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TMI Blog2012 (10) TMI 364X X X X Extracts X X X X X X X X Extracts X X X X ..... nalysis & that assessee charged higher rate from its AEs that what it charged from third party. The department has also not brought any evidence on record to controvert the submissions of assessee that the services rendered to the AEs and third parties are of similar type and operate in the same geographical region - assessee has submitted before the TPO as well as before the authorities below that AEs as well as third party are located in the same region and availing similar services and the department has not brought any evidence on record to controvert the same contention of assessee. Hence, ld D.R. has no merit to find fault with the order of CIT(A) that CUP method as adopted by the assessee is not justifiable. In view of above facts, we hold that ld CIT(A) has rightly held that AO/TPO has not brought out a case for making any adjustment on account of ALP - in favour of assessee. Disallowance of set off the loss from one 10A unit against the taxable profits from the other 10A units and non-10A unit - Held that:- As decided in Hindustan Unilever Ltd v. Dy. CIT [2010 (4) TMI 206 - BOMBAY HIGH COURT] assessee had all the four units of the assessee were eligible under Section 10 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ial Services. It offers depth and breadth of expertise in Photogrammetry, Remote sensing, Data Conversion, and IT programming consulting. 4. The assessee filed its return of income declaring total loss of ₹ 2,92,83,328. The AO made a reference under section 92CA(1)of the Act for computation of Arms Length Price (ALP) in relation to the international transactions. 5. Assessee filed requisite details to the Transfer Pricing Officer (TPO) in respect of its international transactions which are summarized by the TPO in para 3 of his order as under: R. No. Nature of transaction Amount (in Rs.) Method used 1. Technical services rendered 5,87,85,108 TNMM 2. Scanning service availed of 53,76,310 TNMM Total: 6,41,61,418 6. TPO accepted the transactions pertaining to payment for offering scanning services and not picked up for adjustment. However, in respect of technical services rendered, TPO stated that assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 03-04 and arrived at average margin of 13.3 per cent as against assessee's margin of Arm's Length Price of 8.85 per cent details of which are given in para 4.3 of TPO's order. Accordingly, TPO made an adjustment of ₹ 66,75,078 as per calculation made in para 4.4 of his order. 6. iv Consequently, AO while passing the assessment order made adjustment of an amount of ₹ 66,75,078 to the total income of the assessee. Being aggrieved, assessee filed appeal before the first appellate authority. 7. On behalf of assessee, it was contended that assessee has in actual practice followed CUP method in arriving at ALP even though it had in its return of income filed as well as in its submissions made before the TPO stated that it followed TNMM method. It was contended that assessee during the period 1.4.2003 to 31.3.2004, provided services to its AEs in USA and UK and similar services were provided to third parties in the same geographical region. It was contended that for determining the arm's length charge received from AE, assessee had documented the rates charged to its AE as well the rates charged to independent third parties operating in the same geographi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... updates 0.65 16. 31.12.03 Tax Parcel updates 0.40 17. 31.12.03 Tax Parcel updates 0.90 18. 31.12.03 Tax Parcel updates 0.75 19. 31.1.04 Tax parcel updates 0.90 20. 31.7.03 Maps 9.52 21. 31.8.03 Maps 9.52 22. 31.10.03 Maps 9.52 23. 30.11.03 Maps 9.52 24. 31.1.04 Maps 9.52 25. 30.9.03 Maps ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... carrying out same business transaction and in subsequent year, it has benchmarked its transactions by adopting CUP method and same was accepted by the TPO in respect of technical services rendered by the assessee. Relying on the decision of ITAT in the case of Asstt. CIT v. MSS India Pvt Ltd., 25 DTR 19 (Sic) , it was submitted that TNMM method is to be treated as a method of last resort and is to be pressed into service only when the Standard method which are also termed as traditional methods (i.e. CUP method, Resale method, cost plus method) cannot be reasonably applied. It was contended that assessee's AEs are in USA and UK and the Third Party too is in the same geographical region and, therefore, application of CUP method squarely fits in the case of the assessee. However, TPO has arrived at ALP of international transaction and services to AEs by just adding the difference in the profit margin on totality basis to the total value of services to AEs. He has failed in understanding the fact that assessee company's total service income is not to AEs only but assessee has transactions with the third party and same is approximately 71.19 per cent (wrongly stated 78 per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansaction with Non-AEs. Further, ld CIT(A) has also accepted the contention of the assessee that the difference between the average margin of assessee as declared at 8.85 per cent on cost as per TPO and average margin as determined by TPO at 13.30 per cent on cost is within 5 per cent range of ALP. Hence, ALP as adopted by the assessee should not be disturbed. 