9911796707
TMI Blog2009 (12) TMI 668X X X X Extracts X X X X X X X X Extracts X X X X ..... e facts and circumstances of the case. 2. The ld. CIT(A), as well as ld. Assessing Officer/TPO have erred in law as well as facts of the case in not accepting the Arm's Length Price (hereinafter referred as 'ALP') determined by the appellant. 3. The ld. CIT(A), as well as ld. Assessing Officer/TPO have erred in law as well as facts of the case by passing an order in a mechanical manner by ignoring the fact that the appellant is entitled to deduction under section 10A of the Act and there is not incentive for it to manipulate the price of International Transaction. 4. The ld. CIT(A), as well as ld. Assessing Officer/TPO have ignored the factual position that the associated enterprise of the appellant, i.e., RCS Centre Corpn., has incurred losses and as such, there is no transfer of profits by the appellant to its associated enterprise. 5. The ld. CIT(A), as well as ld. Assessing Officer/TPO have erred in determining the ALP by taking the appellant as the tested party and by rejecting the submission of the appellant that RCS Centre Corpn. (now known as Global Vantedge Inc.) has to be considered as the tested party. 6. The ld. CIT(A), as well as the ld. Assessing Officer/TPO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue, it is seen that the grounds raised by the assessee and revenue revolved around the issue regarding the determination of the Arm's Length Price in respect of transactions entered into by the assessee with related parties. 6. Under the business profile, the TPO mentioned that the assessee is subsidiary of Global Vantedge, Mauritius and which in turn is a wholly-owned subsidiary of Global Vantedge, Bermuda. The assessee is engaged in rendering IT enabled services in the field of credit collection and telemarketing services and is eligible for deduction under section 10A of the Act as a STPI unit. The RCS Centre Corpn., a Delaware Corporation, is wholly-owned subsidiary of Global Vantedge, Bermuda. As the assessee and RCS have the common shareholder of Global Vantedge, Bermuda, which holds more than 26 per cent shares (directly and indirectly), they are associated enterprise by virtue of provisions of section 92A(2)(b) of the Act. RCS is engaged in the business of contracting with clients located in USA, to provide them debt collection and telemarketing services. RCS does not own the requisite infrastructure or capacity for execution of that work. The work is actually performed in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 14,70,10,071 while making the assessment under section 143(3) of the Act. 10. Being aggrieved with the Assessing Officer's order, the assessee preferred an appeal before the ld. CIT(A) raising as much as 25 grounds of appeal which have been reproduced by the ld. CIT(A) in his order. After considering the various grounds raised by the assessee and submission of the assessee, the following issues were framed by the ld. CIT(A) for his consideration :- "1. Whether Assessing Officer/TPO have erred while determining the ALP by taking appellant as the tested party as opposed to the analysis carried out by the appellant in which RCS was accepted as the tested party? 2. Can the ALP of the international transaction between the appellant and its associated enterprise exceed the total amount of revenue earned from clients by the appellant and RCS together? 3. Whether Assessing Officer/TPO erred in rejecting the ALP determined by the appellant? 4. In case the ALP determined by either the appellant or the Assessing Officer is found to be improper, what will be the appropriate ALP?" 11. The aforesaid four issues have been discussed and decided by the ld. CIT(A) by observing and holding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sharing model between two entities (say A & B), it may be contended that the amount of revenue received by an entity (say entity A, is lower than the fair amount of revenue receivable by it is due to the other entity (say entity B) receiving a larger share. Such unfairness may be mitigated by requiring the entity B to retain only its fair share and give up the balance amount in favour of entity A. In the worst case, entity B may be required to give up its entire share of revenue which would result in entity A receiving 100 per cent of the revenue. However, it cannot be logical to say that the fair amount of revenue to be received by entity A is more than 100 per cent of the total revenue earned by both A and B. Under such circumstances, entity B will have to pay the additional amount from its internal sources which in addition to being a highly absurd proposition, may also lead to the bankruptcy of B since this cannot be sustained over a period of time. 5.2.3 In view of the above discussions, the contention of appellant is found to be acceptable, especially with reference to the object and scheme of transfer pricing regulation which govern the international transaction undertaken ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inally selected in the later part of this order, also comes to 1.64 per cent of turnover. Hence, the industry average shown by ICRA report for the financial year 2003 at 1.40 per cent is very much reliable and authentic figure. Keeping in view the functional profile of the two entities (appellant and RCS) including the FAR analysis and also keeping in view the fact that as per rule 10B(4) on data for the current year to be used. As in the financial year 2002-03, the average expenditure on selling expenses in the software industry were in the range of 1.4 per cent accordingly I am of the view that a share of 1.40 per cent of the revenue is adequate to compensate RCS for its activities. Thus, as per this hypothesis, the ALP determined cannot exceed 98.60 per cent of the revenue earned by the Global Vantedge Group as a whole, i.e., the ALP 98.60 per cent of the revenue earned by the Global Vantedge Group as a whole, i.e., the ALP has to be restricted to Rs. 9,16,55,231 (Rs. 9,29,56,624 x 98.6 per cent)." 