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2015 (11) TMI 1545 - ITAT BANGALORE

2015 (11) TMI 1545 - ITAT BANGALORE - TMI - Determination of Arm’s Length Price (ALP) under Sec.92CA - MAM - comparable selection - Held that:- TPO had erred in choosing an external comparable, when there was an internal comparable uncontrolled transaction which the assessee had taken in its TP study - section 10A computation - Held that:- Following the Patni Telecom Pvt. Ltd. [2008 (1) TMI 452 - ITAT HYDERABAD-A] e4e is not involved in rendering technical services outside India, but it in t .....

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ide India solely for the purpose of excluding travel expenses incurred in foreign currency from the ET as envisaged in the definition of ‘export turnover’ as provided in section 10A of the IT Act. Accordingly, the adjustment made by the AO is to be quashed in entirety. We direct the AO to re-work the same. - IT(TP)A No.324(B)/2015, IT(TP)A No.220(Bang.)/2015 - Dated:- 4-11-2015 - SMT ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER AND SHRI JASON P BOAZ, ACCOUNTANT MEMBER Assessee by : Shri Ajith Kumar Jain .....

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business of customer relationship management services and related business process outsourcing services through a variety of customer contract channels such as voice, e mail, chat and web-based services. The company acquired all the business (all assets, liabilities, employees and business) from e4e Tech Support ((India) Pvt.Ltd. a group company, with effect April 1, 2007 on slump sale basis. Consequent to the same, the company has also started rendering infrastructure management services, which .....

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into by the assessee were referred by the learned DCIT, Circle-11(3) to the DCIT (Transfer Pricing)-IV for determination of Arm s Length Price (ALP) under Sec.92CA of the IT Act, 19161 ( The Act). 3.2 The company has adopted transactional Net margin method (TNMM) as the most appropriate method (MAM) to arrive at the ALP which is evident from the Transfer Pricing (TP) Documentation maintained for AY: 2009-10. The Profit Level Indicator (PLI) adopted by the company is operating profit to the tota .....

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ng companies as comparable to the business of the assessee. These 10 companies included 8 new companies and 2 of the companies selected by the assessee in the TP study. Accordingly, the TPO determined the ALP at 27.70- percent based on the profit margins computed for the 10 selected companies after making an adjustment of (0.84) percent towards working capital differences. Subsequently, the TPO passed an order under section 92CA of the Act, making an adjustment to the ALP amounting to ₹ 61 .....

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e of the assessee at ₹ 87,773,397/- and determined the total tax payable at ₹ 33,530,390/- (including interest under section 234B,234C and 234D of the Act). 5. The assessee filed its objections with the Dispute Resolution Panel (DRP) against the said draft assessment order on March 24, 2014. The DRP vide its directions dated November 26, 2014 has upheld the rejection of TP documentation and the filters applied by the TPO. Further, the DRP has suo-moto modified the export filter to 75 .....

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the DRP directed the AO to reduce the telecommunication expenses incurred in foreign currency from both export turnover as well as total turnover. Pursuant to the above directions , the AO passed the final assessment order under section 143(3) r.w.s.144C of the Act, dated December 30,014 (received on January 6, 2015) determining the total income of the assessee at ₹ 100,873,056/- and raised a tax demand of ₹ 42,605,150/-. In the final assessment order the AO has made the following ad .....

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resent case and in any case in violation of the principle of equity and natural justice. Transfer Pricing adjustment b. The DRP and the AO erred in fact and in law in confirming the action of the TPO in making an adjustment amounting to ₹ 76,342,156/-to the ALP of the international transactions of the assessee. c. The DRP and the AO have erred in upholding the action of the TPO in rejecting the TP documentation maintained and the detailed bench marking analysis conducted by the assessee, w .....

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on. e. The DRP and the AO have erred in upholding the action of the TPO in rejecting certain comparables identified by the assessee in its TP study using unreasonable comparability criteria and contrary to facts as evidenced by the audited financial statements of the said companies, despite the arguments submitted by the assessee. f. The DRP and the AO have erred in upholding the action of the TPO in finalizing the transfer pricing order with companies as comparable to the assessee despite such .....

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of operating margins of the comparable companies and the assessee by the TPO thereby ignoring the factual errors and ignoring of certain items which ought to have been considered as operating or non-operating items, as the case may be. i. The DRP and the AO have erred in upholding the action of the TPO in not granting the working capital/risk adjustment as claimed by the assessee. j. The DRP and the AO/TPO erred in law and on facts in upholding the arm s length margin arrived at by the learned T .....