11. In view of above, ld CIT(A) deleted the adjustment of ₹ 66,75,078 made by the AO as per TPO's order. Hence, this appeal by the department. 12. Ld D.R. submitted that assessee itself marked its transactions on TNMM in the report to TPO. He submitted that the dispute relates to only technical services rendered by the assessee and adjustment has been made by TPO in regard thereto. Ld D.R. submitted that 8 comparables selected by the assessee give margin of 9.64 per cent but TPO accepted 4 comparables and rejecting remaining comparables on account of non-availability of data. He submitted that TPO added one of party namely WTI Advanced Technology Ltd, and also accepted four comparables selected by the assessee and arrived at mean profit at 13.8% as against 8.85% arrived at by the assessee. He submitted that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,29,104 made on account of adjustment made by the AO/TPO under section 92CA of the Act. 18. The assessee filed return of income for assessment year 2005-06 declaring loss of ₹ 86,39,503. The AO made reference to TPO u/s.92CA(1) of the Act. In response to notice issued u/s.92CA(2) of the Act, assessee submitted details of international transactions with AEs during the relevant financial year 2004-05 as under: Sr. No. Nature of transaction Amount(in Rs.) Method used 1. Technical services rendered 3,71,02,131 TNMM 2. Scanning services availed 2,99,065 TNMM 3. Reimbursement of expenses 1,36,04,860 TNMM Total 5,10,06,056 19. Assessee filed a transfer pricing report benchmarking its international transactions. It is relevant to state that TPO has stated that there have been no transactions in IT services segment and only segmental data for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ur rate and not the services as such. It has not been able to illustrate as to how the services are rendered to all the parties were exactly the same. A CUP analysis cannot be made on averages. TPO stated that an activity employs a number of persons of different rank. The hourly rate of a senior executive/a senior technician may be much higher than that of a junior clerk/worker Therefore, for proper cup analysis you need to match such activities where the proportion of the services rendered by similar ranked people are matching. An average hourly rate mixing the higher and the lower rates cannot justify the benchmarking under CUP. 19(ii). For benchmarking under TNMM method, assessee has taken the following comparables: Ace Software Exports Ltd Central Mine Planning and Design Institute Ltd. Nucleus Netsoft and GIS India Ltd. Scan Point Graphics Ltd and Zigma Software Ltd. 19(iii). However, TPO has not accepted said comparables and stated that on perusal of PLI, it is observed that assessee has taken multiple year data for working the PLI. The only contemporaneous data, i.e. data relating to 2004-05 should have been considered. Previous year data c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income part that requires benchmarking, OP/ Cost is taken to be the Profit Level Indicator. Since the PLI of assessee is lower than that of comparables, and adjustment will be made as under: REVENUE 164.060,835 210,689,939 AE 37,102,131 83,731,235 46,629,104 NON-AE 126,958,704 126,958,704 COST 164,378,059 164,378,059 OPERATING PROFIT -317,224 46,311,880 OP/TC -0.19 28.17 19. (iv) In view of above, TPO considered adjustment of ₹ 4,66,29,104, and stated that it is outside the 5% safe harbour. Accordingly, AO made the said addition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 11 9-Sep-04 Image rectification, Mosalcing $30.00 12 21-Jun-04 Image rectification, Mosalcing $25.00 13 14-Sep-04 Image rectification, Mosalcing 25.00 The Appellant also submitted the summarized chart of the average rates charged to AE and Non-AE during the year as reproduced below: A.Y. 2005-06 Sales invoiced on Subsidiary Third party US UK Normal projects 32,792,705 - 119,013,535 Engg 618,500 ASL - 2,194,951 Total GIS sales invoiced 32,792,705 2,194,951 119,632,035 Production hours See ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rded in preference over transactional profit methods (i.e TNMM and Profit Split Method) unless the revenue authorities are able to demonstrate the fallacies in application of standard methods. In any event any preference of one method over the other method must be justified by the TPO on the basis of cogent material sound reasoning. The Hon'ble ITAT has observed that the only factor which has prevailed on the TPO in rejecting the method adopted, or canvassed, by the Assessee is the fact that the Assessee has incurred loss in the relevant previous year, but, such a consideration is wholly irrelevant. The Hon'ble ITAT has also observed that the ultimate profit or Loss of the Assessee is not a relevant factor in this exercise. Unlike in a Transaction / profit method, in which the basis of determination of ALP is comparability of the profit margin on independent transactions, the basis of determination of ALP in a traditional or