14. With regard to the question whether TPO or the Assessing Officer has erred in rejecting the Arm's Length Price determined by the assessee, the ld. CIT(A) has given his decision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on in a manner prejudicial to the interest of the other associated enterprise because of several reasons. 5.4.2 As regards contention of the appellant that transaction of the appellant with independent clients, should not be benchmarked under TNMN I agree that when TNMN is used as the Most Appropriate Method to determine the Arm's Length Price, the TNMN, as the name itself suggests, evaluates profitability of transactions rather than profitability of an enterprise. Transaction of different nature cannot be aggregated for the purpose of comparison under TNMN. In practice though the profitability of comparable entities is used to benchmark the international transactions of taxpayers, however, in such a scenario an underlying assumption overrides the analysis for the lack of data. The acting assumption in such a scenario is that due to a well designed functional analysis only those companies are selected as comparables which have undertaken homogeneous and comparable transactions. Thus, in such a scenario, the profitability of the comparable entities, in effect, represents the profitability of comparable transactions. Even the OECD transfer pricing guidelines for Multinational Enter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the submissions of the appellant and looking to the fact that the remaining 6 comparables were established entities, accordingly adjustment needs to be made while doing the comparability analysis. Normally wherever an entity is established it always carried some surplus capacity vis-a-vis present/projected business operations. Looking into the IT industries which were in booming stage I hold that a surplus capacity to the extent of 1/3rd of the existing capacity is treated as normal in this industry in anticipation of future growth in business. Hence, an adjustment to the profitability of the comparables should be made to the extent of 33.33 per cent. This is also in accordance with the provision of rule 10B(2) which states that condition prevailing in the market in which the tested party and comparables operates have to be considered while judging comparability of an international transaction with an uncontrolled transaction. The working submitted by the appellant, however, tries to adjust the profitability of the appellant by eliminating the idle costs incurred by the appellant due to excess capacity due to initial business phase and low volume of business. However, in order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xceeds the total revenue earned by the group as a whole. In view of the adjudication made for ISSUE 2, the ALP cannot exceed Rs. 9,16,55,231, therefore, the ALP is determined to be Rs. 9,16,55,231. Hence, additions to the income of the appellant is confirmed at Rs. 83,88,625 (i.e., Rs. 9,16,55,231 - i.e., the maximum ALP less Rs. 8,32,66,596, i.e., the actual value of the international transaction)." 17. With regard to the assessee's claim that there should be an adjustment to the extent of +/- 5 per cent under the proviso to section 92C(2) of the Act, the ld. CIT(A) has decided the point by observing and holding as under :- "Adjustment of +/- 5 per cent under proviso to section 92C(2) As far as relief on account of +/- 5 per cent adjustment under the proviso to section 92C(2) is concerned, in order to examine the contention of the appellant, it becomes pertinent to have a look at the said section, as reproduced hereunder :- "The most appropriate method referred to in sub-section 92C(2) shall be applied, for determination of arm's length price, in the manner as may be prescribed : Provided that where more than one price is determined by the most appropriate method, the arm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of Arm's Length Price in respect of the transactions entered into by the assessee with its associate enterprises, namely, RCS Centre Corpn. Therefore, the order of ld. CIT(A) is upheld, and the grounds raised by the assessee as well as by the revenue on this issue are rejected. 20. Similarly, in the assessment year 2004-05, an identical issue about the determination of Arm's Length Price is involved and in that year, the ld. CIT(A) determined the Arm's Length Price in the same manner or basis as done in the assessment year 2003-04. The Arm's Length Price determined by the ld. CIT(A) is as under :- "8. Re-computation of ALP To summarize, the ALP determined by the Assessing Officer/TPO needs to be recomputed in view of matters adjudicated above. Therefore, the ALP is recomputed after making the following adjustments :- 1. Out of 6 comparables whose operating margin is used by the TPO to benchmark the international transaction, 2 comparables namely Genesys and Hinduja TMT are rejected. The operating margin of these 4 comparables is summarized as below :- Sl. No. Name of the Company OP/TC 1. Ace Software 1.44% 2. Allsec (36.12)% 3. