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2011 (7) TMI 509 - AT - Income TaxTransfer Pricing - areas of dispute is regarding the exact nature of services rendered by the assessee - assessee contended that it was purely providing voice based call centre service and BPO sector selected by the TPO (9 companies) were not mere call centre but performing much more skilled jobs than that of a call center - no valid reasons have been assigned by the TPO while ignoring assessee s submissions - AY 05-06 - Held that - It is only after finding out exact nature of services rendered by the assessee can a comparative uncontrolled transaction can be brought to the picture. We therefore set aside the order of the CIT(A) and restore the issue to the TPO/Assessing Officer for a fresh consideration. set aside the order of the Assessing Officer and remand the question of determination of ALP by the Assessing Officer afresh in the light of the directions given above. Order of AO in respect of AY 06-07 is also set aside and remanded back in view of non-consideration of objections of assessee in respect of non-comparability of comparable on ground of functionally submission as to why the comparable transactions relied upon by the assessee cannot be rejected reasons as to why saving on account of link cost recovery of reimbursement of expenses should be considered while working ALP Deduction u/s 10A before setting off of unabsorbed depreciation - Held that - Deduction u/s 10A has to be allowed on profits of the undertaking before set-off of unabsorbed depreciation. Unabsorbed depreciation has therefore to be allowed to be adjusted against interest income - Decided against the revenue. Treatment of exchange rate gain - Business Income or Income from other sources - Held that - CIT(A) rightly held that exchange rate gain is integral part of the exports and hence part of Business Income and cannot be treated as Income from other sources. Interest on L/C Margin & Bank Guarantee - assessee contended that AO erred in treating said interest as Income from Other Sources as against Business Income of the eligible 10A unit for the first time in his final assessment order without having considered so in his draft assessment order u/s 144C and accordingly erred in denying deduction u/s 10A in respect of such interest income - Held that - AO had no jurisdiction to consider an issue which was not considered in the draft assessment order passed u/s 144C. AO is therefore directed to consider the interest income in question as Income from business.
Issues Involved:
1. Determination of Arm's Length Price (ALP) for international transactions. 2. Set-off of unabsorbed depreciation against other income. 3. Classification of foreign exchange gain as business income. 4. Treatment of interest on L/C Margin & Bank Guarantee as business income. Issue-wise Detailed Analysis: 1. Determination of Arm's Length Price (ALP) for International Transactions: The primary issue was whether the assessee's transactions with its Associated Enterprises (AEs) were at Arm's Length Price (ALP). The assessee, engaged in providing IT-enabled services (ITES), used the Transactional Net Margin Method (TNMM) for benchmarking, selecting 13 comparables with an arithmetic mean of 6.95%. The TPO rejected several comparables and added nine new ones, leading to an ALP adjustment of Rs. 24.79 crores. The CIT(A) found that the TPO misunderstood the nature of the assessee's business, which was a call centre, not engaged in high-end ITES like software development. The CIT(A) held that the TPO's rejection of loss-making comparables was incorrect, and the new comparables added by the TPO were not engaged in similar services. The Tribunal noted that the exact nature of services rendered by the assessee needed to be ascertained and remanded the issue to the TPO/Assessing Officer for fresh consideration, emphasizing the need for accurate adjustments and comparability analysis. 2. Set-off of Unabsorbed Depreciation Against Other Income: The assessee claimed set-off of unabsorbed depreciation against interest income, arguing that deduction under section 10A should be computed before setting off unabsorbed depreciation. The CIT(A) allowed this claim, referencing the Chennai Tribunal's decision in Changepond Technologies (P.) Ltd. and the Special Bench decision in Scientific Atlanta India Technology (P.) Ltd., which held that profits of a 10A unit can't be adjusted against losses of a non-10A unit. The Tribunal upheld the CIT(A)'s decision, confirming that unabsorbed depreciation should be set off against interest income before computing the deduction under section 10A. 3. Classification of Foreign Exchange Gain as Business Income: The assessee earned a foreign exchange gain of Rs. 3,19,32,434, which it claimed as part of business income. The Assessing Officer excluded this gain from the profits of the business, arguing it was attributable to earlier sales and not derived from the eligible undertaking. The CIT(A) disagreed, citing the Tribunal's decision in Changepond Technologies (P.) Ltd. and the Special Bench decision in Asstt. CIT v. Prakash L. Shah, which held that foreign exchange gain related to export activities should be included in the profits for computing deduction under section 10A. The Tribunal upheld the CIT(A)'s decision, confirming that the foreign exchange gain is integral to the business income. 4. Treatment of Interest on L/C Margin & Bank Guarantee as Business Income: The Assessing Officer treated interest on L/C Margin and Bank Guarantee as "Income from Other Sources" in the final assessment order, which was not considered in the draft assessment order. The Tribunal noted that under section 144C, any variation to the income or loss returned by an eligible assessee must be specified in the draft assessment order to allow the assessee to address grievances before the DRP. Since this issue was not in the draft order, the Tribunal held the Assessing Officer's action to be bad in law and directed the interest income to be considered as business income. Conclusion: The Tribunal remanded the issue of ALP determination to the TPO/Assessing Officer for fresh consideration, upheld the set-off of unabsorbed depreciation against interest income, confirmed the classification of foreign exchange gain as business income, and directed the interest on L/C Margin & Bank Guarantee to be treated as business income.
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