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2014 (10) TMI 493 - AT - Income TaxArm s length price adjustment International transaction with IT and ITES - Low end back office support services - Held that - Assessee is a 100% Export Oriented Unit (EOU) engaged in providing low end back office support services - As both the units of the assessee are situated at Software Technology Park, deduction u/s.10A was claimed in the return of income - During the year under consideration, assessee had also entered into transaction in connection with IT & ITES activity undertaken by it with its associated enterprises - the assessee has benchmarked the low end back office support services rendered by it to its AE on an aggregated basis - The affair of the assessee company demonstrates that assessee company is a low end back office support services provider - The assessee has applied transactional net margin method (TNMM) as the most appropriate method to test the international transactions and operating profit to total cost as profit level indicator (PLI) - the PLI of the assessee is 18.18%, which is higher than all comparable companies - the international transaction of the assessee was at arm s length price - The remaining set of 17 comparable companies were having an arithmetic mean of 32.33% - After considering overall PLI of assessee at 17.38% an upward adjustment of ₹ 16,83,86,191/- was made by TPO to the transfer price. The company is a knowledge process outsourcing (KPO) engaged in providing data analysis and data process solutions, online operation support, customer relationship management support, data de-duplication services etc. - Since functionally, it is different from assessee company, DRP was not justified in not excluding the same from the list of comparables - the AO has called for information with respect to this company u/s.133(6), wherein it was found that company is engaged in providing services under IT segment and it is functionally comparable to the assessee. The assessee has placed segment-wise revenue in case of engineering division at ₹ 218,000,505/, and in case of Information Technology Services division, at ₹ 385,147,981 - If we will take correct segmental revenue of information technology service as per audited accounts at ₹ 385,147,981/- in place of ₹ 208,000,505/-, PLI will be much more than 35.30% - There appears to be some contradiction/ error which requires examination on the part of the lower authorities - the AO/TPO is directed to verify and compare the revenue of IT segment of Acropetal Technologies Ltd. with that of assessee company in place of revenue of its engineering design and services the matter is remitted back to the AO for fresh adjudication Decided in favour of assessee. Disallowance u/s 40(a)(v) - Tax borne by employer which was claimed as exempt by the employee u/s.10(10CC) of the Act Held that - Following the decision in The Commissioner of Income Tax Versus M/s. Gem Plus Jewellery India Ltd. 2010 (6) TMI 65 - BOMBAY HIGH COURT - the AO is directed to allow deduction u/s10A on the enhanced business profit of the assessee i.e. profit to be increased by the amount of disallowance made u/s 40(a)(v) since the assessee has no income other than the income eligible for deduction u/s.10A of the Act - the AO is directed to allow the claim of deduction u/s.10A on the profit of business as increased by the disallowance made on account of foreign exchange loss - the purpose of excluding some items of expenditure mentioned in the definition of export turnover is to ensure that deduction is given only for the consideration for the export of the software and not for amounts received merely as reimbursement of the expenses - It depends on the manner in which bills are raised by the assessee - The assessee has made a specific claim before the CIT that it has excluded those receipts which it received merely as reimbursement of expenses and there is no need to exclude those items further as has been done by the CIT the matter is to be remitted back to the AO Decided in favour of assessee.
Issues Involved:
1. Adjustment to Arm's Length Price (ALP) in respect of international transactions. 2. Denial of Section 10A benefit on disallowance made under Section 10(10CC). 3. Disallowance in respect of foreign exchange loss. 4. Exclusion of expenditure incurred in foreign currency from export turnover. 5. Re-computation of deduction for the purposes of Section 10A and levy of interest. Detailed Analysis: 1. Adjustment to Arm's Length Price (ALP) in respect of international transactions: The assessee, a wholly owned subsidiary of Lionbridge Mauritius Limited, provided IT and ITES services to its associated enterprise (AE). The Transfer Pricing Officer (TPO) rejected the internal Transactional Net Margin Method (TNMM) used by the assessee, arguing that each function and transaction must be benchmarked separately. The TPO used external TNMM and identified 22 comparables, later reduced to 17 by the Dispute Resolution Panel (DRP), resulting in an upward adjustment of Rs. 10,39,54,664/- to the ALP. The assessee contested the inclusion of Mold-Tek Technologies Limited, Eclerx Services Ltd., and Acropetal Technologies Ltd. as comparables, arguing they were functionally different. The Tribunal found Mold-Tek and Eclerx to be Knowledge Process Outsourcing (KPO) providers and thus not comparable. The Tribunal directed the TPO to verify the correct segmental revenue of Acropetal Technologies Ltd. and decide afresh. 2. Denial of Section 10A benefit on disallowance made under Section 10(10CC): The AO/TPO disallowed the deduction under Section 10A on the revised business profit enhanced due to disallowance under Section 40a(v). The Tribunal directed the AO to allow deduction under Section 10A on the enhanced business profit, following the decision of the Bombay High Court in the case of Gem Plus Jewellery India Pvt Ltd (330 ITR 175). 3. Disallowance in respect of foreign exchange loss: The AO disallowed the foreign exchange loss, treating it as contingent. The Tribunal, relying on the Supreme Court's decision in CIT vs. Woodward Governor India (P) Ltd. (312 ITR 254), directed the AO to allow the claim of deduction under Section 10A on the profit increased by the disallowance of foreign exchange loss. 4. Exclusion of expenditure incurred in foreign currency from export turnover: The AO excluded expenditure incurred in foreign currency from the export turnover. The Tribunal restored the issue to the AO for re-examination, following its earlier decision in the assessee's case for the A.Y. 2004-05, where it was directed to ensure that only the consideration for the export of software is included in the export turnover. 5. Re-computation of deduction for the purposes of Section 10A and levy of interest: The Tribunal directed the AO to recompute the deduction under Section 10A by including the disallowed amounts in the business profit and to levy interest accordingly. Conclusion: The appeal was partly allowed, with directions to the AO/TPO to re-examine specific comparables and recompute the deductions under Section 10A, ensuring compliance with the Tribunal's and higher courts' decisions. The Tribunal emphasized the functional differences in comparables and the correct computation of segmental revenues, aligning with established legal precedents.
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