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2017 (10) TMI 1384 - AT - Income TaxCurtailment of deduction claimed under section 10A - Deduction claimed u/s 10A by invoking the provisions of section 10A(7) r.w.s. 80IA(10) - assessee was providing high end Design Engineering Services to its associated enterprises and was being remunerated on Man Hourly rate basis which has been computed applying the CUP methodology - Held that - The assessee in its Engineering Design Development Services which was STPI unit shown net profit margin of 68.02%. The international transactions undertaken by the assessee with its associated enterprises in which PLI was 205% by taking OP/OC was accepted by the TPO to be at arm s length and no adjustment was made in the hands of assessee with regard to said division. AO however was of the view that the assessee had earned more than ordinary profits in the Engineering Design Services division and consequently curtailed the deduction claimed under section 10A of the Act. Where the Department has failed to prove that there existed an arrangement between assessee and its associated enterprises to earn more than ordinary there is no merit in the aforesaid curtailment of deduction under section 10A of the Act. In this regard we place reliance on the ratio laid down by the Hon ble Bombay High Court CIT Vs. Schmetz India Pvt. Ltd. 2015 (6) TMI 1044 - BOMBAY HIGH COURT where the SLP filed has been rejected by the Hon ble Supreme Court. We also place reliance on the ratio laid down in Honeywell Automation India Ltd. Vs. DCIT 2017 (3) TMI 1533 - ITAT PUNE and in assessee s own case relating to assessment year 2006-07. Hence grounds of appeal Nos.3 to 8 are allowed. Transfer pricing adjustment made by the Assessing Officer with respect to provision of Customer Support Services - comparable selection - Held that - Where the concern is providing KPO services then the same is not comparable to the assessee which is engaged in ITES services. Concerns operating in different business model than the assessee in the year under consideration the same needs to be excluded from the final set of comparables
Issues Involved:
1. Curtailment of deduction claimed under section 10A of the Act. 2. Transfer pricing adjustment for Customer Support Services. 3. Exclusion of certain comparables in benchmarking ITES segment. 4. Application of +/- 5% range benefit under proviso to section 92C of the Act. Issue-wise Detailed Analysis: 1. Curtailment of Deduction Claimed Under Section 10A of the Act: The primary issue raised by the assessee was the curtailment of deduction claimed under section 10A of the Act by invoking the provisions of section 10A(7) read with section 80IA(10). The assessee argued that the deduction was unjustly curtailed as the arm's length price (ALP) for Engineering Design Services was determined by the Transfer Pricing Officer (TPO) using the Comparable Uncontrolled Price (CUP) method and accepted without adjustments. The Tribunal noted that the assessee had shown high net profit margins due to high-end services provided and that there was no evidence of an arrangement to earn more than ordinary profits. The Tribunal referred to the Pune Bench's decision in Honeywell Automation India Ltd. and the Hon'ble Supreme Court's dismissal of Special Leave Petitions in similar cases, concluding that the Assessing Officer (AO) could not re-examine transactions accepted by the TPO. The Tribunal held that the AO had no basis to curtail the deduction under section 10A without proving an arrangement for profit manipulation. Thus, grounds of appeal Nos. 3 to 8 were allowed. 2. Transfer Pricing Adjustment for Customer Support Services: The assessee contested the upward transfer pricing adjustment of ?1,23,58,027 made by the AO for Customer Support Services. The TPO had rejected the assessee's comparables and selected new ones, leading to a higher arithmetic mean margin. The Tribunal examined the functional profile and comparables and found that certain companies selected by the TPO were not functionally comparable to the assessee's low-end BPO services. Specifically, Accentia Technologies Ltd., Coral Hubs Ltd., Cross Domain Solutions Ltd., and Cosmic Global Ltd. were excluded from the final set of comparables. The Tribunal held that the TPO's selection of these companies was inappropriate and directed their exclusion, thereby allowing grounds of appeal Nos. 9, 10, and 12. 3. Exclusion of Certain Comparables in Benchmarking ITES Segment: The Tribunal addressed the exclusion of specific comparables selected by the TPO: - Accentia Technologies Ltd.: Excluded due to involvement in medical transcription services and software development, making it functionally different from the assessee. - Coral Hubs Ltd.: Excluded as it was engaged in KPO services, following the Hon'ble Delhi High Court's decision in Rampgreen Solutions Pvt. Ltd. - Cross Domain Solutions Ltd.: Excluded for providing KPO services and not meeting the turnover filter applied by the assessee. - Cosmic Global Ltd.: Excluded due to subcontracting ITES to third-party vendors and having a different business model. The Tribunal's decision to exclude these companies was based on their functional dissimilarity to the assessee's ITES services. 4. Application of +/- 5% Range Benefit Under Proviso to Section 92C of the Act: The Tribunal acknowledged that the benefit of the +/- 5% range, as envisaged under the proviso to section 92C(2) of the Act, was consequential. Given the adjustments and exclusions of certain comparables, the Tribunal held that the assessee should be provided this benefit. Therefore, ground of appeal No. 15 was allowed. Conclusion: The Tribunal allowed the appeal partly, granting relief on the curtailment of deduction under section 10A and transfer pricing adjustments while dismissing the unpressed grounds. The order emphasized the necessity of proving an arrangement for profit manipulation to invoke section 10A(7) read with section 80IA(10) and the importance of selecting functionally comparable companies for transfer pricing analysis.
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