2013 (11) TMI 216 - AT - Income Tax

Transfer Pricing Adjustment - Rejection of two comparable companies - Held that - in the period under consideration, comparable company was outsourcing most of its work whereas the assessee was carrying out the work by themselves - There is no dispute to the fact that the assessee providing business process outsourcing services to its AEs and operating in the ITES sector has no software product intangibles - a company having unique software developed in house which also renders specialized services in its area of specialization gets that sort of competitive edge that gives it an advantage - comparable company has developed unique software from which it would derive substantial benefits /advantages when compared with the assessee which is undertaking pure call centre services - company has a clearly demarcated call centre segment and segmental results are available in the audited financial statements of the company and therefore see no reason why this company should not be considered as a comparable - assessee has failed to demonstrate that there was any specific reason for the comparable company s profits to be abnormal in Assessment Year 2004-05 which could adversely affect its comparability. It is also seen that company has a clearly demarcated call centre segment and segmental results are available in the Annual Reports / audited financial statements of the company and TPO has allocated the unallocated expenses in the ratio of sales, which also cannot be faulted - action of the TPO in rejecting these two companies as comparables in the case on hand for Assessment Year 2004-05 is upheld - Following decision of 24/7 Customer. Com (P.) Ltd. Versus Deputy Commissioner of Income-tax, Circle 11(2), Bangalore 2013 (1) TMI 45 - ITAT BANGALORE - Decided in favour of Revenue. Deduction u/s 10A/10B - Set off of brought forward business loss - Held that - After making all such computation the assessee would be entitled to the benefit of set off or carry forward of loss as provided u/s 72 of the Act. That is the benefit which is given to the assessee under the Act irrespective of the nature of business which he is carrying on. The said benefit is available even to undertakings u/s 10B of the Act. The expression deduction of such profits and gains as derived by an undertaking shall be allowed from the total income of the assessee , has to be understood in the context with which the said provision is inserted in Chapter III of the Act. Sub-section (4) of section 10A clarifies this position. It provides that the profits derived from export of articles or things from computer software shall be the amount which bears to the profits of the business of the undertaking, the same proportion as the export turnover in respect of such articles or things or computer software bears to the total turnover of the business carried on by the undertaking. Therefore, it is clear that though the assessee may be having more than one undertaking for the purpose of section 10A it is the profit derived from export of articles or things or computer software from the business of the undertaking alone that has to be taken into consideration and such profit is not to be included in the total income of the assessee. It is only after the deduction of the said profits and gains, the income of the assessee has to be computed - As the income of 10-A unit has to be excluded at source itself before arriving at the gross total income, the loss of non 10-A unit cannot be set off against the income of 10-A unit u/s 72. The loss incurred by the assessee under the head profits and gains of business or profession has to be set off against the profits and gains if any, of any business or profession carried on by such assessee. Therefore as the profits and gains under section 10-A is not be included in the income of the assessee at all, the question of setting off the loss of the assessee of any profits and gains of business against such profits and gains of the undertaking would not arise. Similarly, as per section 72(2), unabsorbed business loss is to be first set off and thereafter unabsorbed depreciation treated as current years depreciation u/s 32(2) is to be set off. As deduction u/s 10A has to be excluded from the total income of the assessee, the question of unabsorbed business loss being set off against such profit and gains of the undertaking would not arise - Following decision of CIT v. Yokogawa India Ltd. 2011 (8) TMI 845 - Karnataka High Court - Decided against Revenue. Deduction u/s 10A - Reduction of telecommunication expenses - Held that - The total turnover of the business carried on by the undertaking would consist of the turnover from export and the turnover from local sales. The export turnover constitutes the numerator in the formula prescribed by sub-section (4). Export turnover also forms a constituent element of the denominator in as much as the export turnover is a part of the total turnover. The export turnover, in the numerator must have the same meaning as the export turnover which is constituent element of the total turnover in the denominator. The legislature has provided a definition of the expression export turnover in Expln.2 to s.10A which the expression is defined to mean the consideration in respect of export by the undertaking of articles, things or computer software received in or brought into India by the assessee in convertible foreign exchange but so as not to include inter alia freight, telecommunication charges or insurance attributable to the delivery of the articles, things or software outside India. Therefore in computing the export turnover the legislature has made a specific exclusion of freight and insurance charges. The submission which has been urged on behalf of the revenue is that while freight and insurance charges are liable to be excluded in computing export turnover, a similar exclusion has not been provided in regard to total turnover. The submission of the revenue, however, misses the point that the expression total turnover has not been defined at all by Parliament for the purposes of s.10A - purpose of applying the formula under sub-section (4) of section 10B, the freight, telecom charges or insurance attributable to the delivery of articles or things or computer software outside India or the expenses, if any, incurred in foreign exchange in providing the technical services outside India are to be excluded both from the export turnover and from the total turnover, which are the numerator and the denominator respectively in the formula - Following decision of CIT v. Gem Plus Jewellery India Ltd. 2010 (6) TMI 65 - BOMBAY HIGH COURT - Decided against Revenue.

