2015 (10) TMI 2692 - AT - Income Tax

TPA - selection of comparable - Held that - Assessee is into marketing support services thus companies functionally comparable with that of assessee need to be deselected from final list of comparability. Claim of deduction u/s 10B in respect of export incentives - Held that - The provisions of sub-section(4) of section 10B of the Act mandate that deduction under that section shall be computed by apportioning the profits of the business of the undertaking in the ratio of export turnover by the total turnover. Thus, even though sub-section(l) of section 10B refers to profits and gains as are derived by a 100% EOU, the manner of determining such eligible profits has been statutorily defined in sub-section(4) of that section. Both sub-sections (1) and (4) are to be read together while computing the eligible deduction u/s 10B of the Act. We cannot ignore sub-section (4) of section 10B which provides specific formula for computing the profits derived by the undertaking from export. As per the formula so laid down, the entire profits of the business are to be determined which are further multiplied by the ratio of export turnover to the total turnover of the business. In case of Liberty India 2009 (8) TMI 63 - SUPREME COURT the Hon. Supreme Court has dealt with the provisions of section 80IA of the Act wherein no formula was laid down for computing the profits derived by the undertaking which has specifically been provided under sub-section (4) of section 10B while computing the profits derived by the undertaking from the export.

Issues Involved:
1. Transfer Pricing Adjustment for Marketing Support Services
2. Non-Compliance with DRP Directions
3. Denial of 5% Standard Deduction under Section 92C(2)
4. Validity of TPO Reference under Section 92CA(1)
5. Determination of Arm's Length Price under Section 92C(3)
6. Deduction under Section 10B for Brokerage on Sea Freight

Detailed Analysis:

1. Transfer Pricing Adjustment for Marketing Support Services:
The assessee contested the addition of Rs. 1,16,26,716 by the TPO/AO, upheld by the DRP, for the international transaction of providing marketing support services, arguing it was not at arm's length price. The TPO had used the Transaction Net Margin Method (TNMM) and included certain companies as comparables, which the assessee challenged. The Tribunal accepted the assessee's plea to exclude certain companies (M/s ICRA Online Ltd, M/s Informational Technology India Pvt. Ltd, M/s Maple E-Solutions, and M/s Vishal Information Technologies) from the comparables array due to functional dissimilarities and other reasons. The Tribunal directed the TPO to re-compute the ALP accordingly.

2. Non-Compliance with DRP Directions:
The assessee argued that the AO did not follow the DRP's directions regarding the rejection of a company as comparable, calculation of correct margin, and allowing working capital adjustment. The Tribunal did not specifically address this issue in the detailed analysis but focused on the comparables and the ALP determination.

3. Denial of 5% Standard Deduction under Section 92C(2):
The assessee argued for a 5% standard deduction as per the proviso to Section 92C(2). The Tribunal referred to the Special Bench decision in IHG IT Services India Pvt. Ltd vs. ITO, which held that the benefit of the tolerance margin is available only if the variation between the ALP and the transaction price does not exceed the specified percentage. The Tribunal upheld the lower authorities' action, denying the 5% standard deduction.

4. Validity of TPO Reference under Section 92CA(1):
The assessee contended that the reference to the TPO was not in accordance with Section 92CA(1). The Tribunal did not specifically address this issue in the detailed analysis but focused on the comparables and the ALP determination.

5. Determination of Arm's Length Price under Section 92C(3):
The assessee argued that the price charged for marketing support services was determined in accordance with the Act, and none of the conditions in Section 92C(3) were satisfied. The Tribunal's detailed analysis focused on the comparables and the ALP determination, ultimately directing the TPO to re-compute the ALP after excluding certain companies from the comparables array.

6. Deduction under Section 10B for Brokerage on Sea Freight:
The assessee claimed a deduction under Section 10B for income received on account of brokerage on sea freight of Rs. 83,267. The Tribunal referred to its decision in the assessee's own case for the preceding assessment year, where it was held that such income forms part of the business profits and is eligible for deduction under Section 10B. The Tribunal accepted the assessee's claim for the deduction.

Conclusion:
The Tribunal partly allowed the assessee's appeal. It directed the TPO to re-compute the ALP by excluding certain companies from the comparables array and upheld the lower authorities' decision to deny the 5% standard deduction under Section 92C(2). The Tribunal also accepted the assessee's claim for a deduction under Section 10B for brokerage on sea freight.

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