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TMI Blog2018 (3) TMI 1031X X X X Extracts X X X X X X X X Extracts X X X X ..... e direct AO to verify the claim of deduction under section 10A Addition u/s 10B on the suo-moto transfer pricing adjustment as relying on case of M/s. iGate Global Solutions Ltd. [2014 (6) TMI 1007 - KARNATAKA HIGH COURT] the assessee is entitled to claim the aforesaid deduction under section 10A on additional income offered on account of suo-moto adjustment on account of transfer pricing provisions. The provisions of section 92C(4) of the Act are not attracted. The modified ground of appeal No.4 raised by the assessee is thus, allowed. - ITA No.1051/PUN/2015 - - - Dated:- 12-3-2018 - MS. SUSHMA CHOWLA, JM AND SHRI ANIL CHATURVEDI, AM For The Appellant : Shri Sunil M. Lala For The Respondent : Shri Vivek Aggarwal ORDER PER SUSHMA CHOWLA, JM: The appeal filed by the assessee is against the order of CIT(A)-13, Pune, dated 18.05.2015 relating to assessment year 2011-12 against order passed under section 143(3) of the Income-tax Act, 1961 (in short the Act ). 2. The assessee has raised the following grounds of appeal:- 1. On the facts and in the circumstances of the case and in law, the learned ( ld ) CIT(A) has erred in upholding certai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ysis during the course of assessment proceedings 5.2 On the facts and circumstances of the case and in law, the learned CIT(A) erred in upholding the action of the Ld. AO in rejecting the use of the search process applied by the Appellant in the documentation maintained under section 92D of the Act and in adopting inappropriate filters for undertaking the comparative analysis. 6. Unjust rejection of functionally comparable companies On the facts and in the circumstances of the case and in law, the Id. CIT(A) has erred in confirming the action of the Id. AO in rejecting functionally comparable companies from the final set of comparable companies. 6.1 Unjust rejection of Vama Industries Limited (Software development and services segment) as a comparable company selected in the TP study for FY 2010-11 On the facts and in the circumstances of the case and in law, the Id. CIT(A) has erred in confirming the action of the Id. AO in rejecting Vama Industries Limited, a functionally comparable company engaged in undertaking software development activities 6.2 Unjust rejection of DCM Limited (Information Technology service segment) as a comparabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncomparable companies On the facts and circumstances of the case and in law, the learned CIT(A) erred in upholding the action of the Ld. AO in not undertaking an objective comparative analysis and inter-alia selecting companies which are not comparable to the Appellant in terms of functions performed, scale of operations, turnover, extraordinary events, abnormal profit margins and other differences. 10. Not allowing the Risk adjustment required to OP/TC margin of the selected comparable companies On the facts and in the circumstances of die case and in law, the learned CIT(A)/the learned AO has erred in not granting any adjustments for differences in functions undertaken and/or assets employed and / or in risk assumed by the comparable companies vis-a-vis the Appellant, by ignoring the quantification for the differences provided by die Appellant, thereby comparing the OP/TC margin of the comparable companies assuming higher risks with the Appellants captive, risk mitigated operations. 11. No motive, circumstances, intention of tax evasion by the Appellant On the facts and in the circumstances of the case and in law, the learned CIT(A)/learned AO have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nerated at cost plus margin basis on the entire cost incurred for rendering such software development services. The assessee during the year under consideration had provided software development services amounting to ₹ 14,50,45,119/- to its associated enterprises. The assessee had selected TNMM method as most appropriate method and had voluntarily offered additional income of ₹ 64,07,399/-. The operating profit to total cost ratio was taken as Profit Level Indicator (PLI) in the TNMM analysis. The PLI of assessee after considering voluntary adjustment of ₹ 64,07,399/- was arrived at 10.88%, as per the TP document of assessee. The Assessing Officer held that as the price charged in the international transactions was higher than arithmetical mean price of margins of comparables, the price charged by the assessee in international transactions in the said segment was treated at arm's length. 6. The issue which needs adjudication before us is in respect of deduction claimed under section 10B/10A of the Act both on regular income and on the additional income offered by way of TP adjustment by the assessee. Accordingly, we restrict our reference to the said issue. