2017 (4) TMI 1610 - AT - Income Tax

TP Adjustment - international transactions pertaining to call centre service segment - TPO accepted CUP method in respect of call centre service however the TPO proposed adjustment in respect of customer care segment of call centre services by considering only 9 months rate charged by the assessee for working out in respect of the average rate of the assessee as well as the comparable party - HELD THAT - We note that this case relates to the Assessment Year 2004-05 which was the initial year of TP Regulation come into force. In the case of call centre segment, the TPO accepted the CUP method though only one comparable was available. Further the data of the said comparable was also available only for 9 months started from July, 2003 onwards upto March,2004. In the case of comparable company, the price for the first 3 months i.e. April, May June were not available. Therefore this is a case of non-availability of complete data in respect of the comparable selected by the assessee and accepted by the TPO. It is pertinent to note that when the assessee has entered into the international transaction throughout the year therefore, the price charged by the assessee from April, 2003 to March, 2004 has to be taken into consideration for bench marking its international transactions. Further the TPO has also disallowed the working capital adjustment on account of the credit period for payment. Thus in view of the facts and circumstances of the case when the appropriate data was not available at the relevant point of time and further the MAM in the case of ITES services, in our view should be TNMM instead of CUP method as it encompass the minor variation and also provides adjustment. Therefore we find that this issue requires a fresh consideration at the level of TPO and the exercise of determination of ALP has to be redone by adopting TNMM as MAM. The assessee is free to submit its set of comparables for consideration of the TPO. Hence Ground No.1.1 is set aside to the record of TPO/A.O. for fresh adjudication in the light of our observations. Shared services segment of call centre - TPO concluded that the services provided by the assessee is more or less is same as that of any other ITES/BPO unit - assessee adopted TNMM as MAM - TPO rejected the TP analysis of the assessee as well as TNMM analysis carried out by the assessee - TPO also rejected the comparables selected by the assessee - HELD THAT - We find that the functional comparability as well as process of selection of the comparables by applying various filters has not been properly examined by the authorities below. Since it was an initial year of applying the TP provisions therefore some criteria evolved in the process of consideration and adjudication was not available to the benefit of the TPO. We further note that out of 8 comparables as selected by the TPO, this Tribunal in the case of 24/7 Customer.Com (P) Ltd. 2013 (1) TMI 45 - ITAT BANGALORE has found six companies not functionally comparable and directed to exclude from the set of comparables. Therefore in the facts and circumstances of the case as well as in the interest of justice, we set aside this issue to the record of the TPO/A.O. for fresh consideration of the selection of comparable companies as well as determination of ALP. Accordingly, this ground of assessee's appeal is allowed for statistical purpose. Off-shore Division Software - Development Services - Comparable selection - HELD THAT - Virinchi Technologies Limited company has shown the earning from export of software of Rs.5.09 Crores. As per the notes forming part of the accounts, the company has stated that it is engaged in development of computer software and services though the production and sale of such software and service has not been expressed in any generic unit therefore quantitative details of sales as required under Schedule VI of the Companies Act has not been provided. In view of the above facts as recorded in the Annual Report, we find that this company cannot be regarded as functionally comparable with the software service provider. Accordingly, we direct the TPO/A.O. to exclude this company from the set of comparables. Thirdware Solutions Limited Company has stated in the Annual Report that its principle activity is software design and consultancy. Further this company has reported that it is engaged in the trading and development of software. This company earned revenue from various diversified activities which comprise the revenue from subscription contracts, revenue from sale of user license for software application and revenue from sale of investment. Therefore in the absence of segmental data this company cannot be considered as functionally comparable. Accordingly, we direct the TPO/A.O. to exclude this company from the set of comparables. Gebbs Infotech Limited company is providing software development services as well as BPO services. However, the segmental operating margins are not available and therefore composite revenue of this company cannot be taken as comparable to the assessee's software development services. Hence we direct the TPO/A.O. to exclude this company from the set of comparables. WTI Advanced Technology Ltd. company has reported income from technical services rendered, CAD convergent drawings and software services. Therefore it is apparent from the profit and loss account as well as notes on accounts that this company has earned revenue by rendering technical services. In the absence of segmental details, composite income of this company cannot be considered as comparable with the assessee. Accordingly, we direct the TPO/A.O. to exclude this company from the set of comparables. Transworld Infotech Limited - As there is a lack of clarity about the source of revenue as this company is showing the revenue from software services and products and further this company is also reported to have engaged in consultancy services; Hence, this company cannot be considered as a comparable in the absence of segmental details. Accordingly, we direct the TPO/A.O. to exclude this company from the set of comparables. Since we have directed to exclude five companies out of seven companies and the assessee has not disputed the comparability of two companies apparently due to the reason that the remaining two companies are having very low profit margin. Therefore in view of the facts and circumstances of the case, we set aside this issue to the record of the TPO/A.O. for de novo exercise of selection of comparables as well as determination of ALP. Deduction u/s 10A - Setting of losses of Hyderabad STPI Unit against the profits of the Bangalore STPI Unit before allowing the deduction under Section 10A - HELD THAT - This issue is covered in favour of the assessee and against the revenue by the decision of the Hon'ble jurisdictional High Court in the case of CIT Vs. Yokogawa India Ltd. 2011 (8) TMI 845 - KARNATAKA HIGH COURT which has been upheld by the Hon'ble Supreme Court 2016 (12) TMI 881 - SUPREME COURT - we decide this issue in favour of the assessee and against the revenue. The Assessing Officer is directed to allow the deduction under Section 10A before setting off of losses of other units. Appeal of the assessee is partly allowed.

