TaxTMI 
TaxTMI 
2017 (5) TMI 1735
X X X X Extracts X X X X
X X X X Extracts X X X X
....nsactions u/s 92CA made by ld Additional CIT (Transfer Pricing)-II (5), Mumbai [ Hereinafter referred to as "The TPO‟] vide order dated 28.01.2013 for AY 2009-10. 2. The assessee has raised the following grounds of appeal:- "The appellant objects to the order of Deputy Commissioner of Income - tax - Circle -II ('DCIT') dated 30 January 2014 (received on 30 January 2014) passed under section 143(3)(ii) r.w.s. 144C(13) of the Income tax Act, 1961 ('the Act'), for the aforesaid assessment year on the following among other grounds: 1. The order of the learned DCIT is bad in law, contrary to the provisions of law and facts of the case. 2. The learned DCIT erred in assessing the total income of the appellant at Rs. 14,36,66,350 as against Rs. 6,35,28,820 declared in the return of income by the appellant. 3. Adjustment of Rs. 65,00,000 with respect to international transaction of provision of provision of Infrastructure Support services needs to be deleted. 3.1 The learned DCIT has erred in making an upward adjustment of Rs. 65,00,000 to the total income of the appellant by holding that the international transaction rel....
X X X X Extracts X X X X
X X X X Extracts X X X X
....IT erred in not appreciating that the appellant has already allocated professional fees allocable to each unit on an actual basis and accordingly, there is no question of further allocation of professional fees. 4.5 The learned DCIT erred in not appreciating that the managerial remuneration and auditor's remuneration are in the nature of corporate expenses which are not incurred for any STP unit and hence, there is no question of further allocation of these expenses. 4.6 The learned DCIT erred in not appreciating that the STP units have their own heads, whose remuneration has been allocated to the said units and hence no further allocation is called for in respect of managerial remuneration. 4.7 The learned DRP erred in not accepting the additional evidence submitted by the appellant to justify its claim. 4.8 The learned DCIT erred in rejecting the method of allocation of expenses, without appreciating that the same method is consistently being followed by the appellant even in the previous assessment years. 4.9 The learned DCIT erred in construing that the appellant has nothing to offer with regard to basis for allocation of expense....
X X X X Extracts X X X X
X X X X Extracts X X X X
..... 4. Ground No. 3 of the appeal is against adjustment of Rs. 65 lakhs with respect to determination of arm‟s length price [in short "ALP‟] of international transaction of provision of infrastructure support services. 5. Assessee is a private limited company engaged in the business of data warehousing solution. It filed its return of income on 30.09.2009 for Rs. 63528820/-. The assessee is engaged in the business of providing data warehousing solutions in the nature of sales support and service of electronic data warehousing hardware and software. During the year the assessee has entered into following international transactions as under:- S. No. Nature of transaction AY 2009-10 Method Used by assesse Business Segment 1 Purchases of Hardware & Software for Local Distribution 18,58,59,094 TNMM- Distribution Distribution of EDW 2 Provision of Technical/ Professional and R&D services (Receipt) 130,25,15,715 TNMM Software development and BPO 3 Availing of services (16,04,85,336) TNMM BPO 4 Import of fixed assets (45,38,608) TNMM 5 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....arables out of which one was rejected and therefore the margin of the comparables was determined at 29.41%. With respect to the software product development, assessee selected 14 comparables and the average margin by adopting Profit level indicator of operating profit/total cost computed the margin of comparable at (-)3.22%, whereas the Ld. Transfer Pricing Officer rejected four comparables, recomputed margin of 3 comparables and further added 14 comparables and derived average margin of the comparables at 13.3%. With respect to infrastructure support services, the assessee computed the average margin of the comparables at () 8.93%, whereas Ld. Transfer Pricing Officer rejected the comparables of the assessee and further introduced 26 comparables whose average margin was 28.45%. The Ld. Transfer Pricing Officer computed the margin of the assessee at 8.18%. Thereafter, the Ld. Transfer Pricing Officer applied the weighted margin of all the three segments of the assessee based on segmental turnover to total turnover and determined weighted average of the margins of the comparable at 22.25%. On that basis he computed the arm‟s length profit of the International transactions of a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....see is contesting the inclusion of comparable number 5, i.e. BNR Udyog Ltd and comparable No. 9 i.e. Cross Domain Solutions Private Limited. He referred to page No. 324 of the paper book, which is an agreement of provision of integrated services cost distribution agreement between assessee and associated enterprise. He referred that the services shall be provided according to that agreement which is listed in Annexure A. According to him this infrastructure support services generally include certain finance, legal, human resources, information technology, and similar back-office functions. He submitted that during the year assessee provided infrastructure support services and received 7% markup on costs. He further referred to page No. 54 - 56 where functional analysis, assets employed and risk assumed by the entities are shown. 12. Coming to the functional dissimilarity of comparables i.e. BNR Udyog limited, he referred to page No. 167 to 169 of the paper book and submitted that that BNR Udyog Limited is carrying on medical transcription, construction and financial activities and it is also the member of National commodities and derivative exchange Ltd and multi commodity excha....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... representative submitted as under:- Ground No, 3: TP Adjustment of Rs. 65,00,000/- confirmed by the DRP in the Infrastructure Support Services (ISS) Segment: The Ld. DRP has allowed relief of Rs. 30 cr to the assessee and has confirmed only the TP Adjustment of Rs. 65 lakhs by holding that subvention income of Rs. 22 cr should be considered in the BPO Segment instead of the Distribution Segment, by directing that the Cost- Plus Markup margin of the comparables should be adopted at 15.64% and by holding that TP Adjustment on account of Intra Group Services is double addition. The submission of the assessee is fit to be rejected on account of the following reasons:- a. All the five comparables selected by the assessee are functionally not comparable as evident from their profiles given at in the TP Study Report (pg 78 of Vol.