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TMI Blog2013 (1) TMI 794X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee to its AE - Remanded back for statistical purposes Deduction u/s 10A - computed the business loss - Held that:- deduction under section 10A is undertaking specific and should be computed without considering the losses of other industrial units, which is a non-STP unit - Decided in favor of assessee X X X X Extracts X X X X X X X X Extracts X X X X ..... MM) to justify the price charged in the international transaction with its AE. According to the assessee, since adequate data was available with it, the net margin earned from services rendered to its AE was compared with the net margin earned on the services rendered to the non-AE (hereinafter referred to as "Internal TNMM"). The comparables chosen for this exercise where the companies situated outside India to whom the assessee exported software much like the AE to whom also the software had been exported. Based on the comparison of the net margin earned from AE and non-AE (Internal TNMM), the assessee concluded that its transaction with the AE was at arm's length price. 3.2 The TPO issued show-cause notice dated 21/6/2010 (page 62 to 79 of the paper book filed by the assessee). The notice had proposed redetermining the arm's length price for the software development services. The notice contained remark on the assessee's study, new search methodology comparables proposed (28) and the copies of the reply received under section 133(6) from other companies. In reply to the show-cause notice, a detailed reply was filed by the assessee on 6/9/2010 raising various objections to the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aper book-I filed by the assessee). Further, additional submissions were made before the DRP on 5/7/2011 (pages 821 to 827 of the paper book-I filed by the assessee). However, the objections raised by the assessee were rejected by the DRP. The Assessing Officer had, accordingly, incorporated the TP adjustments, as suggested by the TPO, while determining the total income. 3.4 Before us, the learned AR filed written submission dated 21/2/2012. The substance of the same is reproduced below for ready reference:- "During the year under consideration, the appellant rendered software development services to its AE. The appellant also rendered software development services to overseas third parties and domestic clients. The total revenues in the software segment was ₹ 24,18,89,627. This revenue comprised of the following: Particulars Amount in INR Export Sales to Associated Enterprise (including exchange gain) 12,41,18,038 Export Sales to Non-Associated Enterprise (including exchange gain) 2,92,86,834 Domestic Sales 8,84,84,755 Total 24,18,89,627 During the financial year, the software services rendered to AE were as follows: Particulars Amount in INR Genisys UK 8,0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Administration and other expenses (excluding loss on sale of assets) 8,375,402 2,015,528 Bank charges 207,792 48,741 Depreciation 3,716,410 871,751 Total Cost 114,060,469 26,621,696 Operating Profit 10,057,569 2,665,138 Operating Profit/Operating Cost 8.82% 10.01% On the basis of the above, the net operating margin on cost of the comparable transaction (non-AE exports) was at 10.01% percent. As the appellant's operating margin on operating cost in case of controlled transaction was with the arm's length range provided under the TP Regulations, the transaction between the appellant and its AEs in respect of software development services was justified and considered to be at arm's length. In the show cause notice dated 21.06.2010, the TPO had raised doubts about apportionment of salary and other expenses between AE and Non AE segments. The TPO also raised doubt about functional similarity and billing model between AE and non-AE transactions. All the queries raised by the TPO were adequately addressed (pages 86 to 95 of PB-I Part 1). In this regard, the appellant submitted agreements, time sheet details, invoices and billing rates relating to AE and Non AE segment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lip;…………… Sub clause (i) provides that first net profit realized by the enterprise from an international transaction should be computed. Sub clause (ii) provides that net profit realized from uncontrolled transactions shall be computed. The profit from uncontrolled transactions can be realized by the (1) enterprise or (ii) unrelated enterprise from comparable uncontrolled transaction. The appellant submits that the Rules recognize and accept the adoption of net profit realized by the enterprise from comparable uncontrolled transaction. Such a result should be preferred over net profit realized by unrelated parties from comparable uncontrolled transaction. This is because, such analysis is more meaningful as the relevant data, facts and features of both the segments are available and are more reliable. The appellant submits relies on the following decisions wherein it has been held that internal comparables are to be preferred: 1. Abhishek Auto Industries Ltd v DCIT 2010-TII-54- ITAT-DEL-TP - held that internal CPM is better than external TNMM 2. ACIT v Schlafhorst Marketing Co Ltd 13 Taxmann.com 104 - held that internal TNMM to be adopted 3. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ip;………………" Sub clause (i) provides that first net profit realized by the enterprise from an international transaction should be computed. Sub clause (ii) provides that net profit realized from uncontrolled transactions shall be computed. The profit from uncontrolled transactions can be realized by the (1) enterprise or (ii) unrelated enterprise from comparable uncontrolled transaction. Thus the Rules recognize and accept the adoption of net profit realized by the enterprise from comparable uncontrolled transaction. Such a result should be preferred over net profit realized by unrelated parties from comparable uncontrolled transaction. This is because, such analysis is more meaningful as the relevant data, facts and features of both the segments are available and are more reliable. On the following decisions, it has been held that internal comparables are to be preferred:- • Abhishek Auto Industries Ltd v DCIT 2010-TII-54- ITAT-DEL-TP - held that internal CPM is better than external TNMM • ACIT v Schlafhorst Marketing Co Ltd 13 Taxmann.com 104 - held that internal TNMM to be adopted • ACIT v Birla Soft Ltd 12 Taxmann.com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... There is cue in the rule itself as to preference to be given to internal comparable uncontrolled transactions vis-à-vis externally comparable uncontrolled transactions. It is because the delegated legislature has firstly referred to the net profit margin realized by the enterprise (internal) from a comparable uncontrolled transaction and, thereafter, it points towards net profit margin realized by an unrelated enterprise (external) from a comparable uncontrolled transaction. Thus where potential comparable is available in the shape of an uncontrolled transaction of the same assessee, it is likely to have higher degree of comparability vis-à-vis comparables identified amongst the uncontrolled transactions of third parties. The underlying object behind computing ALP of an international transaction is to find out the profits which such enterprise would have earned if the transaction had been with some third party instead of related party. When the data is available showing profit margin of that enterprise itself from a third party, it is always safe and advisable to have recourse to such internal comparable case. The reason is patent that the various factors having bear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lied by the taxpayer is rejected and external TNMM is adopted by the TPO …………….". 3.6.3 All the above queries raised by the TPO was addressed to in the assessee's reply dated 6/9/2010 (pages 86 to 95 of the paper book-I). We have noticed from the reply furnished by the assessee that it had produced copies of the agreement, time sheet details, invoices and the billing rates relating to the AE and non-AE segments on sample basis in the months of April, October and December. The assessee had also filed detailed functional similarity as well as the methodology of apportionment of expenses. However, we have, further, noticed that in the transfer pricing order, there was no discussion about the internal TNMM, on the basis of which, the assessee had stated that international transactions were at arm's length. There was no reason as to why the internal comparables have not been adopted. 3.6.4 In the light of the above mentioned orders of the Tribunal and Rule 10B(1)(e)(ii), we direct the Assessing Officer/TPO to adopt the internal TNMM instead of external TNMM. However, the issue is restored to the file of the Assessing Officer/TPO to verify the cost al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... educted at source itself and not after computing the gross total income. The total income used in the provisions of section 10A in this context means the global income of the assessee and not the total income as defined in section 2(45). Hence, the income eligible for exemption u/s 10A would not enter into computation as the same has to be deducted at source level. -------------------------------------------------------------- 29. After making all such computation the assessee would be entitled to the benefit of set off or carry forward of loss as provided u/s 72 of the Act. That is the benefit which is given to the assessee under the Act irrespective of the nature of business which he is carrying on. The said benefit is available even to undertakings u/s 10B of the Act. The expression "deduction of such profits and gains as derived by an undertaking shall be allowed from the total income of the assessee", has to be understood in the context with which the said provision is inserted in Chapter III of the Act. Sub-section (4) of section 10A clarifies this position. It provides that the profits derived from export of articles or things from computer software shall be the amount whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... u/s 10A has to be excluded from the total income of the assessee, the question of unabsorbed business loss being set off against such profit and gains of the undertaking would not arise. In that view of the matter, the approach of the assessing authority was quite contrary to the aforesaid statutory provisions and the appellate Commissioner as well as the Tribunal were fully justified in setting aside the said assessment order and granting the benefit of section 10A to be assessee. Hence, the main substantial question of law is answered in favour of the assessees and against the revenue". 4.4 Following the above judgment of the Hon'ble Court, we hold that deduction under section 10A of the Act is to be allowed prior to setting off of losses of other industrial units, which is a non-STP unit. 4.5 In the result, ground no.17 is allowed. 5. Ground no.18 is consequential to ground no.17 and hence, this ground is dismissed. 6. Ground no.19 is with regard to levy of interest under section 234D of the Act. 6.1 Levy of interest under section 234D of the Act is mandatory and consequential in nature. Accordingly ground no.19 is also dismissed. 7. In the result, the assessee's appeal is ..... X X X X Extracts X X X X X X X X Extracts X X X X
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