2009 (12) TMI 668 - AT - Income Tax

Transfer pricing Adjustment - determination of the Arm s Length Price in respect of transactions entered into by the assessee with related parties - whether transaction between the appellant and its associated enterprise exceed the total amount of revenue earned from clients by the appellant and RCS together? - Whether Assessing Officer/TPO have erred while determining the ALP by taking appellant as the tested party as opposed to the analysis carried out by the appellant in which RCS was accepted as the tested party? HELD THAT - The assessee nor the ld. D.R. for the revenue have been able to point out any basis or material or criteria to controvert or to rebut the findings and conclusion arrived at by the ld. CIT(A) except by relying upon their respective stand taken before the ld. CIT(A). Though the ld. counsel for the assessee made a specific submission about the benefit of adjustment of 5 per cent to be given while determining the Arm s Length Price the ld. counsel for the assessee has not been point out as to how and in what manner the order of ld. CIT(A) in rejecting this claim of the assessee is improper and unjustified. Since both the parties have not been able to controvert the findings recorded by the ld. CIT(A) or point out any material to enable us to take a view other than view taken by the ld. CIT(A) We are inclined to uphold the order of ld. CIT(A) on the point of determination of Arm s Length Price in respect of the transactions entered into by the assessee with its associate enterprises namely RCS Centre Corpn. Therefore the order of ld. CIT(A) is upheld and the grounds raised by the assessee as well as by the revenue on this issue are rejected. Similarly in the assessment year 2004-05 an identical issue about the determination of Arm s Length Price is involved and in that year the ld. CIT(A) determined the Arm s Length Price in the same manner or basis as done in the assessment year 2003-04. The ld. CIT(A) has also decided the issue about the adjustment of 5 per cent as per proviso to section 92C(2) in the same manner as have been decided by him in the assessment year 2003-04. Thus in the light of the decision we have taken in assessment year 2003-04 the identical ground about the determination of Arm s Length Price raised by the revenue as well by the assessee in the assessment year 2004-05 are rejected. Computation of deduction u/s 10A - Whether interest from fixed deposit etc. and miscellaneous income should be taken into account for the purpose of computing deduction? - HELD THAT - In the light of proposition laid down by the Hon ble Supreme Court in the case of Liberty India 2009 (8) TMI 63 - SUPREME COURT we do not find any merit in the claim of the assessee that interest from fixed deposit etc. and miscellaneous income should be taken into account for the purpose of computing deduction u/s 10A. Thus these grounds raised by the assessee are rejected. Setting off of the brought forward business loss and unabsorbed depreciation - whether is to be made before or after allowing deduction u/s 10A? - CIT(A) as well ld. AO has set off the brought forward business losses and unabsorbed depreciation before allowing deduction u/s 10A - HELD THAT - From the facts narrated in immediately preceding para it becomes clear that the assessee has itself made a claim to set off brought forward losses against the income for assessment year 2003-04 and no claim of deduction u/s 10A was made with regard to the profit determined before setting off of brought forward loss pertaining to the assessment year 2002-03. However in the present assessment year 2004-05 the assessee has advanced a claim that deduction under section 10A should be claimed before making set off of brought forward unabsorbed business loss and unabsorbed depreciation In the light of the two decisions in the case of Yokogawa India Ltd. 2006 (8) TMI 448 - ITAT BANGALORE and Changepond Technologies (P.) Ltd. 2008 (2) TMI 486 - ITAT MADRAS-A and in the light of decision of Hon ble Karnataka High Court in the case of Himatasingike Seide Ltd. 2006 (8) TMI 125 - KARNATAKA HIGH COURT it is thus clear that the unabsorbed depreciation or unabsorbed business loss in respect of eligible section 10A unit or division or undertaking is to be set off against the profit of the same eligible section 10A unit or undertaking for the purpose of determining the amount of deduction available u/s 10A. We therefore do not find any justification cause to interfere with the order of the ld. CIT(A) whereby the ld. CIT(A) has upheld the order of the AO in setting-off of unabsorbed business losses or unabsorbed depreciation in respect of eligible unit brought forward from assessment year 2002-03 against the profit of same eligible unit for the purpose of determining the amount of deduction available u/s 10A to the assessee in the present assessment year 2004-05. Therefore this ground raised by the assessee is decided against the assessee and in favour of the revenue.