-II of PB). Besides the above, in none of the cases data for the FY 2008-09 is available as mentioned in the TP Study Report (pg 288 of Vol.-II of PB). b. The TPO has rejected the use of multiple year data of comparables in view of the various decisions of the Court including of the jurisdictional High Court given in case of Chrys capi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e RPTs represents the proportion of transactions with the associated enterprises (numerator) vis-a-vis the total of transactions (denominator). In order to decide that what should constitute the contents of numerator and denominator for the purposes of finding out the percentage of RPTs, it is relevant to note the logic behind applying this filter. It is manifest that the aim of the transfer pricing regime is to ensure that the international transactions are recorded at arm's length price. This is done under the TNMM by comparing the profit earned from the international transaction with that earned by the comparable independent parties in an uncontrolled situation. Thus, while choosing comparables, it must be ensured that the profit earned by them correctly reflects true profit as is earned by an enterprise from an independent third party. If such a chosen company, though functionally comparable, has also entered into international transactions beyond a particular percentage with the related parties, it is quite possible that its overall profit may have been distorted due to such transactions rendering it as incomparable. That is why, this filter is applied to make certain that....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r example, RPT of major sale transaction and minor job income can be combined to find out the percentage of RPTs with the total of sales and job income taken together. In a given case, similar to what is prevailing before us, where the RPTs comprise of purchase, sales, small non-operating expenses and service income, we can preferably find out two percentages of RPTs by ignoring the RPT of payment of non-operating expense of rent, which does not directly affect the profit earned from trading activity. First percentage of RPT purchases with total purchases and second of RPT sales and service income as one unit with the total of sales and service income again as one unit. The decision as to whether such a company be included in the list of comparables by applying the filter of more than 25% RPT, would depend on the outcome of two such percentages of RPTs. If either of the two breaches the 25% threshold, then the company will cease to be comparable. If however, both the percentages are less than 25%, then the company would be liable for inclusion in the list of comparables. We want to make it clear that the above discussion about the components of RPT formula is relevant only in the c....
X X X X Extracts X X X X
X X X X Extracts X X X X
....TAT Delhi has held in case of Interra Information Technologies (India) (P.) Ltd. [2012] 27 taxmann.com 1 (Delhi - Trib.) that the contention of the assessee that the transfer pricing adjustment should not be made for the reason that its income is exempt under section 10A and hence there is no. motive to divert profit has to be rejected applying the judgment of the Special Bench of the Tribunal rendered in the case of Aztec Software Technology Services Ltd. v. Asstt. CIT [2007] 15 SOT 49/162 Taxman 119 (Bang.) h. The functions performed by the assessee in the ISS Segment is not evident from the copy of the agreement available at pg no 324 of Vol.-Il of PB." 15. We have carefully considered the rival contentions and also perused reliance placed by both the parties on several judicial precedents for exclusion or for inclusion of the two comparables in dispute before us. The Ld. departmental representative has also contested that functions performed by the assessee in the infrastructural support segment is not evident. Firstly, coming to the issue about the judicial precedents relied upon before us, we are of the opinion that comparability analysis of the assessee‟s internatio....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Teradata affiliates pursuant to an Integrated Services Agreement. In general/ these activities consist of the support activities necessary for the smooth functioning of a large business as it is not efficient or economical for each individual member of Teradata Group to perform these activities itself. These infra structure support services generally include certain finance, legal, human resources, information technology and similar back office, functions. (emphasis supplied) TPO's Comments; based on the submissions , it is held that this class of activity belongs to the domain of 'business process outsourcing'" Therefore, in view of the clear finding of the Ld. Transfer Pricing Officer that the class of the activity belongs to the domain or business process outsourcing now it cannot be said that the functions of assessee with respect to these services are not clear. Furthermore before us the submission made by the Ld. departmental representative in para number (a) to (g) have not been contested by assessee, as the assessee is only contesting for exclusion of 2 comparables as mentioned by the Ld. departmental representative in his written submission....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t for being a quality output. All the above 3 level quality control system provides a high level of accuracy, which is having a turnaround time of 12 to 24 hours and 4 to 5 hours for reports. There is a process of online storage and retrieval of those reports. From above functional profile it is apparent that 1st stage of the process of dictation is automated, which a qualified proofreader subsequently edited and thereafter it is vetted for quality control process by the doctors employed by the comparable. Therefore, it is apparent that it does not give simple output by out with value addition from experts in medical profession. On looking at the functional profile of the assessee company with respect to integrated support service agreement, services, which are the necessary for the day to day operations of the service recipients business, are provided. The natures of services are also described in the order of the Ld. Transfer Pricing Officer . The above services do not envisage employment of highly qualified professionals such as doctors, but operates as back-office functions. Therefore, there is a functional differentiation in the activities of the comparable vis-à-vis se....
