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2016 (3) TMI 1184 - AT - Income TaxTPA - TP adjustment in respect of transactions with non-AEs? - Held that - As the entire exercise under Chapter-X is confined to computing total income of the assessee from international transactions having regard to the arm s length price, there is no scope for computing income from noninternational transactions having regard to the ALP. As the TPO has computed the transfer pricing adjustment qua all the transactions carried out by the assessee under this segment with reference to the base of total costs , also inclusive of costs relevant for transactions with non- AEs, we vacate the impugned order to this extent and restore the matter to the file of the TPO/AO for recalculating the amount of addition of transfer pricing adjustment by taking into consideration the international transactions only under this segment, to the exclusion of transactions with non-AEs. Computation of Operating costs - Personnel expenses - Held that - Since the revenue from this international transaction representing 150% is ₹ 7,30,47,418, we hold that the employee cost for rendering ITES be taken at ₹ 4,86,98,278 (Rs.7,30,47,418 100/150). The remaining employee cost is relatable to software development services. We have also gone through an Agreement with M/s Wells Fargo India Solutions Pvt. Ltd., which is a non-AE and the assessee has rendered software development services to this Indian company also. It is common submission that agreements with other non-AEs are on the same terms as with M/s Wells Fargo. No mechanism has been set out under this Agreement for determining the Personnel costs incurred by the assessee in rendering services to non- AE. In the absence of any mechanism for apportionment of employee cost between AE and non-AE transactions of software development services, we direct that the remaining personnel costs (after exclusion of ₹ 4,86,98,278) be apportioned between AE and non-AE transactions in the ratio of revenue. Operational and other expenses - TPO, in the first step, has bifurcated such expenses along with others in the ratio of revenue from software development and ITES segments. Then he reduced nonoperational expenses of Financial expenses, Forex loss, Provision of doubtful debts, Loss on sale/discarded of fixed assets and Provision for doubtful advances, to find out the amount of total operating expenses other than Personnel expenses. The ld. AR could not point out any rational basis for apportionment of such expenses, other than the revenue from the relevant segments. We, therefore, uphold in principle, the apportionment of such other expenses, except depreciation, in the ratio of revenue from both the segments. As regards the five items treated by the TPO as non-operating nature, the ld. AR did not raise any objection to such treatment. We, therefore, hold that that the other proportionate expenses relating to software development segment as deduced from the bifurcation on the basis of revenue, should be further apportioned between AE and non-AE transactions in the ratio of the revenue from the two streams. The five items of non-operating expenses are also directed to be reduced in the same way. The proportionate part relatable to the AE transactions be considered in the calculation of OP/OC of the international transaction of rendering software development services. As regards Depreciation, we find that the assessee, inter alia, earned Rent of ₹ 88,90,195 and credited it to Profit and Loss account. This amount of rent has been taken as nonoperating income and rightly so. Once rent is non-operating, then the amount of depreciation on the assets yielding rent cannot also be treated as operating expenses. Accordingly, we direct that the above discussed exercise of bifurcating Other Operating expenses be carried out in respect of Depreciation also, but after reducing such amount of depreciation as relates to the assets fetching rental income. Selection of comparabale - Held that - The mere fact that company A has been held to be not comparable in a judicial order passed in the case of company B , does not per se make it incomparable in all the subsequent cases to follow. Not only company A held to be incomparable to company B can be comparable to company C , but company X held to be comparable to company Y can also be incomparable to company Z , depending upon the functional profile and the applicability or otherwise of the related factors. There can be no hard and fast rule that if a particular company has been found to be not comparable in the case of another company, then such former company would cease to be comparable to the assessee company also. Comparability of each company needs to be ascertained only after matching the functional profile and the relevant factors of the other company. International transaction of Software development of the assesseee need to be considered while selection comparable. Addition on account of re-allocation of indirect costs amongst eligible units (section 10A) and non eligible unit on the basis of gross revenue receipts - Held that - It prima facie appears from the language of the assessment order that the assessee maintained consolidated accounts and apportionment of expenses was done at the instance of the AO alone. Be that as it may, we have to decide the basis of allocation of indirect expenses, for which the assessee also conceded to some extent before the DRP for apportionment on certain basis given in the paper book. We agree with the Ld. AR that all the expenses cannot be apportioned on the basis of gross receipts from each unit. There are certain expenses which have separate keys for allocations. In such circumstances, each expenditure needs to be viewed from the apportionment angle separately and there cannot be a strait jacket formula for apportioning them on the basis of gross revenue. Under the given circumstances, we set aside the impugned order and remit the matter to the file of AO for making apportionment of all the indirect costs separately on some reasonable basis.
