TMI Blog2015 (12) TMI 1811X X X X Extracts X X X X X X X X Extracts X X X X ..... cluding production of books of accounts. Accordingly AO is directed to verify the actual margin earned by AE and make an addition, if any considering the principle stated above. The appellant company is directed to produce the entire accounts of AE for verification of its income. Needless to state fair and proper opportunity will be provided by TPO/AO to the appellant company. Ground No. 2.9 is therefore allowed for statistical purposes. - ITA No.5620/Del./2012 And 6354/Del/2012 (ASSESSMENT YEAR : 2008-09) - - - Dated:- 28-12-2015 - Shri S.V.Mehrotra, Accountant Member And Shri A.T. Varkey, Judicial Member ASSESSEE BY : S/Shri Neeraj Jain, Advocate Abhishek Agarwal, CA REVENUE by : Shri Amrendra Kumar, CIT, DR. ORDER A.T. Varkey, These appeals involving consideration of common issue are directed against orders passed u/s 143(3) read with section 144C of the Income Tax Act, 1961 (hereinafter the Act ) and are in relation to assessment year 2008-09. 2. To appreciate the controversy we take up the appeal of M/s Interrra Infotech India (P) Ltd. in ITA No. 5620/D/2012. The grounds raised by the appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cer/TPO erred on facts and in law in not appreciating that the appellant is engaged in the business of rendering low end software maintenance services resulting in low combined profitability of the appellant and its associated enterprise. 2.9 That the Assessing officer/TPO erred on facts and in law in not appreciating that the associated enterprise of the appellant has incurred losses due whereas the appellant has consistently been earning profits. 2.10 That the Assessing officer/TPO erred on facts and in law in not appreciating that the appellant operates as a low-risk bearing contract service provider and an appropriate risk adjustment is warranted. 3. Briefly stated, the facts of the case are that assessee company is a 100% subsidiary of Interra Information Technology Inc., USA. It is a contract service provider rendering offshore services to its parent company, Interra Information Technology Inc (Interra IT Inc. or AE ) and certain other unrelated entities. It has a software development unit established in SEZ and is entitled to exemption under section 10A of the Act. During the relevant previous year the assessee received a tot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 11 Persistent Systems Ltd 27.23% 12 Quintegra Solutions Ltd 21.74% 13 R Systems International (seg) 15.30% 14 RS Software India Ltd 6.46% 15 Sasken Communication Technology Ltd (seg) 13.44% 16 Tata Elxsi (seg) 18.97% 17 Thirdware Solutions Ltd. 18.01% 18 Wipro Ltd (seg) 28.38% 19 Softsol India Ltd 42.15% Average PLI (OP/OC %) 26.16% 5. The Transfer Pricing Officer in the order passed under section 92CA(3) of the Act accordingly computed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ₹ 11,08,54,524 raised by Interra Information and ₹ 15,07,01,606 raised by the appellant being 98.05% of the total revenue charged from third party customer Balance revenue retained by AE $129963 51,85,524 AE has retained only 1.95% of the total revenue charged from end customer Cost-G A (cost incurred by AE, Interra Inc., USA) $1,219,282 4,86,49,352 Profit ($1,089,318) (4,34,63,788) AE has only incurred loss Profitability % -14.03% Particulars Amount (INR) Invoice raised by Interra Information Technologies India and Appellant 26,11,45,500 Addition made by the TPO in the case of Interra Information Technologies India (Disputed in ITA No. 6354/D/2012) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rating Profit of the associated enterprise, Interra Inc., USA for the year ended 31-03-2008, are summarized as follows: (Amount in Dollars) Particulars Year ended 31.03.2008 Net Revenues 18,986,509 Cost of revenues 15,180,000 Gross profit 3,806,509 Selling, general and administrative expenses 3,468,169 Income/(Loss) from the operations 338,340 Further, the audited profit and loss account for the years ended 31-12-2007 and 31-12-2008 of Interra Information Technologies, Inc. is extracted as hereunder: (USD in thousand) Particulars Year ended 31.12.2007 31.12.2008 Net Revenues 19,939 19091 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the case of Phillips Software Centre Private Ltd. vs. ACIT (ITA No. 218 (Bng.)/2008)(copy enclosed) wherein it is held that- Quote the basic intention behind introducing the transfer pricing provisions in the Act is prevent shifting of profits and the assessee is claiming benefits u/s 10A of the Act, the transfer pricing provisions ought not to be applied to the assessee. Unquote In view of the fact that the overseas associated enterprise are only incurring loss and not even earning profit, which is commensurate with the functions performed and risks assumed by the concerned entity, there cannot be a possibility of shifting of profits from India to the respective AE s. Further, since the assessee is entitled to deduction u/s 10A of the Act, it had no motive to charge a price which is less than the arm s length price from its associated concern. X. Adjustment at best cannot exceed the amount of margin retained by the associated enterprise. Further, it would be appreciated that the adjustment computed as aforesaid in the order passed under section 92CA(3) of the Act at best cannot exceed the margin, i.e., gross revenue rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 11. The TPO however had rejected the above argument by observing as under: The taxpayer has contended that the overseas associated enterprise has earned 1.81% on cost and has booked a loss of 16.23% on its offshore operations. I have called for the annual report of the overseas associate and examined the same. The contention of the assessee is wrong. The overseas entity has, for the period ending December; 2007 earned a profit of 6.42% on cost before tax. Hence, the profitability of the overseas AE is certainly more than that of the assessee. There is nothing in accounts to demonstrate that segmental accounts had been prepared. Hence the offshore business loss as claimed by the assessee goes unsubstantiated. Therefore, the arguments of the assessee in this regard cannot be accepted to. 12. Accordingly by Ground No. 8, the appellant had reiterated its objection before DRP and it was inter-alia submitted as under: Further reliance in this regard is placed on the following observation of the Hon ble Delhi Bench of the Tribunal in the case of Li Fung (India) Pvt. Ltd. vs DCIT (ITA No. 5156/D/2010) In view of these facts, we are of the v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al in a judgment dated 14.3.2013 in ITA No. 1828/2010, 1829/2010 and 1254/2011 and against which SLP filed by revenue before Apex Court stands dismissed vide judgment dated 2.1.2014. 16. We therefore hold that adjustment in no case can exceed the amount received by the AE from third party. However since the details of AE available on record are only upto 31.3.2007 and not upto 31.3.2008, we restore the matter to the file of the AO since the learned counsel has during the course of hearing stated that appellant company will cooperate and provide all documents to find out the revenue earned by the AE upto 31.3.2008 including production of books of accounts. 17. Accordingly AO is directed to verify the actual margin earned by AE and make an addition, if any considering the principle stated above. The appellant company is directed to produce the entire accounts of AE for verification of its income. Needless to state fair and proper opportunity will be provided by TPO/AO to the appellant company. Ground No. 2.9 is therefore allowed for statistical purposes. The remaining grounds are not being adjudicated, as they have not been argued and, otherwise too are of ac ..... X X X X Extracts X X X X X X X X Extracts X X X X
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