2014 (4) TMI 427 - AT - Income Tax

Transfer pricing adjustment Eligibility for tax holiday u/s 10A of the Act Offshore business process outsourcing service Assessee rendered data support services - Held that - Relying upon CBDT vide its Circular No.14 of 2001, dated 09.11.2001 and the decision in Philips Software Centre ( P.) Ltd. Vs. ACIT, 2008 (9) TMI 466 - ITAT BANGALORE-B The provisions of the Transfer Pricing were introduced in the Statute to ensure that due to any arrangement made by the assessee with its AE in the course of an international transaction income taxable in India is not reduced for any reason -in a case where the income derived from an international transaction is exempt from tax in India because of provisions of Section 10A, then it cannot be held that because of an arrangement between the assessee and its AE any income taxable in India had been under reported - there is no provision in the Statute to show that in case of an assessee whose income is exempt u/s 10A and international transaction made with an AE should not be benchmarked with ALP determined on the basis of the provisions of Transfer Pricing. The assessee has not reported any excess exempt income from its international transactions with AE - as per the opinion of the lower authorities exempt income declared by the assessee when benchmarked with the ALP determined in accordance with the provisions of Transfer Pricing, the assessee has declared lesser exempt income and thereby no taxable base in India was eroded - no adjustment with the exempt income of the assessee was required to be made as per provisions contained in Chapter X of the Act thus, the AO is directed to treat the income declared from the business at the amount as shown by the assessee in its return of income Decided in favour of Assessee.

Issues Involved:
1. Applicability of Transfer Pricing provisions when the assessee is eligible for a tax holiday under section 10A of the Income Tax Act.
2. Determination of Arm's Length Price (ALP) and adjustments made by the Assessing Officer (AO).
3. Selection and rejection of comparable companies for determining ALP.
4. Admission of additional grounds of appeal by the assessee.
5. Levy of interest under Section 234B and Section 234C.
6. Proposal to initiate penalty proceedings under section 271(1)(c).

Detailed Analysis:

1. Applicability of Transfer Pricing provisions when the assessee is eligible for a tax holiday under section 10A of the Income Tax Act:

The assessee, an offshore business process outsourcing service provider, claimed exemption under section 10A for its income. The AO applied Transfer Pricing provisions, leading to an adjustment of Rs. 1,19,97,965. The assessee contended that Transfer Pricing provisions should not apply as its income was exempt under section 10A, citing the Bangalore Tribunal's decision in Philips Software Centre (P.) Ltd. v. ACIT. However, the TPO and DRP rejected this argument, referencing the statutory provision that no deduction under section 10A shall be allowed in respect of income enhanced due to Transfer Pricing adjustments. The Tribunal, relying on CBDT Circular No. 14 of 2001 and the decision in Philips Software Centre (P.) Ltd., held that Transfer Pricing provisions should not apply to exempt income under section 10A, as the basic intention is to prevent profit shifting that reduces taxable income in India.

2. Determination of Arm's Length Price (ALP) and adjustments made by the Assessing Officer (AO):

The TPO determined that the assessee's profit margin was lower than the ALP, resulting in an addition of Rs. 1,19,97,965. The Tribunal found that the assessee's entire income was exempt under section 10A and thus, any adjustment to the exempt income was unnecessary. Consequently, the Tribunal directed the AO to treat the income declared by the assessee as per its return.

3. Selection and rejection of comparable companies for determining ALP:

The assessee contested the TPO's selection and rejection of certain comparable companies, arguing that the financial data of the comparable companies should be considered for multiple years and not just for the year ending March 31, 2006. Additionally, the assessee raised concerns about the inclusion of companies involved in fraud and outsourcing significant portions of their business. The Tribunal admitted these additional grounds of appeal but did not adjudicate on them, as the primary issue regarding the applicability of Transfer Pricing provisions was decided in favor of the assessee.

4. Admission of additional grounds of appeal by the assessee:

The assessee raised additional grounds regarding the selection of comparable companies and adjustments for differences in working capital and risk profiles. The Tribunal admitted these additional grounds following the decision of the Chandigarh Special Bench in Quark Systems Pvt Ltd V. DCIT, which allows taxpayers to point out errors in comparable selections even at the appellate stage. However, these grounds were rendered academic due to the Tribunal's decision on the primary issue.

5. Levy of interest under Section 234B and Section 234C:

The assessee challenged the levy of interest under Section 234B and Section 234C. The Tribunal held that the charging of interest is consequential and disposed of this ground accordingly.

6. Proposal to initiate penalty proceedings under section 271(1)(c):

The assessee also challenged the proposal to initiate penalty proceedings under section 271(1)(c). The Tribunal dismissed this ground as premature, noting that no submissions were made on this issue.

Conclusion:

The Tribunal allowed the appeal partly, deciding that Transfer Pricing provisions should not apply to the assessee's exempt income under section 10A. Consequently, other grounds related to the determination of ALP and selection of comparables were rendered academic. The issues of interest levy and penalty proceedings were addressed as consequential and premature, respectively.

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