9911796707
TMI Blog2013 (11) TMI 216X X X X Extracts X X X X X X X X Extracts X X X X ..... 2) of the Act. As there were international transactions, in excess of Rs. 5 Crores entered into by the assessee, in the period under consideration, a reference was made by the Assessing Officer to the Transfer Pricing Officer (TPO) u/s. 92CA(1) of the Act for determination of the Arm's Length Price ('ALP' in short) of those transactions. The details of the international transactions in the relevant period are as under : (i) Back office Expenses : Rs. 11,86,41,555 (ii) Expenses reimbursed by AE : Rs. 1,06,13,403 (iii) Expenses reimbursed to AE : Rs. 1,49,88,146 The TPO after examination of the international transactions passed an order u/s.92CA of the Act vide order dt.15.12.2006 proposing an adjustment of Rs. 2,03,04,850 in respect of the international transactions pertaining to the assessee's BPO services rendered to group companies (viz. AEs). After receipt of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mmunication expenses amounting to Rs. 56,40,267 both from the export turnover and the total turnover, without appreciating the facts and circumstances of the case. 3. The learned CIT (Appeals) has erred in not appreciating that there is no provision in section 10A, which requires telecommunication expenses reduced from the export turnover as per clause (iv) of Explanation 2 to section 10A, to be reduced from the total turnover also. 4. The learned CIT (Appeals) was not justified in allowing relief of Rs. 53,25,814 out of the adjustment made by the Assessing Officer under section 92CA of the IT Act, 1961 by directing the Assessing Officer to adopt the mean PLI of 34.335% as reduced by 5% i.e. At 29.335%, without appreciating the facts and circumstances under which the adjustment was made by the Assessing Officer based on the TPO's order. 5. The learned CIT (Appeals) was not justified in holding that the assessee was entitled to a standard deduction of 5% from the arithmetical mean of the profit margin of the comparables under the proviso to section 92C(2) of the IT Act, 1961 while computing the arm's lengt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t was required to be recomputed in consequence of the CIT(A) direction to exclude 2 (two) of the comparables selected by the TPO. 12. For these and such other grounds that maybe urged at the time of hearing, it is humbly prayed that the order of the CIT (Appeals) be reversed in so far as the above mentioned issues are concerned and that of the Assessing Officer be restored. 13. The appellant craves leave to add, to alter, to amend or to delete any of the grounds that may be urged at the time of hearing of the appeal." Assessee's appeal in ITA No.661/Bang/2011 - Assessment Year 2004-05 4.0 Transfer Pricing Issues 4.1 The approach of the assessee and the TPO In the relevant period, the international transactions entered into by the assessee were as under : (i) Back office Expenses : Rs. 11,86,41,555 (ii) Expenses reimbursed by AE : Rs. 1,06,13,403 (iii) Expenses reimbursed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rd deduction of 5% from the arithmetic mean of the profit margin of comparables and also granted an adhoc working capital adjustment of 3.2% as against 2% granted by the TPO. Transfer Pricing Adjustment 5.1 In ground No.1, the assessee has challenged the order of the learned CIT(A) in computing the cost plus mark up of the assessee at 29.33%, thereby partially sustaining a transfer pricing adjustment of Rs. 1,49,75,036 as against the T.P. Adjustment of Rs. 2,03,04,850 made by the TPO. At the outset the learned A.R. submitted that the facts of this case are similar to the case of 24/7 Customer.Com (P.) Ltd. v. Dy. CIT [2013] 140 ITD 344 wherein the co-ordinate Bench of the Bangalore ITAT rendered its order in and also that the comparables selected by the TPO in the case on hand is the same as those in the cited case. The learned A.R. submitted that the only issue of contention is the issue of selection of the correct comparable companies for the determination of the ALP of the international transactions entered into by the assessee in the relevant period under consideration. We, therefore, now proceed to examine the individual companies chosen by the TPO as comparables. 5.2 Nucle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the case of Asstt. CIT v. Maersk Global Services Center (India) (P.) Ltd. [2011] 133 ITD 543 which held that since VITL is outsourcing most of its work it has to be excluded from the list of comparables whereas the assessee in the cited case was carrying out the work by itself. This, the learned AR submitted that view was followed by co-ordinate benches of the Bangalore Tribunal in the cases of - (i) Netlink India (P.) Ltd. [IT Appeal No. 454 (Bang.) of 2011, dated 19-10-2012] and (ii) 24/7 Customer Com. (P.) Ltd. (supra) wherein was held that VITL needs to be excluded from the list of comparables. 5.4.2 We have heard both parties and have perused and carefully considered the material on record. We find from the cited cases that, there is a clear finding that, in the period under consideration, VITL was outsourcing most of its work whereas the assessee therein was carrying out the work by themselves. In the case on hand also, the assessee was carrying out its work by itself, whereas VITL is outsourcing most of its work. We are of the considered opinion that the decision of the co-ordinate bench in the case of 24/7 Customer.Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rating in the ITES sector has no software product intangibles, whereas, in the case of Tricom India Ltd., it is on record that it owns software product intangibles by which it provides niche services to its customers. The issue of whether Tricom India Ltd., is to be taken as a comparable, for Assessment Year 2004-05, with ITES entities having no intangibles of their own was considered in detail by a co-ordinate bench of this Tribunal in the case of 24/7 Customer.Com (P.) Ltd. (supra) at paras 15.0 to 15.3.3 thereof. At para 15.3.3 of this order, the Tribunal held that this company, Tricom India Ltd., requires to be excluded from the list of comparables observing that :- "......... On appraisal of the submissions and the material on record, it would certainly stand to reason that a company having unique software developed in house which also renders specialized services in its area of specialization gets that sort of competitive edge that gives it an advantage. Applying the principle that companies which are on similar standards only should be taken as comparables, we hold that this company which has unique intangibles cannot be taken as a comparable for th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wns web based unique software "Finetran", etc. by which it provides niche services to its customers. The issue of whether Fortune Infotech Limited is to be taken as a comparable for Asst. Year 2004- 05 with ITES entities having no intangibles of their own was considered in detail by the co- ordinate bench of this Tribunal in the case of 24/7 Customer.Com (P.) Ltd. (supra) at paras 15.0 to 15.3.4 thereof. At para 15.3.4 of this order, the Tribunal held that this company; Fortune Infotech Limited requires to be excluded from the list of comparables observing that - "...On perusal of the details furnished and submissions made, it is seen that this company has developed its own software called "Finetran" and "image index" for performing specialized services in medical transcription and patient record management. On appraisal of the same, we are of the opinion that this comparable company has developed unique software from which it would derive substantial benefits /advantages when compared with the assessee which is undertaking pure call centre services. Applying the principle that companies which are on similar standards only should be taken as comparables, w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee's case for Asst. Year 2004-05. 5.8.1 Ultramarine Pigments Limited The learned A.R. vehemently argued for exclusion of this company from the list of comparables for the following reasons : (i) The assessee is engaged in a host of services such as Laundry and Allied Services, packaging products and others besides ITES; (ii) The TPO has considered the segmental margins for call centre activities which constitute only 16% of total margin while determining the comparability with the assessee / taxpayer. (iii) The company has earned a margin of 63.27% and has been rejected as an outlier by the learned CIT(A) in the appellate order for A.Y. 2004-05 which is the subject matter of this appeal. (iv) Comparable companies using segmental financials are to be excluded on the basis of the decision of the ITAT, Mumbai in the case of DHL Express (I) (P.) Ltd. (supra). In view of the above submissions, the learned A.R. pleaded that the order of the learned CIT(A) excluding this company from the list of comparables be upheld. 5.8.2 Per contra, the learned Departmental Representative in s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ' was considered by a co-ordinate bench of this Tribunal in the case of M/s. Netlink India Pvt Ltd (ITA No.454/Bang/2011) to which both of us were a party. In that order, it was held that the word 'super' is a superlative word which denotes something extraordinary and noted that in al the cases / decisions where these super profit making companies were directed to be excluded, the TPO was comparing cases like Infosys, Wipro, etc. where the turnover was more than 10 times that of the assessee or the profit margin was abnormally high. In the case of Exxon Mobile Company India Pvt Ltd v. DCIT (ITA No.8311/Mum/2010 dt.10.6.2011), the ITAT, Mumbai held that : "A comparable cannot be eliminated just because it is a loss making unit. Similarly, a higher profit making unit cannot also be automatically eliminated just because the comparable company earned higher profits than the average. In other words, as a general principle, both loss making unit and high profit making unit cannot be eliminated from the comparables unless, there are specific reasons for eliminating the same which is other than the general reason that the comparable has i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted expenses in the ratio of sales, which also cannot be faulted. Respectfully following the action of decision of the co-ordinate bench of the Tribunal in the case of 24/7 Customer.Com (P.) Ltd. (supra) as laid out above, we hold that the decision of the learned CIT (Appeals) in excluding Ultramarine Pigments Ltd as a comparable company on account of super profits is erroneous as it is not in keeping with the principle laid down and the finding of the co-ordinate bench of this Tribunal in the case of Netlink India (P.) Ltd. (supra) and in the case of 24/7 Customer.Com (P.) Ltd. (supra) on the issue of 'Super Profits'. We, therefore, reverse the decision of the learned CIT (Appeals) and direct that Ultramarine Pigments Ltd. be retained as a comparable for the assessee's case for Assessment Year 2004-05. In view of this finding, revenue's grounds at S.Nos.8 to 10 are allowed. 