TMI Blog2017 (10) TMI 1384X X X X Extracts X X X X X X X X Extracts X X X X ..... ore than ordinary, there is no merit in the aforesaid curtailment of deduction under section 10A of the Act. In this regard, we place reliance on the ratio laid down by the Hon’ble Bombay High Court CIT Vs. Schmetz India Pvt. Ltd.[2015 (6) TMI 1044 - BOMBAY HIGH COURT] where the SLP filed has been rejected by the Hon'ble Supreme Court. We also place reliance on the ratio laid down in Honeywell Automation India Ltd. Vs. DCIT [2017 (3) TMI 1533 - ITAT PUNE] and in assessee’s own case relating to assessment year 2006-07. Hence, grounds of appeal Nos.3 to 8 are allowed. Transfer pricing adjustment made by the Assessing Officer with respect to provision of Customer Support Services - comparable selection - Held that:- Where the concern is providing KPO services, then the same is not comparable to the assessee, which is engaged in ITES services. Concerns operating in different business model than the assessee in the year under consideration, the same needs to be excluded from the final set of comparables - ITA No.2544/PUN/2012 - - - Dated:- 30-10-2017 - Ms. Sushma Chowla And Shri D. Karunakara Rao, JJ. Appellant by : Shri Vishal Kalra Respondent by : Ms. Nirupama Kotru, C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f that the said provision seeks to cure. 6. That on the facts and circumstances of the case and in law, the AO/ DRP have erred in not appreciating that the provisions of section 10A(7) read with section 80IA(10) of the Act, could not have been invoked in Appellant's case as the provisions of that section are only applicable to domestic transactions. 7. That on the facts and circumstances of the case and in law, DRP/ AO erred in restricting the deduction under section 10A of the Act to the extent of profit margin earned by John Deere (India) Private Limited ( JDIPL ), i.e. 13.79%, ignoring that business model as the nature of services rendered by appellant are not functionally comparable to JDIPL and hence the profit margin earned by JDIPL ought not to have been taken as a true and correct measure of 'ordinary profits' in computing the disallowance under section 10A(7) of the Act. 8. That on a true and correct interpretation of the provisions of section 10A(7) read with section 80IA(10) of the Act, DRP / AO erred in law and on the facts and circumstances of the case in invoking the said provisions in the absence of establishing the existence of any arrangement& ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aking suitable adjustments as per the provisions of the Act and the Rules. 15. That on the facts and circumstances of the case and in law, the DRP/AO/TPO have erred in not providing the benefit of a 5 percent range to the Appellant as envisaged under proviso to Section 92C(2) of the Act. Each of the above grounds is independent and without prejudice to the other grounds of appeal preferred by the Appellant. 3. The grounds of appeal No.1 and 2 are general in nature and hence, dismissed. 4. The issue raised vide grounds of appeal No.3 to 8 raised by the assessee is against curtailment of deduction claimed under section 10A of the Act by invoking the provisions of section 10A(7) r.w.s. 80IA(10) of the Act. The learned Authorized Representative for the assessee pointed out that the issue in grounds of appeal No.9, 10 and 12 is the TP adjustment made while benchmarking the transactions of customer support service. Further, the grounds of appeal No.11 and 13 have not been pressed by the learned Authorized Representative for the assessee and hence, the same are dismissed as not pressed. The issue in ground of appeal No.14 is in relation to the transfer pricing adjustment and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arties, there was no merit in curtailment of deduction claimed under section 10A r.w.s. 10A(7) r.w.s. 80IA(10) of the Act. He further pointed out that the issue now stands covered by the decision of Hon'ble Supreme Court in CIT Vs. M/s. Schmetz India Pvt. Ltd. in SLP CC No.6097/2016, judgment dated 08.04.2016 and in CIT Vs. M/s. Schmetz India Pvt. Ltd. in SLP CC No.2013/2016, judgment dated 08.02.2016, wherein the Special Leave Petition has been dismissed. He further referred to the order of Hon ble Bombay High Court in the said case, wherein the Hon ble Bombay High Court had considered the findings of the Tribunal and upheld the same. He further referred to the order of the Pune Bench of Tribunal in assessee s own case relating to assessment year 2006-07, wherein the Commissioner had exercised the jurisdiction under section 263 of the Act and had held the order of Assessing Officer to be erroneous and prejudicial to the interest of revenue in granting the deduction under section 10A of the Act. The Tribunal (supra) held that in the absence of any arrangement on the export of services to associated enterprises, the same could not be curtailed by invoking the provisions of secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ordinary profits. The Assessing Officer passed the final assessment order under section 143(3) r.w.s. 144C(13) of the Act. 8. The first issue which has been raised before us is in respect of curtailment of deduction claimed under section 10A of the Act. The assessee was providing high end Design Engineering Services to its associated enterprises and was