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TMI Blog2019 (6) TMI 1092X X X X Extracts X X X X X X X X Extracts X X X X ..... /s 10A of the Act. The return of income for the captioned year was filed declaring an income of Rs. 66,39,988/- which was initially processed u/s 143(1) and was later selected for scrutiny in terms of CASS guidelines. The assessee also claimed deduction of Rs. 1,69,61,565/- u/s 10A of the Act. 2.1 The assessee had also entered into international transactions with its Associated Enterprises (AEs) and, therefore, in accordance with provisions of section 92CA of the Act, a reference was made to the Transfer Pricing Officer (TPO) for determining the Arm's Length Price (ALP) of the international transaction. 2.2 Since, while filing the return of income, the assessee had made a voluntary transfer pricing adjustment amounting to Rs. 1,96,45,478/- and, thereafter, had claimed a deduction of Rs. 1,69,61,565/- u/s 10A of the Act, the Assessing Officer, in his draft assessment order, held that the assessee had carried out a faulty calculation of the deduction u/s 10A of the Act. The Assessing Officer was of the opinion that suo moto transfer pricing adjustment of Rs. 1,96,45,478/- could not be included as part of the 'total turnover' of the undertaking and resultantly could not also form pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... length principle and also by not allowing the benefit of (+/-) 5% as provided in the proviso to Section 92C(2) of the Act. 2. On facts and in law, the Hon'ble DRP and Ld. AO erred in disregarding the Appellant's use of multiple year/ prior years' data in contravention of the provision of section 92C of the Act read with Rule 10B and Rule 10D of the Income Tax Rules, 1962 ("the Rules"). Addition on account of Transfer Pricing - Interest on outstanding receivables 3. On facts and in law, the Hon'ble DRP / Ld. AO have erred in making an addition of INR 4,536,868 to the income of the Appellant, by making an impugned adjustment in lieu of interest on account of delayed payments from AE during the year. C. Corporate Tax Grounds B.1 Deduction u/s 10A is to be computed on taxable income determined under normal provisions of the Act and not on profits as per books of accounts. 1.1 On the facts and in the circumstances of the case, the learned AO has erred in proposing and the Hon'ble DRP has further erred in confirming the computation of deduction u/s 10A of the Act on the profits as per books of accounts instead of income under the Act, and holding that for the purpose of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... being pressed because the issue already stood resolved in favour of the assessee of virtue of the rectification order passed u/s 154 by the Assessing Officer vide order dated 16.7.2015. 3.1 With respect to ground no. C pertaining to disallowance in the deduction u/s 10A of the Act, the Ld. AR submitted that the Ld. DRP while upholding the disallowance had held that proviso to section 92C(4) is applicable because it has ordered certain adjustment to the ALP of the main ITES transaction in Para 7 of its directions. It was submitted that subsequently no adjustment to the ALP had survived as there was a computational error in this respect and the TPO had passed an order u/s 154 on 16.7.2015 deleting the adjustment ordered by the Ld. DRP. Our attention was drawn to the said rectification order u/s 154 of the Act which was placed at paper book pages 346 and 347. The Ld. AR further submitted that various High Courts and the different Benches of the ITAT on various occasions had held that provisions of section 92C (4) of the Act would not be attracted on the voluntary transfer pricing adjustment made by the assessee and the provisions were to apply only in cases where the adjustments had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dia Ltd. of the Hon'ble Bombay High Court reported in 194 Taxman 192 iii) PCIT vs. Lionbridge Technologies Pvt. Ltd. of Hon'ble Bombay High Court reported in 86 taxmann.com 101 iv) ITO vs. Cerner Healthcare Solutions Pvt. Ltd. of the Bangalore Tribunal 83 taxmann.com 62 3.4 The ld. AR further argued that the voluntary transfer pricing adjustment made by the assessee will essentially have to form part of the profits of the business for the purposes of claiming deduction u/s 10 of the Income Tax Act. It was submitted that the assessee is engaged in the business of providing information technology enabled services to its overseas group entities and the very basis of the voluntary transfer pricing adjustment was the fact that the profit level margins of the assessee's business were deemed below the accepted profit margin under the provisions of section 92 and, therefore, voluntary adjustment was made to revise the profit margin upwards to meet the provisions of section 92. It was submitted that in numerous cases, the deduction u/s 10A had been allowed even on ancillary income. In this regard, following judicial precedents were brought to our notice:- i) C.I.T. vs. Motorola India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no. B3 challenging the action of the Assessing Officer in not allowing the set off of available MAT credit, it was prayed that suitable directions may be given in this regard. 