5.9.1 Allsec Technologies Ltd . Both the assessee and the TPO have no dispute that this company is a comparable company to the assessee. It is the learned CIT (Appeals) who in his order has directed the exclusion of this company from the list of comparables holding this company to be an outlier with abnormall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... list of comparables. From the details on record, it is seen that the assessee has objected to the exclusion of the following companies : (i) Ace Software Exports Ltd. (ii) MCS Limited. (iii) Tata Share Registry Ltd. 6.1.1 Ace Software Exports Limited The learned Authorised Representative submitted that this company is engaged in providing CAD-CAM services which are in the nature of ITES and therefore ought to be accepted as a comparable. It was also submitted that the TPO had erred in rejecting this company as a comparable on the basis that it had entered into an agreement with Apex Data Services Inc., USA on buy back of 100% of production and for the reason that it supplies 100% of its services to a single enterprise. It is prayed that this company be included in the list of comparables. 6.1.2 We have heard both parties and carefully perused and considered the material on record. We find that the co-ordinate bench of this Tribunal in the case of 24/7 Customer.Com (P.) Ltd. (supra) in its order in for Assessment Year 2004-05 has held that this company needs to be excluded from the list of comparables. In para 18.2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nbsp; (a) Conditions prevailing in the export and domestic market in which the respective parties to the transactions operate are different. (b) Geographical locations (domestic and export) are different. (c) Size of the markets (domestic and export) to which companies cater to are different. (d) Cost of labour and capital in the markets (domestic and export) are different. (e) Overall economic development and level of competition is different. (f) Government incentives like tax incentives etc are available only for exporters. (g) As the pricing for services differs in the domestic market vis-à-vis the export market, the level of competition, size of the market etc are different in the domestic and export sectors. In view of the facts of the matter as discussed above, we uphold the action of the TPO in rejecting these two companies as comparables or the assessee on the ground of both functional dis-similarity and also for failing the export filter." Respectfully following the aforesa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... non-STP unit is required to be set off against the income of the other STP unit before allowing deduction under section 10A of the amended Act? (ii) Whether the Tribunal was correct in holding that the deduction under section 10A or section 10B of the Act during the current assessment year has to be allowed without setting off brought forward unabsorbed losses and the depreciation from earlier assessment year or current assessment year either in the case of non-STP units or in the case of the very same undertaking?" (Emphasis supplied) 7.4 The relevant findings of the Hon'ble High Court at paras 19, 20, 31 to 33 reads as follows:- "19. It is after the deduction under Chapter VI-A that the total income of an assessee as arrived at. Chapter VI-A deductions are the last stage of giving effect to all types of deductions permissible under the Act. At the end of this exercise, the total income is arrived at. Total income is thus, a figure arrived at after giving effect to all deductions under the Act. There cannot be any further deduction from the total income as the total income is itself arrived at after all deductions. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions of the Act would apply. The profits derived by him from the STP undertaking would suffer tax in the normal course subject to various provisions of the Act including those of Chapter VI-A. If in such a year, the assessee has suffered losses, such losses would be subject to inter source and inter head set off. The balance if any thereafter can be carried forward, for being set off against profits of the subsequent assessment years in the normal course. Unabsorbed depreciation also merits a similar treatment. 33. As the income of 10-A unit has to be excluded at source itself before arriving at the gross total income, the loss of non 10-A unit cannot be set off against the income of 10-A unit u/s 72. The loss incurred by the assessee under the head profits and gains of business or profession has to be set off against the profits and gains if any, of any business or profession carried on by such assessee. Therefore as the profits and gains under section 10-A is not be included in the income of the assessee at all, the question of setting off the loss of the assessee of any profits and gains of business against such profits and gains of the undertaking woul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ision of the Chennai Special Bench of ITAT in the case of ITO v. Sak Soft Ltd. [2009] 30 SOT 55. The learned Departmental Representative supported the order of the Assessing Officer on this issue and sought reversal of the finding of the learned CIT (Appeals) on this issue. 11.2 The learned Authorised Representative supported the finding of the learned CIT (Appeals) in directing the Assessing Officer to recompute the deduction under section 10A of the Act by reducing telecommunication expenses from both the export turnover as well as the total turnover. The learned Authorised Representative submitted that this issue as held by the learned CIT (Appeals) is squarely covered in favour of the assessee by the decision of the Hon'ble jurisdictional High Court of Karnataka in the case of CIT v. Tata Elxsi Ltd. and therefore revenue's grounds are liable to be dismissed. 