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se of calculating the deduction under section 10A of the Act. The assessee has also taken a ground for authorities below have erred in excluding the miscellaneous income while computing the deduction under section 10A of the Act. 24. We have heard both the parties and have carefully gone through the orders of the authorities below. 25. Section 10A provides for a deduction of such profits and gains as are derived by an undertaking from the export of articles or things or computer software from the total income of the assessee. It is, thus, clear that deduction to be allowed under section 10A is in respect of profit and gains derived by an undertaking from the export of articles or things or computer software. The expression used by the Legislature is derived by undertaking from the export of articles or things or computer. Therefore, earning of interest from fixed deposits pledged with bank for bank guarantees and interest in fixed deposits kept in lien in favour of IBM for the purpose of obtaining computers on lease and the miscellaneous income cannot be considered to be a profit derived by an undertaking from the export of articles or things or computer software. Recently, the H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gibility, sub-section (1) purports to restrict the quantum of deduction to a specified percentage of the profits. This is the importance of the words "derived from an industrial undertaking" as against "profits attributable to an industrial undertaking." DEPB/Duty drawback are incentives which flow from the schemes framed by the Central Government or from section 75 of the Customs Act, 1962. Incentive profits are not profits derived from eligible business under section 80-IB : they belong to the category of ancillary profits of such undertaking. Profits derived by way of incentives such as DEPB/Duty drawback cannot be credited against the cost of manufacture of goods debited in the profit and loss account and they do not fall within the expression "profits derived from industrial undertaking" under section 80-IB." 26. In the light of the aforesaid proposition laid down by the Hon'ble Supreme Court in the case of Liberty India (supra), we do not find any merit in the claim of the assessee that interest from fixed deposit, etc., and miscellaneous income should be taken into account for the purpose of computing deduction under section 10A of the Act. Thus, these grounds raised by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 154 of the Act dated 12-6-2006 whereby he set off the brought forward loss of assessment year 2002-03 to the extent the total income of Rs. 2,89,84,301 determined for the assessment year 2003-04 and, thus, arrived at the total income of Rs. Nil. After set off of the loss of assessment year 2002-03, the business loss and unabsorbed depreciation pertaining to that assessment year 2002-03 still remained to be set off are as under :- (i) Unabsorbed loss brought forward from assessment year 2002-03 89,08,926 (ii) Unabsorbed depreciation 82,93,021 Aggregating Total 1,72,01,947 The aforesaid amount of Rs. 1,72,01,947 has been set off against the profit for the assessment year 2004-05 by the Assessing Officer before allowing or determining the amount of deduction available to the assessee under section 10A of the Act. 32. From the facts narrated in immediately preceding para, it becomes clear that in the assessment year 2003-04, the assessee has itself made a claim to set off brought forward losses against the income for assessment year 2003-04 and no claim of deduction under section 10A was made with regard to the profit determined before setting off of brought forwa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the income one has to take into consideration, the various additions and deletions in terms of the Act. In fact, the petitioner knowing fully well has chosen to take into consideration the allowability of depreciation for the purpose of calculating of total income. But curiously an argument has now been advanced that exemption in terms of section 10B could also be on commercial basis not necessarily in terms of the calculation. We do not accept this submission, section 10B cannot be read in isolation of other provisions. It is only an exemption provision. Exemption cannot be fanciful and it has some rationale with other provisions of the Act. Therefore, a combined reading of the definition of exemption, total income-tax liability deductibility, etc., one has to come to a conclusion that calculation as far as possible is to be in terms of the Income-tax Act. That is exactly what has been done by the assessee. Having calculated in a particular manner, now it does not lie in the mouth of the assessee to contend contra in these proceedings. It cannot be argued that the calculation so provided is on a mistaken basis or that could be on commercial basis. We are not prepared to accept ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Income-tax Act. The Hon'ble High Court has also held that calculation of deduction is to be made in terms of the provisions of Income-tax Act. Therefore, the assessee's contention that the definition of 'total income' given under section 2(45) of the Act cannot be imported into for the purpose of determining profit to be deducted from the total income under section 10A cannot be accepted. The assessee's contention that provisions of section 32(2) pertaining to the set-off of brought forward unabsorbed depreciation cannot be applied while determining the profit of undertaking under section 10A is also not tenable, which contention is against the very scheme of