9911796707
TMI Blog2009 (12) TMI 668X X X X Extracts X X X X X X X X Extracts X X X X ..... ustment of 5 per cent to be given while determining the Arm s Length Price, the ld. counsel for the assessee has not been point out as to how and in what manner, the order of ld. CIT(A) in rejecting this claim of the assessee is improper and unjustified. Since both the parties have not been able to controvert the findings recorded by the ld. CIT(A) or point out any material to enable us to take a view other than view taken by the ld. CIT(A), We are inclined to uphold the order of ld. CIT(A) on the point of determination 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. 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 ld. CIT(A) has also decided the issue about the adjustment of + 5 per cent as per proviso to section 92C(2) in the same manner as have b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ind any justification cause to interfere with the order of the ld. CIT(A) whereby the ld. CIT(A) has upheld the order of the AO in setting-off of unabsorbed business losses or unabsorbed depreciation in respect of eligible unit brought forward from assessment year 2002-03 against the profit of same eligible unit for the purpose of determining the amount of deduction available u/s 10A to the assessee in the present assessment year 2004-05. Therefore, this ground raised by the assessee is decided against the assessee and in favour of the revenue. X X X X Extracts X X X X X X X X Extracts X X X X ..... ent year 2003-04 are as under :-- "1.(i)That the ld. CIT(A) ought not to have held that the total adjustments to be made in the hands of the assessee together with the ALP already reported by it cannot exceed the total revenue earned by the assessee and its AE from third party independent clients. (ii)That the TNMN (Transaction Net Margin Method) adopted by the assessee seeks to determine the arm's length price of the tested party only. It cannot capture the profitability of the AE, which is at the other end of the International Transaction. (iii)That the profit sharing motive and tax avoiding purpose cannot be taken as an essential ingredient for the TP purpose as such criteria would burden the operation of arm's length revenue and it would defeat the basic purpose of the arm's length principle and its foundation. This is against the internationally accept tenets of Transfer pricing as held in the case of the Australian Tax Office in W.R. Carpenter Holdings (P.) Ltd. et.al. v. CIT [2008] HCA 33. 2. The ld. CIT(A) ought to have upheld the arm's length price as determined by the Assessing Officer/TPO on a mark-up based average price of the comparables of 11.08 per cent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment proceedings, it was noticed by the Assessing Officer that the following international transactions were entered into by the assessee with its associated enterprises :-- Sr. No. Name & address of Associated Enterprises Description of transaction Amount paid/payable for the services provided Method for used deter- mining the ALP Book value of transaction (Rs.) Value of transaction as computed by the assessee having regard to the ALP (Rs.) 1. RCS Centre Corpn. 700 Larkspur Landing Circle, Suite 235, Larkspur, California 94939, USA Market support services 8,32,66,596 8,32,66,596 TNMN 8. Therefore, the Assessing Officer made reference under section 92CA(1) of the Act to the TPO for computation of Arm's Length Price in respect of the above transaction. The TPO after analyzing the international transaction, business model and the relationship between the assessee and associated enterprise concluded that associated enterprises is not to be treated a tested party. The TPO had chosen the assessee itself as the tested party and identified 9 Indian comparables. The average operating margin of the comparables was 11.88 per cent as against the loss of 53.5 per cent incurred by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lt to compare entitles in different jurisdictions since the facts and circumstances are different in each geographical location. Moreover, it is difficult to obtain all relevant facts that could lead to a proper FAR analysis. Further the relevant data which may be required to make the requisite adjustments is also very difficult to obtain in relation to the foreign comparables. In view of the above, I hold that international comparables cannot be accepted. This issue has, accordingly, been decided against the appellant." 13. On issue No. 2, the ld. CIT(A) has discussed the matter and given his finding as under :-- "5.2.1 The crux of the contention raised by the appellant is that in a revenue sharing arrangement between the entities, what may be questioned is the proportion of sharing between the entities and not the absolute amount of revenue itself which is subject of sharing because that is beyond the control of either the appellant or its associated enterprise(s). I would agree with such a view because the Indian Transfer Pricing Regulations only require us to analyse the transactions between associated enterprise and not the transactions with third parties since ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ir amount of revenue receivable by RCS for its services. 