TMI Blog2013 (9) TMI 116X X X X Extracts X X X X X X X X Extracts X X X X ..... ur of assessee. Transfer pricing adjustment - Held that:- net profit margin is to be considered qua the comparable uncontrolled transaction or number of such uncontrolled transactions. Uncontrolled transaction has been defined in Rule 10A(a) to mean “a transaction between enterprises other than associate enterprises, whether resident or non-resident”. Rule 10B(1)(e) in juxtaposition to Rule 10A(a). The position which emerges is that in applying the TNMM, net profit margin realized from a comparable uncontrolled transaction is to be taken into consideration. The conditions thus envisaged for making a case as comparable for this purpose, should not only be comparable but also have uncontrolled transaction. These twin conditions need to be cumulatively satisfied. If such other case is only comparable but has controlled transaction or vice-versa, it shall fall outside the ambit of list of comparable cases - TPO suggested to make adjustment only by comparing the rate of commission paid to AE on First Notice and no case has been brought on record that commission paid by assessee to AE @ 15% is excessive. Further we observe that Ld. CIT(A) has held that similar issue was also considere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... these units i.e. Unit No. II and Unit No. III and relevant facts as reported in the audit report have been stated by AO in paras 3.2 and 3.3 of assessment order which are as under: The facts as reported in the audit report for unit II are as under: It is claimed that unit II is set up at 1st 2nd floor, HTMT House, 614, Vajpayee Nagar, Bommanahalli, Hosur Road, Bangalore -560068. It is certified that unit II is registered with Software Technology Parks of India, Bangalore and quantified the admissible deduction u/s. 10A of the Act, at a sum of Rs. 12,41,79,095/-. Nature of the business of the unit is stated to be insurance claim processing. The date of initial registration with the Software Technology Park is stated to be on 22.07.1992. It is claimed that the unit started the manufacture or production of computer Software in June 2000 and it is 5th year of the deduction u/s 10A. The total turnover of the undertaking /unit was quantified at a sum of Rs. 55.96 Cr and the total turnover of the business was quantified at a sum of Rs. 166.13 Cr. The total profits derived by the undertaking / unit was quantified at a sum of Rs. 13.24 Cr and the total profit derived by the busi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he name of AL Information Tech Ltd. vide approval number 15(63)/92SDA dt. 22.7.1992. On the application of ALIT under Software Technology Park Scheme, Inter Ministerial Standing Committee of Department of Electronics had approved the setting up of Unit at a total foreign exchange outflow of US$ 81.76 lakhs over the five years of project. ALIT had executed a legal undertaking of its unit with STPI on 28th September, 1992 which is valid for a period of 10 years i.e. upto 21.7.2002 for carrying out development and 100% export of software using Data Communication Link or in the form of Physical export. The Unit of ALIT had stated operating under customs bonded warehouse licence No. 10/93 (customs) dt. 22.4.1993, which was valid upto 22.7.2002. The AO stated that undertaking of ALIT was set up at STP, Block-III, Flat No. A-101, A-102, A-106 and A-107, KSSIDC, Multistoried complex, Hosur Road, Keonics Electronics City, Bangalore-562158/ However, after amalgamation of ALIT with assessee w.e.f. 1st July, 1999, a letter was filed on 4.12.2000 before Director STPI seeking its no objection for transfer of assets and liabilities of ALIT to assessee. Director, STPI on 18.12.2000 approve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gar, Bommanahalli, Hosur Road, Bangalore are not correct. As a matter of fact, no separate undertaking was established by assessee at 1st 2nd floor, HTMT House, Vajpayee Nagar, Bommanahalli, Hosur Road, Bangalore. The AO has further stated that auditor s report states that Unit No. III is located at ground and 3rd floor of HTMT House, Vajpayee Nagar, Bommanahalli, Hosur Road, Bangalore and the audit report reveals that date of manufacture/production was on 19.11.2001. However, assessee expanded the existing undertaking and permission of Director, STPI was sought on 5.9.2001 by the assessee and the approval for expansion of STPI facility was accorded by Director, STPI on 12.9.2001. Therefore, claim of assessee that a separate undertaking known as unit-III is established is factually incorrect and it was only an expansion of undertaking located at Electronic City, Bangalore. AO further stated that in response to letter dt. 25th November, 2008, Director STPI vide her letter dt. 10.12.2008 has categorically stated that Unit-II III are not separate units under the STP Scheme and they were only the expanded locations of the initial letter of permission dt. 22.7.1992 and no separate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent to make it a new undertaking eligible for deduction u/s. 10A. Ld. CIT(A) stated that in fact it is only expansion of an existing undertaking and accordingly, justified action of AO to deny deduction u/s. 10A of the Act. Hence, assessee is in further appeal before Tribunal. 