being remunerated on Man Hourly rate basis, which has been computed applying the CUP methodology. The assessee in the transfer pricing study report to benchmark the Engineering Design Services had applied CUP method as the most appropriate method and the transaction was declared to at arm's length. The TPO in the order passed under section 92CA(3) of the Act has accepted the arm's length price of Engineering Design Services as declared by the assessee. The assessee had shown net profit margins of 68.02% during the year under consideration, which as per the assessee, was not more than ordinary profits since it was providing high end Engineering Design Services. Once the arm's length price of international transactions of provision of Engineering Design Services has been accepted i.e. Man Hourly rates charged by the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ologies (India) Pvt. Ltd. Vs. DCIT in ITA No.2584/PUN/2012 order dated 10-02-2017 which has been applied by the Tribunal further in Tata Johnson Controls Automotive Limited Vs. DCIT (supra). The onus is upon the department to prove that there existed an arrangement between the assessee and its Associated Enterprises to earn more than ordinary profits and in the absence of the said onus having been discharged by the department and following the parity of reasoning as in Honeywell Turbo Technologies (India) Pvt. Ltd. Vs. DCIT and Tata Johnson Controls Automotive Limited Vs. DCIT (supra), we find no merit in the order of the Commissioner passed under section 263 of the Act in holding that the Assessing Officer while granting deduction under section 10A of the Act has passed the said order without any application of mind. Similar issue of invoking of jurisdiction under section 263 of the Act by the Commissioner curtailing the deduction under section 10B(7) r.w.s. 80IA(8) and 80IA(10) of the Act arose before the Tribunal in Spicer India Ltd. Vs. CIT (supra) and the Tribunal vide order dated 08-07-2015 in similar circumstances had reversed the order of the Commissioner passed under secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the assessee. It may also be pointed out herein itself that the total turnover of Engineering Design and Development Services was ₹ 60.67 crorees and under the Design Development Services the total turnover of international transaction was only ₹ 2.66 crores. Because the order of the TPO in this regard has become final and has been accepted by the Assessing Officer under which no addition has been made in the margins shown by the Engineering Design and Development Services, there is no merit in the order of Commissioner in comparing the operating profit margin to cost of the said division shown at 270% with the operating profit margin to cost shown by the BSS segment at 7.39%. Accordingly, the directions of the Commissioner in curtailing the deduction under section 10A of the Act by applying provisions of section 10A(7) r.w.s. 80IA(10) of the Act are not correct and are reversed. The finding of the Commissioner that the assessee had shown higher profits in STPI unit for claiming deduction under section 10A of the Act is thus misplaced. In view thereof we find no merit in the order of the Commissioner passed under section 263 of the Act and reversing the same we hold ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions of law in the present facts and are therefore dismissed. 12. The decision of the Hon ble Bombay High Court in CIT Vs. M/s. Schmetz India Pvt. Ltd. (supra) and in CIT Vs. M/s. Schmetz India Pvt. Ltd. (supra) has been approved by the Hon'ble Supreme Court. 13. Before parting, we may also refer to the decision of the Pune Bench of Tribunal in the case of Honeywell Automation India Ltd. Vs. DCIT (supra), wherein the Tribunal had come to a finding that existence of mere agreement could not by itself mean that there was an arrangement for the purpose of 80IA(10) of the Act. The Tribunal had further held that the provisions of section 10A(7) of the Act were attracted where closely connected parties were taxable in India. In this regard, relevant portion of the Tribunal order dated 25.02.2015 read as under:- 22. Before we proceed further, it would be appropriate to examine the scope and intent of the provisions of section 10A(7) r.w.s. 80-IA(10) of the Act. In this context, a reference has been made to the CBDT Circular No.308 dated 29.06.2008 wherein the reasons for introduction of sub-section (7) to section 10A of the Act has been explained. In-particular, reference h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e presence of the expression the course of business is so arranged . that the business transacted produces to the assessee more than ordinary profits is significant and its understanding has to be prefaced by the legislative objective of plugging abuse of the tax concessions granted u/s 10A of the Act by manipulation of profits between associated parties. In other words, the import of the expression so arranged has to be read in conjunction with the legislative intent that there should not be any abuse of tax concession by manipulation of profits. Therefore, section 10A(7) r.w.s. 80-IA(10) of the Act can be invoked only where it is shown that the course of business is so arranged which reflects an abuse of tax concession whereby the business transacted between two entities is so arranged, which produces to the assessee more than the ordinary profits which might be expected to arise in such eligible business. The emphasis is to eschew those more than the ordinary profits‟ which are as a result of a business between two closely connected concerns having been arranged with the intent of abuse of the tax concession. Ostensibly, in the present case, the Revenue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 80-IA(10) of the Act. Thus, according to the Ld. CIT-DR, in the instant case there is an arrangement and it has lead to production of more than the ordinary profits. According to the Ld. CIT-DR, the meaning of the words so arranged in section 80-IA(10) of the Act only seeks to ensure that there was an agreement between the assessee and associated enterprise. 