the section 10A read with other provisions of the Income-tax Act. It is not in dispute that under section 10A, the deduction of profit is to be allowed from the total income and, therefore, while determining profit of eligible undertaking under section 10A, the provisions of sections 28 to 44D and provisions relating to the adjustment of brought forward losses of the same eligible business are to be taken into account as so propounded in the decision of Hon'ble Karnataka High Court in the case of Himatasingike Seide Ltd. (su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ain incomes are not included under section 10 of the Income-tax Act. It depends on the particular case where certain income, in respect of which the Act is made inapplicable to the scheme of the Act, and in such a case, the profit and loss resulting from such a source do not enter into the computation at all. But there are other sources which for certain economic reasons are not included or excluded by the 'will' of the Legislature. In such a case we must look to the specific exclusion that has been made." 13. In view of the abovereferred judgment, we have to consider the exclusion or deduction as per section 10A. As pointed out earlier, section 10A specifically states that a deduction is to be given. The deduction is in respect of profits and gains and the word 'such' mentioned before the profit and gains refers to the profits and gains of the undertaking, which is related in the export of articles or things or computer software. Before the word 'undertaking', it is qualified by the word 'an'. It means that it refers to a single undertaking. The words 'profit and gains' and its computation is mentioned under section 29 of the Income-tax Act. As per section 29, profit and gains ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 36. From the said decision, it is clear that the assessee's contention that profit of the eligible unit, i.e., section 10A unit should not be included in the total income has been rejected by the Tribunal. After amendment made by the Finance Act, 2000, with effect from 1-4-2001, section 10A mentions the deduction of such profits and gains as derived by undertaking from the export of articles or things or computer software, and it does not refer that such profits and gains derived by undertaking from the export of articles or things or computer software will not be included in the total income. Thus, section 10A specifically states that a deduction is to be given from the total income. The Tribunal further observed that section 10A refers to eligible undertaking. Thus, the business losses of the undertaking, whose income is not exempt under section 10A, cannot be set off to ascertain the profits and gains derived by an undertaking from the export of computer software, i.e., section 10A unit, and hence, business losses of other units will not be set off against the profits of the undertaking engaged in export of computer software for the purpose of determining the allowable deduction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. (supra) and has observed and hold as under :- "20. After considering the rival contentions, the materials on record and the legal propositions on the issue we note that a perusal of the provisions contained in section 10A along with sub-section (6) shows that it is a distinct and separate deeming provision which laid down a special manner of computation of profits and gains entitled for deduction under section 10A of the Act. Moreover sub-section (6) of section 10A is of an overriding nature providing specifically that during each of the assessment years in the tax holiday period in which the assessee is entitled to deduction under section 10A of the Act, this provision will be applied as if the undertaking is an independent unit and is the one and the only source of income of the assessee. Therefore, while computing the deduction under section 10A, the profits and gains of that undertaking for the purpose of determining the quantum of deduction is to be computed if such eligible activity of the said undertaking is the only source of income of the assessee and as such before computing the deduction under section 10A the income, profit and loss pertaining to the other activit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rendered in favour of the assessee without applying the ratio of the decision of Hon'ble Karnataka High Court in the case of Himatasingike Seide Ltd. (supra). It is well-settled that the decision of High Court has a binding force as compared to the decision of Tribunal. There is no decision of any other High Court or jurisdictional High Court contrary to the decision of Karnataka High Court. In this view of the matter, the aforesaid decision of Tribunal in the case of KPIT Cummins Infosystems (India) (P.) Ltd. (supra) cannot be applied to the present case. 43. The decision of ITAT, Mumbai Bench in the case of Enercon Wind Farms (Krishna) Ltd. (supra) was rendered in respect of setting off the business loss brought forward from assessment year 1999-2000, which is to be considered on a different footing in the light of insertion of words "ending before 1-4-2001" in sub-section (6) of section 10A by the Finance Act, 2000. After the amendment with effect from 1-4-2001 onwards, the brought forward loss pertaining to the specific undertaking eligible for deduction under section 10A are allowed to be carried forward and set off against the income of such undertaking in the future assess ..... X X X X Extracts X X X X X X X X Extracts X X X X
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