TMI Blog2009 (12) TMI 668X X X X Extracts X X X X X X X X Extracts X X X X ..... ustment 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0A. 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. - C.L. SETHI AND K.D. RANJAN, JJ. Vikas Srivastava for the Appellant. L.M. Pandey and Pankaj Jindal for the Respondent. ORDER C.L. Sethi, Judicial Member. - These cross appeals, filed by the assessee as well by the revenue, are directed against two separate orders dated 28-1-2009 and 27-3-2009 passed by the ld. CIT(A) in the matter of an assessment made by the Assessing Officer under section 143(3) of the Income-tax Act, 1961, for the assessment years 2003-04 and 2004-05 respectively. 2. The grounds or the issues raised by the assessee as well as by revenue in both the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt. 4. The grounds raised by the revenue for the assessment year 2003-04 are as under : 1.( i )That the ld. CIT(A) ought not to have held that the total adjustments to be made in the hands of the assessee together with the ALP already reported by it cannot exceed the total revenue earned by the assessee and its AE from third party independent clients. ( ii )That the TNMN (Transaction Net Margin Method) adopted by the assessee seeks to determine the arm s length price of the tested party only. It cannot capture the profitability of the AE, which is at the other end of the International Transaction. ( iii )That the profit sharing motive and tax avoiding purpose cannot be taken as an essential ingredient for the TP purpose as such criteria would burden the operation of arm s length revenue and it would defeat the basic purpose of the arm s length principle and its foundation. This is against the internationally accept tenets of Transfer pricing as held in the case of the Australian Tax Office in W.R. Carpenter Holdings (P.) Ltd. et.al. v. CIT [2008] HCA 33. 2. The ld. CIT(A) ought to have upheld the arm s length price as determined by the Assessing Officer/TPO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... independent clients services by the appellant. 7. In the course of assessment proceedings, it was noticed by the Assessing Officer that the following international transactions were entered into by the assessee with its associated enterprises : Sr. No. Name address of Associated Enterprises Description of transaction Amount paid/payable for the services provided Method for used deter- mining the ALP Book value of transaction (Rs.) Value of transaction as computed by the assessee having regard to the ALP (Rs.) 1. RCS Centre Corpn. 700 Larkspur Landing Circle, Suite 235, Larkspur, California 94939, USA Market support services 8,32,66,596 8,32,66,596 TNMN 8. Therefore, the Assessing Officer made reference under section 92CA(1) of the Act to the TPO for computation of Arm s Length Price in respect of the above transaction. The TPO after analyzing the international transaction, business model and the relationship ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g out Arm s Length analysis. The reasons for testing the margins of a less complex party is that the simpler party requires a fewer and more reliable adjustments to be made to its operating profit margins. However, it is difficult to accept the appellant s contentions to select a foreign entity as a tested party because it is difficult to compare entitles in different jurisdictions since the facts and circumstances are different in each geographical location. Moreover, it is difficult to obtain all relevant facts that could lead to a proper FAR analysis. Further the relevant data which may be required to make the requisite adjustments is also very difficult to obtain in relation to the foreign comparables. In view of the above, I hold that international comparables cannot be accepted. This issue has, accordingly, been decided against the appellant. 13. On issue No. 2, the ld. CIT(A) has discussed the matter and given his finding as under : 5.2.1 The crux of the contention raised by the appellant is that in a revenue sharing arrangement between the entities, what may be questioned is the proportion of sharing between the entities and not the absolute amount of reven ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom third party independent clients it would mean that RCS performs the marketing activities without any consideration which again is an absurd proposition since in a commercial world no person of ordinary prudence would perform any activity without any reward. Therefore, before proceeding further it becomes pertinent to determine the fair amount of revenue receivable by RCS for its services. 