25. We have carefully examined the aforesaid contentions of the Ld. CIT-DR. In our considered opinion, the import of the expression arranged in section 80-IA(10) of the Act is not to be understood in its plain language but the same has to be understood in the context in which it is placed in the section. Notably, section 80-IA(10) of the Act restricts the plain meaning of the term arranged because it is placed between the words ..the course of business between them is so arranged that the business transacted between them produces to the assessee more than the ordinary profits which might be expected to arise in such eligible business . Therefore, it would necessarily mean that the arrangement‟ referred to is an arrangement of the course of business which produces to the assessee more than the ordin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een rejected by the Hon'ble Supreme Court. We also place reliance on the ratio laid down in Honeywell Automation India Ltd. Vs. DCIT (supra) and in assessee s own case relating to assessment year 2006-07. Hence, grounds of appeal Nos.3 to 8 are allowed. 16. The next issue raised vide grounds of appeal No.9, 10 and 12 is against transfer pricing adjustment made by the Assessing Officer with respect to provision of Customer Support Services amounting to ₹ 1,23,58,027/-. 17. Brief facts relating to the issue are that the assessee had rendered Customer Support Services to its associated enterprises through GSSC India. The assessee was remunerated at cost plus mark up basis i.e. 12.87% for provision of such services to associated enterprises. The Assessing Officer from transfer pricing study report submitted by the assessee noted that GSSC India undertook to provide IT Enabled Back Office services to the associated enterprises. The assessee in the TP study report had selected TNMM method as the most appropriate method to benchmark the international transactions relating to Customer Support Services. As per the TP study report, the operating margins i.e. OP/Total Cost of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which the assessee filed objections before the DRP. However, the DRP upheld the final comparables selected by the TPO and also rejected the arguments of assessee in allowing risk adjustment. The Assessing Officer passed the order under section 143(3) of the Act making an upward adjustment of ₹ 1.23 crores. 19. The assessee is in appeal against aforesaid order of Assessing Officer. 20. The learned Authorized Representative for the assessee drew our attention to the functional profile of the said division which is placed at pages 382 and 386 of the Paper Book-2 and pointed out that the assessee was engaged in facilitating orders, getting orders and taking care of shipment, etc. He further pointed out that though services were on IT enabled platform but were in the line of low end BPO services. The learned Authorized Representative for the assessee referred to the final list of comparables selected by the TPO and pointed out that certain concerns are to be excluded from the final set of comparables and in case the same are excluded, the margins shown by the assessee and the arithmetic mean of the margins of balance comparables would be within +/- 5% range. Accordingly, we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of comparables is Coral Hubs Ltd., which was engaged in KPO services. In this regard, the learned Authorized Representative for the assessee placed reliance on the decision of the Hon ble High Court of Delhi in Rampgreen Solutions Pvt. Ltd. Vs. CIT in ITA No.102/2015, judgment dated 10.08.2015. 26. The learned Departmental Representative for the Revenue placed reliance on the order of TPO. 27. We have heard the rival contentions and perused the record. The Hon ble High Court of Delhi in Rampgreen Solutions Pvt. Ltd. Vs. CIT (supra) has held that there are different factors which have to be judged with reference to service / product characterization and the same cannot be undermined by using broad classification of ITES. The Hon ble High Court of Delhi drew the distinction between BPO service provider and the KPO service provider and held that where the controlled transactions were in the nature of lower end ITeS such as Call Centres, etc. for rendering data processing not involving domain knowledge, in such circumstances inclusion of any KPO service provider as a comparable would not be warranted and the transfer pricing study must take that into account at the threshold. The ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