Issues Involved:
1. Transfer Pricing Adjustment for Software Development Services. 2. Transfer Pricing Adjustment for IT Enabled Services (ITES). 3. Allocation of Indirect Costs among Eligible and Non-Eligible Units under Section 10A. 4. Allowing Foreign Tax Credit. Detailed Analysis: I. Transfer Pricing Adjustment for Software Development Services a) TP adjustment in respect of transactions with non-AEs? The first issue concerns the computation of transfer pricing adjustment in respect of transactions with Associated Enterprises (AEs) and non-AEs. The TPO included total operational costs of the Software development segment, which led to an adjustment of ?31,62,04,137/-. The assessee contended that no adjustment should be made for transactions with non-AEs. The Tribunal held that transfer pricing adjustments should only be made for transactions with AEs and not non-AEs. The matter was remanded to the TPO/AO for recalculating the adjustment considering only international transactions with AEs. b) Computation of the assessee’s profit margin The second aspect is the computation of the assessee’s operating margin, initially calculated at 14.77%. The Tribunal directed that the revenue from non-AE transactions should be excluded in determining the ALP of the international transaction. The Tribunal also provided detailed instructions on apportioning personnel expenses, operational expenses, and depreciation between AE and non-AE transactions. c) Selection of Comparables The Tribunal examined the comparability of several companies included by the TPO and those excluded. It ordered the exclusion of e-Infochips Bangalore Limited, Infosys Technologies Ltd., and Tata Elxi Limited due to functional dissimilarities or inclusion of non-comparable segments. The inclusion of Infinite Data System Pvt. Ltd. was upheld, while the comparability of Sonata Software Limited was remanded for recalculating RPTs. The Tribunal also directed the inclusion of certain companies if the relevant financial data could be adjusted for the financial year ending 31st March. II. Transfer Pricing Adjustment for IT Enabled Services (ITES) a) Computation of the assessee’s profit margin The Tribunal directed that the same principles applied to the computation of profit margins for Software Development Services should be applied to ITES. It provided specific instructions on retaining operating income, apportioning employee expenses, depreciation, and other operational expenses. b) Comparables The Tribunal reviewed the comparability of several companies included by the TPO and excluded by the assessee. It ordered the exclusion of Accentia Technologies Ltd. and Infosys BPO due to extraordinary financial events. TCS E-Serve International Ltd. was excluded due to its mixed revenue from transaction processing and technical services. However, TCS E-Serve Ltd. was retained as comparable despite objections regarding high profit/turnover. The Tribunal directed the inclusion of CG-Vak Software & Exports Ltd. (BPO segment) and Datamatics Financial Services Ltd. and remanded the comparability of R Systems International Ltd. and Caliber Points Business Solutions Ltd. for further examination. III. Allocation of Indirect Costs among Eligible and Non-Eligible Units under Section 10A The AO reallocated indirect costs among eligible and non-eligible units based on gross revenue receipts, reducing the claim of deduction under Section 10A. The Tribunal found that the assessee maintained consolidated accounts and directed the AO to apportion indirect costs on a reasonable basis, considering specific keys for different expenses where available. IV. Allowing Foreign Tax Credit The Tribunal directed the AO to examine the assessee’s claim for foreign tax credit amounting to ?2,35,708/- and allow relief as per law. Conclusion The appeal was partly allowed for statistical purposes, with the Tribunal providing detailed instructions for recalculating transfer pricing adjustments, selecting comparables, and allocating indirect costs. The AO was directed to re-examine the foreign tax credit claim.
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