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TMI Blog2013 (1) TMI 369X X X X Extracts X X X X X X X X Extracts X X X X ..... Revenue ground is also on the same issue. Both the grounds of assessee and the Revenue are as under: Assessee's Ground No.2: "Transfer Pricing: The learned CIT (A) erred on facts and in law by allowing only partial relief to the adjustments made by AO in relation to transfer pricing matters. The Appellant therefore, prays that the adjustments in relation to transfer pricing matters made by the CIT (A) be deleted". Revenue's Ground: "On the facts and in the circumstances of. the case and in law, the learned CIT (A) erred in deleting the addition made by AO on the basis of working provided by the TPO where the operating margin was taken at 11.96% instead of 9.47% taken by assessee without appreciating the facts of the case. The appellant prays that the order of the CIT (A) on the above ground be set aside and that of the ITO/ACIT/DCIT be restored". 5. Briefly stated, assessee is a domestic company formed by a shareholding between Sitel Group & TATA group with 50% stake each. Assessee has provided software development services to its overseas enterprise. Assessee in the TP study used TNM method to benchmark its ALP for its transaction with AE and has computed the profit margin o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uted with the end customers. It was the submission of assessee that the AEs retained part of the revenues varying from 0 to 26% and passed on the balance to assessee. Therefore, adjustment so proposed by the TPO does not arise. 7. The learned CIT (A) discussed these objections elaborately vide Para 3 of the order item-wise and vide Para 3.11 to 3.13 decided the issue as under: "3.11. I have perused the order of the TPO and considered all the above submissions/contentions of the Appellant. I have also perused the remand report received from the AO vide letter dated 11.06.2007 and another report dated 27.02.2008 received from TPO. At the outset, the Appellant has prayed for admission of additional evidence on the above grounds relating to transfer pricing adjustment. I have perused the additional evidence filed by the Appellant and find it appropriate to take cognizance of the same and accept it under Rule 46A, as the appellant did not have sufficient opportunity during the course of the assessment proceedings to produce the above documentary evidence. Looking at the evidence received from the AEs providing details of revenue, costs, profit/loss margin earned by the AEs, it is clea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irmation of Rs. 54,56,479 whereas the Revenue is aggrieved on the reduction made by the CIT (A). The learned Counsel referred to the submissions made before the CIT (A) and also the orders passed by the authorities in later years wherein assessee's margin were accepted without any adjustment. On the principles of consistency it was submitted that the same approach should be made for this year also. It was one of the argument that the additions proposed cannot be exceeded the profit earned by the AE as assessee is a contact service contractor and the gross receipts are accounted by the PE. In this regard assessee's Counsel submitted a note with reference to 'having regard to" used in section and submitted that as AE made losses the addition cannot be exceeded the ultimate profits earned in the whole transactions with third parties. The learned Counsel also made detailed submission on the object of TP provisions, determination of ALPs to contend that the method/formula cannot be accepted which gives absurd result in the TP adjustments. He also referred to the TPO order for 2006-07 wherein all profits and costs have been accepted. In assessment year 2005-06 when the adjustments were p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t should not be disallowed and the margin of comparable of 11.96% be not considered to determine the arms length price for this transaction. Assessee has only reiterated what was stated in the earlier submissions that the idle capacity is not operating cost and hence the same is excluded. The submission of assessee is not accepted because third party software developer would not bear such cost in the course of business. Moreover, no such idle capacity adjustments have been made while arriving at the margins of the comparable companies. Accordingly an adjustment is being made to this transaction on the following basis: Income 57,39,34,000 OP cost 55,82,69,000 Margin (A) 1,56,66,000 Margin on costs 2.81% Arms length margin 11.96% Arms length profit (B) 6,67,88,000 Adjustment (A-B)= 5,11,22,000 11. This indicates that assessee's TP study has not been considered by the TPO. Vide Annexure-D to the TP study assessee has selected ten comparable companies and summary of net cost + margin varies from -6.04% to 19.06%. Mean arrived at assessee's TP study was at 9.47%. How this amount was rejected and why it is fixed at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e is restored to AO, assessee is free to raise various objections before the TPO in the re-assessment proceedings. 14. In the result assessee's grounds as well as Revenue ground on this issue are considered allowed for statistical purposes. The matter is restored to AO for fresh consideration. 