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2013 (2) TMI 607 - AT - Income TaxReference made to Transfer Pricing Officer - determination of the ALP by rejecting the TP study made by the assessee - as per TPO assessee is to be considered as Service Provider, working on Research and Development and not as Software Development as claimed by the assessee - Held that - Assessee is a service provider for research and development in various fields of engineering (including computer software) as enumerated in the agreements between the assessee and its associated enterprises and the result of such research and development is being delivered to the clients/associated enterprise in the form of customized computer data through network/internet. Thus, even as per the assessee s submissions, it is conducting the research and development through its multi-disciplinary R&D centre JFWTC and its activities are for several streams/areas including Information Technology. Thus it can be seen that it is catering to nearly all of GE s diverse business worldwide touching nearly every scientific discipline across the spectrum therefore rightly held by the TPO that the assessee is not into simple software development but is engaged in research and development in technical and engineering services on contract basis. Therefore, the TPO has rightly rejected the TP study conducted by the assessee and has rightly proceeded to select his own comparables in the field of Research and Development and redetermine the ALP - against assessee. Whether the comparables adopted by the TPO are relevant and comparable to the assessee - Held that - As rightly pointed out by the TPO and the CIT(A)/DRP for the relevant assessment years, the assessee is not in the business of software development but it is in the business of research and development in various fields of engineering including the computer software. The outcome of the research and development conducted by the assessee is delivered to the customers/AE through electronic media. The mode of delivery of result of research and development cannot determine the nature of the functions/activities of the assessee. Therefore, the TPO was right in conducting search on the data base prowess using the word research and development Adoption of Vimta Labs as a comparable - Held that - The relative risk profile of the comparable company, particularly on the factors of human involvement in the clinical trails needs to be evaluated and a determination made whether such differences in risk needs to be adjusted or whether such risks are not amenable for adjustment at all, as claimed by the assessee. In view of the observations and also inconsistencies in the approach of the assessee and also in view of the fact that the assessee was not given an opportunity of hearing for A.Y 2006-07 against adoption of Vimta Labs as a comparable and also in view assessee s submissions that there has been a change in the classification of the Vimta Labs in the database in AY 2006-07, and also additional evidence filed before us with regard to the risks encountered by Vimta Labs and Celestial Labs, it is deemed fit and proper to remand the issue to the file of the AO/TPO for reconsideration of the issue de novo for all the A.Ys. Computation of deduction u/s 10A - Held that - As decided in Yokogawa India case 2011 (8) TMI 845 - KARNATAKA HIGH COURT for computing the deduction u/s 10A of the Act, the profit of eligible units have to be deducted at source and do not enter into the computation of income and as a consequence of which, the losses suffered by non eligible units cannot be set off against the profits of eligible units. Further it has been held that the depreciation and business loss of eligible units relating to the assessment year 2000-01 onwards is eligible for set off and carry forward for set off against the income post tax holiday as per the amended provision of sec. 10A(vi) amended with retrospective effect from 1/4/2001. Thus Losses of non-10A units cannot be set off against profit of 10A unit. TP adjustment to the ALP on account of interest on external commercial borrowings - Held that - The interest rate is depending upon the credit rating of the borrowings and also on the prices and economic conditions prevailing at the time of advancing the loan. The assessee has obtained the loans in the year 2001 and the issue has been considered by the TPO for the assessment years 2004-05 and 2005-06 and also for the assessment year 2008-09. After considering the assessee s submissions, the TPO accepted the rate of interest fixed in the loan agreements. In view of rules of uniformity and consistency interest rate on ECB should be taken as fixed in loan agreement in computation of ALP. Exclusions of telecommunication expenses and travelling expenses incurred in foreign currency from the export turnover but not making the corresponding reduction from the total turnover for the purpose of computation of deduction u/s 10A - Held that - As decided in Tata Elxi Pvt. Ltd. 2011 (8) TMI 782 - KARNATAKA HIGH COURT when any expenditure is reduced from the export turnover, then the same should also be reduced from the total turnover for the purposes of computation of deduction u/s 10A.
