TMI Blog2012 (9) TMI 89X X X X Extracts X X X X X X X X Extracts X X X X ..... national transactions then the computation that has to be considered is one done based on the entries made in the books in respect of such international transactions. Assessee here had profits which were in excess of the profits of the comparable cases. This addition, therefore, stands deleted. Period of limitation – assesse contended that there being no transfer pricing adjustment, order u/s 143(3) itself ought have been passed before 31.12.2010, hence draft assessment order and all proceedings subsequent thereto became invalid – final assessment order passed on 27.9.2011 – Held that:- Reference made to the TPO, the order passed by the TPO, the draft assessment order passed by the Assessing Officer and the directions issued by the DRP are all pre-assessment procedures of aid and guidance provided to the assessing authority by the statute. If any irregularity is committed by the Assessing Officer in following the above set of pre-assessment procedures, such irregularity does not make the assessment order illegal. At the best, it makes the order only irregular. Ground stands dismissed. Deduction u/s 10B – denial even in respect of certain sale proceeds which were brought into ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d only to technical services outside India. Nevertheless, A.O. is directed to exclude such amounts both from export turnover as well as from total turnover - Decided partly in favor of assessee - I.T.A. No. 1870/Mds/2011 & S.P. No.74/Mds/2012 - - - Dated:- 15-6-2012 - SHRI ABRAHAM P. GEORGE, AND SHRI CHALLA NAGENDRA PRASAD, JJ. Appellant/Petitioner by : Shri Arvind P. Datar, Sr. Advocate Respondent by : Shri Shaji P. Jacob, Additional CIT O R D E R PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER : This is an appeal filed by the assessee directed against an order dated 27.9.2012 of ACIT III(4), Chennai, passed pursuant to the directions of the Dispute Resolution Panel (in short DRP ). A Stay Petition has also been moved by the assessee for stay of demand. The appeal has been listed and heard and hence is disposed of through this order. Assessee has filed a concise grounds of appeal and this alone is considered. Ground No.1 in such concise grounds of appeal is general needing no adjudication. 2. Vide its ground No.2, grievance of the assessee is that the A.O. had done the assessment under Section 143(3) of Income-tax Act, 1961 (in short 'the Act') after 31st Decembe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ute Resolution Panel (DRP). Primary objection of the assessee was that the draft assessment order issued by the A.O. under Section 144C of the Act was invalid since no transfer pricing adjustment was required to be made by the TPO. As per the assessee, it did not fall within the definition of eligible assessee given in Section 144C(15)(b) of the Act. Argument of the assessee was that there being no transfer pricing adjustment, order under Section 143(3) itself ought have been passed before 31st December, 2010. Hence, as per the assessee, the draft assessment order and all proceedings subsequent thereto became invalid. Reliance was placed on the decision of Hon ble Gujarat High Court in the case of Pankaj Extrusion Ltd. v. ACIT (2011) 56 DTR 32. However, the DRP was not impressed. According to them, the variation in the returned income made by the A.O. in the draft assessment order was only on account of report of the TPO and therefore, the assessee fell within the definition of eligible assessee under Section 144C(15)(b) of the Act. DRP was also of the opinion that the decision of Hon ble Gujarat High Court in the case of Pankaj Extrusion Ltd. (supra), relied on by the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e decision of Hon ble Gujarat High Court in the case of Pankaj Extrusion Ltd. (supra), it is clearly held at para 10 that the contention regarding extended time limit provided under Section 153 of the Act for cases falling under Section 92CA, when an assessee cannot be considered as an eligible assessee as defined in clause (b) sub-section (15) of Section 144C of the Act, is left open and not decided. Relevant paras 8 to 10 of the judgment of Hon ble Gujarat High Court are reproduced hereunder:- 8. From the above, it is clear that for assessment year relevant for our purpose, on account of procedure undertaken in s. 92CA of the Act, there was no variation in the income by virtue of order of TPO. That being the position, the petitioner cannot be stated to be an eligible assessee as defined in cl. (b) of sub-s. (15) of s. 144C of the Act. Procedure for issuance of draft order calling for his objection and taking further steps as laid down under s. 144C therefore, would not apply. 9. We are of the opinion that with above declaration petition can be closed. 