Summary

Issues Involved:
1. Determination of Arm's Length Price (ALP).
2. Selection of the tested party.
3. Revenue sharing limits.
4. Rejection of ALP determined by the assessee.
5. Selection of comparables.
6. Adjustments for idle capacity and working capital.
7. Adjustment of +/-5% as per proviso to section 92C(2).
8. Treatment of interest income and miscellaneous income under section 10A.
9. Setting off brought forward business losses and unabsorbed depreciation before or after allowing deduction under section 10A.

Detailed Analysis:

1. Determination of Arm's Length Price (ALP):
The core issue revolved around the determination of the ALP for transactions between the assessee and its associated enterprise, RCS Centre Corpn. The Transfer Pricing Officer (TPO) selected the assessee as the tested party and identified 9 Indian comparables, resulting in an average operating margin of 11.88%. The TPO proposed an adjustment of Rs. 14,70,10,071 based on this margin, which was upheld by the Assessing Officer.

2. Selection of the Tested Party:
The assessee argued that RCS should be the tested party, citing it as the less complex entity. However, the CIT(A) rejected this argument, emphasizing the difficulty in comparing entities across different jurisdictions and the lack of reliable data for foreign comparables. The CIT(A) held that international comparables cannot be accepted, thus deciding against the assessee.

3. Revenue Sharing Limits:
The CIT(A) agreed with the assessee that the ALP cannot exceed the total revenue earned by both the assessee and RCS from third-party clients. The CIT(A) determined that the maximum ALP should be 98.60% of the total revenue earned by the Global Vantedge Group, resulting in an ALP of Rs. 9,16,55,231 and an addition of Rs. 83,88,625 to the assessee's income.

4. Rejection of ALP Determined by the Assessee:
The CIT(A) rejected the assessee's ALP determination, stating that the taxpayer's analysis must be subject to scrutiny by tax authorities to prevent profit shifting. The CIT(A) emphasized the importance of a Functional, Asset, and Risk (FAR) analysis in determining the ALP.

5. Selection of Comparables:
The CIT(A) excluded Genesys, Hinduja TMT, and Karvy Consultants from the list of comparables due to dissimilar functions and lack of data. The CIT(A) adjusted the operating margins of the remaining comparables to account for the assessee's idle capacity, resulting in a revised ALP calculation.

6. Adjustments for Idle Capacity and Working Capital:
The CIT(A) acknowledged the need for adjustments due to the assessee's start-up phase and idle capacity. A 33.33% adjustment was made to the profitability of the comparables. The CIT(A) found that the TPO had already made suitable working capital adjustments, thus requiring no further changes.

7. Adjustment of +/-5% as per Proviso to Section 92C(2):
The CIT(A) denied the assessee's claim for a +/-5% adjustment, stating that the difference between the determined ALP and the transaction value exceeded 5%, making the adjustment inapplicable.

8. Treatment of Interest Income and Miscellaneous Income under Section 10A:
The CIT(A) held that interest from fixed deposits and miscellaneous income could not be considered as profits derived from the export of articles or software under section 10A. This decision was supported by the Supreme Court's ruling in Liberty India v. CIT, which emphasized that such income does not qualify for deduction under section 10A.

9. Setting Off Brought Forward Business Losses and Unabsorbed Depreciation:
The CIT(A) upheld the Assessing Officer's decision to set off brought forward business losses and unabsorbed depreciation before allowing the deduction under section 10A. This decision was based on the Karnataka High Court's ruling in Himatasingike Seide Ltd., which mandated that the calculation of profits for deduction purposes must consider total income as defined under the Income-tax Act.

Conclusion:
The ITAT upheld the CIT(A)'s decisions on all issues, including the determination of ALP, selection of tested party, revenue sharing limits, rejection of the assessee's ALP, selection of comparables, adjustments for idle capacity and working capital, denial of +/-5% adjustment, treatment of interest and miscellaneous income under section 10A, and setting off brought forward losses and unabsorbed depreciation. Both the assessee's and the revenue's appeals were dismissed.