Issues Involved:
1. Reference to Transfer Pricing Officer (TPO) and determination of Arm's Length Price (ALP). 2. Nature of activities of the assessee: Service Provider for Research and Development vs. Software Development. 3. Selection and rejection of comparables by the TPO. 4. Computation of deduction under section 10A of the Income-tax Act. 5. Transfer Pricing adjustment on account of interest on External Commercial Borrowings (ECB). 6. Deduction of telecommunication and traveling expenses from export turnover for section 10A deduction. Detailed Analysis: 1. Reference to TPO and Determination of ALP: The appeals were filed by the assessee for the assessment years 2004-05, 2005-06, and 2006-07. The primary issue was the reference made by the AO to the TPO under section 92CA of the Income-tax Act for determining the ALP by rejecting the Transfer Pricing (TP) study conducted by the assessee. The TPO held the assessee to be a Service Provider working on Research and Development rather than Software Development and rejected the assessee's comparables, conducting his own study and selection of comparables. 2. Nature of Activities of the Assessee: The TPO observed that the assessee was providing contract services of research and development in various fields of engineering, not software development as claimed by the assessee. The assessee contended that it was exporting customized electronic data and computer software resulting from research activities. However, the TPO, after examining the service agreements and the website of the assessee, concluded that the assessee was engaged in research and development activities and not software development. The Tribunal upheld the TPO's finding that the assessee was not into simple software development but engaged in research and development in technical and engineering services on a contract basis. 3. Selection and Rejection of Comparables: The TPO rejected the TP study conducted by the assessee and selected his own comparables in the field of Research and Development. For the assessment years 2004-05 and 2005-06, the TPO selected comparables such as Alphageo India Ltd., Vimta Labs Ltd., and Lurgi India Co. Ltd. For the assessment year 2006-07, the TPO included Celestial Labs Ltd. The assessee objected to the adoption of Vimta Labs and Celestial Labs, arguing that they were functionally different and engaged in dissimilar activities. The Tribunal remanded the issue of comparability of Vimta Labs and Celestial Labs back to the AO/TPO for reconsideration, directing a detailed analysis of the objections raised by the assessee. 4. Computation of Deduction under Section 10A: The assessee contended that the deduction under section 10A should be allowed from its source (10A unit) itself, and the profits of the 10A unit should not enter the computation of business income. The Tribunal, following the decision of the Hon'ble High Court of Karnataka in the case of Yokogawa India Ltd., held that the losses of non-10A units could not be set off against the profits of the 10A unit. The brought forward losses of the 10A unit for the assessment years 2002-03 and 2003-04 could not be set off against the current year's 10A profits but could be set off against the profits of the post-tax holiday period. 5. Transfer Pricing Adjustment on Account of Interest on ECB: The assessee had obtained ECBs from its AE with fixed interest rates determined based on business and economic circumstances at the time of entering into the loan agreement. The TPO made adjustments to the ALP on account of interest on ECB. The Tribunal noted that the interest rates were consistently accepted by the Revenue in earlier and subsequent assessment years. Following the principle of uniformity and consistency, the Tribunal held that the TP adjustment on account of interest on ECB for the assessment year 2006-07 was not warranted. 6. Deduction of Telecommunication and Traveling Expenses: The assessee raised an issue regarding the exclusion of telecommunication expenses and traveling expenses incurred in foreign currency from the export turnover but not making the corresponding reduction from the total turnover for the purpose of computation of deduction under section 10A. The Tribunal, following the decision of the jurisdictional High Court in the case of Tata Elxi Pvt. Ltd., directed the AO to reduce the same from the total turnover for the purpose of section 10A deduction. Conclusion: The Tribunal allowed the appeals for statistical purposes, remanding certain issues back to the AO/TPO for reconsideration and directing the AO to follow the jurisdictional High Court's decision regarding the computation of deduction under section 10A. The Tribunal emphasized the need for a consistent approach in the adoption of comparables and the determination of ALP.
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