10. Counsel for the petitioner however, submitted that even the extended time-limit provided in s. 153 of cases under s. 92 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PO and the order of the DRP are followed. While making proposals on the basis of the order of the TPO, the Assessing Officer may propose adjustments which in fact do not fall under the segment of TP matters but fall under the segment of non-TP matters. For the reason that the Assessing Officer has made such a mistake, it is not possible to hold that an erroneously passed draft assessment order will make the assessment order passed under sec.143(3), time barred. The Assessing Officer has made a reference to the TPO and on the basis of the order of the TPO, he has made a draft order. In the said draft order, there is no proposal on TP matters, but he made a proposal on sec.10A deduction. But the material necessary for making such a proposal, even if erroneous, was generated from the order of the TPO. Therefore, the Assessing Officer proposed to reduce the super profit from the computation of sec.10A deduction. That may not be in accordance with the procedure prescribed. But it does not mean that the Assessing Officer should have never passed such a draft assessment order. If the Assessing Officer has to make such adjustment in the light of the information available from the order of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m the TPO on the ALP after the conclusion of the transfer pricing assessment. Further, the learned A.O. erred in neither sharing the same with VTSC nor granting an opportunity to VTSC to provide its rebuttal, leading to violation of principles of natural justice. 6. The learned TPO/DRP having accepted Sankhya Infotech Ltd. as a comparable company with a margin of 32.13 percent, erred in considering the margin earned by the Appellant (24.09 percent) as extraordinary profits. The TPO in her letter dated 29.12.2010 had given a finding that the Profit Level Indicator (PLI) of the assessee came to 24.09%, as against which the arithmetic mean of such PLI of the comparable companies, came to only 10.06%. Assessee had adopted Transactional Net Margin Method (TNMM) for arriving at arm's length price. The Transfer Pricing Officer in her report dated 16.9.2010, had made the following observations with respect of the adjustments required on the international transactions:- 5. The case was discussed with the assessee s representative. On examination of the international transactions, the value of those transactions are verified to be determined at arm s length. Hence, no adjustment is c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 10,89,20,652/-, which was considered by the Assessing Officer as excess profits, was not given the benefit of deduction under Section 10B of the Act. 9. Now before us, learned A.R., strongly assailing the orders of A.O. as well as DRP, submitted that the issue stood decided in favour of assessee by virtue of decision of co-ordinate Bench of this Tribunal in the case of Visual Graphics Computing Services (India) Pvt. Ltd. (supra). According to him, this Tribunal, in the above order, after considering another co-ordinate Bench s decision in the case of Tweezerman (India) (P) Ltd. v. ACIT (133 TTJ 308), had held that reduction of eligible profits by invoking Section 80-IA(10) read with Section 10B(7) in the context of TPO order, was unsustainable. Therefore, according to him, the Assessing Officer fell in error in holding that there were unreasonably high profits which were not eligible for deduction under Section 10B of the Act. 10. Per contra, learned D.R. fairly conceded that the issue stood decided in favour of the assessee by the decision of co-ordinate Bench of this Tribunal in the case of Visual Graphics Computing Services (India) Pvt. Ltd. (supra). 11. We have peruse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isions of transfer pricing it is to verify as to whether the local AE is getting its right share of revenue and as per s. 80-IA(10), it is to verify and adjust the profits of an eligible business so that under the garb of the eligible business the taxable income of an AE is not reduced by shifting its income to the eligible business. However, he has given a further fact in his order that the profit level indicator of the assessee is higher than the mean of the profit level indicator of the comparable cases. The assessee has been right from the beginning claiming that M/s Rahul Electricals Electronics, which showed a low ratio of profit before tax to sales was not a comparable. This has not been refuted by either the TPO or the A.O. In fact, with the comparable, which the assessee itself is pointing out being a sister-concern of the assessee showed the ratio of the PBT to sales at 90.1 per cent, if M/s Rahul Electricals is being considered as comparable and had shown a PBT to sales at 7.3 per cent, has the TPO taken any action under transfer pricing against M/s Rahul Electricals Electronics has also not been placed before us. This is because, after all the