5.2.5 It is important to note that while determining the fees payable to any agency responsible for marketing, the complexity of the process being outsourced, the operating margins that the service provider is expected to earn, the size of the contract, etc., all play an important role. In order to determine the remuneration of RCS for its activities, the appellant was asked to furnish an independent research report/survey on the Indian BPO industry. The appellant submitted a report on the Indian BPO Industry prepared by INGRES, a division of ICRA Ltd. in December, 2003. The report suggests that on an average BPO companies have selling expenses of 1.40 per cent to 4.40 per cent of their turnover (referred as operating income in the report) over a period of three years (financial year 2001 to financial year 2003). Keeping in view this standard, the revenue retained by RCS (9.40 per cent) seems unreasonable. Though it is recognized that the standard as per the report (4.40 per cent to 1.40 per cent) is not a sacrosanct applicable across all the companies and in the absence of requisite information it is not possible to comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r should be the one determining the same, however, it should be subject to scrutiny by the tax administration so that any profit shifting methodology being adopted by the assessee can be rejected. However, with this power, also comes the responsibility of being judicious and, thus, the Assessing Officer/TPO have to exercise their authority in accordance the Transfer Pricing Regulations. I am though in agreement with the contention of the appellant that FAR Analysis forms the basic foundation on which the ALP is determined and its importance just cannot be overemphasized. I have provided full opportunity to the appellant to present the facts of the case, including FAR analysis, and, hence, has been adjudicated on merits in the subsequent paras of this order. Thus, for statistical purposes, this issue is decided against the appellant." 15. With regard to the question as what would be the appropriate Arm's Length Price in case the Arm's Length Price determined either by the assessee or by the TPO found to be improper, the ld. CIT(A) has decided the issue as under :-- "5.4.1 I have carefully gone through the various contentions and submission made by the appellant. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e used, the profits attributable to the transactions of the independent enterprise must not be distorted by controlled transactions of that enterprise." In view of above discussions, I hold that while applying the TNMN to determine ALP, the revenue earned by the appellant from servicing the independent clients, without any involvement of RCS should not be benchmarked. The proportionate costs (18.14 per cent) attributable to such revenue should be ignored while computing ALP of the international transactions. 5.4.3 As regards the objection raised by the appellant against the selection of comparables performing dissimilar functions, I have perused the profile of Genesys and Hinduja TMT and it is found that they are engaged in dissimilar activity profile vis-a-vis appellant. Hinduja TMT was also found to have substantial related party transactions. These two companies cannot be taken as comparable and are, thus, rejected for the purpose of determining the ALP. Further in relation to - Karvy Consultants, it was noticed that no data is available in the public domain for the relevant financial year, i.e., financial year 2002-03. The TPO erroneously used the data for financial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sing 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 9 comparables identified by the TPO, 3 companies namely Genesys and Hinduja TMT and Karvy Consultants are rejected. 2. The operating Margin of the remaining 6 comparables has been suitably adjusted to account for the idle capacity costs incurred additionally by the appellant. A statement showing the computation of average operating margin of the comparable is as per annexure. The computation of ALP on the basis of aforesaid average operating margin of comparables is given hereunder :-- Particulars Amount (Rs.) Total operating cost of the appellant as computed by TPO 22,46,97,971 Less : Operating Cost incurred in relation to service to third parties (18.14%) 4,07,60,212 Net operating cost in relation to the international transaction with RCS(A) 18,39,37,759 Arm's Length margin that should have been earned by the appellant, i.e., 38.11% of the Operating Cost (B)=(A)* -38.11% -7,00,98,680 Arm's Length Value of the International Transaction under- taken by the appellant (C)=(A) + (B) 11,38,39,079 Value a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t not exceeding 5 per cent of such arithmetic mean. It is clear from the language of the provision that the option is to take ALP which is not in excess of 5 per cent of the said mean. In the present case, since the difference (Rs. 83,88,635) between the ALP determined (Rs. 9,16,55,231) and value of transaction declared (Rs. 8,32,66,596) exceeds 5 per cent of the ALP (Rs. 9,16,55,231), no adjustment is allowable to the appellant. Thus, this ground is adjudicated against the appellant." 