Summary

Issues Involved:
1. Transfer Pricing Adjustment
2. Corporate Tax: Setting off brought forward business loss and unabsorbed depreciation
3. Computation of deduction under section 10A
4. Levy of interest under section 234B

Detailed Analysis:

1. Transfer Pricing Adjustment:

Approach of the Assessee and TPO:
- The assessee aggregated all international transactions using the Transactional Net Margin Method (TNMM) and identified six comparable companies with an average margin of 11.87%. The TPO rejected this study and identified eight different comparables with an average margin of 34.49%, leading to a proposed adjustment of Rs. 2,03,04,850.

CIT(A) Decision:
- The CIT(A) upheld the TPO's rejection of the assessee's study but deleted two comparables due to abnormal profits/losses and granted a standard deduction of 5% from the arithmetic mean of the profit margin of comparables, resulting in a partial adjustment of Rs. 1,49,75,036.

Tribunal's Analysis:
- Nucleus Net Soft & GIS India Ltd.: Accepted as comparable by both parties.
- Wipro BPO Limited: Excluded due to disproportionate turnover compared to the assessee.
- Vishal Information Technologies Ltd.: Excluded as it outsources most of its work.
- Tricom India Ltd.: Excluded due to ownership of unique software product intangibles.
- Fortune Infotech Limited: Excluded for owning unique web-based software.
- Spanco Telesystems & Solutions Limited: Retained as a comparable due to clear segmental results.
- Ultramarine Pigments Limited: Retained as a comparable despite high profits, as no specific reason for exclusion was demonstrated.
- Allsec Technologies Ltd.: Retained as a comparable since both parties agreed on its inclusion.

Objections to TPO's Exclusions:
- Ace Software Exports Ltd.: Excluded as its transactions are with a single enterprise, making it an AE.
- MCS Limited and Tata Share Registry Ltd.: Excluded due to catering to the domestic market, failing the export filter.

2. Corporate Tax: Setting off Brought Forward Business Loss and Unabsorbed Depreciation:

Assessee's Argument:
- The deduction under section 10A should be computed without setting off brought forward business loss and unabsorbed depreciation.

Tribunal's Decision:
- Following the jurisdictional High Court's decision in Yokogawa India Ltd., the deduction under section 10A is to be calculated without setting off carried forward business loss, allowing the assessee's ground.

3. Computation of Deduction under Section 10A:

Revenue's Argument:
- The CIT(A) erred in directing the AO to recompute the deduction under section 10A by reducing telecommunication expenses from both export turnover and total turnover.

Tribunal's Decision:
- Following the jurisdictional High Court's decision in Tata Elxsi Ltd., expenses excluded from export turnover should also be excluded from total turnover to maintain parity. The CIT(A)'s order was upheld.

4. Levy of Interest under Section 234B:

Assessee's Argument:
- Challenged the levy of interest under section 234B.

Tribunal's Decision:
- The levy of interest is consequential and mandatory. The AO is directed to recompute the interest while giving effect to this order.

Conclusion:
- The Tribunal partly allowed both the assessee's and revenue's appeals, directing specific inclusions/exclusions of comparables and adjustments to the working capital, and upheld the CIT(A)'s decisions on corporate tax and section 10A computation.