5.2.5 It is important to note that while determining the fees payable to any agency responsible for marketing, the complexity of the process being outsourced, the operating margins that the service provider is expected to earn, the size of the contract, etc., all play an important role. In order to determine the remuneration of RCS for its activities, the appellant was asked to furnish an independent research report/survey on the Indian BPO industry. The appellant submitted a report on the Indian BPO Industry prepared by INGRES, a division of ICRA Ltd. in December, 2003. The report suggests that on an average BPO companies have selling expenses of 1.40 per cent to 4.40 per cent of their turnover (referred as operating income in the report) over a period of three years (financial year 200 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rying to make is that in every case, the ALP determined by the taxpayer should be accepted. This cannot be accepted since if the assessee is given the power to determine the ALP which cannot be challenged by the tax officers, then the transfer pricing regulations introduced into the tax legislation shall become infructuous. The taxpayer should be the one determining the same, however, it should be subject to scrutiny by the tax administration so that any profit shifting methodology being adopted by the assessee can be rejected. However, with this power, also comes the responsibility of being judicious and, thus, the Assessing Officer/TPO have to exercise their authority in accordance the Transfer Pricing Regulations. I am though in agreement with the contention of the appellant that FAR Analysis forms the basic foundation on which the ALP is determined and its importance just cannot be overemphasized. I have provided full opportunity to the appellant to present the facts of the case, including FAR analysis, and, hence, has been adjudicated on merits in the subsequent paras of this order. Thus, for statistical purposes, this issue is decided against the appellant. 15. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t enterprise. Similarly, when analyzing the transaction between the independent enterprises to the extent they are needed, profits attributable to transactions that are not similar to the controlled transactions under examination should be excluded from the comparison. Finally, when profit margins of an independent enterprise are used, the profits attributable to the transactions of the independent enterprise must not be distorted by controlled transactions of that enterprise. In view of above discussions, I hold that while applying the TNMN to determine ALP, the revenue earned by the appellant from servicing the independent clients, without any involvement of RCS should not be benchmarked. The proportionate costs (18.14 per cent) attributable to such revenue should be ignored while computing ALP of the international transactions. 5.4.3 As regards the objection raised by the appellant against the selection of comparables performing dissimilar functions, I have perused the profile of Genesys and Hinduja TMT and it is found that they are engaged in dissimilar activity profile vis-a-vis appellant. Hinduja TMT was also found to have substantial related party transactions. Thes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e appellant and I am satisfied that the TPO has already given the suitable adjustment and, hence, at this stage it does not call for any interference. 16. After deciding all the aforesaid issues, the ld. CIT(A) computed the Arm s Length Price as under : Re-computation of ALP To summarize, the ALP determined by the Assessing Officer/TPO needs to be recomputed in view of matters adjudicated above. Therefore, the ALP is recomputed after making the following adjustments : 1. Out of 9 comparables identified by the TPO, 3 companies namely Genesys and Hinduja TMT and Karvy Consultants are rejected. 2. The operating Margin of the remaining 6 comparables has been suitably adjusted to account for the idle capacity costs incurred additionally by the appellant. A statement showing the computation of average operating margin of the comparable is as per annexure. The computation of ALP on the basis of aforesaid average operating margin of comparables is given hereunder : Particulars Amount (Rs.) Total operating cost of the appellant as computed by TPO 22,46 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch may vary from the arithmetical mean by an amount not exceeding five per cent of such arithmetical mean. It may be sent that there are two limbs of the provision. Its first limb deals with the situation where the Most Appropriate Method leads to more than one ALP and in that situation the ALP should be the arithmetic mean. Second limb of the provision, provides the facility of option to the taxpayer if price varies by an amount not exceeding 5 per cent of such mean. There is no dispute as to the interpretation of the above part or limb of the provision and the controversy is related to the second limb of the provision where an option is given to the taxpayer to take ALP which may vary from the arithmetic mean by an amount not exceeding 5 per cent of such arithmetic mean. It is clear from the language of the provision that the option is to take ALP which is not in excess of 5 per cent of the said mean. In the present case, since the difference (Rs. 83,88,635) between the ALP determined (Rs. 9,16,55,231) and value of transaction declared (Rs. 8,32,66,596) exceeds 5 per cent of the ALP (Rs. 9,16,55,231), no adjustment is allowable to the appellant. Thus, this ground is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2. Allsec (36.12)% 3. MCS Limited 15.43% 4. Nucleus 23.95% Mean 1.175% 2. A suitable working capital adjustment has been made to adjust the operating margin of the abovementioned remaining 4 comparables. The final operating margin of the comparables, after giving effect to the said working capital adjustment comes to 0.43 per cent. The detailed computation of the operating is given at Annexure 3. 