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peal set, after realizing the fact that the assessee renders similar service to both its Associated Enterprises (AE) and its non-AEs for the subject year (this is apparent from the transfer pricing order), the learned Transfer Pricing Officer (TPO) ought to have applied internal transactional net margin method (internal TNMM) for determining the ALP of the assessee. The learned Dispute Resolution Panel (DRP) has erred in upholding the approach followed by the TPO and; b. The DRP has erred in suo .....

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ciated Enterprises (AE) and non-AE s. The counsel relied on the decision in the case of Mylan Labs Ltd. I(TP)A No.179/Bang/2015 and 214/Bang/2015. 7.1 We find that in IT(TP)A No.214/Bang/2015 and IT(TP)A No.179/Bang/15 in the case of M/s Mylan Labs Ltd. at para-10 it has been held as follows; 10. The TPO had applied external TNMM on entity level and on this issue, the Third Member decision of the Mumbai Bench of the Tribunal in the case of M/s. Technimont ICB Pvt. Ltd. v. Addl. CIT in ITA No.460 .....

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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 realised by the enterprise ………………… from a comparable unco .....

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rom a comparable uncontrolled transaction. The word comparable may encompass internal comparable or external comparable. There is cue in the rule itself as to preference to be given to internal comparable uncontrolled transactions vis-à-vis externally comparable uncontrolled transactions. It is because the delegated legislature has firstly referred to the net profit margin realized by the enterprise (internal) from a comparable uncontrolled transaction and, thereafter, it points towards n .....

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earned if the transaction had been with some third party instead of related party. When the data is available showing profit margin of that enterprise itself from a third party, it is always safe and advisable to have recourse to such internal comparable case. The reason is patent that the various factors having bearing on the quality of output. assets employed, input cost etc. continue to remain by and large same in case of an internal comparable. The effect of difference due to such inherent .....

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follow the decision of the Third Member, ITAT Mumbai Bench in the case of M/s. Tecnimont ICB Private Ltd. (supra) wherein it is held that …….. The underlying object behind computing ALP of an international transaction is to find out the profits which such enterprise would have earned if the transaction had been with some third party instead of related party. When the data is available showing profit margin of that enterprise itself from a third party, it is always safe and advisabl .....

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n external comparable. Hence, we conclude our decision as follows; 8. Ground no.1 & 2 are general in nature and needs no adjudication. Ground no.3,4 & 5 are not pressed. Ground no.7,8 & 9 are infructuous and ground no.6 & 10 are allowed. 8.1 With respect to ground no.11, we hereby summarize the proceeding as follows; 8.2 During the course of assessment proceedings for AY: 2010-11 the international transactions entered into by the company were referred by the AO to the TPO for det .....

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ign currency of ₹ 731,249 from the adjusted export turnover and added similar amounts to the adjusted total turnover of the company. Based on such adjustment, the AO re-computed the relief under section 10A of the IT Act at ₹ 25,131,114/- as against a claim of ₹ 26,977,360/- thereby resulting in an upward adjustment of ₹ 1,846,246/- to the total income of the company. The AO was of the view that the aforementioned expenses need to be reduced only from the ET and no such r .....

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ade by the AO in the DAO. The DRP rejected some of the comparable companies adopted by the TPO and consequent to such rejection, the adjustment under section 92CA of the Act increased to ₹ 76,342,156/-. Based on the decision of the KHC in the case of Tata Elxsi Ltd., the DRP directed the AO to reduce the telecommunication expenses and travel expenses incurred in foreign currency from both the IT & TT. As M/s e4e is not a 100 percent export oriented unit, such adjustment from both the E .....

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round no.11. The ground raised in the department appeal in IT(TP)A No.220(B)/2015 is as follows; 1. The directions of the DRP are opposed to law and facts of the case. 2. On the facts and in the circumstances of the case the DRP erred in law in directing the AO to exclude reimbursement of specific expenditure both from the export turnover as well as from total turnover for the purpose of computation of deduction u/s 10A, without appreciating the fact that the statute allows exclusion of such exp .....

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same has not been accepted by the Department and SLPs are pending before the Hon ble Supreme Court. 4. For these and other grounds that may be urged at the time of hearing, it is prayed that the directions of the DRP in so far as it relates to the above grounds may be reversed. 5. The assessee craves leave to add, alter, amend and/or delete any of the grounds mentioned above . 9. The learned counsel for the assessee submitted before us that the telecommunication expenses and travel expenses inc .....

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he term technical service indicates that the assessee needs to provide a particular or specific technical service outside India and expenses incurred in foreign currency in providing those technical services are to be excluded. Accordingly, this clause of exclusion of foreign currency expenditure would be applicable only if the assessee is providing technical services outside India. The above argument has been upheld in the following decisions; Jurisdictional Bangalore Bench of the ITAT in the c .....

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