18. Being aggrieved, assessee as well as the department are in appeal before us. 19. During the course of hearing of this appeal, neither the ld. counsel for the assessee nor the ld. D.R. for the revenue have been able to point out any basis or material or criteria to controvert or to rebut the findings and conclusion arrived at by the ld. CIT(A) except by relying upon their respective stand taken before the ld. CIT(A). Though the ld. counsel for the assessee made a specific submission about the benefit of adjustment of ± 5 per cent to be given while determining the Arm's Length Price, the ld. counsel for the assessee has not been point out as to how and in what manner, the order of l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erating Cost (B)=(A)* 0.43% 1,681,412 Arm's Length Value of the International Transaction under-taken by the appellant (C)=(A) +(B) 392,707,428 Value at which international transaction between the appellant and RCS took place 393,386,386 Thus, the ALP determined on the basis of above working comes to Rs. 393,386,386 which is lower than the book value of the international transaction, as declared by the appellant. Therefore, the book value of the international transactions as declared by the appellant is accepted to be at ALP. Hence, entire addition of Rs. 5,22,28,112 made by the TPO to the income of the appellant is deleted." 21. The ld. CIT(A) has also decided the issue about the adjustment of + 5 per cent as per proviso to section 92C(2) in the same manner as have been decided by him in the assessment year 2003-04. 22. Thus, in the light of the decision, we have taken in assessment year 2003-04, the identical ground about the determination of Arm's Length Price raised by the revenue as well by the assessee in the assessment year 2004-05 are rejected. 23. In the assessment year 2004-05, the assessee has taken one more ground contending that the authorities below hav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) constitutes a stand-alone item in the matter of computation of profits. Sections 80-IB and 80-IA are a code by themselves as they contain both substantive as well as procedural provisions. Section 80-IB provides for the allowing of deduction in respect of profits and gains derived from the eligible business. The connotation of the words "derived from" is narrower as compared to that of the words "attributable to". By using the expression "derived from" Parliament intended to cover sources not beyond the first degree. Sections 80-I, 80-IA and 80-IB are to be read as having a common scheme. Sub-section (5) of section 80-IA (which is required to be read into section 80-IB) provides for the manner of computation of the profits of an eligible business. Such profits are computed as if such eligible business is the only source of income of the assessee. Therefore, devices adopted to reduce or inflate the profits of the eligible business have to be rejected in view of the overriding provisions of section 80-IA(5). Sections 80-I, 80-IA and 80-IB provide for incentives in the form of deductions which are linked to profits and not investment. On analysi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of CIT in revising the assessment order under section 263 by holding that before allowing the deduction under section 10A the brought forward losses and unabsorbed depreciation have to be adjusted before allowing the claim under section 10A. In view of this decision of the High Court, I hold that the Assessing Officer was right in holding the view that the claim under section 10A should be allowed only after adjusting the brought forward losses and unabsorbed depreciation. Therefore, this ground is dismissed." 30. We have heard both the parties and have considered various decisions cited by the ld. counsel for the assessee on this issue. 31. The assessee-company is engaged in the business of rendering business process out sourcing business. It started its business operation in the financial year 2001-02 relevant to the assessment year 2002-03. In the assessment year 2002-03, the assessee was assessed at business loss of Rs. 3,72,77,332 and also had unabsorbed depreciation to the extent of Rs. 89,08,926. In the assessment year 2003-04, the assessee's total income was initially assessed at Rs. 2,89,84,301. Thereafter, the assessee filed an application under section 154 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Total income has been defined as the total amount of income referred to in section 5, computed in the manner laid down in this Act. 9. Section 4 provides for charge of income-tax. 10. Section 5 provides for scope of total income. 11. Sub-section (1) of section 5 says that subject to the provisions of this Act, the total income of any previous year of a person who is a resident includes all income from whatever source derived which-- (a)is received or is deemed to be received in India in such year by or on behalf of such person; or (b)accrues or arises or is deemed to accrue or arise to him in India during such year; or (c)accrues or arises to him outside India during such year : Provided that in the case of a person not ordinarily resident in India within the meaning of sub-section (6) of section 6, the income which accrues or arises to him outside India shall not be so included unless it is derived from a business controlled in or a profession set up in India. 12. Chapter III provides for incomes which do not form part of total income. 13. Chapter IV provides for computation of total income. 14. Section 32 of the Income-tax Act provides for deduction on deprec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome. The petitioner by dividing depreciation contrary to section 32 has virtually taken exemption from payment of tax even for other business income in the case on hand. That cannot be allowed as rightly ruled by the Commissioner. The allowance of the depreciation by the Tribunal, in our view, is prejudicial to the interests of the revenue as argued by the department. The Tribunal has taken a narrow view of the matter without taking into consideration, the laudable object of exemption and at the same time providing for tax liability towards other liability. The interpretation has to be meaningful and acceptable and it cannot be against the intention of the legislation. Legislation never wanted the entire income to be exempted by taking advantage of section 10B of the Act. The approach of the Tribunal to our mind is incorrect and, hence, we find substance in the argument of the revenue." 