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #8377; 64,07,399/- represented the transfer pricing adjustment made to the profits of business undertaking and not to the sale proceeds and hence, there was no need to realize the same in convertible foreign exchange. It was also pointed out that in case any disallowance is made under section 92C(4) of the Act by the Assessing Officer, then the assessee is not entitled to claim the deduction under section 10B of the Act; but in the instant case, the assessee itself had disallowed the additional income in the return of income based on transfer pricing review, then on the said amount, the claim of deduction under section 10B of the Act could not be disallowed. Reliance in this regard was placed on the ratio laid down by Bangalore Bench of Tribunal in the case of iGate Global Solutions Ltd. Vs. ACIT (2008) 24 SOT 3 (Bang.). The Assessing Officer in the first instance rejected the claim of deduction under section 10B of the Act and also rejected the alternate plea of claim of deduction under section 10A of the Act. The Assessing Officer also rejected the contention of assessee that there was no requirement to bring convertible foreign exchange in India and hence, deduction under sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee is in appeal against the order of CIT(A). 9. The first issue which is raised before us is the claim of deduction under section 10B of the Act which was made in the return of income and / or alternate claim of deduction under section 10A of the Act, which was claimed during the course of assessment proceedings. The learned Authorized Representative for the assessee pointed out that the Tribunal had set aside the issue in assessment year 2009-10 to the file of Assessing Officer, who in order giving effect to the order of Tribunal had allowed the benefit of deduction under section 10A. He further pointed out that the Assessing Officer had relied on the ratio laid down by the Hon ble High Court of Delhi in Regency Creations which was on the deduction claimed under section 10B of the Act. However, subsequently, the Hon ble High Court of Delhi in Fast Booking (I) (P.) Ltd. Vs. DCIT (2017) 80 taxmann.com 142 (Del) had held that alternate claim could not be rejected. The learned Authorized Representative for the assessee also pointed out that the CIT(A) had stated that the return of income was not filed in time and hence, rejected the claim of deduction. However, the return ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t be said that the amount against the same had not been received in foreign exchange and hence, the assessee was not entitled to the benefit of 10A deduction. The learned Authorized Representative for the assessee placed reliance on the ratio laid down by Hon ble Bombay High Court in CIT Vs. Gem Plus Jewellery India Ltd. (2011) 330 ITR 175 (Bom). The learned Authorized Representative for the assessee here stressed that if there was no turnover, then how there could be a condition of getting foreign exchange and something impossible cannot be asked to be done. 11. The learned Departmental Representative for the Revenue in reply, in respect of claim of deduction under section 10B/10A of the Act relied on the order of CIT(A). In respect of second deduction claimed under section 10A of the Act on additional TP adjustment, the learned Departmental Representative for the Revenue pointed out that the issue stands covered against the assessee by the ratio laid down by the Mumbai Bench of Tribunal in Deloitte Consulting India Pvt. Ltd. Vs. ITO in ITA No.157/Mum/2012, relating to assessment year 2007-08, order dated 15.07.2015. He further stressed that the profits derived from exports sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10B of the Act, but the assessee was held to be eligible to claim the deduction under section 10A of the Act, for which the matter was restored back to the file of Assessing Officer. The Tribunal in ITA No.1921/PUN/2014, relating to assessment year 2010-11, vide order dated 25.01.2017, following the earlier order of Tribunal in assessment year 2009-10 had also similarly held and had remitted the issue back to the file of Assessing Officer to verify the claim of assessee vis- -vis eligibility of deduction under section 10A of the Act and passed the order accordingly. The assessee during the course of hearing has placed on record the copy of order passed under section 143(3)/254 of the Act by the Assessing Officer giving effect to the order of Tribunal relating to assessment year 2009-10. The Assessing Officer vide order dated 03.03.2017 has allowed the claim of assessee under section 10A of the Act. The issue thus, stands settled in the case of assessee, wherein as against original claim of deduction under section 10B of the Act in the return of income, the alternate plea of claim of deduction under section 10A of the Act raised during the course of assessment proceedings has been a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income in the hands of assessee. This is the basic point which has to be kept in mind while adjudicating the issue raised in the present appeal. 16. Under section 92CA of the Act, where a person has entered into an international transaction in any previous year with its associated enterprises, then in order to benchmark the arm's length price of such an international transaction and to compute its arm's length price under section 92C of the Act, reference is to be made to the TPO by the Assessing Officer under the specified conditions, who in turn has to compute the said arm's length price in the hands of assessee. 