assessee-company is sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chinery, the depreciation thereon, the location which would affect the cost of transportation as also the cost of the labour, cost of power and fuel would have to be seen. These are but only some factors which would affect the comparability when comparing two different enterprises. M/s Rahul Electricals Electronics which has a turnover of only Rs. 1.28 crores, obviously cannot be compared with the assessee which has the turnover of more than Rs. 15.06 crores. Further, from the order of the TPO, M/s Rahul Electricals Electronics is also in the business of making tools, which include tweezers, whereas manufacture of tweezers is nearly 90 per cent of the total manufacturing of the assessee. The fact that the A.O. has also not shown any calculation on the basis of which he has determined Rs. 3.54 crores is the excess profit received by the assessee cannot stand in view of the fact that he has not shown as to what he feels is the actual ordinary profit which the assessee could have generated nor has he shown any particulars he has used for arriving at such a figure especially when the assessee himself has filed the calculation showing the error in the difference between the profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction was entered into.] It is thus clearly specified that where computation of income was done, considering the arm's length price for the international transactions and such computation result in reducing the income chargeable to tax or increasing the loss, as the case may be, then the computation that has to be considered is one done based on the entries made in the books in respect of such international transactions. Assessee here had profits which were in excess of the profits of the comparable cases. There was thus no question of addition of Rs. 10,89,20,652/- based on the TPO order. This addition, therefore, stands deleted. 15. In the result, ground No.7 of the assessee is allowed. 16. Vide its ground Nos.8 to 11, grievance of the assessee is that deduction under Section 10B of the Act was denied to it even on sale proceeds which were brought into India within the time limit prescribed under sub-section (3) thereof, despite such directions of the DRP. Further, as per the assessee, if unrealized export proceeds were reduced from export turnover, such amounts had to be reduced from total turnover as well. 17. Facts apropos are that in Form No.56G filed alongwith ret ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tly tally with the names of the clients, the disallowance was made. Relying on subsection (3) of Section 10B of the Act, learned A.R. submitted that the only requirement was that sale proceeds in convertible foreign exchange was to be brought into India within a period of six months or extended periods allowed by the competent authority. This was done and despite that, the disallowance was made. In any case, according to him, if such amount was excluded from the export turnover, it had to be excluded from total turnover, in the formula adopted for computing of deduction under Section 10B and reliance was placed on the decision of Special Bench of this Tribunal in the case of ITO v. Sak Soft Ltd. (2009) 313 ITR (AT) 353. 19. Per contra, learned D.R. submitted that assessee could not produce evidence for receipt of sale proceeds worth Rs. 7,05,40,982/- within the period permitted by RBI. As per the details filed by the assessee, the said amount was received from one M/s Yanfeng Visteon Automotive Electronics Co. Ltd., whereas, sundry debtors as on 31st March 2007 as per assessee s accounts disclosed only dues of Rs. 7,03,11,303/- from the said company during the relevant previous y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... excluded from export turnover. . 21. We have perused the orders and heard the rival submissions. It is true that in the draft assessment order, the Assessing Officer proposed to exclude from export turnover a sum of Rs. 7,05,40,982/- mentioned in Form 56G filed by the assessee, as to have been received after the six months period. DRP based on the submissions of the assessee, required the Assessing Officer to go through the details filed by the assessee in this regard and also consider the extension of time limit given by RBI through its general Circular. The direction of the DRP in this regard is clear and reproduced hereunder:- As regards the receipt of foreign exchange within one year the assessee has filed details in p.100-133 of the paperbook filed with the objections on 28.11.2011. The A.O. s comments on the objections, though specifically called for, have not been received. Prima-facie, there is merit in the assessee s grievance. The A.O. is directed to verify the circulars cited and the details and evidence of the time of remittance given in the paperbook and allow appropriate relief. Assessing Officer, based on the details furnished by the