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TMI Blog2020 (5) TMI 548X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee to its Associated Enterprises (AEs) includes financial analysis and reporting functions such as standard reporting/analysis, work-in-progress details, time sheet details etc., accounting centre processing activities/functions such as accounts receivable, accounts payable functions, billing analysis and invoice preparation etc and financial assistance/administration functions such as time and expenses review, helpdesk providing assistance on employee queries etc. The assessee is remunerated at "cost plus" basis for the services provided to its AEs. 3. The assessee adopted TNMM method to benchmark its international transactions and adopted Operating Profit/Operating Cost (OP/OC) as Profit Level Indicator (PLI). The assessee made Transfer pricing adjustment of Rs. 8,11,70,000/- voluntarily to its financial results. It also included foreign exchange gains as part of its operating income. Accordingly, it worked out the PLI at 28.86%. The arithmetic mean of PLI of comparable companies selected by the assessee worked out to 18.53%. Accordingly, the assessee claimed that its international transactions with the AEs are at arms length. The Transfer Pricing Officer (TPO), however ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd accordingly directed the AO to disallow the claim. The AO, accordingly, passed the final assessment order in pursuance of directions given by Ld DRP. 5. Aggrieved by the directions given by Ld DRP, both the parties are in appeal before us. 6. We shall first take up the appeal filed by the Revenue. Ground No.1,11 & 12 are general in nature. The ground no.2 & 3 relate to the direction of Ld DRP to allow deduction of telecommunication expenses and foreign travel expenses from Total turnover also while computing deduction u/s 10A/10AA of the Act. We notice that the Ld DRP has followed the binding decision rendered by the Hon'ble jurisdictional High Court in the case of Tata Elxsi Ltd (2011)(247 CTR 334)(Kar.) in giving the said direction. Since the Ld DRP has followed the decision rendered by the jurisdictional High Court in directing the AO to exclude telecommunication & foreign travel expenses both from Export turnover and Total turnover while computing deduction u/s 10A/10AA of the Act, we do not find any reason to interfere with the said direction. 7. In Ground No.4 and 5, the revenue is aggrieved in exclusion of two comparable companies, viz., M/s E-Clerx Services Ltd and M/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g Solutions India (P) Ltd (IT(TP)A No.1316/Bang/2012 dated 14.08.2013 for AY 2008-09), the co-ordinate bench has held as under:- "12.......As far as Acropetal Technologies Ltd is concerned, this company does the business of export of software services. It is also seen from segmental revenue of this company (Note 15 to the notes on accounts to Annual report 07-08) that it derives income from engineering design services and software development services. It is also pertinent to point out that before the TPO, the assessee raised an objection that this company performs different functions and mainly engaged in the area of software development services and engineering design services. The TPO in his order has observed that the services rendered by this company fall in the definition of ITES. 13. We have considered the submissions of the learned counsel for the Assessee. On a perusal of the Note No.15 of notes to accounts which gives segmental revenue of this company, it is clear that the major source of income for this company is from providing Engineering Design Service and Information Technology Services. The functions performed by the Engineering Design Services segment of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Ld DRP, following the decision rendered by the co-ordinate bench in the case of SAP Labs India (P) Ltd vs. ACIT (2011)(44 SOT 156)(bang.) held that the foreign exchange gain should be considered as part of operating income. The revenue is aggrieved. 12. We heard the parties on this issue and perused the record. We notice that the Ld DRP has followed the decision rendered by the coordinate bench in the case of SAP labs India (P) Ltd (supra). Identical view has also been expressed by another co-ordinate bench in the case of CISCO Systems (India) Private Ltd (IT(TP)A No.271/Bang/2014 dated 14.08.2014. Accordingly, we do not find any infirmity in the direction given by Ld DRP on this issue. 13. Ground No.10 urged by the revenue relates to the direction given by Ld DRP to apply export filter in ITES segment. The contention of the revenue is that the said direction actually amounts to setting aside the draft order and hence the same is beyond the scope of the DRP. We notice that the Ld DRP has applied the export filter on all the comparable companies and since one of the comparable companies selected by the TPO named M/s Sundaram Business Services Ltd failed this filter, the Ld DRP h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndered by the co-ordinate bench in the case of I-Gate Global Solutions Ltd (2007)(112 TTJ 1002) is distinguishable. Accordingly the Ld DRP directed the AO to disallow the deduction claimed u/s 10AA in respect of Voluntary Transfer pricing adjustment. 18. We heard the parties on this issue and perused the record. The Ld A.R submitted that the Ld DRP was factually not correct in observing that the assessee did not furnish details of voluntary Transfer pricing adjustment. It has added the amount of voluntary TP adjustment while computing the revised margin of the assessee, which is placed at page 680 of the paper book. He further submitted that the assessee has arrived at the amount of voluntary T.P adjustment in a scientific manner by comparing the margins of comparable companies selected by the assessee. Accordingly he submitted that the Ld DRP was not justified in observing that the same is an adhoc amount. He further submitted that the coordinate bench has held in the case of I-Gate Global Solutions Ltd (supra) has held that the assessee is eligible for deduction u/s 10AA on the amount of voluntary TP adjustment. He submitted that the decision of the Tribunal in the above said c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transactions entered into by the assessee is notional income in the hands of assessee. This is the basic point which has to be kept in mind while adjudicating the issue raised in the present appeal. 