34. In the light of the aforesaid decision of Hon'ble Karnataka High Court in the case of Himatasingike Seide Ltd. (supra), which has been rendered in the context of provisions contained in section 10B, which is analogous to the provisions contained in section 10A of the Act, it is clear tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ogawa India Ltd. (supra), the issue in dispute was whether the loss of non-eligible unit, i.e., non-section 10A unit can be set off against the income of eligible unit, i.e., section 10A unit. In this case, the ld. CIT(A) directed the Assessing Officer to allow exemption under section 10A without setting off the losses of the non-section 10A unit. On an appeal before the Tribunal, the Tribunal upheld the order of the ld. CIT(A) by observing and holding as under :-- "11. Section 10A was inserted by the Finance Act, 2000 with effect from 1st April, 2009 mentions the deduction of such profits and gains as derived by undertaking from the export of articles or things or computer software. This section does not refer that such profits and gains derived by undertaking from the export will not be included in the total income. Under section 10, the operative part of the section is that any income falling within the clause in section 10 shall not be included in computing the total income. From wording of sections 10 and 10A, it is clear that the Legislature was fully aware of the meaning of the words "amount not to be included and the deduction to be allowed". Hence, we are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be set off under section 72 of the Income-tax Act and the same is not mentioned under section 29 of the Income-tax Act. Hence, unabsorbed business losses will not be set off against the profit of the undertaking engaged in the export of computer software for the purpose of ascertaining the deduction admissible under section 10A. 14. As per section 72(2), unabsorbed business loss is to be first set off and thereafter unabsorbed depreciation treated as current years depreciation under section 32(2) is to be set off. For computing deduction under section 10A, we are concerned only with the profit derived from export of computer software. As already observed unabsorbed business losses of other units cannot be set off and, therefore, unabsorbed depreciation which is to be set off after unabsorbed business loss as per section 72(2) also cannot be set off for ascertaining the deduction under section 10A. 15. In the instant case, there is no unabsorbed depreciation or unabsorbed business loss in respect of software services division and, therefore, profits and gains of the software services division will be exempt under section 10A without setting off the loss of other division or the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... divisions will be exempt under section 10A without setting off the loss of other division. Thus, the Tribunal was concerned with the losses of other division other than the eligible division, and has specifically pointed out that there was no unabsorbed depreciation or unabsorbed business losses in respect of eligible unit, i.e., division of software services. Had there been unabsorbed business losses or depreciation in respect of eligible unit, the same would have been allowed to be set off against the profit of same eligible unit for the purpose of determining the allowable deduction of profit in respect of eligible unit under section 10A of the Act. 37. In this view of the matter and applying the ratio decidendi of the above-mentioned decision of the Tribunal in the case of Yokogawa India Ltd. (supra) we hold that, on the facts of the present case, the aforesaid decision goes against the assessee rather than supporting the assessee's case. 38. Similarly, the decision of ITAT, Chennai Bench 'A' in the case of Changepond Technologies (P.) Ltd. v. Asstt. CIT [2008] 22 SOT 220 , the issue for consideration was whether CIT(A) erred in law in directing the Assessing Officer to allo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d itself. Thus, it is clear that the computation of profit of the specific undertaking for the purpose of computation of deduction is to be as per the provisions of section 10A. Only after the computation of deduction under this section, carry forward of losses can be set off against the remaining income of the said undertaking." 40. Therefore, this decision was rendered in the light of a dispute whether profit and losses pertaining to the other activities or units of the assessee can be taken into consideration for the purpose of computing deduction in respect of eligible unit under section 10A of the Act. Thus, this decision is also of no help to the assessee's case where the question involved is altogether different about setting off of unabsorbed losses or depreciation of eligible 10A unit against the profit of same eligible section 10A unit. 41. In the light of the aforesaid two decisions in the case of Yokogawa India Ltd. (supra) and Changepond Technologies (P.) Ltd. (supra), and in the light of decision of Hon'ble Karnataka High Court in the case of Himatasingike Seide Ltd. (supra), it is, thus, clear that the unabsorbed depreciation or unabsorbed business loss in res ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
