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TMI Blog2011 (9) TMI 477X X X X Extracts X X X X X X X X Extracts X X X X ..... act that the lease line charges are incurred for general communication purposes as well. 3. The learned AO has erred in law and in fact by not considering the plea of the appellant that it does not provide any technical services outside India and therefore, foreign currency expenditure incurred by the appellant should not be reduced from 'export turnover' for the purposes of computing the deduction u/s10A of the IT Act, 1961. 4. The learned AO has erred in law and in fact by not considering the plea of the appellant that if expenses such as lease line charges, internet charges and foreign currency expenditure, if reduced from export turnover should also be reduced from total turnover for computing the deduction u/s 10A of the Act. 5. The learned AO /TPO erred in making an addition of Rs. 268,657,520 to the total income of the appellant on account of adjustment to the arm's length price in relation to the spares replacement services transaction entered into by the appellant with its associated enterprise; 6. The learned AO/TPO has erred in law and in fact by disregarding the economic analysis undertaken by the appellant and conducting a fresh economic analysis for the determ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uter software outside India. 3.1 As regards deduction of foreign currency expenditure from the export turnover learned counsel for the assesse submitted that the definition of export turnover as appearing u/s 10A of the Act provides for exclusion of certain expenses which can broadly be divided into two categories as stated below; a) freight, telecommunication charges or insurance attributable to the delivery of the articles or things or computer software outside India; and b) expenses incurred in foreign exchange in providing technical services outside India. Thus, according to him, it is only such expenses which are incurred incurred in foreign exchange in rendering technical services outside India are required to be reduced from export turnover. He submitted that the assessee is engaged in the business of undertaking software development activities for its oversees group affiliated and the activities are predominantly based on an offshore model. Thus, according to him the assesse is not providing any kind of technical services outside India and therefore, the foreign currency expenditure incurred by the assessee should not be reduced from the export turnover for the purpos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -IT, we direct the AO to reduce the said expenditure from the total turnover and also for the computation of deduction u/s 10A of the IT Act. These grounds are accordingly allowed for statistical purposes. 5. As regards grounds nos.5 to 8, the brief facts of the case are that the assessee is a company engaged in undertaking software development activities, marketing support services and product replacement services for Cisco-products in India. The assessee is registered under the STPI of India Scheme and has claimed deduction u/s 10A of the IT Act, in respect of profit earned from the provision of software development services to Cisco Technology Inc. USA from the STPI Unit. 5.1 M/s Cisco Systems Inc. USA is the common parent company for over 100 Cisco subsidiaries worldwide. Cisco-US conducts business globally and develops, manufactures and sells networking and communication products and also renders services associated with the equipments and their use. Cisco US makes direct sales to customers in India, along with the warranties or AMCs. In relation to the direct sales made by Cisco-US to customers in India, it has entered into an agreement with the assessee for product replace ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as specified under the Rules. 4. Making transfer Pricing adjustments without giving benefit of +/- 5 percent as available under erstwhile proviso to sec.92C(2) of the IT Act. 5.3 The learned counsel for the assessee while reiterating the submissions made before the authorities below submitted that the TPO and the DRP have characterized the assessee to be a trader/distributor of spare parts by only considering the nomenclature given to the assessee in the product replacement agreement, as purchaser and the AE as a seller. He submitted that it is not mere nomenclature in the agreement which will determine the character of the transaction but it is the essence of the agreement which is to be taken into consideration. He submitted that only for the purpose of sending the spare parts into India, that the mode of import has been adopted wherein the AE is described as the seller and the assessee is described as a purchaser, but from the various clauses of the agreement, it is clear that the assessee is holding spare parts only as a custodian of its AE and is delivering the spare parts to the customer free of charge at the direction of the AE. Thus, the assessee is not incurring any exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rofits/value added expenses incurred is also correct. He submitted that the cost of spares and revenues there from and the expenses incurred in the delivery of spares and revenues therefrom are considered as a single transaction for the purpose of determining whether the 'product replacement services' transaction is at ALP. In computing the margin earned by the assessee, the cost of spares delivered to the customers have been treated as 'pass through costs' as there was no value added on by Cisco-India in relation to spare parts delivered. Accordingly, Cisco-India's margin of 38.5% is higher than the average margin of 1.02% earned by the comparable companies and hence the product replacement services transaction can be considered to be at ALP. He submitted that even if the cost of spares and revenues therefrom and the expenses incurred in the delivery of spares and revenues therefrom are considered as two different and separate transactions for the purposes of determining whether they are at arm's length, the updated margins of the comparable's companies considered in the TP report with the financial information pertaining to FY: 2005-06 only, the comparable margin is 1.02% as agai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lected the following four companies as comparables i.e.. 1. Bajaj Electricals 2. Iris Computers 3. Spice Mobiles 4. Avaya Global 6.1 He submitted that these companies do not satisfy the comparable criteria and therefore, the same needs to be rejected. According to him, Avaya Global is engaged in trading as well as manufacturing activity and also has significant related party transactions, with respect to services received, royalty made etc. He submitted that there is no break up provided separately with respect to manufacturing and trading activities and considering these companies as a comparable company would be inappropriate. 6.2 With regard to Spice Mobile, he submitted that this company is also engaged in the trading as well as manufacturing activities and the data available with regard to this company is also for a period of 9 months only and not 12 months as required. He submitted that this company also has significant related party transactions during the year which include sale of traded and finished goods, customer services expenses, loans availed from holding company, loans given to fellow subsidiaries, interest expenses etc. and due to these factors this compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orrect method of computing the ALP. 7.2 In the case before us, two different methods are adopted TNMM by the assessee and RPM by the TPO. Which is the most appropriate method for arriving at the ALP is to be examined. Rule 10B of IT Rules provides for different methods to be followed for determination of the ALP under sub-sec.2 of sec.92C of the IT Act. The following are the methods for computing the ALP. (a) Comparable Uncontrolled Price Method (CUP) in which the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions, is identified and such price is adjusted to account for differences, if any, between the international transaction and the comparable uncontrolled transactions or between the enterprises entering into such transactions, which could materially affect the price in the open market and the adjusted price arrived at is taken to be an arm's length price in respect of the property transferred or services provided in the international transaction; Thus, it can be seen that in this method a comparison has to be with transaction of a comparable in an uncontrolled market conditions i.e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. When the assessee cannot be held to be a trader or distributor of the spare parts, it is clear that the resale price method is not applicable for arriving at the ALP of the international transactions. 7.4 The other methods provided are cost plus method which is applicable to the transactions relating to manufacture and sale of goods and Profit Split Method which is applicable mainly in international transactions involving transfer of unique intangibles or in multiple international transactions which are so inter-related that they cannot be evaluated separately for the purpose of determining the ALP of any one transaction. These two methods cannot be made applicable to the facts before us. The only remaining method is the Transactional net margin method (TNMM)by which the net profit margin realized by an enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise and is compared to net profit margin realized by an unrelated enterprise from an uncontrolled transaction or a number of such transactions and the adjustments for the difference ..... X X X X Extracts X X X X X X X X Extracts X X X X
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