2017 (8) TMI 1627 - AT - Income Tax

Revision u/s 263 - assessee by booking excessive expenditure in respect of non 10A unit reduced the taxable profit and increased the eligible 10A unit thereby the assessee claimed excessive deduction under Section 10A - assessee has not maintained separate books of account for the eligible 10A unit and non 10A unit - HELD THAT - When the assessee specifically claims that one of the non 10A unit was in USA the expenditure incurred in USA has to be recorded in the separate books maintained in USA even though the assessee-company is Indian based. Otherwise the branch at USA may not be able to carry out its financial transaction as expected. Further without maintaining separate books of account for the purpose of expenses it is not known how they are able to prepare Profit Loss account for each unit. Therefore this Tribunal is of the considered opinion that the CIT(Appeals) has rightly exercised its jurisdiction under Section 263 of the Act. Convertible foreign exchange not received in India by the due date - HELD THAT - Both the Ld. D.R. and assessee submitted that this issue is covered against the assessee by order of this Tribunal for assessment year 2008-09. In view of the above this Tribunal does not find any reason to interfere with the order of the lower authority and accordingly the same is confirmed. Deduction u/s 10A - Exclusion of telecom expenses travelling software development charges etc. from total turnover also - HELD THAT - When the export turnover does not include telecommunication charges travelling software development charges for providing technical service outside India the same shall also be excluded from total turnover. In other words the export turnover and total turnover shall be of the same factor. The denominator and numerator shall consist of same factor. Once the freight telecommunication charges travelling software development charges etc. are excluded from export turnover the same shall be excluded from total turnover also. In view of the above this Tribunal is of the considered opinion that the Dispute Resolution Panel has rightly excluded the same from total turnover also. Hence this Tribunal does not find any reason to interfere with the order of the lower authority and accordingly the same is confirmed. Determination of arm s length price under section 92C - selection of tested parties - HELD THAT - In this case Transaction Net Margin Method is the most appropriate method adopted both by the assessee and Transfer Pricing Officer. A bare reading of Rule 10B(1)(e) shows that the net profit margin realized by an enterprise from international transaction entered into with an Associated Enterprise has to be computed in relation to cost incurred or sales effected etc. The main object is to compute the net profit margin realized by the enterprise from international transaction. The comparison shall be with regard to the transaction of unrelated enterprise from comparable uncontrolled transaction. Therefore the net profit margin of the enterprise shall be computed in the international transaction by comparing comparable uncontrolled transaction. For the purpose of selecting tested party being a least complex party as already observed the functional risk assumed by the Associated Enterprise has to be established by producing material evidence. In this case the assessee miserably failed to establish functional risk assumed by the Associated Enterprise. Under the scheme of Indian Income-tax Act the transaction of the assessee more particularly the international transaction of the assessee has to be compared with that of other company s transactions in comparable uncontrolled transactions. The main object of comparison is to determine the net profit margin of the assessee-company. Therefore the transaction of assessee-company with Associated Enterprise outside the country has to be compared with that of the transaction of the comparable uncontrolled transaction of other companies. In view of the above in the absence of any material on record with regard to risk assumed by the Associated Enterprise the assessee-company has to be taken as tested party for the purpose of transfer pricing adjustment. Therefore this Tribunal does not find any reason to interfere with the order of the lower authority and accordingly the same is confirmed. This Tribunal finds that the TPO has correctly selected the comparable companies. In view of this this Tribunal does not find any reason to interfere with the order of the lower authority and accordingly the same is confirmed

Issues Involved:
1. Condonation of delay in filing the appeal by the Revenue.
2. Deduction under Section 10A of the Income-tax Act, 1961.
3. Convertible foreign exchange not received by the due date.
4. Exclusion of telecom expenses, traveling, software development charges, etc., from total turnover.
5. Selection of tested parties for Transfer Pricing.

Issue-wise Detailed Analysis:

1. Condonation of Delay in Filing the Appeal by the Revenue:
The Revenue filed a petition to condone a 24-day delay in filing the appeal. After hearing both the Departmental Representative and the Senior Counsel for the assessee, the Tribunal found sufficient cause for the delay and admitted the appeal.

2. Deduction under Section 10A of the Income-tax Act, 1961:
The assessee claimed a deduction of ?76,83,44,038 under Section 10A, which was initially allowed by the Assessing Officer. The Principal Commissioner, however, observed discrepancies in the profit margins between the 10A eligible unit and the non-10A unit, with the latter showing significantly lower profits. The Principal Commissioner noted that the assessee did not maintain separate books for the two units, leading to suspicion of profit shifting to claim higher deductions. The Tribunal confirmed the Principal Commissioner's decision to invoke Section 263, directing the Assessing Officer to re-examine the matter, particularly the maintenance of separate books for the US branch.

3. Convertible Foreign Exchange Not Received by the Due Date:
Both parties agreed that this issue was already settled against the assessee in a previous Tribunal order for the assessment year 2008-09. Therefore, the Tribunal upheld the lower authority's decision without further interference.

4. Exclusion of Telecom Expenses, Traveling, Software Development Charges, etc., from Total Turnover:
The Tribunal held that expenses incurred in foreign currency for telecom, traveling, and software development should be excluded from both export turnover and total turnover. This is to ensure that the numerator and denominator used in calculating the deduction under Section 10A are consistent. The Tribunal confirmed the Dispute Resolution Panel's decision to exclude these expenses from the total turnover.

5. Selection of Tested Parties for Transfer Pricing:
The assessee argued that its overseas subsidiaries should be considered as the tested parties for transfer pricing analysis, claiming they were the least complex entities. The Transfer Pricing Officer (TPO) rejected this, selecting the assessee as the tested party and making adjustments based on external comparables. The Tribunal upheld the TPO's decision, citing Rule 10B(1)(e) of the Income-tax Rules, which mandates that the net profit margin of the enterprise (assessee) must be determined. The Tribunal found no material evidence to support the claim that the overseas subsidiaries were less complex or assumed minimal risk. Consequently, the Tribunal confirmed the lower authority's order.

Conclusion:
The Tribunal dismissed the assessee's appeals for the assessment years 2010-11 and 2011-12 and the Revenue's appeal for the assessment year 2011-12. The Tribunal's order was pronounced on 18th August 2017 at Chennai.

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