17. Section 92C(4) of the Act provides that where an arm's length price is determined under sub-section (3), then the Assessing Officer may compute total income of assessee having regard to the arm's length price so determined. In other words, the Assessing Officer is empowered to compute total income of assessee in relation to international transactions undertaken by the assessee with its associated enterprises. The proviso therein provides that no deduction under section 10A/10AA or 10B or Chapter VI-A of the Act shall be allowed in respect o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rticles or things of computer software and the profits of business of undertaking. The additional income is on the basis of artificial / notional income computed in the hands of assessee under the provisions of section 92(1) of the Act. The case of CIT(A) is that the assessee has failed to bring into country the export proceeds in foreign exchange in respect of such additional income offered and consequently, no deduction under section 10A of the Act is to be allowed. The connected aspect of the issue is that there is no dispute in the minds of authorities below that it is profits of business. Such profit of business is neither export turnover nor the total turnover of assessee but is artificial income which needs to be taxed in the hands of assessee. Consequently, we hold that the said artificial income cannot be part of export turnover or total turnover though it will be part of profits of business. Simile which follows is that in the absence of it being offered as export turnover or total turnover, then there could not be any condition for getting foreign exchange to India. The assessee has computed the additional income by following the transfer pricing provisions and has offer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll be ninety per cent of the profits and gains derived by an undertaking from the export of such articles or things or computer software : Provided also that no deduction under this section shall be allowed to any undertaking for the assessment year beginning on the 1-4-2010 and subsequent years. 18. Section 10A(4) has also been amended with effect from 1-4-2001. Before amendment, the profit derived from export of articles or things was the amount which bears to the profit of the business, the same, proportion as the export turnover in respect of such article or thing or computer software, bears to the total turnover of the business. With effect from 1-4-2001, instead of profits of the business, the words 'profit of the business of the undertaking have been substituted. The word 'undertaking' has not been defined under section 10A. The words 'industrial undertaking' have been defined in the book Law Lexicon by Venkataramiya, at p. 1133 it has been defined as under :- The expression 'industrial undertaking' must have a technical and economic content. An industrial undertaking would normally be in its ordinary excitation some industrial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s an independent unit, then it will be treated as independent undertaking and the assessee cannot be forced to have exemption in respect of such independent undertaking. In that case the loss will (not) be adjusted against other income. 21. The last grievance is in respect of not allowing deduction under section 10A on the adjustment made by the assessee to the arm's length price. 22.In the instant case, the assessee company entered into transaction with associated enterprise. The assessee company determined arm's length price and accordingly made adjustment to the income because arm's length price determined was more than the consideration, at which the transactions were shown in the books of account. The deduction under section 10A has not been allowed as per proviso to section 92C(4). As per this proviso, no deduction under section 10A or 10B or under Chapter VI-A is to be allowed in respect of amount of income, by which the total income of the assessee is enhanced after computation of income under the sub-section. The. learned Authorised Representative during the course of proceedings has referred to the word 'enhanced'. In case the income is enh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Length Price was determined by the Assessing Officer. That mistake has been corrected by the Tribunal by setting aside the order passed by the Commissioner as well as the assessing authority. 6. In that view of the matter, we do not see any error committed by the Tribunal in the impugned order. Therefore, the said question is also answered in favour of the assessee and against the Revenue. 23. The issue thus, has been decided by the Hon ble High Court of Karnataka in the case of CIT Anr. Vs. M/s. iGate Global Solutions Ltd. (supra), wherein the assessee s claim for deduction under section 10A of the Act in respect of suo-moto TP adjustment made by the assessee, has been allowed. 24. The Bangalore Bench of Tribunal in a later decision in the case of Austin Medical Solutions Pvt. Ltd. Vs. ITO (supra) has applied the said proposition of the Hon ble High Court of Karnataka (supra) and had allowed the deduction claimed under section 10A of the Act in respect of suo-moto TP adjustment amounting to ₹ 28,61,352/- while determining the arm's length price of international transactions. 25. The learned Departmental Representative for the Revenue on the other hand ..... 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