TMI Blog2013 (1) TMI 794X X X X Extracts X X X X X X X X Extracts X X X X ..... ss loss - Held that:- deduction under section 10A is undertaking specific and should be computed without considering the losses of other industrial units, which is a non-STP unit - Decided in favor of assessee - ITA No.908 /Bang/2011 - - - Dated:- 29-1-2013 - SHRI N BARATHVAJA SANKAR, VICE PRESIDENT AND SHRI GEORGE GEORGE K, JUDICIAL MEMBER For the Appellant : Shri Padam Chand Khincha, C.A. For the Respondent : Shri S K Ambastha, CIT (DR-I), ITAT ORDER PER GEORGE GEORGE K : This appeal, at the instance of the assessee, is directed against the assessment order passed under section 143(3) rws 144C of the Act, in pursuance to the direction of the Dispute Resolution Panel (DRP) dated 23.8.2011. The relevant assessment year is 2007-08. 2. Briefly stated, the facts of the case are as follows:- The assessee is a company. It is engaged in the business of providing software development and IT enable services (Call Centres). The assessee exports the services to the Associated Enterprises (AE) and other clients. During the relevant assessment year, the assessee had entered into international transaction with its AE (as reported in Form No.3CEB) for sof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ify the price charged in the international transaction with its AE. According to the assessee, since adequate data was available with it, the net margin earned from services rendered to its AE was compared with the net margin earned on the services rendered to the non-AE (hereinafter referred to as Internal TNMM ). The comparables chosen for this exercise where the companies situated outside India to whom the assessee exported software much like the AE to whom also the software had been exported. Based on the comparison of the net margin earned from AE and non-AE (Internal TNMM), the assessee concluded that its transaction with the AE was at arm s length price. 3.2 The TPO issued show-cause notice dated 21/6/2010 (page 62 to 79 of the paper book filed by the assessee). The notice had proposed redetermining the arm s length price for the software development services. The notice contained remark on the assessee s study, new search methodology comparables proposed (28) and the copies of the reply received under section 133(6) from other companies. In reply to the show-cause notice, a detailed reply was filed by the assessee on 6/9/2010 raising various objections to the proposed a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er by the taxpayer or by the TPO in its final comparable set and which may not be finding place in this order. In essence, any disturbance in any one of the criteria of the taxpayer or the TPO results in fresh comparability analysis and the TPO should be given an opportunity if such situation arises . 3.3 The assessee filed detailed objections with the DRP on 21/1/2011 (pages 647 to 820 of the paper book-I filed by the assessee). Further, additional submissions were made before the DRP on 5/7/2011 (pages 821 to 827 of the paper book-I filed by the assessee). However, the objections raised by the assessee were rejected by the DRP. The Assessing Officer had, accordingly, incorporated the TP adjustments, as suggested by the TPO, while determining the total income. 3.4 Before us, the learned AR filed written submission dated 21/2/2012. The substance of the same is reproduced below for ready reference:- During the year under consideration, the appellant rendered software development services to its AE. The appellant also rendered software development services to overseas third parties and domestic clients. The total revenues in the software segment was ₹ 24,18,89,627. This ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TION (Page 82 to 84 of PB-I) The appellant incurs various costs in rendering software development services. These costs comprises of direct costs, indirect costs and other general administration costs. The appellant allocated the salary cost (except gratuity and management/support salary) based on the time spent by employees for various segments viz AE exports, Non- AE exports and domestic. Gratuity and management/support salary cost was apportioned based on revenue. The salary of employees engaged in other than software development activities (like finance, admin etc) was allocated based on revenue. The appellant allocated staff welfare, staff recruitment and training and security and office maintenance expenses based on employee head count. Other expenses where actual were identifiable were booked accordingly. All the other expenses were allocated based on revenue ratio. PLI AND MARGIN COMPUTATION The appellant adopted operating profit to operating cost as the Prime Level Indicator (PLI). The net operating margin on cost of AE and Non AE transactions was as below: Particulars AE Non-AE ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the arm s length price. Large portions of the order u/s 92CA are borrowed or copied from the orders passed for other software companies (various such examples are detailed on page 657 658 of the PB-I Part 2). In the TP Order, the TPO has proceeded as if the appellant had selected external TNMM (refer page of 5 of the TP Order) and had performed a search on Prowess and Capital-line database. Various submissions which were never made by the appellant have been recorded and thereafter rebutted. The Order u/s 92CA appears to be a mechanical exercise. It is a reproduction largely of Orders passed in other cases. In this process, the TPO has overlooked the essence of the comparability exercise undertaken by the appellant. The initial notice from the TPO does refer to the internal TNMM. However, in the final order, there is not even a whisper of the same or about