assessee, came to a conc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation, 128, Spring Road, Ypsilanti MI 48198, USA Export of Software Service and Information Technology enabled services 841,272,058 841,272,058 2. Visteon Japan Ltd., 4-25-2 Kilayamata Tsuzuki-Ku, Yokohama- Shi Kanagawa 224- 0021, Japan 65,489.916 65,489,916 3. Yanfeng Visteon Ltd., 300, Minolta Road, Songjang, County shanghai, China 40,494,820 40,494,820 Total 947,256,794 947,256,794 It is clear from the above that the sales of the assessee were to Visteon Corporation, USA, Visteon Japan Ltd., Japan and Yanfeng Visteon Ltd., China. The only name in which Yanfeng Visteon appearing is Yanfeng Visteon Ltd. No sales to any company by the name of Yanfeng Visteon Automotive Electronics Co. Ltd., China is there. Further, for the dues from Chinese companies, we cannot presume that money would have come from USA and/or Japan companies, though they were all associated enterprises. The only probability is that the amount Rs. 40,494,820/- accepted by the A.O. as received from Yanfeng Visteon Automotive Electronics Co. Ltd., China, was nothing but what was billed and due fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issued unless an opportunity of being heard is given to the assessee and the Assessing Officer on such directions which are prejudicial to the interest of the assessee or the interest of the revenue, respectively. (12) No direction under sub-section (5) shall be issued after nine months from the end of the month in which the draft order is forwarded to the eligible assessee. (13) Upon receipt of the directions issued under sub-section (5), the Assessing Officer shall, in conformity with the directions, complete, notwithstanding anything to the contrary contained in section 153, the assessment without providing any further opportunity of being heard to the assessee, within one month from the end of the month in which such direction is received. Sub-section (8) clearly specifies that the power of Dispute Resolution Panel is limited to confirmation, reduction or enhancement of variations proposed. There cannot be any setting aside of any proposed variation for further enquiry and passing of the assessment order. Here, the Dispute Resolution Panel had given a direction to the Assessing Officer, at page 13 of its order which read as under:- As regards the receipt of foreign exc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otal turnover for computation of deduction under Section 10B of the Act. 25. Before us, learned A.R. submitted that in view of the decision of Special Bench of this Tribunal in the case of Sak Soft Ltd. (supra), whatever was excluded from export turnover had to be excluded from total turnover also. 26. Per contra, learned D.R. submitted that if unrealized export proceeds were excluded both from total turnover as well as export turnover, then Section 10B(3) of the Act will become otiose when an assessee was doing 100% exports . According to him, if the profit of the assessee was Rs. 100/- against the turnover of Rs. 1000/-, of which only Rs. 800/- was realized, if the formula proposed by learned A.R. was accepted, then deduction under Section 10B of the Act may be equal to Rs 100 x Rs. 800 = Rs. 100 Rs 800 In other words, according to him, if it was excluded both from numerator and denominator then there would be no reduction in the export profit and non-realization of export proceeds within the period mentioned in Section 10B(3) of the Act, will have no effect in the work-out of deduction available under Section 10B of the Act. 27. Ad libitum, reply of the le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s to be excluded from total turnover, has to be seen alongwith the question raised before the Special Bench. As held by Hon ble Apex Court in the case of CIT v. Sun Engineering Works Pvt. Ltd. (1992) (198 ITR 297) (SC), a decision of court could not be considered divorced from the question raised before it. We are of the opinion that the decision of Special Bench of this Tribunal in the case of Sak Soft Ltd. (supra) could not be extended to mean that items comprised in the turnover which had no element of expenses, was also covered by such decision, so as to exclude such items from both export as well as total turnover, while applying the mathematical formula prescribed for working out deduction under Sections 10A or 10B of the Act. In our opinion, more appropriate will be to apply the decision of Hon ble Apex Court in the case of CIT v. K. Ravindranathan Nair (295 ITR 228) where total turnover has been lucidly explained to include all items which are business receipts. We, therefore, cannot accept the contention of the learned A.R. that if sale proceeds, which were not realized, are excluded from export turnover for going beyond the time limit prescribed in Section 10B(3) of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /2008 dated 19th August, 2011, submitted that whether