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TMI Blog2015 (10) TMI 2692X X X X Extracts X X X X X X X X Extracts X X X X ..... ire profits of the business are to be determined which are further multiplied by the ratio of export turnover to the total turnover of the business. In case of Liberty India [2009 (8) TMI 63 - SUPREME COURT] the Hon. Supreme Court has dealt with the provisions of section 80IA of the Act wherein no formula was laid down for computing the profits derived by the undertaking which has specifically been provided under sub-section (4) of section 10B while computing the profits derived by the undertaking from the export. - ITA No. 2811/Ahd/2011 - - - Dated:- 21-10-2015 - Shri Pramod Kumar, Accountant Member and Shri S. S. Godara, Judicial Member For The Reveneu : Shri Krishan Vyas CIT-D.R. and Shri B.Y. Chavan, TPO For The Assessee : Shri Dhanesh Bafna, A.R. ORDER PER : S. S. GODARA, JUDICIAL MEMBER:- This assessee s appeal for AY2007-08, arises from assessment order passed by the DCIT, Circle- 1(2), Baroda dated 06-09-2011 in case No. D.C. 05/001/II/2011-12, in proceedings under section 143(3) r.w.s.144C(13) of the Income Tax Act, 1961; in short the Act . 2. The assessee pleads following grounds:- 1. On the facts, in law and in circumstances of the cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... On the facts, in law and in circumstances of the case, the AO has erred in rejecting deduction under Section 10B of the Act in respect of income received on account of brokerage on sea freight of ₹ 83,267 without appreciating that such income was earned by the Business by the Appellant in the course of its business and hence it formed part of the profits of the business. The Appellant prays that the deduction under section 10B of the Act be granted on income received on account of brokerage on sea freight. 3. Both parties reiterate their respective cases during the course of hearing. They file written submissions as well. The assessee s contentions challenge lower authorities action making transfer pricing adjustment of ₹ 1,16,26,716/- relating to provision of marketing support services. Its second plea claims (+/-) 5% tolerance margin as a standard deduction in the impugned arms length price alp adjustment. Its third substantive argument is on the issue of deduction claim u/s. 10B qua income received on account of brokerage on sea freight amounting to ₹ 83,267/- . The Revenue strongly supports all three additions being made in assessee s hands. We have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2.14, 12.21 and 30.6; respectively thereby issuing show cause for adopting average profit level indicator PLI @ 32.56. 7. The assessee filed its reply on 14-08-2010 supporting its ALP. It stated market support activity as not involving any technical expertise being in the nature purely supportive functions. The prowess data base was also justified. The assessee submitted that its methodology of operating profit to operating cost (%) as very much appropriate since arithmetic mean of its seven comparables was only 4.3% was against the one declared @ 4.53%. It pleaded absence of the TPO s satisfaction u/s. 92C(3) before rejecting its TP study indicated hereinabove. And that the relevant data as available in public domain stood duly searched supported its comparability exercise in selecting five entities sought to be rejected (supra). The assessee highlighted the fact that the relevant data qua the TPO s seven entities sought to be included came in data base much after its TP study. It objected to inclusion of seven comparables by quoting various anomalies in their services performed, annual reports indicating alleged extra-ordinary profit margins etc. The TPO rejected all these ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to be engaged in ITES/BPO activities. He accepted inclusion of the former entity above said and rejected the latter one by terming it as a loss making company in the last three years. 13. Now we come to yet another entity M/s Taylormade Outsourcing Solutions. The assessee pleaded that in case this company was included in the array of comparables, two more entities namely; M/s. E-nxt Financial Ltd and Quantum E-Services Pvt. Ltd should also follow the suit. The TPO ordered inclusion of the former entity and turned down the latter one being a loss making company in F.Y.s 2004-05 to 2005-06. 14. The assessee s last objection pertained to M/s Vishal Information. Its case was that this entity s employees cost was only 3.5%. The TPO observed that the assessee itself included M/s Shreejal (supra) having 7.7% employee s cost. He adopted the same analogy and included M/s Vishal Information in the array of comparables. 15. We find that the TPO s above stated action in rejecting assessee s objections and in accepting two more companies resulted in eleven entities taken as comparables as under:- Sl No. Name of the Company PBIT/Cost % ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany M/s. ICRA had been selected at the assessee s behest and no objection in this regard seeking its exclusion was raised before any of the lower authorities. It refers to page 6 39 of the paper book pointing out that this entity is engaged in engineering design services and computer software. Our attention is drawn to the fact that the TPO had himself rejected one of such entity M/s Vakranjee Software (supra) performing the very functions. The Revenue s submissions invoke estoppel principle. It pleads on merits at page no. 116 containing this entity s annual report clarifying that M/s. CS Software Enterprise Ltd provided information technology enabled services in a single segment. The assessee cites case law of DCIT vs. Quark Systems Pvt. Ltd 38 SOT 307 (Chandigarh) (SB) holding that there is no estoppel in arguing exclusion of a comparable already included in an assessee s TP study. It quotes page 639 of the paper book to submit that this entity is in engineering design services and computer software. However, it fails to rebut the fact highlighted at the Revenue s behest demonstrating that this comparable company is providing information technology enabled services as per its a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d vs. ACIT (Pune) ITA 1605/Pn/2011 and M/s Zabata India Pvt. Ltd vs. DCIT 35 taxman.com 423 (Hydra) holding that this comparable entity is very much engaged in ITES/BPO services. The assessee seeks to raise yet another plea relying upon the decision of Maersk Global Centre India Pvt. Ltd vs. ACIT 147 ITD 83 (Mumbai) (SB) holding that whether a comparable is a low end or high end service provider has to be seen in facts of each case . It states that this comparable entity provides high end services to its clients and deserves to be excluded. 