TMI Blog2013 (2) TMI 65X X X X Extracts X X X X X X X X Extracts X X X X ..... plying the CUP method – In favour of assessee Exemption u/s 10A – Computation of Turnover – Adjustment of communication charges from export turnover & total turnover - Held that:- Following the decision in case of Tata Elexi Ltd. (2011 (8) TMI 782 - KARNATAKA HIGH COURT) that the expenditure incurred towards communication charges, if excluded from the export turnover, has also to be excluded from the total turnover. The communication charges have to be excluded both from the export turnover as well as the total turnover, while computing exemption u/s 10A – In favour of assessee - IT Appeal No. 565 (Hyd.) of 2011 - - - Dated:- 19-10-2012 - CHANDRA POOJARI AND SAKTIJIT DEY, JJ. V. Srinivas for the Appellant. K. Gopal for the Respondent. ORDER Saktijit Dey, Judicial Member - This appeal by the Revenue is directed against the order of the CIT(A) III, Hyderabad dated 28.1.2011, for the assessment year 2005-06. 2. The Department has raised the following grounds- "1. The order of the CIT(A) is erroneous on the facts and in the circumstances of the case. 2. The Ld. CIT(A) ought to have upheld the addition of Rs. 1,70,51,255 made u/s. 92CA which was determi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o independent parties in India. The CBay USA pays a standard rate of 6 Cents per line (subject to the achievement of certain quality standards which are common for the outsourced company and the assessee) for the medical transcription activities carried on by the assessee and other outsourced companies. The assessee further submitted that the services received from third parties are similar to the services received by CBay USA from the assessee. The assessee has also entered into independent transactions with unrelated third parties during the year, viz. Ariel, Medscribe, Medwrite, and its transactions with these concerns are comparable or at lower rate. The assessee submitted that the five comparables selected by the assessee, which includes three internal comparables and two external comparables, and the price received being within the Arms Length standard as per the CUP method is similar to the rate charged by the AE to the assessee and the two independent Indian companies located at Hyderabad for rendering medical transcription services were similar. Similarly, the rates charged per line of medical transcription by the assessee to the three other independent overseas companies ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mount, it was not known as to how much income was generated by that company from medical transcription work. The TPO noted that as per the report of the Directors of that company, during the year, total 14,600 lines of transcription work was received from CBay Systems Ltd. but in the last paragraph of that report, there is a mention that during the current year, the company has also taken up additional medical transcription work from M/s. Accurate Transcription Inc. USA. It is further mentioned that this work could not be continued since Accurate Transcription Inc. was not in a position to outsource its work to their company. On the basis of the aforesaid observations, the TPO noted that in the absence of required particulars and the details of revenue generated from the medical transcription work and also the total number of lines of transcription done by that AE, it cannot be said that such rate of 0.05US$ per line of medical transcription is an uncontrolled rate so as to use the same as a bench mark in the CUP method adopted by the assessee. So far as the other comparable, i.e. M/s. ELICO Ltd,. is concerned, the TPO referring to the Profit Loss Account for the year ending 31.3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee by adopting CUP method. The TPO held that the CUP method cannot be applied due to lack of information and comparables. The TPO held that Transfer Net Margin method(TNMM) is the most appropriate method for determining the ALP of the international transactions in the case of the assessee The TPO observed that the CUP method adopted by the assessee is not workable on the basis of the comparable rates per line with reference to independent comparable as the rate per line varies according to the quantity of work, i.e. number of lines of work done. Since the assessee has not provided the quantity, i.e. the number of lines billed with reference to any relative comparables, the ALP computed by the assessee cannot be accepted. The TPO for the purposes of determining the ALP of such international transactions made by the assessee with its AE, selected nine comparable companies, and on the basis of the profit margins in six of these companies, determined the average profit margin, i.e. Arithmetic Mean Profit Level Indicatro(PLI) at 24.65 per cent. After allowing deduction of 1.59% towards working capital adjustment, the Arithmetic Mean PLI was determined at 23.06 per cent and on that basis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he aforesaid companies under S.133(6) of the Act. The assessee submitted that the rejection of CUP method by the TPO is not based on proper reasoning but on flimsy grounds. It was further submitted by the assessee that the OECD guidelines as well as the guidelines issued by the ICAI accept the CUP ,method as the best method for Transfer Pricing Study. Therefore, the TPO without pointing out any infirmity in the comparables selected by the assessee, was not justified in rejecting the method applied by the assessee for computing ALP. The assessee disputing the observation made by the TPO that it