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TMI Blog2013 (4) TMI 642X X X X Extracts X X X X X X X X Extracts X X X X ..... ng policy was determined at the ratio of 85:15 on the gross receipts received from third parties. 4. For the financial year 2003-04, i.e. AY 2004-05, the assessee filed return of income and claimed deduction under S.10A to the extent of Rs. 3,15,69,530. The Assessing Officer selected the return for scrutiny and having noticed that the assessee has transactions with AE made a reference to the Additional Commissioner of Income-tax, Transfer Pricing under S.92CA(1) of the Act, for determination of Arm's Length Price(ALP) of the International transactions relating to BPO services. 5. The assessee made TP study and based on the functional analysis chose the Comparable Uncontrolled Price (CUP) method as the most appropriate method for determination of ALP. It justified its allocation of profits on the basis of the price paid by third party for services at US$10, wherein proper BPO services/call centre services are placed, and since the assessee is not having that much telecommunication services, was paid at US$8.50, and justified the price by the CUP method. 6. Without prejudice to the primary analysis undertaken under the CUP method, the assessee also supplemented International trans ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ipulation has been made in the said section. Therefore, this argument of the appellant is not tenable. The provisions of section 10A(7) r.w.s. 80IA(10) are primarily meant to check the tendency of the assessees to show higher profits of the undertakings which are eligible for tax concession. Such provisions are found in most of the other sections in the Act for granting incentives in respect of profits of certain business activities. The other argument of the appellant is that the word 'arranged' suggest a motive to avoid tax by manipulating the profits of the company. In this context, it was argued that the appellant had no motive as where the profits are higher the appellant has to pay more taxes in the form of dividend distribution tax owing to the income in the amount of dividend available for distribution. The argument of the appellant is not acceptable in view of the transaction analysis contained in Chapter 4 of the Transfer Pricing Report. As per the said functional analysis, the entire Corporate Strategy and Management of the group, salary and marketing activities including customer identification, presentation of technical qualification, contract negotiations and fee coll ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... whereas it was 8.96% even in the cases figuring in the upper range. TNMM requires establishing comparability at a broad functional level. It requires comparison between the net margins derived from the operation of the uncontrolled parties and the net margins derived by an associate enterprise on similar operation. Under this method, the net profit margin realisation by an associate enterprise from an international transaction is computed in relating to a particular factor such as costs incurred, sales, assets., utilized etc. The net profit margin realized by an associate enterprise compared with net profit margin of uncontrolled transactions to arrive at the ALP. By making the said analysis, the appellant himself under the TNMM method indicated that the percentage of operating profit with reference to the operating cost in the case of the appellant company was 159.51%. As against this, for uncontrolled parties such margin of profit ranged between (-)1.42% to 8.96%, the arithmetical mean being 3.77%. This clearly establishes the fact that the profit of the appellant company by virtue of providing the services to the AE was very high. Therefore, the Assessing Officer is justified in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The intention with reference to this situation is to cover two distinct taxable entities belonging to the same business group, in a situation, where the group may abuse such tax incentives by transferring profits of non-eligible assessees (which would be subject to tax in India) to eligible assessees (which would not be taxable). Such an abuse would result in reduction of the overall amount of tax liability in India, and consequently loss of legitimate revenue to the Indian Government exchequer. In the instant case, it is submitted, the AE is not taxable in India. The Assessing officer's contentions that the assessee could abuse the deduction claimed by routing back of funds to the AE is not correct, since the AE is not subject to tax in India. On the contrary, it is submitted, where the profits are higher and the Appellant routes back the funds, the Appellant has to pay more taxes in the form of dividend distribution tax owing to the increase in the amount of dividends available for distribution. It is, thus, there cannot be situation resulting in loss of revenue in subsequent years. It is further submitted in this context, that the assessee has never routed any funds by wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r submitted that US revenue authorities have not questioned the transfer pricing policy of the SDC US for US Transfer Pricing purposes. It was further submitted that the Assessing Officer also wrongly concluded excess profit on the basis of arithmetic mean when comparables selected by the assessee has a margin varying from - 94.26 % to + 48.32 %. It was further submitted that the assessee has operational advantages as it has less cost on telecommunications and other operational advantage in staff salaries etc. whereas the comparable cases selected are not exactly in BPO business like assessee and they also have software development and other activities. Since the Transfer Pricing Officer accepted that the assessee's transactions are at Arms Length, the Assessing Officer was not correct in invoking the provisions of S.10A(7). It was further submitted that it has received a market price for its services and the reasons for good margin is the pricing policy, location, savings and low cost of work force. Since the operating cost is less, the percentage of profit looks more, but the assessee has received the standard price for its services rendered to the AE. Since the receipts of asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her referred to the amendment brought to the provisions of S.80IA(10) by the Finance Act, 2012 with reference to domestic transfer pricing mechanism in order to provide objectivity in determination of income from domestic related party transactions. It was submitted that the adjustments made by the Transfer Pricing Officer is deemed to be the amount determined under S.80IA(10) with effect from assessment year 2013-14, and this indicates subjective approach being adopted by the Transfer Pricing authority. It was further submitted that the Assessing Officer interpreted the arithmetic mean of profit determined (3% on the sale in the instant case as ordinary profit) whereas the Transfer Pricing Officers themselves computed 39% at the maximum as profit of the BPO service companies and made adjustment to the income of the assessees, in making such analysis independent companies having profit margins of over 100% have been considered as comparables. 