16. Under section 92CA of the Act, where a person has entered into an international transaction in any previous year with its associated enterprises, then in order to benchmark the arm's length price of such an international transaction and to compute its arm's length price under section 92C of the Act, reference is to be made to the TPO by the Assessing Officer under the specified conditions, who in turn has to compute the said arm's length price in the hands of assessee. 17. Section 92C(4) of the Act provides that where an arm's length price is determined under sub-section (3), then the Assessing Officer may compute total income of assessee having regard to the arm's length price so determined. In other words, the Assessing Officer is empowered to compute total income of assessee in relation to international transactions undertaken by the assessee with its associated enterprises. The proviso therein provides that no deduction under section 10A/10AA or 10B or C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he profits derived from export of articles or things of computer software and the profits of business of undertaking. The additional income is on the basis of artificial/notional income computed in the hands of assessee under the provisions of section 92(1) of the Act. The case of CIT(A) is that the assessee has failed to bring into country the export proceeds in foreign exchange in respect of such additional income offered and consequently, no deduction under section 10A of the Act is to be allowed. The connected aspect of the issue is that there is no dispute in the minds of authorities below that it is profits of business. Such profit of business is neither export turnover nor the total turnover of assessee but is artificial income which needs to be taxed in the hands of assessee. Consequently, we hold that the said artificial income cannot be part of export turnover or total turnover though it will be part of profits of business. Simile which follows is that in the absence of it being offered as export turnover or total turnover, then there could not be any condition for getting foreign exchange to India. The assessee has computed the additional income by following the transf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -section shall be ninety per cent of the profits and gains derived by an undertaking from the export of such articles or things or computer software : Provided also that no deduction under this section shall be allowed to any undertaking for the assessment year beginning on the 1-4-2010 and subsequent years." 18. Section 10A(4) has also been amended with effect from 1-4- 2001. Before amendment, the profit derived from export of articles or things was the amount which bears to the profit of the business, the same, proportion as the export turnover in respect of such article or thing or computer software, bears to the total turnover of the business. With effect from 1-4-2001, instead of profits of the business, the words 'profit of the business of the undertaking have been substituted. The word 'undertaking' has not been defined under section 10A. The words 'industrial undertaking' have been defined in the book Law Lexicon by Venkataramiya, at p. 1133 it has been defined as under :- "The expression 'industrial undertaking' must have a technical and economic content. An industrial undertaking would normally be in its ordinary excitation some industria ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... independent unit, then it will be treated as independent undertaking and the assessee cannot be forced to have exemption in respect of such independent undertaking. In that case the loss will (not) be adjusted against other income. 21. The last grievance is in respect of not allowing deduction under section 10A on the adjustment made by the assessee to the arm's length price. 22. In the instant case, the assessee company entered into transaction with associated enterprise. The assessee company determined arm's length price and accordingly made adjustment to the income because arm's length price determined was more than the consideration, at which the transactions were shown in the books of account. The deduction under section 10A has not been allowed as per proviso to section 92C(4). As per this proviso, no deduction under section 10A or 10B or under Chapter VI-A is to be allowed in respect of amount of income, by which the total income of the assessee is enhanced after computation of income under the sub-section. The. learned Authorised Representative during the course of proceedings has referred to the word 'enhanced'. In case the income is enhanced, then ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessing Officer. That mistake has been corrected by the Tribunal by setting aside the order passed by the Commissioner as well as the assessing authority. 6. In that view of the matter, we do not see any error committed by the Tribunal in the impugned order. Therefore, the said question is also answered in favour of the assessee and against the Revenue." 23. The issue thus, has been decided by the Hon'ble High Court of Karnataka in the case of iGate Global Solutions Ltd. (supra), wherein the assessee's claim for deduction under section 10A of the Act in respect of suo-moto TP adjustment made by the assessee, has been allowed. 24. The Bangalore Bench of Tribunal in a later decision in the case of Austin Medical Solutions (P.) Ltd. (supra) has applied the said proposition of the Hon'ble High Court of Karnataka (supra) and had allowed the deduction claimed under section 10A of the Act in respect of suo-moto TP adjustment amounting to Rs. 28,61,352/- while determining the arm's length price of international transactions. 25. The learned Departmental Representative for the Revenue on the other hand, had placed reliance on the ratio laid down by Mumbai Bench of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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