11. On behalf of assessee, Ld. AR Shri Trivedi, Sr. Counsel, made his detailed submission on the lines of submission made before authorities below. He contended that assessee had been claiming such deduction u/s. 10A in respect of Units-II and III from the year in which it commenced new line of business. He submitted that Unit-II started in June, 2000 and this is the 5th year claiming deduction u/s. 10A of the Act and Unit No.III started in November, 2001 and this is the 4th year claiming deduction u/s. 10A of the Act. Ld. AR relying on decision of ITAT, Pune Bench in the case of Patni Computer Systems Ltd. Vs DCIT in ITA No. 426 1131/PN/06 dt. 30.6.2011 submitted that period eligibility of deduction u/s. 10A of the Act is liable to be considered from the year of setting up of such unit and not from the point of time when original unit were set up. Ld. AR submitted that Tribunal has held in the abov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... With these directions, the matter stands restored to AO and accordingly ground No. 1 of appeal taken by assessee is allowed for statistical purposes. 14. In ground No. 2, assessee had disputed disallowance of expenditure u/s. 14A of the Act. 15. We have heard Ld. Representatives of parties and have perused the orders of authorities below. We observe that AO has applied Rule 8D for the purpose of making disallowance of expenditure incurred for earning exempt income u/s. 14A of I.T. Act. However, Ld. CIT(A) has stated that Rule 8D is not applicable to the assessment year under consideration in view of decision of Hon ble Bombay High Court in the case of Godrej Boyce Mfg. Co. Ltd. Vs DCIT 328 ITR 81, as the said Rule 8D is held to be prospective in nature and is applicable from assessment year 2008-09 onwards and accordingly has directed the AO to work out disallowance in following manner: i) Disallow all direct expenses relating to exempt income or asset generating exempt income. ii) Make prorate disallowance of the interest paid by assessee in the ratio of assets from which income is exempt and total assets. iii) While working out the total assets, the AO should not re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st transformation from Financial Company to ITES business company. However, AO did not accept the contention of assessee and stated that it carried on transactions in shares and securities in a systematic and organized manner. There are numerous transactions in shares and securities which constituted its business activities. Hence profits arising to assessee to the share and securities trading should be treated as profits from business and not capital gains. 20. Being aggrieved, assessee filed appeal before First Appellate Authority. 21. Ld. CIT(A) has stated that details of purchase as well as sale dates of shares and units have been furnished and it is observed that minimum period of holding is 3 years whereas in some cases, it is more than 7 years. Ld. CIT(A) has stated that assessee has maintained separate portfolio for investment and stock in trade as shown in annexure A B to the Audited Financial statement. It is only those shares and units which are held for longer period, depicted as investments in balance sheet and only that have been offered under the head Capital Gains. Ld. CIT(A) stated that taking into account all the above facts and circumstances and also co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll amount Commission to AE Aetna Insurance claim processing 497,205,546 15% First Notice - Do - 4,197,284 12% 26. In view of above, TPO stated the difference in rate of commission to (AEs). He has stated that commission paid to AETNA is @ 15% on Rs. 49,72,05,546/- which comes to Rs. 7,45,80,832/- and after calculating differential rate of 3%, which comes to Rs. 1,49,16,166/- suggested an adjustment of it by way of disallowance. Following TPO s order, AO made said disallowance of Rs. 1,49,16,166/- 27. The assessee disputed the said disallowance before First Appellate Authority. 28. Ld. CIT(A) considered the fact that in the earlier assessment year 2004- 05, this issue was examined at length. That TPO had made a fundamental mistake of comparing controlled transactions with another controlled transaction which goes against the basic principle of Transfer Pricing Regulations. It was observed that assessee company had generated total business of Rs. 50,14,02,800/- out of which business pertaining to AETNA amounted to Rs. 49,72,05,546/- which is more than 99% of total business generated by assessee. Therefore 1% of business generated by First Notice ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... establish that payment of commission by assessee to AETNA is excessive and is not at Arm s Length Price. We consider it prudent to state that Section 92 of I.T. Act, 1961 provides that any income arising from an international transaction shall be computed having regard to the ALP. Further Sec. 92C deals with the computation of ALP. Sub-Section (1) of Sec. 92C prescribes that the ALP in relation to an international transactions shall be determined by any of the prescribed methods, which inter alia include TNMM. Rule 10B of I.T. Rules, 1962 provies the mechanism for determination of ALP u/s. 92C. Rule 10B(1)(e)(i) provides that the ALP in relation to an international transaction shall be determined by TNMM by which the net profit margin realized by the enterprises 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 or having regard to any other relevant base. Sub-clause (ii) of clause (e) of Rule 10B(1) provides as under:- the net profit margin realized by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction ..... X X X X Extracts X X X X X X X X Extracts X X X X
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