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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 ..... ransfer pricing study has not resulted in any addition and ALP was accepted. Even though the authorities relied on "arranged" transaction between the assessee and AE, we do not see any such arrangement on the facts of the case. Nor there is any passing of profits directly or indirectly. In view of this, since the assessee's operations are efficient enough to obtain more profits and since the receipts are at arms length and there is no passing of excess profits by the parent company (AE) to the assessee, we are of the opinion that Assessing Officer's action in restricting the profits is not correct. We also do not see any reason to restore it to the Assessing Officer since there is nothing else to examine. Accordingly, we allow the grounds of the assessee and direct the Assessing Officer to treat the profits declared by the assessee as ordinary profits and allow deduction under S.10A, without any further adjustment. - IT Appeal No. 628 (Hyd.) of 2008 - - - Dated:- 31-1-2013 - B. RAMAKOTAIAH AND SAKTIJIT DEY, JJ. For the Appellant Rajan R. Vora. For the Respondent Phani Raju. ORDER:- B. Ramakotaiah, Accountant Member - This is an appeal by the assessee against the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncluded that the pricing of the assessee is within the Arm's Length Standard and no adjustment is required to be made to the value of the international transactions between the assessee and its AE. However, the Assessing Officer invoked the provisions of S.10A(7) read with S.80IA(10) to consider that the assessee has earned more than the ordinary profit and considering the same TP study submitted by the assessee under TNMM method, determined the excess profit at Rs.2,99,34,750 and denied deduction under S.10A while completing the assessment. 8. The other adjustment with reference to reducing internet charges from the export turnover was deleted by the CIT(A) and therefore, that aspect of the action of the Assessing Officer was not subject matter of this appeal. 9. Assessee contended before the CIT(A) that the order of the Assessing Officer in invoking the provisions of S.10A(7) relying on the TNMM study submitted for the Transfer Pricing purposes is not correct. It raised various contentions. However, the CIT(A) confirmed the order of the Assessing Officer by stating as under- "4.3 The next issue is whether the Assessing Officer was justified in invoking the provision of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ke the service liability risk, credit and collection risk, foreign exchange risk, idle capacity risk, contractual risks, etc. was also on the AE. The appellant company had absolutely no responsibility in this regard. Further, it is noted that the value of the assets employed by the appellant company was not substantial. Therefore, it can be fairly concluded that as per the analysis of transaction the risks and responsibility of the appellant company in comparison to the AE was minimal and substantially lower. As against this, the revenue sharing ratio was heavily loaded in favour of the appellant company its sharing being 85%. Thus, this was clearly an arrangement vide which the Indian company was given a more of revenue in view of the fact that its income was totally exempted from tax u/s. 10A. This implies that the said income was ploughed back to the Directors and Share holders in the form of dividends. One of the Directors of the appellant company was Mr. Sriram Davaloor who held 50% of the share holding and being a resident of USA his income was not taxable in India. This was possibly the motive for giving bigger share of revenue to the appellant company which resulted in unju ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich provides the most reliable measure of an ALP in relation to an international transaction. Rule 10(c)(2), inter alia provides that the most appropriate method shall be selected having regard to the class or classes of Associate Enterprises entering into the transaction and the functions performed, assets employed and the risks assumed by them. In the instant case, as explained in earlier para, the entire risk of running the business by the appellant company is on the AE and the assets employed appellant company was negligible. Hence, the Assessing Officer is justified in treating the TN MM method as the most appropriate method for computation of the AKLOP. Accordingly, the Assessing Officer is justified in not considering the 151% profit i.e. 159,51% - 8.5% amounting to Rs.2,99,34,750/- as the profit of the eligible undertaking for the purposes of computation of deduction u/s. 10A of the Act. The said action of the Assessing Officer is hereby 'confirmed' and the grounds raised vide (i), (ii), (iii) and (iv) which are interrelated and pert5ains to the same