10. The computation of ALP on the basis of aforesaid average operating margin of comparables is given hereunder : Particulars Amount (Rs.) Total Operating Cost of the appellant as computed by the TPO 3,93,307,198 Less : Operating Cost incurred in relation to service to third parties (0.58%) 2,281,182 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion to be allowed under section 10A is in respect of profit and gains derived by an undertaking from the export of articles or things or computer software. The expression used by the Legislature is derived by undertaking from the export of articles or things or computer. Therefore, earning of interest from fixed deposits pledged with bank for bank guarantees and interest in fixed deposits kept in lien in favour of IBM for the purpose of obtaining computers on lease and the miscellaneous income cannot be considered to be a profit derived by an undertaking from the export of articles or things or computer software. Recently, the Hon ble Supreme Court in the case of Liberty India v. CIT [2009] 317 ITR 218, has considered the meaning of derived from and held as under : (Extracted from Head Note ) The Income-tax Act, 1961, broadly provides for two types of tax incentives, viz., investment-linked incentives and profit-linked incentives. Chapter VI-A of the Act which provides for incentives in the form of deductions essentially belongs to the category of profit-linked incentives . Therefore, when section 80-IA/80-IB refers to profits derived from eligible business, it is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g. Profits derived by way of incentives such as DEPB/Duty drawback cannot be credited against the cost of manufacture of goods debited in the profit and loss account and they do not fall within the expression profits derived from industrial undertaking under section 80-IB. 26. In the light of the aforesaid proposition laid down by the Hon ble Supreme Court in the case of Liberty India ( supra ), 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 under section 10A of the Act. Thus, these grounds raised by the assessee are rejected. 27. In the assessment year 2004-05, the assessee has also taken a ground about whether setting off of the brought forward business loss and unabserved depreciation is to be made before or after allowing deduction under section 10A of the Act. 28. This ground raised by the assessee reads as under : 9. The ld. CIT(A) as well ld. Assessing Officer have erred in setting off the brought forward business losses and unabsorbed depreciation before allowing deduction under section 10A of the Act. 29. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m assessment year 2002-03 89,08,926 ( ii ) Unabsorbed depreciation 82,93,021 Aggregating Total 1,72,01,947 The aforesaid amount of Rs. 1,72,01,947 has been set off against the profit for the assessment year 2004-05 by the Assessing Officer before allowing or determining the amount of deduction available to the assessee under section 10A of the Act. 32. From the facts narrated in immediately preceding para, it becomes clear that in the assessment year 2003-04, 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 under section 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 by relying on following decisions : 1. Nous Infosystems (P.) Lt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w been advanced that exemption in terms of section 10B could also be on commercial basis not necessarily in terms of the calculation. We do not accept this submission, section 10B cannot be read in isolation of other provisions. It is only an exemption provision. Exemption cannot be fanciful and it has some rationale with other provisions of the Act. Therefore, a combined reading of the definition of exemption, total income-tax liability deductibility, etc., one has to come to a conclusion that calculation as far as possible is to be in terms of the Income-tax Act. That is exactly what has been done by the assessee. Having calculated in a particular manner, now it does not lie in the mouth of the assessee to contend contra in these proceedings. It cannot be argued that the calculation so provided is on a mistaken basis or that could be on commercial basis. We are not prepared to accept this argument advanced by the assessee. Exemption also has to be scrutinized by the department as otherwise there is every chance of exemption being misused by an assessee. It may be true that even after taking into consideration, the unabsorbed depreciation, the assessee may get exemption but noneth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the purpose of determining profit to be deducted from the total income under section 10A cannot be accepted. The assessee s contention that provisions of section 32( 2 ) pertaining to the set-off of brought forward unabsorbed depreciation cannot be applied while determining the profit of undertaking under section 10A is also not tenable, which contention is against the very scheme of the section 10A read with other provisions of the Income-tax Act. It is not in dispute that under section 10A, the deduction of profit is to be allowed from the total income and, therefore, while determining profit of eligible undertaking under section 10A, the provisions of sections 28 to 44D and provisions relating to the adjustment of brought forward losses of the same eligible business are to be taken into account as so propounded in the decision of Hon ble Karnataka