The assessee was registered with Software Technology Parks of India (STPI) and had 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 fil....
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....d on third party comparables, which in turn, has been accepted by the TPO to be at arm's length price, there is no merit in the order of Assessing Officer in applying the provisions 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 ....
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....-à-vis, operating profit margin to cost shown by Business Support Services at 7.39% or any other suitable benchmark found after fresh search, if the Business Support Services was found to be 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 proce....
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....ere was an arrangement between the assessee and its parent company resulting in extraordinary profits, where the assessee had concentrated on exports to its parent company only, which had resulted in 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 th....
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....-tax Officer to determine the reasonable profits that could be attributed to the qualifying undertaking in the free trade zone in cases where, owing to the close connection between the Assessee and any other persons or for any 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 r....
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....ssions granted u/s 10A of the Act by manipulating profits between associated persons. Ostensibly, the same is required to be demonstrated on the basis of a cogent material and evidence. In other words, the presence of the expression "so arranged" 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....
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....A(10) of the Act." 14. Similar principle has been laid down by the Pune Bench of Tribunal in Tata Johnson Control Automotive Ltd. Vs. DCIT in ITA No.1450/PN/2011 and in DCIT Vs. Tata Johnson Controls Automotive Ltd. in ITA No.1454/PN/2011, relating to 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. Th....
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....n filters i.e. excluded companies with less than 75% earning from exports and also excluded persistent loss making companies and companies with related party transactions of more than 25%. In this exercise, the TPO rejected the comparable companies selected by 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....
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....e find merit in the plea of assessee where the concern Accentia Technologies Ltd. was involved on site development and was also functionally different as was engaged in the business of medical transcription services. The assessee on the other hand, was providing back office services to its associated enterprises and hence, the margins of 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 clai....