11.3.1 We have heard the rival submission and perused the material on record. The Hon'ble Karnataka High Court in the case of Tata Elxsi Ltd. (supra) had held that while computing the exemption u/s 10A, if the export turnover in the numerator is to be arrived at after excluding certain expenses, the same should also be ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or of the formula. If the export turnover in the numerator is to be arrived at after excluding certain expenses, the same should also be excluded in computing the export turnover as a component of total turnover in the denominator. The reason being the total turnover includes export turnover. The components of the export turnover in the numerator and the denominator cannot be different. Therefore, though there is no definition of the term 'total turnover' in section 10A, there is nothing in the said section to mandate that, what is excluded from the numerator that is export turnover would nevertheless form part of the denominator. When the statute prescribed a formula and in the said formula, 'export turnover' is defined, and when the 'total turnover' includes export turnover, the very same meaning given to the export turnover by the legislature is to be adopted while understanding the meaning of the total turnover, when the total turnover includes export turnover. If what is excluded in computing the export turnover is included while arriving at the total turnover, when the export turnover is a component of total turnover, such an interpretation would run counter to the legislativ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Since export turnover has been defined by Parliament and there is a specific exclusion of freight and insurance, the expression "export turnover" cannot have a different meaning when it forms a constituent part of the total turnover for the purposes of the application of the formula. Undoubtedly, it was open to Parliament to make a provision which has been enunciated earlier must prevail as a matter of correct statutory interpretation. Any other interpretation would lead to an absurdity. If the contention of the Revenue were to be accepted, the same expression viz. 'export turnover' would have a different connotation in the application of the same formula. The submission of the Revenue would lead to a situation where freight and insurance, though these have been specifically excluded from 'export turnover' for the purposes of the numerator would be brought in as part of the 'export turnover' when it forms an element of the total turnover as a denominator in the formula. A construction of a statutory provision which would lead to an absurdity must be avoided. Moreover, a receipt such as freight and insurance which does not have any element of profit cannot be included in the total t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5% as per the proviso to section 92C(2) of the Act while computing the ALP. This the learned Departmental Representative contends was done by the learned CIT (Appeals) without taking into account the amendment introduced in section 92CA of the Act brought by Finance (No.2) Act, 2009 with effect from 1.10.2009 and as per the amendment operating retrospectively from 1.4.2002 introduced in section 92C(2A) of the Act as per Finance Act, 2012. In view of these amendments, the learned Departmental Representative submitted that, the assessee was not entitled to the standard deduction of 5% from the arithmetic mean of the profit margin of the comparables and prayed that the same be withdrawn by allowing the grounds raised by revenue. 12.2.1 We have heard both parties on this issue. It is a matter of record that the learned CIT (Appeals) has allowed the assessee a standard deduction of 5% from the arithmetical mean of the profit margin of the comparables under the proviso to section 92C(2) of the Act while computing the ALP, thereby directing the Assessing Officer to adopt the Mean PLI at 29.335%. This issue is now covered against the assessee in view of the amendment to the IT Act, 1961 w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... against 2% allowed by the TPO. The learned Departmental Representative contends that while the TPO allowed working capital adjustment at 2% based on the list of 8 comparables taken whereas the learned CIT (Appeals)'s order allowing working capital adjustment 3.2% was both baseless and erroneous since the working capital adjustment was required to be recomputed only after taking into account the exclusion or inclusion of comparables pursuant to the orders of the appellate authorities. In this view of the matter, the learned Departmental Representative prayed that the order of the learned CIT (Appeals) allowing the assessee a working capital adjustment of 3.2% be set aside and the Assessing Officer be directed to recompute the working capital adjustment in keeping with the orders of the Tribunal on the basis of the final list of comparables after inclusion / exclusion of comparable companies as ordered. 14.2 The learned Authorised Representative supported the order of the learned CIT (Appeals). 14.3 We have heard both parties and carefully perused and considered the material on record. It is seen from the order of the learned CIT (Appeals) that he has disregarded the working capit ..... X X X X Extracts X X X X X X X X Extracts X X X X
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