telecommunication charges were incurred in foreign currency or not, to the extent it was expended for delivery of articles or things or computer software outside India, it had to be excluded from export turnover. In any case, according to him, when conflicting decisions of the Tribunal were there, latter decision of the Tribunal to be followed in view of the decision of Delhi High Court in the case of Bhika Ram v. Union of India (238 ITR 113). However, learned D.R. fairly admitted that in view of the decision of Special Bench of this Tribunal in the case of Sak Soft Ltd. (supra), such amounts had to be excluded from total turnover also while calculating deduction under Section 10B of the Act. 35. We have perused the orders and heard the rival submissions. No doubt, in the decision relied on by the learned A.R., namely, California Software Co Ltd. (supra) dated 29th August, 2008, it has been held that telecommunication expenditure in Indian rupee could not be excluded from export turnover. What is specifically noted by us is that the above decision in the case of California Software Co Ltd. (supra) was given prior to the decisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gh the question placed before the Special Bench seems to assume that expenses attributable to the delivery of computer software outside India was incurred in foreign currency, statutorily there seems to be no requirement that such expenses should only be incurred in foreign currency. Subject to this clarification or modification, which really does not make any fundamental change to the substance of the question posed before the Special Bench for decision, we proceed to decide the issue which really arises in the cases before us, namely, whether any expenses on freight, telecommunication charges, or insurance attributable to the delivery of the articles or things or computer software outside India or any expenses incurred in foreign exchange in providing the technical services outside India, which are required to be excluded from the export turnover as defined in Expln. 2(iii) below s. 10B, ought also to be excluded from the figure of total turnover while applying the formula prescribed by sub-s. (4) of s. 10B. It is clear from the above that what was considered by Special Bench, inter alia, included freight and telecommunication charges or insurance incurred in Indian currency a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aid we are unable to accept this line of reasoning. Learned A.R. has not rebutted with any evidence, findings of the A.O. that telecommunication charges were incurred by the assessee for delivery of computer software outside India and such expenses were attributable to the delivery of computer software outside India. When the expenses were incurred for delivery of computer software outside India, even if the assessee had not invoiced such amounts specifically in its bills raised on its customers abroad, the amounts would have definitely been fixed, taking into consideration such telecommunication expenses also. Just because the invoices raised did not specifically mention recovery of telecommunication charges, we cannot say that the billed amounts were exclusive of such telecommunication charges. Assessee while agreeing for delivery of computer software at prices mutually accepted, would have definitely reckoned the telecommunication charges which were to be incurred by it for the delivery of such software outside India. It is not the case of the assessee that the telecommunication expenses were not considered by it for working out its profits. It is also not a case of the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have been excluded from total turnover, we are unable to accept. The Special Bench of this Tribunal in the case of Sak Soft Ltd. (supra) has clearly held that whatever has been excluded from export turnover had to be excluded from total turnover also since total turnover included export turnover as well. We are fortified in taking this view by the decision of Hon'ble Bombay High Court in the case of CIT v. Gem Plus Jewellery India Ltd. (330 ITR 175). Therefore, we do not find any merits in the arguments advanced by the assessee or the Revenue in respect of their respective grounds in this regard. We are, therefore, of the opinion that the A.O. was justified in excluding the expenses incurred in foreign currency as well as the telecommunication expenses from the export turnover. Nevertheless, we direct the A.O. to exclude such amounts both from export turnover as well as from total turnover, in accordance with the Special Bench decision in Sak Soft Ltd. (supra) and re-compute the deduction available to the assessee under Section 10B of the Act accordingly. 36. In the result, grounds No.13, 14, 16 and 17 are dismissed, whereas grounds No.15 and 18 are allowed for statistical pur ..... X X X X Extracts X X X X X X X X Extracts X X X X
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