2018 (5) TMI 343 - AT - Income Tax

TPA - margin adopted for US transactions - mark-up applied in the MAP Resolution for USA transactions - Held that - Following the decision in the case of J P Morgn Services Pvt. Ltd. (2015 (12) TMI 296 - ITAT MUMBAI) we hold that the margin adopted for US transactions, in ITES Segment, as was decided in the MAP Resolution, shall be adopted for non-US transactions as well. The TPO/A.O. is directed accordingly. Deduction u/s.10A - Held that - The issue is squarely covered by the judgment of the Hon ble jurisdictional High Court in the case of Tata Elxsi Ltd. (2011 (8) TMI 782 - KARNATAKA HIGH COURT ) in which it has been held that if certain expenses are excluded from export turnover, then the same should also be excluded from the total turnover.

Issues Involved:

1. Transfer Pricing Adjustments for Software Development Services (SWD) and IT Enabled Services (ITES) segments.
2. Deduction under Section 10A of the Income Tax Act.
3. Application of Mutual Agreement Procedure (MAP) margins to non-USA transactions.

Detailed Analysis:

1. Transfer Pricing Adjustments for SWD and ITES Segments:

For Assessment Year 2008-09, the Transfer Pricing Officer (TPO) proposed adjustments of ?4,44,90,888 for the Software Development Services segment and ?3,42,26,973 for the ITES segment, totaling ?7,87,17,861. Consequently, the assessee's income was determined at ?8,46,69,607 after disallowing the deduction under Section 10A of ?59,25,686. For Assessment Year 2009-10, the TPO proposed adjustments of ?5,90,21,801 for the Software Development Services segment and ?2,60,38,856 for the ITES segment, totaling ?8,50,60,657. The assessee's income was determined at ?9,46,17,689 after disallowing the deduction under Section 10A of ?59,72,945.

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

The CIT (Appeals) allowed partial relief by upholding the application of the turnover filter and granting relief in the computation of deduction under Section 10A. The Revenue's appeal contested the exclusion of internet charges and foreign travel expenses from both export turnover and total turnover while computing the deduction under Section 10A. The Tribunal upheld the CIT (Appeals)'s decision, citing the jurisdictional High Court's judgment in Tata Elxsi Ltd. (349 ITR 98), which mandates that if certain expenses are excluded from export turnover, they must also be excluded from total turnover.

3. Application of MAP Margins to Non-USA Transactions:

The assessee filed for Mutual Agreement Procedure (MAP) under Article 27 of the India-USA DTAA, which concluded with the CBDT's letter dated 28.10.2015. The MAP resolution determined a margin of 18.82% for USA transactions in the ITES segment for Assessment Year 2008-09 and 15.27% for Assessment Year 2009-10. The assessee argued that these margins should also apply to non-USA transactions, as no distinction was made between USA and non-USA transactions in the annual accounts or by the authorities. The Tribunal agreed, following the ITAT Mumbai Bench's decision in J.P. Morgan Services Pvt. Ltd. and the co-ordinate bench's decision in CGI Information Systems & Management Consultants Pvt. Ltd., where similar margins were applied to non-USA transactions due to the insignificant percentage of non-USA transactions (7.14% for 2008-09 and 7.72% for 2009-10).

Conclusion:

The Tribunal partly allowed the assessee's appeals for Assessment Years 2008-09 and 2009-10 for statistical purposes, directing that the margins determined in the MAP resolution for USA transactions be applied to non-USA transactions. The Revenue's cross appeal for Assessment Year 2008-09 was dismissed. The Tribunal's order emphasized the consistent application of margins and upheld the CIT (Appeals)'s decisions regarding the computation of deductions under Section 10A.

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