2020 (6) TMI 699 - AT - Income Tax

Determination of ALP in respect of international transaction of rendering SWD services - Selection of comparable - HELD THAT - Assessee provides support services to its group entities. The services provided by the Assessee are Call Centre, Shared services and Offshore development Centre (testing and support) thus companies functionally dissimilar with that of assessee need to deselected from final list. Non-grant of deduction under section 10A on the income determined as per Mutual Agreement between Competent Authorities of India and USA - HELD THAT - In the present case the conditions under which the dispute was resolved under MAP, was that the Assessee had to increase its taxable income and the sum agreed was to be subsequently invoiced and realized and thereby there was inflow of foreign exchange in India. Such features do not exist when the adjustment to ALP is suggested by a TPO which is subsequently incorporated in an order of assessment by the AO. Pune Bench of the ITAT had an occasion to deal with an identical question in the context of determination of ALP under the Advance Pricing Arrangement APA in the case of Dar Al Handasah Consultants (Shair Partners) India Private Limited 2019 (12) TMI 153 - ITAT PUNE and took the view that deduction u/s. 10A of the Act on additional income offered as per APA would be eligible to claim deduction u/s. 10AA. The proviso to section 92CA(4) of the Act will apply only to adjustment to transfer pricing made by the AO which is enumerated in Sl.No.(ii) above and not to any other modes of determination of ALP. The decision of the Pune Bench of ITAT in the case of Dar Al Handasah Consultants (Shair Partners) India Private Limited (supra) will be clearly applicable to the facts of the present case. Whether non-receipt of foreign exchange within the period required u/s. 10A of the Act would be a bar to allow the deduction in AY 2007-08? - As already observed that similar to provisions of section 92CC of the Act, the provisions of the DTAA r.w.s. 90(2) of the Act provide to the contrary in matters where issues are settled under the MAP. Following the decision of the Tribunal referred to above, we hold that the assessee should be allowed the benefit of deduction u/s. 10A of the Act in respect of the amount settled under the MAP for the AY 2007-08. Accordingly, the relevant grounds of appeal are allowed.

Summary

Issues Involved:
1. Determination of Arm's Length Price (ALP) for Software Development Services (SWD).
2. Non-grant of deduction under Section 10A on income determined as per Mutual Agreement Procedure (MAP).

Detailed Analysis:

1. Determination of Arm's Length Price (ALP) for Software Development Services (SWD):

Facts: The assessee, a wholly-owned subsidiary of Dell International Inc., provided support services to its group entities, including Call Centre, Shared services, and Offshore development Centre (testing and support). For the assessment year 2007-08, the assessee entered into international transactions with its Associated Enterprises (AEs) for Call Centre services, Back office support services, and Software Development Services (SWD). The Transfer Pricing Officer (TPO) suggested a TP adjustment aggregating to ?177,54,56,095.

Contention: The dispute before the Tribunal was regarding the addition made to the total income on account of determination of ALP in respect of the international transaction of rendering SWD services. The assessee claimed that the price received was at arm's length, supported by a TP study using the Transactional Net Margin Method (TNMM) with Operating Profit to Total Cost (OP/TC) as the Profit Level Indicator (PLI). The TPO accepted 3 out of 17 comparables chosen by the assessee and added 23 other comparables, determining the ALP with an arithmetic mean of 25.14% (WC unadjusted) and 24.13% (WC adjusted).

Tribunal's Findings: The Tribunal noted that the functional profile of the assessee and that of the assessee in the case decided by the Tribunal in NXP Semiconductors Pvt. Ltd. v. ACIT were identical. Following the decision in NXP Semiconductors, the Tribunal excluded 14 out of 26 comparable companies for reasons including functional dissimilarity and lack of segmental data. The Tribunal directed the AO/TPO to exclude these companies and recompute the ALP after affording the assessee an opportunity of being heard.

2. Non-grant of deduction under Section 10A on income determined as per Mutual Agreement Procedure (MAP):

Facts: The assessee sought deduction under Section 10A on the enhanced export income determined as per MAP between the Competent Authorities of India and the USA. The AO refused to grant the deduction on the enhanced income, considering it undisclosed and applying the first proviso to Section 92CA(4).

Contention: The assessee argued that the proviso to Section 92C(4) applies only to adjustments made by the AO/TPO and not to voluntary adjustments or those made under MAP. The MAP resolution required additional billing and realization of payment, resulting in an inflow of foreign exchange. The assessee contended that the enhanced income should be treated similarly to the original transaction for deduction purposes.

Tribunal's Findings: The Tribunal agreed with the assessee, noting that the first proviso to Section 92C(4) would not apply to income determined under MAP, as it is akin to voluntary adjustments. The Tribunal referenced the decision in Dar Al Handasah Consultants (Shair & Partners) India Private Limited, which allowed deduction under Section 10A on additional income offered as per APA. The Tribunal directed that the assessee should be allowed the benefit of deduction under Section 10A for the amount settled under MAP.

Conclusion: The appeal was partly allowed, with the Tribunal directing the exclusion of certain comparables for ALP determination and granting deduction under Section 10A on the enhanced income determined as per MAP.