has accepted the TNMM method to evaluate the ALP, submitted that only where the data under the CUP method cannot be accepted then the other method can be explored to compute the ALP. The assessee has never accepted the TNMM method for computation of ALP. The assessee, objecting to the adoption of TNMM method by the TPO for computing the ALP, submitted that when information and data are available, the TPO should not have rejected the CUP method and adopted TNMM method, which should be adopted as a method of last resort, when all other methods fail. 7. The CIT(A), after considering the submis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... day during the second half of the year with continuous improvement, which effectively means that the said company, i.e. Shaster Technologies produced on an average 4,400 lines per day of medical transcription during the first half and an average of 10,200 lines per day during the second half of the financial year 2004-05. So, on this basis and taking into account only the working days during the financial year 2004-05, the total number of lines transcribed by that company during the whole year exceeds 19 lakhs, which is not correct, as the actual number of lines of medical transcription work done by M/s. Sahster Technologies Ltd. was much more. Similarly, the CIT(A) also found that the observations made by the TPO in the case of ELICO Ltd., and the Directors' Report in the case of that company does not mentions anything with regard to ITES or medical transcription activity carried on by that company is not correct. The CIT(A) observed that the TPO's reasoning that the rate of 0.05US$ per line of medical transcription cannot be accepted, as the uncontrolled rate in the absence of segmental break of revenue, is without any basis. Since there is no denying the fact that M/s. ELICO Li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ional transactions made by it with its AE during the financial year 2004-05 relevant to assessment year 2005-06 and the amount of Rs. 84,840,538 received by it from its AE is within the Arms' length range. The CIT(A), therefore, deleted the addition of Rs. 1,70,51,255. 8. Aggrieved by the order of the CIT(A), Revenue is in appeal before us. 9. The learned Departmental Representative, relying upon the reasoning of the TPO, submitted that the assessee is a contract service provider. Since the assessee did not provide the quantitative details in the case of comparables, the TPO was justified in rejecting the CUP method adopted by the assessee. The learned Departmental Representative, though agreed to the fact that the CUP method is the most appropriate method, submitted that in the absence of relevant data, the TPO was left with no other option but to adopt the TNMM method. He further submitted that the agreements between the AE and the assessee as well as the other two Indian companies were identically worded, which gives rise to a reasonable doubt that the comparables are not uncontrolled. 10. The learned Authorised Representative for the assessee, reiterating the contentions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rendered by the assessee to its AE as well as to the other overseas customers and the services rendered by the other two Indian companies to CBay systems is also same, i.e. medical transcription work. Therefore, the comparables adopted by the assessee are uncontrolled parties and can be considered for the purpose of determining the Arms' Length Price as per CUP method. As can be seen from the order of the TPO, though the TPO accepts the fact that CUP method is the most direct and reliable one to apply for determining Arms' Length Price, he rejects the CUP method adopted by the assessee in the present case on the ground that in the absence of information, the assessee's statement that in medical transcription industry, in general, the price charged per line of transcription is around 00.6 US$ cannot be accepted and that apart, no publicly available information on prices charged in independent transactions of similar and identical nature that reflect the characteristics of the services rendered by the assessee, has been furnished. Therefore, the comparable for applying the CUP method cannot be accepted. The TPO has further observed that the assessee also accepts that the TNMM method ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PO was not justified in rejecting the computation of ALP made by the assessee by applying the CUP method. The CIT(A) has passed a well reasoned order, elaborately discussing the various issues raised by the TPO and ultimately came to a conclusion that the CUP method is the most appropriate method for computing the ALP for the international transactions entered into by the assessee with its AE. We fully agree with the order of the CIT(A) in this behalf. We accordingly uphold the same and reject the ground of the Revenue on this issue. 12. In grounds 3 and 4, the department has challenged the direction of the CIT(A) to exclude the communication charges of Rs. 15,23,721/- from the total turnover also while computing the exemption u/s. 10A of the Act. 13. Briefly stated, facts are that in the course of the assessment proceedings, the assessing officer found that the assessee has claimed exemption under S.10A of the Act, for an amount of Rs. 20,11,603. While verifying the details, the assessing officer noticed that the assessee has incurred expenses towards communication charges amounting to Rs. 15,23,721. The assessing officer asked the assessee to explain as to why the communicati ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