issue, i.e. invoking the provisions of section 10(7) r.w.s. 80IA(10) are hereby 'dismissed'." The assessee is aggrieved on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esent case, it is explained that the word "arranged" has been interpreted to suggest a motive to avoid tax by manipulating the profits of the Company. Without appreciating the facts of the assessee's case and performing an objective analysis, it is submitted, the learned assessing officer has concluded that the Appellant has arranged its business with a view to earn more than ordinary profits. In this regard, reliance is placed on the following rulings in the context of section 80IA(10), wherein it was held that avoidance of tax must be the main motive for provisions to apply and a mere incidental benefit is not sufficient. The Hon'ble Supreme Court in the case of V. N. M. Arunachala Nadar v. Commissioner of Excess Profits-tax [1962] 44 ITR 352 The Bombay ITAT in context of 80IA(10) in the case of ITO v. P.C.A. Engineers Ltd. [1984] 8 ITD 518 In this context, it is submitted that the issue under appeal is no more RES INTEGRA and has been decided by the following benches of the Tribunals which are squarely applicable to facts of the present case of the assessee: Visual Graphics Computing Services (India) (P.) Ltd. v. Asstt. CIT Tweezerma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... age No. of Employees Capital Assets (Net fixed assets-Current assets) Turnover (Sales+ Other Income Profits Dividend paid 2002-03 1,00,000 5,78,616 48,14,312 (87.069) No 2003-04 123 1,00,000 3,42,02,207 5,15,14,464 3,16,88,225 No 2004-05 230 1,01,000 7,89,71,564 8,13,93,954 3,57,50,943 No 2005-06 310 1,01,000 11,46,09,415 12,70,92,840 1,08,71,480 No 2006-07 445 1,01,000 21,95,66,251 25,62,62,629 3,03,02,068 No 2007-08 587 1,01,000 21,56,00,194 29,68,43,890 3,59,64,101 No 12. It was further submitted that the assessee has not paid any dividend and all the profits earned in the period were ploughed back into the business. It was further submitted that in later years, the TPO considered the margins earned by the assessee are not at Arm's Length and he made adjustments in the TP assessments which are contested by the assessee, but as far as this year is concerned, asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er, the newly inserted proviso to S.80IA(10) with reference to the binding nature of TP adjustment is effective only from assessment year 2013-14. It was further submitted that the transfer pricing study indicates average mean prices at 8-9% whereas the assessee earned profits at 151 %, which is more than the normal profits. It was further submitted that in the case relied upon by the Assessing Officer and the CIT(A), viz. Weston Knowledge Systems Solutions India (P.) Ltd. (supra) the ITAT restored the matter to the file of the Assessing Officer for considering the decisions relied upon by the assessee in the case of Tweezerman (India) (P.) Ltd. (supra) Chennai and Digital Equipment India Ltd. (supra). It was his submission that the matter can be set aside as additional evidence in the form of certification by the parent company about the Transfer Pricing acceptance by the US authorities are not filed before the Revenue authorities in India. 17. We have considered the issue and perused the orders of the Assessing Officer and the CIT(A). In our opinion, as far as the transfer pricing issues are concerned, the Transfer Pricing matters got settled with the orders of the TPO dated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fied by the nature of the BPO services undertaken by the assessee in the TP study. It is further mentioned while determining the 'arms' length price' during the financial year 2003-04, SDC US has sub-contracted voice based BPO services to Swift Response Inc USA(SWIFT), an unrelated entity at a rate of USD 10 per hour. Hence, the price paid by SDC US to SWIFT US has been identified as price paid/charged in a comparable uncontrolled transaction. Similarly, it was stated that based on the provisions of Rule 10B regarding application of CUP method, where differences exist between the controlled and uncontrolled transactions, reasonably accurate adjustments would be required. Though it may be difficult to determine reasonably accurate adjustments to eliminate the effect on price, the broadly cost difference between voice based BPO services and non-voice based BPO services has been considered for determining the arm's length price of services provided by SDC US. Telecom cost forms a unique feature of the voice-based BPO business. However, key variable such as bandwidth requirements, cost of international carrier, talk-time cost, etc. vary across different BPO models. As per an India cent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the assessee in the country. Reading of the provisions of s. 10B shows that the deduction of the profits and gains derived