2013 (1) TMI 369 - AT - Income Tax

Transfer pricing adjustment made by the TPO - operating margin to be taken at 11.96% or 9.47% as taken by assessee - assessee is a domestic company formed by a shareholding between Sitel Group & TATA group with 50% stake each - Assessee in the TP study used TNM method to benchmark its ALP for its transaction with AE - CIT (A) has not only shifted the method adopted by assessee and the TPO but also changed the tested party - Held that - Assessee s TP study has not been considered by the TPO as vide Annexure-D to the TP study assessee has selected ten comparable companies and summary of net cost margin varies from -6.04% to 19.06%. Mean arrived at assessee s TP study was at 9.47%. How this amount was rejected and why it is fixed at 11.96% could not be discerned from the order of the TPO, as it is very brief without any discussion. Further when assessee raised arguments on various issues and submitted that the total profits earned by the AEs and assessee put together and furnished the information how the profits are apportioned between the AE and assessee, the CIT (A) shifted tested party from assessee to AE and that too only two AEs were accepted in which there were profits, ignoring the AEs which incurred losses on various projects. Even after considering the profit companies, the CIT (A) arbitrarily fixed the margin at 6% without there being any basis and arrived at the TP adjustment restricting to Rs. 54,56,479. Therefore, neither the TPO s order can be considered as appropriate nor the order of the CIT (A) on the given facts of the case - even though the method of TNM was accepted, the CIT (A) went by profit split method and further restricted to two AEs by shifting the tested party from assessee to AE, in view of this, the matter should be restored to AO for fresh consideration by the TPO. Treatment of interest on term deposit receipts and miscellaneous income - Held that - Undisputedly the assessee is not in regular business of lacing various deposits and therefore, the interest income has no direct or live connection with the business undertaking of the assessee and particularly, the export articles or things and computer software. Thus in view of the decision in the case of Liberty India (2009 (8) TMI 63 - SUPREME COURT) interest earned by the assessee on surplus funds deposit in the bank does not come under the first degree of source of profit derived from profit of business of undertaking. Accordingly, this issue is decided against assessee. Deduction under section 10A - Held that - As decided in Sak Soft Ltd s case 2009 (3) TMI 243 - ITAT MADRAS-D & CIT v. Gem Plus Jewellery India Ltd. 2010 (6) TMI 65 - BOMBAY HIGH COURT whatever is excluded from the export turnover has to be excluded from the total turnover also while computing the deduction under section 10A. In view of this, AO is directed to exclude the communication line charges from the total turnover as well.

Issues Involved:
1. Transfer Pricing Adjustment
2. Treatment of Interest on Term Deposit Receipts and Miscellaneous Income
3. Deduction under Section 10A of the Income Tax Act
4. Software Expenses

Detailed Analysis:

1. Transfer Pricing Adjustment:

The Assessee and the Revenue both appealed against the transfer pricing adjustment made by the TPO and partly confirmed by the CIT (A). The Assessee argued that the CIT (A) erred by only allowing partial relief and requested the deletion of the adjustments. The Revenue contended that the CIT (A) erred in deleting the addition made by AO based on the TPO's working, where the operating margin was taken at 11.96% instead of 9.47% as claimed by the Assessee.

The Assessee, a domestic company formed by a shareholding between Sitel Group and TATA group, provided software development services to its overseas enterprise. The Assessee used the TNM method to benchmark its ALP and excluded idle capacity costs while calculating operating profit margins. The TPO did not allow this exclusion and fixed the arm's length margin at 11.96%, resulting in an adjustment of Rs. 5,11,22,000.

The CIT (A) admitted additional evidence and found that AEs retained varying amounts of revenue, leading to a partial adjustment. The CIT (A) considered a 6% profit margin appropriate for the AEs' services and restricted the adjustment to Rs. 54,56,479, giving relief of Rs. 45,665,521.

The ITAT found that the TPO's order lacked detailed reasoning and that the CIT (A) had shifted the tested party from the Assessee to the AE without a proper basis. The ITAT set aside both the CIT (A) and TPO's orders, directing the AO to reconsider the arms-length margin with due opportunity for the Assessee to present objections.

2. Treatment of Interest on Term Deposit Receipts and Miscellaneous Income:

The Assessee contested the treatment of interest earned on term deposit receipts and miscellaneous income as "income from other sources" instead of "business income." The ITAT upheld the CIT (A)'s decision, referencing previous ITAT Mumbai decisions which determined that such interest income does not have a direct connection with the Assessee's business activities and should be treated as income from other sources.

3. Deduction under Section 10A of the Income Tax Act:

The Assessee argued that communication line expenses should be reduced from both export turnover and total turnover while computing the deduction under Section 10A. The ITAT agreed with the Assessee, citing the Chennai Special Bench decision in ITO v. Sak Soft Ltd. and the jurisdictional High Court's decision in CIT v. Gem Plus Jewellery India Ltd., which held that expenses excluded from export turnover should also be excluded from total turnover. The ITAT directed the AO to exclude communication line charges from the total turnover.

4. Software Expenses:

The Assessee's ground regarding the disallowance of software expenses as capital expenditure was withdrawn during the proceedings. Therefore, this issue was not adjudicated.

Conclusion:

The Assessee's appeal was partly allowed for statistical purposes, and the Revenue's appeal was also allowed for statistical purposes. The matter regarding the transfer pricing adjustment was restored to the AO for fresh consideration, while the treatment of interest income and the deduction under Section 10A were decided against the Assessee and in favor of the Assessee, respectively. The software expenses issue was withdrawn by the Assessee.

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