High Court in the case of Himatasingike Seide Ltd. ( supra ). We further observe that mere because the effect to the provisions of section 72 are to be first given as against the effect to the provisions of section 32(2), it would not mean that section 32(2) is not a part of the Chapter IV-D containing provisions of section 28 to sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from such a source do not enter into the computation at all. But there are other sources which for certain economic reasons are not included or excluded by the will of the Legislature. In such a case we must look to the specific exclusion that has been made. 13. In view of the abovereferred judgment, we have to consider the exclusion or deduction as per section 10A. As pointed out earlier, section 10A specifically states that a deduction is to be given. The deduction is in respect of profits and gains and the word such mentioned before the profit and gains refers to the profits and gains of the undertaking, which is related in the export of articles or things or computer software. Before the word undertaking , it is qualified by the word an . It means that it refers to a single undertaking. The words profit and gains and its computation is mentioned under section 29 of the Income-tax Act. As per section 29, profit and gains of business or profession is to be computed in accordance with the provisions contained under sections 30 to 43D. Section 70 of the Income-tax Act governs the setting off a loss from one source against income from another source under the same head ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act, 2000, with effect from 1-4-2001, section 10A mentions the deduction of such profits and gains as derived by undertaking from the export of articles or things or computer software, and it does not refer that such profits and gains derived by undertaking from the export of articles or things or computer software will not be included in the total income. Thus, section 10A specifically states that a deduction is to be given from the total income. The Tribunal further observed that section 10A refers to eligible undertaking. Thus, the business losses of the undertaking, whose income is not exempt under section 10A, cannot be set off to ascertain the profits and gains derived by an undertaking from the export of computer software, i.e., section 10A unit, and hence, business losses of other units will not be set off against the profits of the undertaking engaged in export of computer software for the purpose of determining the allowable deduction under section 10A of the Act. However, this decision is of no help to the assessee, rather it supports the revenue s stand inasmuch as the dispute in the present case is about the matter whether unabsorbed depreciation and business loss o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntained in section 10A along with sub-section (6) shows that it is a distinct and separate deeming provision which laid down a special manner of computation of profits and gains entitled for deduction under section 10A of the Act. Moreover sub-section (6) of section 10A is of an overriding nature providing specifically that during each of the assessment years in the tax holiday period in which the assessee is entitled to deduction under section 10A of the Act, this provision will be applied as if the undertaking is an independent unit and is the one and the only source of income of the assessee. Therefore, while computing the deduction under section 10A, the profits and gains of that undertaking for the purpose of determining the quantum of deduction is to be computed if such eligible activity of the said undertaking is the only source of income of the assessee and as such before computing the deduction under section 10A the income, profit and loss pertaining to the other activities of the assessee cannot be taken into consideration. As per the IT return ITR-6, the description of column 34 is profit or loss before deduction under section 10A/10AA/10D/10DA which means the amount of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tled that the decision of High Court has a binding force as compared to the decision of Tribunal. There is no decision of any other High Court or jurisdictional High Court contrary to the decision of Karnataka High Court. In this view of the matter, the aforesaid decision of Tribunal in the case of KPIT Cummins Infosystems (India) (P.) Ltd. ( supra ) cannot be applied to the present case. 43. The decision of ITAT, Mumbai Bench in the case of Enercon Wind Farms (Krishna) Ltd. ( supra ) was rendered in respect of setting off the business loss brought forward from assessment year 1999-2000, which is to be considered on a different footing in the light of insertion of words ending before 1-4-2001 in sub-section (6) of section 10A by the Finance Act, 2000. After the amendment with effect from 1-4-2001 onwards, the brought forward loss pertaining to the specific undertaking eligible for deduction under section 10A are allowed to be carried forward and set off against the income of such undertaking in the future assessment year and set off within the block period itself. 44. In the light of the discussion made above, we, therefore, do not find any justification cause to in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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