Summary

Issues Involved:

1. Transfer Pricing Adjustment for Call Centre Service Segment.
2. Transfer Pricing Adjustment for Shared Services Segment.
3. Transfer Pricing Adjustment for Off-shore Division – Software Development Services.
4. Setting off losses of Hyderabad STPI Unit against profits of Bangalore STPI Unit before allowing deduction under Section 10A.

Detailed Analysis:

1. Transfer Pricing Adjustment for Call Centre Service Segment:

The assessee, a 100% subsidiary of Dell International, USA, provides call centre, back office, and other support services to Dell Group companies. The TPO accepted the CUP method for the call centre service segment but proposed an adjustment based on a 9-month rate comparison. The assessee contended that the entire financial year's revenue should be considered, citing differences in contractual terms and credit periods. The TPO rejected this, stating Rule 10B does not allow adjustments to international transactions. The tribunal noted the incomplete data for the comparable company and concluded that the TNMM method should be adopted instead of CUP for ITES services. The issue was remanded to the TPO/A.O. for fresh adjudication using TNMM as the MAM.

2. Transfer Pricing Adjustment for Shared Services Segment:

The assessee earned revenue of Rs.27.12 Crores from back office services and used TNMM as the MAM. The TPO rejected the assessee's comparables and selected 8 new comparables with a mean margin of 36.4%, proposing an adjustment of Rs.7,82,43,749. The assessee argued that the services provided were low-end and not comparable to the selected companies. The tribunal found that the functional comparability and selection process were not properly examined by the authorities. The issue was remanded to the TPO/A.O. for fresh consideration of comparables and determination of ALP.

3. Transfer Pricing Adjustment for Off-shore Division – Software Development Services:

The assessee earned Rs.84.50 Crores from offshore development services, remunerated on a Cost + 10% basis. The TPO selected 7 comparables and proposed an adjustment of Rs.22.26 Crores, later revised to Rs.13,44,85,218 by the CIT (Appeals). The assessee sought exclusion of 5 companies, arguing functional dissimilarity and lack of segmental data. The tribunal directed the exclusion of these companies and remanded the issue to the TPO/A.O. for a de novo exercise of selecting comparables and determining ALP.

4. Setting off losses of Hyderabad STPI Unit against profits of Bangalore STPI Unit before allowing deduction under Section 10A:

The tribunal noted that the issue is covered by the decision of the Hon'ble Supreme Court in CIT Vs. Yokogawa India Ltd., which held that deductions under Section 10A should be made independently for each eligible undertaking before setting off losses of other units. The tribunal directed the Assessing Officer to allow the deduction under Section 10A before setting off losses of other units.

Conclusion:

The appeal was partly allowed, with the tribunal remanding several issues to the TPO/A.O. for fresh consideration and adjudication. The tribunal upheld the assessee's contention regarding the deduction under Section 10A, directing the Assessing Officer to follow the precedent set by the Hon'ble Supreme Court.