15. Summarising the arguments, it was submitted that provisions of S.10A(7) were wrongly invoked, the CIT(A) mixed up the issues with transfer pricing and S.10A(7) and further there is no arrangement between the party and the assessee has not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... justments to the Arm's Length transactions, in our view, the issue of profit of comparable companies has lost its relevance. However, unfortunately, the Assessing Officer considered the arithmetic mean at 8% to be the profit margin of the comparable companies, ignoring various TP studies made by other TP officers in the BPO service sector to an extent of 39%. Further as already stated the profit margin of companies varies to a large extent. What we also notice is that the assessee's receipts are from services rendered to the US company who rendered the services to third parties at US$ 10 per hour, and out of the amount so received, it retained 15% for its marketing and front end expenses and passed on 85% of the price to the assessee. Therefore, the receipts are as considered by the TPO are at arms length. Further, as seen from the summary of the transactions analysed in executive Summary Chapter I of the TP Study, it was very clearly stated that as an investment for the future growth prospects, SDC US has rendered significant managerial, financial and technical support to SDC US free of charge. Therefore, as against Rs.5.14 crores received, the expenditure on payments to staff was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... justed for voice based BPO services by 15% to arrive at the arm's length price for non-voiced BPO services. 18. Therefore, as seen from the non-voice based BPO services rendered by the assessee, the direct telecommunication cost being only 2.03% of the revenue, the operational cost to the assessee is very less. Therefore, profit margin looks very high since the cost of the services to the US company are charged at arm's length price. The operational efficiency of the assessee cannot be considered as earning super profits. 19. In the case of Tweezerman (India) (P) Ltd. (supra), it has been held by the Chennai Bench of the Tribunal as under- 8. We have considered the rival submissions. A perusal of the order of the TPO for the relevant assessment year shows that the TPO has verified the ALP and has confirmed that no adjustment on account of transfer pricing was required to be made. The provisions of transfer pricing relate to international transactions between two or more AEs. The intention of the provisions of transfer pricing is to see to it that when international transactions are done between two or more AEs, the affairs of the enterprises are not adju ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t been refuted by either the TPO or the AO. In fact, with the comparable, which the assessee itself is pointing out being a sister-concern of the assessee showed the ratio of the PBT to sales at 90.1 per cent, if M/s Rahul Electricals & Electronics is being considered as comparable and had shown a PBT to sales at 7.3 per cent, has the TPO taken any action under transfer pricing against M/s Rahul Electricals & Electronics has also not been placed before us. This is because, afterall the assessee-company is showing a higher margin and complying with the intention of the transfer pricing policy in the country, whereas the comparable which has been taken by the TPO and the AO showed a far lower margin than even the mean of the profit level indicator of the so-called comparables. At the time of hearing, the learned Departmental Representative was vehemently of the view that the transfer pricing action by the TPO at the behest of the AO was a separate proceeding and the AO while completing the assessment by invoking the provisions of s. 10B(7) r/w s. 80-IA(10) was doing an independent action though using the evidence and documents which had been submitted before the TPO. Even if this sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he fact that the AO has also not shown any calculation on the basis of which he has determined Rs. 3.54 crores is the excess profit received by the assessee cannot stand in view of the fact that he has not shown as to what he feels is the actual ordinary profit which the assessee could have generated nor has he shown any particulars he has used for arriving at such a figure especially when the assessee himself has filed the calculation showing the error in the difference between the profits and the ALP as filed before the TPO. Under these circumstances, we are of the view that the reduction of the eligible profits of the assessee by an amount of Rs. 3.54 crores as done by the AO by invoking the provisions of s. 80-IA(10) r/w s. 10B(7) of the Act is unsustainable and consequently the same is deleted in toto." 20. In the case of Digital Equipment India Ltd. (supra), which was relied upon by the Assessing Officer and the CIT(A), the coordinate bench has considered the issue as follows- "Exemption u/s 10A-Computation-Applicability of sec 80-I(9) r.w.s. 10A(6)-For invoking sec 80-I (9), AO has to adduce evidence and cogent reasons-Profits earned being comparab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpared the profit of software unit with that of hardware unit. Thus the foundation itself is on wrong premise. There cannot be comparison between an orange and an apple. It is known fact that profitability of software units is always higher than hardware unit. The test whether the appellant has earned more than ordinary profits, in this case, the answer is obvious no, even as found by the AD. When the profits earned are reasonable and not excessive, there is no reason to sustain the addition. Further there is no evidence of existence of any arrangement as contemplated under s. 80-1(9). Further on the issue of separate books one has to see whether the books maintained by the appellant enables computation of profits from the activity, if it is so, such records meet the test of separate books. Separate books do not mean it should be a separate daybook or ledger. It means such books or records from which profits can be computed. If the unit books are combined with other activities, the appellant should make efforts to cull out or separate the entries pertaining to the unit and maintain and produce records or statement separating the results. Such an effort would be sufficient to comply ..... X X X X Extracts X X X X X X X X Extracts X X X X
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