15. Ground No.3. Assessee's ground is as under: "3. Treatment of interest on term deposit receipts and miscellaneous income: Based on the facts of the case and in law, the learned CIT (A) erred in upholding the action of AO in treating interest earned on term deposit receipts and miscellaneous income as income from other sources instead of business income. The appellant therefore prays that the amount of Rs. 78,70,769 towards interests earned on term deposit receipts and Rs. 31,745 as miscellaneous income should be considered as part of net profits earned in business while computing deduction under section 10A of the Act and AO be directed to compute the deduction accordingly". 16. It was fairly admitted that this issue is decided against assessee by the order of the ITAT Mumbai in ITA Nos. 6395/Mum/05 & 3110/Mum/08 in assessment years 2002-03 and 2003-04. The findings of the ITAT vide pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rces? According to the assessee(s), DEPB credit/duty drawback receipt reduces the value of purchases (cost neutralization), hence, it comes within first degree source as it increases the net profit proportionately. On the other hand, according to the Department, DEPB credit/duty drawback receipts do not come within first degree source as the said incentives flow from the incentive schemes enacted by the Government of India or from section 75 of the Customs Act, 1962. Hence, according to the Department, in the present cases, the first degree source is the incentive scheme/provisions of the Customs Act. In this connection, the Department places heavy reliance on the judgment of this court in Sterling Foods [1999] 237 ITR 579. Therefore, in the present cases, in which we are required to examine the eligible business of an industrial undertaking, we need to trace the source of the profits to manufacture. (see CIT v. Kirloskar Oil Engines Ltd. reported in [1986] 157 ITR 762.)" 10 Thus, in view of the decision of the Hon'ble Supreme Court in the case of Liberty India (supra), we hold that interest earned by the assessee on surplus funds deposit in the bank does not come under the first ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any, incurred in foreign exchange in providing the technical services outside India are to be excluded both from the export turnover and from the total turnover, which are the numerator and the denominator, respectively, in the formula. The learned Counsel also relied on the decision of the Hon'ble High Court in the case of CIT v. Tata Elxis Ltd, [2012] and jurisdictional High Court in the case of CIT v. Gem Plus Jewellery India Ltd. [2011] 330 ITR 175. The learned DR however, relied on the orders of AO and the CIT (A) on this issue. 21. We have considered the issue and the rival contentions. As far as definition of export turnover is concerned, AO has correctly excluded the communication line charges as per the provisions of the Act. Since the total turnover is not defined in the Act, this issue has been contested and the ITAT Chennai Special Bench in the case of Sak Soft Ltd's case (supra) has decided the issue as under: "Exemption under section 10B: Computation of total turnover-Expenses attributable to delivery of computer software outside India-As per cl, (iii) of Expln. 2 to s. 10B, freight, telecom charges and insurance attributable to delivery of goods outside India and e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n undertaking from the export of articles or things or computer software for a period of ten consecutive assessment years commencing from the assessment year relevant to the previous year in which the undertaking begins manufacture or production. Sub-section (4) of section 10A provides the manner in which the profits derived from the export of articles or things or computer software shall be computed. Under sub-section (4) the proportion between the export turnover in respect of the articles or things, or, as the case may be, computer software exported, to the total turnover of the business carried over by the undertaking is applied to the profits of the business of the undertaking in computing the profits derived from export. In other words, the profits of the business of the undertaking are multiplied by the export turnover in respect of the articles, things or, as the case may be, computer software and divided by the total turnover of the business carried on by the undertaking. The expression "total turnover" has not been defined at all by Parliament for the purposes of section 10A. However, the expression "export turnover" has been defined. The definition of "export turnover" e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Assessing Officer must follow. The Tribunal was justified in directing the Assessing Officer to grant the exemption under section 10A of the Act on the assessed income, which was enhanced due to disallowance of the employer's as well as employees' contribution towards PF/ESIC. 23. The principle laid down in the above decision is that whatever is excluded from the export turnover has to be excluded from the total turnover also while computing the deduction under section 10A. In view of this, AO is directed to exclude the communication line charges from the total turnover as well. Ground is allowed. 24. Ground No.5 is with reference to software expenses. The ground is as under: "5. Software Expenses: On the facts and in the circumstances of the case, the learned CIT (A0 erred in upholding the action of AO in disallowing the software expenditure of Rs. 38,85,928 incurred by the Appellant by treating the same as capital expenditure instead of revenue expenditure. The appellant therefore, prays that the additions made by AO I this regard is not justified and be deleted". 25. During the course of the argument, the learned Counsel did not press this ground. Accordingly treated as w ..... X X X X Extracts X X X X X X X X Extracts X X X X
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