standard method is the Price of the product or the Markup over costs of sales in independent transactions. Whether or not the additional costs are to be passed on to the AE is a business decision, which may or may not be relevant in an ALP determination ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er the market in which assessee had transactions with the Third party are in the same region or not. He submitted that assessee provided services in other region apart from UK and USA, which ld CIT(A) failed to consider. Ld D.R. also referred the decision of ITAT in the case of M/s. Intervet India (P.) Ltd. v. Asstt. CIT, [IT Appeal No. 2845 185 (Mum.) of 2006, dated 31-3-2010] and also the decision of ITAT in the case of Asstt. CIT v. Dufon Laboratories, [IT Appeal No. 1899 (Mum.) of 2009, dated 20-03-2010] and submitted that while applying CUP method, adjustment relating to economic and market condition in different geographical locations have to be made because the geographical situation effects/influence the transfer pricing. Ld D.R. submitted that the matter requires to be reconsidered by the TPO and, therefore, the matter be restored to him for his fresh consideration. 25. Ld A.R. supported the order of ld CIT(A) and submitted that TPO while making the ALP adjustment, added the difference in the profit margin on totality basis to the total value of services of AEs and failed to consider that assessee's total service income is not to AEs only. That assessee has transa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f M/s. Intervet India Pvt Ltd (supra) and also the decision of ITAT in the case of Dufon Laboratories (supra). We agree with ld D.R. that the geographical consideration have to be kept in mind while considering the rates and to determine the ALP while applying CUP method. We observe that in the case before us, assessee has submitted before the TPO as well as before the authorities below that AEs as well as third party are located in the same region and availing similar services and the department has not brought any evidence on record to controvert the same contention of assessee. Therefore, above contention of ld D.R. support the case of the assessee. Hence, ld D.R. has no merit to find fault with the order of ld CIT(A) that CUP method as adopted by the assessee is not justifiable. In view of above facts, we hold that ld CIT(A) has rightly held that AO/TPO has not brought out a case for making any adjustment on account of ALP. Therefore, we uphold the order of ld CIT(A) and reject grounds of appeal taken by department. 27. Now we take up appeal filed by assessee being I.T.A. No.2972/M/2010 for assessment year 2005-06. 28. The assessee has disputed the order of ld CIT(A) on f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inst the scheme of the Act. 12.1 The provisions of section 10A are placed under Chapter III which only relates to :- (a) Income which do not, form part of total income. (b) The word 'such 'refer to the profits and against of the undertaking which is engaged in the export of articles or things or computer software (c) The word 'an' which qualifies the word 'undertaking' means that it refers to a single undertaking. (d) The provision of section 10A do not form part of the sections mentioned in section 29. 31. Hence, assessee is in further appeal before the Tribunal. 32. Ld A.R. submitted that the provisions of section 10A provides deduction and not exemption particularly after the amendment to section 10A(6) by Finance Act, 2003 with retrospective effect from A.Y. 2002-03. He submitted that assessee is entitled to set off the loss incurred by Pune Unit against the profits after claiming deduction u/s.10A of its Mumbai and Bangalore Units as well as its income from other sources as per provisions of section 70 to 74, while computing its taxable income. ld A.R. submitted that similar issue has been considered by Hon'ble ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction under section 10A of the Act could be set off against current profit of the eligible unit for computing deduction u/s.10A of the Act, held vide para 3 as under: Section 10A is a provision which is in the nature of a deduction and not an exemption. This was emphasized in a judgment of a Division Bench of this Court while construing the provisions of section 10B in Hindustan Unilever Ltd. v. Deputy Commissioner of Income Tax . The submission of the Revenue placed its reliance on the literal reading of section 10A under which a deduction of such profits and gains as are derived by an undertaking from the export of articles or things or computer software for a period of ten consecutive Assessment Years is to be allowed from the total income of the assessee. The deduction under section 10A, in our view, has to be given effect to at the stage of computing the profits and gains of business. This is anterior to the application of the provisions of section 72 which deals with the carry forward and set off of business losses. A distinction has been made by the Legislature while incorporating the provisions of Chapter VI-A. Section 80A(1) stipulates that in computing the total inco ..... X X X X Extracts X X X X X X X X Extracts X X X X
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