3.8 On the transfer pricing ground B3 challenging the upward addition of Rs. 45,36,868/- on account of notional interest on delayed payments from the AE, the Ld. AR submitted that during the year under consideration, the assessee had compared its operating margin (OP/OC) with its comparable companies. It was submitted that the TPO made an adjustment on account of delayed payment of outstanding receivables by allowing a credit period of 30 days whereas it was the assessee's policy to allow 90 days credit period. For this, our attention was drawn to copy of invoices raised by the assessee which was part of the paper book in pages 450-453. The Ld. AR also submitted that the TPO had applied interest rate of 14.88% by taking SBI PLR plus 300 points whereas the interest rate of LIBOR and 150 points should have been taken. It was further submitted that both the TPO and the Ld. DRP had failed to appreciate that the adjustment, if any, should have been worked out on net outstanding receivables balance i.e. after mak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fer pricing adjustment made by the assessee. Both the parties have argued at length on the issue. On one hand, it is the assessee's contention that provisions of section 92(4) will not be applicable in this case as the transfer pricing adjustment has been made voluntarily by the assessee and once the income has been offered to tax, it forms part of the profit of the business and the deduction u/s 10A cannot be denied. The Ld. AR has also cited a number of judicial precedents in support of his contention. On the other hand, Ld. Sr. DR has taken a stand that the Act does not empower the assessee to enhance the Arm's Length Price and that only the Assessing Officer is empowered to make adjustments u/s 92C(4) of the Act. The facts leading to this controversy are that while filing its income tax return, the assessee had compared its operating margin with the comparable companies and since the operating margin earned by the assessee was lower than the operating margin earned by the comparable companies, the assessee made a voluntary transfer pricing adjustment amounting to Rs. 1,96,45,478/-. After this voluntary adjustment, operating profit margin of the assessee came to 25% which was hi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th price so determined, the A.O. may compute the total income of an assessee. The first proviso to sub-s. (4) provides that where the total income of the assessee as computed by AO is higher than the income declared by the assessee, no deduction under s. 10A or s. 10B or under Chapter VI-A will be allowed in respect of the amount of income, by which the total income of the assessee is enhanced after computation of income under subsection." From the Memo Explaining the Provisions of Finance Bill, 2006 as well as from the literal meaning of the word 'enhanced1, it is clear that if income increased, as a result of computation of arm's length price, then such increase is not to be considered for deduction under s. 10A. In the instant case, the assessee himself has computed the arm's length prices and has disclosed the income on the basis of arm's length prices. It is not a case, where there is an enhancement of income due to determination of arm's length price. Hence, it is held that the assessee was entitled to deduction under section 10A in respect of income declared in the return of income on the basis of computation of arm's length price. In the result, both app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... does not stand because of the ratio of the judgment of the Hon'ble High Court of Karnataka on the same issue. Though the said judgment is of the non-jurisdictional High Court, the same is binding on this Tribunal in absence of any contrary decision of the Jurisdictional High Court. Therefore, respectfully following the ratio of the decision of the Coordinate Benches as mentioned in the preceding paragraphs as well as the Hon'ble High Court of Karnataka, we allow assessee's ground nos. B.1, 1.1, 1.2 and 1.3 and we direct the Assessing Officer to delete this disallowance and grant benefit of deduction u/s 10A on the amount of voluntary TP adjustment made by the assessee. 5.3 Coming to the ground relating to transfer pricing adjustment in respect of notional interest on outstanding receivables, it is seen that the department has made transfer pricing adjustment based on credit period of 30 days whereas it is the contention of the assessee that it allows credit period of 90 days and for this, the assessee has also placed reliance on invoices raised by it wherein credit period of 90 days has been mentioned. Another grievance of the assessee in this regard is that the department has not ..... X X X X Extracts X X X X X X X X Extracts X X X X
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