X X X X Extracts X X X X
X X X X Extracts X X X X
....le is held to be KPO and the functional profile of the assessee with respect to the infrastructure support services do not lead to such a conclusion that it is also a KPO. Therefore, based on incomplete information, we direct the Ld. Transfer Pricing Officer to exclude this comparable from the comparability analysis. In view of this ground No. 3 of the appeal of the assessee is allowed considering ground No. 3.3 with respect to selection of the comparables. All other contentions mentioned in ground No. 3 of the appeal are not contested and therefore except ground No. 3.3 all other grounds covered under Main ground. 3 of the appeal of the assessee are dismissed. 21. Now we come to the ground No. 4, where there is a deduction under section 10 A of the assessee is reduced by Rs. 64666012/-. During the year the assessee has claimed deduction under section 10 A of the income tax act of Rs. 35080640/- and Rs. 53412877/- in respect of Pune and Hyderabad units of the assessee. The Ld. Assessing Officer compared the profit percentage of STP units, which is at 17.03% as against 5.16% in respect of other units. Assessee was asked to furnish unit wise profit and loss account and balance she....
X X X X Extracts X X X X
X X X X Extracts X X X X
....spect to the various units. Therefore, the finding of the Ld. Assessing Officer is incorrect to that extent. He also submitted that the professional services fees amounting to Rs. 17592 1519/- has also been allocated. He also submitted the audit expenses are also allocated. With respect to the foreign travel expenses he submitted that it is included in travelling expenses. In substance he referred to page No. 432 to substantiate his claim that proper expenditure have been allocated to the various units whether exempt or normal therefore, the adjustment in the deduction claimed by the assessee by the Ld. Assessing Officer was incorrect. He submitted that allocation of the common expenditure even otherwise based on the turnover is not appropriate. He further submitted that assessee submitted certain details before the Ld. Dispute resolution panel, which were not admitted by them due to paucity of time. He submitted that the need for submitting the additional evidence arose because of the reason that the Ld. Assessing Officer did not raise this query during assessment proceedings. He referred to para No. 8.2 of the order of Ld. dispute resolution panel to substantiate his claim. He al....
X X X X Extracts X X X X
X X X X Extracts X X X X
....uditor's remuneration and professional fees etc. are required to be attributed to all the units of the assessee on the basis of the turnover. The Hon'ble ITAT Mumbai in case of Datamatics Financial Services v. ACIT ITA No.4457/Mum/2011 dated 29.06.2012 has clearly held that the head office caters to the needs of all the units and therefore the head office expenses are required to be attributed to the various units and, in our view, attribution of expenses based on turnover is quite appropriate. The above view has been affirmed by the Hon'ble ITAT Mumbai in case of Ganesh Polycam Ltd, v. ITO ITA no. 3270/Mum./2014 dated 06.01,2016." Therefore, he submitted that the Ld. Assessing Officer correctly makes reduction in the deduction u/s 10A of the act. 24. We have carefully considered the rival contention and also perused the orders of the lower authorities as well as the direction of the Ld. dispute resolution panel with respect to the allocation of common expenditure for working out deduction under section 10 A of the income tax act. According to the provisions of section 10 A of the income tax act assessee is entitled to deduction of profit derived by an eligible un....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ing out deduction under section 10 A of the income tax act, after affording reasonable opportunity of hearing to the assessee. In view of this ground No. 4 of the appeal of the assessee is allowed with above direction. 25. Ground No. 5 of the appeal of the assessee is with respect to not granting deduction for rent of Rs. 90 lakhs, which was disallowed in the assessment year 2008- 2009 on the ground that it is a prepaid expenditure. While filing return of income of the assessee for this year in the computation of total income, assessee has disallowed the above sum stating that rent debited to the prepaid expenses claimed in assessment year 2008 - 09 of Rs. 90 lakhs may be disallowed only if the same is allowed in that year. The note at point No. 5 is that the assessee has claimed deduction in respect of rent paid to the landlord of Rs. 24695642/- in the assessment year 2008 - 09, which was accounted as prepaid expenses. Accordingly, the rent amounting to Rs. 90 lakhs debited to the profit and loss account during the year ended 31st part 2009 is added back. The Ld. dispute resolution panel did not allow claim of assessee for the reason that assessee is in appeal before coordinate....