19. We have given our thoughtful consideration to our rival contentions. We see merit in assessee s arguments. It is evident from annual report of this compare entity, this company is indeed involved in high end niche market segment of financial contents which cannot be equated with routine marketing support services in which the assessee is involved. The relevant extracts at page 333 relating to this entity are as follows:- The Company is operating as IT enabled, knowledge based Back Office Processing Centre. The Company currently serves the needs of the financial content sector in the USA. The Company collects and analyses data o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efers to case law of ACIT vs. Meersk Global Services Centre (India) Pvt. Ltd (ITA No. 3774/Mum/2011) (A.Y. 2005-06), M/s. Capital IQ Information Systems (India) Pvt. Ltd vs. DCIT (ITA No. 1961/HYd/2011) (Hyd) (A.Y. 2007-08) and ACIT vs. Hapag Lloyd Global Services P. Ltd (ITA No.8499/Mum/2010) (Mum) (AY 2005-06) in support 22. The Revenue s arguments refer to DRP s observations relying upon this entity s expenditure account allegedly confirming it to be an ITES company. And also that an expenditure book as salary or data entry charges cannot form basis for determining whether or not these services had been performed. Its case is that mere accounting treatment does not change a company s function. Case law of DCIT vs. Deloittee Consulting India Pvt. Ltd (2011) 12 taxman.com 500 (Hyd) is quoted in support holding this entity as a valid comparable. 23. The assessee in rebuttal submits three decisions of the tribunal i.e. Techbooks International (P.) Ltd. (2014) 45 taxmann.com 528 (Delhi-Trib) AY 2009-10, Copal Research India (P) Ltd (2015) taxmann.com 27 (Delhi-Trib) AY 2006-07 and New River Software Services (P.) Ltd (2015) 56 taxmann.com 440 (Delhi-Trib) excluding M/s Vishal I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s as under : (2) The most appropriate method referred to in sub-section (1) shall be applied for determination of arm's length price, in the manner as may be prescribed: Provided that where more than one price is determined by the most appropriate method, the .arm's length price shall be taken to be the arithmetical mean of such prices: Provided further that if the variation between the arm's length price so determined and price at which the international transaction has actually been undertaken does not exceed five per cent, of the latter, the price at which the international transaction has actually been undertaken shall be deemed to be the arm's length price. 7. That Finance Act, 2012 with retrospective effect from April 1, 2002 has modified the second proviso to section 92C. The position of section 92C(2) after the Finance Act, 2012 reads as under : (2) The most appropriate method referred to in sub-section (1) shall be applied, for determination of arm's length price, in the manner as may be prescribed : Provided that where more than one price is determined by the most appropriate method, the arm's length price sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 39;s length price. Thus, the benefit of tolerance margin would be available only if the variation is within the tolerance margin. Once the variation exceeded the tolerance margin, then there would be no benefit even up to tolerance margin. Then, the arm's length price as worked out under section 92C(1) shall be taken as the arm's length price without any benefit of tolerance margin. 10. We have gone through the decision of the Income-tax Appellate Tribunal, Pune Bench in the case of Piagio Vehicle P. Ltd. [2012] 53 SOT 253 (Pune) (URO) wherein the Income-tax Appellate Tribunal held as under : 17. In view of the precedent, the stand of the Revenue in the present case to deny the assessee benefit for adjustment of 5 per cent, variation while computing the arm's length price is not justified. As per the Tribunal, though the amended proviso to section 92C(2) was applicable with effect from October 10, 2009, so however, for the reasons contained therein, it would not cover such like cases as is the case before us. In para 22 of the order, which has been reproduced above, it has been observed that the applicability of amendment is to be effective in respect of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ject the assessee's argument that retrospective amendment to the second proviso to section 92C(2) by the Finance Act, 2012 is constitutionally invalid. 13. Coming back to the provisions of the Income-tax Act, we are of the opinion that after the retrospective amendment to the second proviso to section 92C(2) by the Finance Act, 2012, there remains no ambiguity that the benefit of tolerance margin is available only when the variation between the arm's length price as determined under section 92C(1) and the price at which the international transaction has actually been underI. taken does not exceed the tolerance margin. Once it exceeds the tolerance margin, no benefit under the proviso would be available to the assessee and the arm's length price as determined under section 92C(1) shall be considered. The question referred to the Special Bench is answered accordingly, i.e., in favour of the Revenue and against the assessee. The assessee fails to point out any distinction on facts or law. We uphold action of the lower authorities by deciding the issue in hand against the assessee by following the Special Bench decision hereinabove. The assessee s second substan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s decided the issue by holding as under:- It is clear from the plain reading of section 10B(1) of the Act that the said section allows deduction in respect of profits and gains as are derived by a 100% EOU. Further, section 10B(4) of the Act stipulates specific formula for computing the profit derived by the undertaking from export. Thus, the provisions of sub-section(4) of section 10B of the Act mandate that deduction under that section shall be computed by apportioning the profits of the business of the undertaking in the ratio of export turnover by the total turnover. Thus, even though sub-section(l) of section 10B refers to profits and gains as are derived by a 100% EOU, the manner of determining such eligible profits has been statutorily defined in sub-section(4) of that section. Both sub-sections (1) and (4) are to be read together while computing the eligible deduction u/s 10Bof the Act. We cannot ignore sub-section (4) of section 10B which provides specific formula for computing the profits derived by the undertaking from export. As per the formula so laid down, the entire profits of the business are to be determined which are further multiplied by the ratio of export ..... X X X X Extracts X X X X X X X X Extracts X X X X
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