various contentions urged. The Order u/s 92CA has been passed routinely and without application of mind. The order so passed is bad in law and hence liable to be quashed. The appellant submits that internal comparables are more appropriate and are to be given precedence over external comparables. The computation of arm s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he appellant and rejecting transfer pricing analysis of the appellant In para-4 of the TP order, the TPO detailed for rejection of comparable selected by the assessee. In the selected comparables, the financial result for the year ending 31/03/2005, 31/03/2006 and 31/03/2007 were considered whereas the TPO applied financial data for F.Y.2006-07 only. Secondly, the companies engaged in software development were considered as comparable irrespective of verticals horizontals of software services . 3.4.2 In rebuttal, the assessee submitted as follows:- The appellant submits that it had used internal comparable (adopting TNMM as the most appropriate method) to justify the price charged in international transactions. Therefore, the contention of the learned DR that the appellant used data relating to earlier years is without basis . 3.5 We have heard the rival submissions and perused the materials on record. As rightly pointed out by the learned AR, the internal comparables are more appropriate and are to be given precedence over external comparables. The computation of arm s length price in case of TNMM is done as per Rule 10B(1)(e). The Rules reads as follows: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... found and accepted at Arm s Length Price (ALP) can be taken as a comparable being an internal comparable for computation of (sic-arm) ALP of an international transaction with another AE? 3.6.1 The Hon ble Third Member observed that the internal uncontrolled transaction/comparable is to be given preference to the external comparables. The relevant finding of the Hon ble Tribunal at para 10 reads as follows:- 10. Clause (i) of Rule 10B(e) stipulates that net profit margin from an international transaction with an AE is computed in relation to cost incurred or sales effected or assets employed etc. Clause (ii) is material for the present purpose. It provides that the net profit margin realized by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base. The base of this provision takes one back to clause (i) which refers to cost incurred or sales effected or assets employed or to be employed. On splitting clause (ii) into two parts, it divulges that the reference is made to internal and external comparables. One part of clause (ii) refers to the net profit margin re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oftware development services. The TPO had raised doubts about the apportionment of salary and other expenses between the AE and non AE segment. The TPO also raised doubts about the functional dissimilarity and billing models between the AE and non AE transactions. The relevant portion of TPO notice proposing to reject the internal TNMM applied by the assessee reads as follows: 3. --------------------------------------------- Rejection of TP Document The taxpayer is rendering software development services to both AE and Non-AE. The taxpayer has compared the services, direct costs, indirect costs and other general administration costs with its Non-AE. The taxpayer has stated that these expenses were incurred for all the segments of the AE, Non-AE and Domestic. The taxpayer has compared the PLI of the AE and Non-AE which is at 5.46% and 6.58% respectively. Based on these assumptions the taxpayer considers the transactions are at Arm s Length Price. The Internal TNMM applied by the Taxpayer is rejected for the following reasons:- (i) The nature and services rendered to Non-AE and AE may not be similar. In this regard please produce copies of agreement with Non- AE; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uted the business loss at ₹ 77,58,532/- after claiming deduction of ₹ 61,39,512/- under section 10A of the Act. The Assessing Officer had held that deduction under section 10A is to be allowed from the total income computed after setting off of the loss of other units. After setting off of the loss of other units (non-10A unit), 10A deduction was considered as NIL. 4.1 It was submitted before us that deduction under section 10A is undertaking specific and should be computed without considering the losses of other units (non STP unit). It was stated that the contention of the assessee is supported by the judgment of the Hon ble High Court of Karnataka in the case of ACIT v Yokogawa reported in 341 ITR 385 (Kar.). 4.2 The learned DR present was duly heard. 4.3 We have heard the rival submissions and perused the materials on record. The Hon ble jurisdictional High Court in the case cited supra had categorically held that section 10A is allowable without setting off of losses of the other units. The relevant finding of the Hon ble jurisdictional High Court at paras 18, 19 29 to 31 reads as follows:- 18. It is after the deduction under Chapter VI-A that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income of the assessee. It is only after the deduction of the said profits and gains, the income of the assessee has to be computed. 30. The provisions of this sub-section will apply even in the case where an assessee has opted out of section 10A by exercising his option under sub-section (8). As discussed, it is permissible for an assessee to opt in and opt out of section 10A. In the year when the assessee has opted out, the normal provisions 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. 31. 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 un ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