by the assessee from 100 per cent export-oriented undertaking is granted. The provisions of s. 10B(7) provide for the applicability of the provisions of s. 80-IA(10) and sub-s. (8) when computing the profits and gains of 100 per cent export oriented undertaking. The provisions of sub-s. (10) of s. 80-IA which have been invoked in the present case provide that if the AO is of the opinion that owing to the connection between the assessee carrying on the eligible business with another person the business between them is so arranged so that as a result of the business transacted between the eligible person and other person, the profit of the eligible person is inflated so as to claim the exemption provided, then the AO, while computing the profits and gains of the eligible business for the purpose of granting deduction can readjust the amount of profit as would reasonably be derived from such eligible business. Here, in the present case the TPO has categorically given a finding that the income of the assessee is at the arm's length. One must keep in mind that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as to why he feels that the profits of the assessee are being shown at a higher figure, which he has done by alleging the close proximity between the assessee and the USA company with whom the assessee is transacting. He has further to show as to how he has computed the ordinary profits which he deems to be the ordinary profits which the assessee might be expected to generate. Here, the AO failed insofar as he has blindly taken a calculation which the assessee has given before the TPO which the assessee himself has admitted to be erroneous and the errors have been corrected and the fresh calculation given. This calculation is also not a calculation for determining the ordinary profits which the assessee might be expected to Generate . The AO would be expected to use a comparable case to determine the possible ordinary profit which the assessee could be expected to generate from his business. In the absence of any other substantial evidence available with him, when using a comparable, the assessee's own past and future performance would obviously be the best comparable. Comparing the assessee's modus operandi of conducting its business with another when the same are not of equal te ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce and cogent reasons showing close connection and arrangement as envisaged in sec 80-I(9), addition made by the Assessing Officer by invoking sec 10A(6) r.w.s. 80-I(9) was not well founded: Held: The requirements u/s 80-I(9) are: (a) there must be a close connection between the appellant and other person; (b) the course of business between them should be so arranged that it produces to the appellant more than the ordinary profits from such business. To satisfy the above test the AO has to adduce evidence and reasons cogently and the same is open to verification by the appellate authorities. The primary rule of evidence is that "what is apparent is real" unless proved otherwise by the person alleging it otherwise. The manner of satisfaction outlined in the section should be based on evidence and not on surmise or suspicion. The question is not whether the onus is light or heavy but whether the AD has discussed objectively the conditions mentioned in the section to disturb the results declared by the appellant. In this case, the AD has failed to adduce any evidence or reason to satisfy the invoking of s. 80-1(9). First of all, a mere substantial profit does not give r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al we hold that the exercise undertaken by the Assessing Officer under S.10A(7) is neither sustainable on facts nor under the provisions of law. The learned DR requested for setting aside the order to AO on the reason that the decision in Weston Knowledge Systems Solutions (India) (P.) Ltd (Supra) was set aside by the ITAT to the Assessing Officer and since Assessing Officer and the CIT (A) relied on that order, it is necessary to restore the matter to the Assessing Officer. We have considered this request also. The Coordinate Bench in the above referred case has relied on the decision in the case of Tweezeman (India) (P.) Ltd (Supra) and Digital Equipments India Ltd. (Supra). In that case the issue was set aside to the file of the Assessing Officer with a direction to verify the comparables where the issue was taken up under the transfer pricing provisions. In this case as already stated above, the transfer pricing study has not resulted in any addition and ALP was accepted. As rightly pointed out by the learned Counsel, the receipts are fixed at US$ 8.5 per hour and the margin of profit became higher only because the operation costs were less being in the non voice based BPO se ..... X X X X Extracts X X X X X X X X Extracts X X X X
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