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Income Tax Appellate Tribunal, BANGALORE BENCH ‘ B ’
Before: SHRI VIJAY PAL RAO & SHRI S. JAYARAMAN
Per Shri Vijay Pal Rao, J.M. : This appeal by the assessee is directed against the order dt.23.06.2009 of Commissioner of Income Tax (Appeals) for the Assessment Year 2004-05.
The assessee has raised the following grounds :
2 IT(TP)A No.699/Bang/2009 3 IT(TP)A No.699/Bang/2009 4 IT(TP)A No.699/Bang/2009
The assessee is a 100% subsidiary of Dell International, USA. The assessee provides call centre, back office and other support services to various Dell Group companies and their customers. The assessee has 3 sub-divisions – Call Centre, Shared Services and Off-shore Development Services. Therefore the assessee's international transactions are divided in 3 segments. During the previous year relevant to the assessment year under consideration, the assessee has reported financial results and international transactions as reproduced by the TPO in paras 3.4 and 3.5 as under :
5 IT(TP)A No.699/Bang/2009
Ground No.1.1is regarding Transfer Pricing Adjustment in respect of international transactions pertaining to call centre service segment. To bench-mark its international transactions, the assessee has adopted CUP as a Most Appropriate Method (in short MAM) however supplementary analysis of Transactional Net Margin Method (TNMM) was also done in TP document. The TPO accepted CUP method in respect of call centre service however the TPO proposed adjustment in respect of customer care segment of call centre services by considering only 9 months rate charged by the assessee for working out in respect of the average rate of the assessee as well as the comparable party. Thus the TPO noted that ratecharged by the assessee was less than the CUP rate. The assessee objected to the adjustment proposed by the TPO and explained that the difference in rate as attributed to the difference in the contractual terms
6 IT(TP)A No.699/Bang/2009 specifically the difference in credit party for payment which was 45 days for the third party service provider and as against 15 days in the case of the assessee. Therefore the assessee claimed that receivable adjustment in respect of both the enterprises by comparing average rate of comparable companies and EXL India for the whole year with its own rates for the said period. The TPO rejected the said contention of the assessee on the ground that Rule 10B allowed for adjustment to the CUP only and it does not contemplate any adjustment to be made in the international transactions. The TPO has also rejected aggregation of rates charged by the assessee for 12 months. Accordingly, the TPO concluded that the rate charged by the assessee at USD 1.63 for the period of June 2003 to March, 2004 cannot be merged with the rate charged by the assessee for the months of April and May, 2003 because the comparable company had only 9 months of rate started from July, 2003 till March, 2004. Accordingly, the TPO worked out the adjusted CUP/Arm’s Length Price (ALP) at USD 1.83 as against the assessee's rate of USD 1.36 and proposed an adjustment to the tune of Rs.2,30,95,928.
The assessee challenged the action of the TPO before the CIT (Appeals) but could not succeed as the CIT (Appeals) has sustained the adjustment
7 IT(TP)A No.699/Bang/2009 proposed by the TPO and consequential addition made by the Assessing Officer in this respect.
Before us, the learned Authorised Representative of the assessee has submitted that the assessee's entire financial year, revenue has to be taken into consideration for the purpose of bench marking its international transactions instead of bifurcating the price charged by the assessee for 9 months. He has thus contended that the assessee also given a supplementary TNMM analysis but which was not accepted by the TPO on the ground that contemporaneous data and adequate results of comparables was not available.
On the other hand, the learned Departmental Representative has relied upon the orders of the authorities below and submitted that when the assessee itself has adopted CUP as a MAM then the TPO has not carried out any fresh search but only comparable price was taken by the TPO which was available for 9 months.
We have considered the rival submissions as well as the relevant material on record. At the outset, we note that this case relates to the Assessment Year 2004-05 which was the initial year of TP Regulation come into force. In the case of call centre segment, the TPO accepted
8 IT(TP)A No.699/Bang/2009 the CUP method though only one comparable was available. Further the data of the said comparable was also available only for 9 months started from July, 2003 onwards upto March,2004. The comparative rates charged by the independent comparable and the assessee are as under :
Thus it is clear that in the case of comparable company, the price for the first 3 months i.e. April, May & June were not available. Therefore this is a case of non-availability of complete data in respect of the comparable selected by the assessee and accepted by the TPO. It is pertinent to note that when the assessee has entered into the international transaction throughout the year therefore, the price charged by the assessee from 9 IT(TP)A No.699/Bang/2009 April, 2003 to March, 2004 has to be taken into consideration for bench marking its international transactions. Further the TPO has also disallowed the working capital adjustment on account of the credit period for payment. Thus in view of the facts and circumstances of the case when the appropriate data was not available at the relevant point of time and further the MAM in the case of ITES services, in our view should be TNMM instead of CUP method as it encompass the minor variation and also provides adjustment. Therefore we find that this issue requires a fresh consideration at the level of TPO and the exercise of determination of ALP has to be redone by adopting TNMM as MAM. The assessee is free to submit its set of comparables for consideration of the TPO. Hence Ground No.1.1 is set aside to the record of TPO/A.O. for fresh adjudication in the light of our observations.
Ground No.1.2 is regarding the Transfer Pricing Adjustment in respect of shared services segment of call centre. The assessee has earned revenue of Rs.27.12 Crores during the year under consideration from back office services provided to its Associated Enterprise (AE) The assessee claimed that it is being paid @ cost + 5% for providing the services. The TPO concluded that the services provided by the assessee
10 IT(TP)A No.699/Bang/2009 is more or less is same as that of any other ITES/BPO unit. The assessee adopted TNMM as MAM. However the assessee has taken earlier years data for comparables for bench marking its transactions. The TPO rejected the TP analysis of the assessee as well as TNMM analysis carried out by the assessee. The TPO also rejected the comparables selected by the assessee. The TPO carried out a fresh search and selected 8 comparables with mean margin of 36.4% as under :
11 IT(TP)A No.699/Bang/2009 Accordingly, the TPO proposed an adjustment under Section 92CA of Rs.7,82,43,749. The assessee challenged the action of the TPO and also the comparability of companies selected by the TPO on the ground that the assessee rendered services to the AE are of very low end category and therefore cannot be compared with the companies which are providing highly skilled and high end services. The CIT (Appeals) did not accept the contention of the assessee and held that adjustment made by the Assessing Officer based on the proposal of TPO.
Before us, the learned Authorised Representative of the assessee has submitted that the TPO while determining the ALP of the shared services has clubbed both sub segments. The learned Authorised Representative of the assessee has submitted that an identical set of 8 comparable companies has been examined by the co-ordinate bench of this Tribunal in the case of 24/7 Customer.Com (P) Ltd. Vs. DCIT 28 Taxman.com 258. Thus the learned Authorised Representative of the assessee has submitted that the entire set of comparables has to be rejected as none of the company is comparable with the assessee which is a simple data processing service provider. He has relied upon the said
12 IT(TP)A No.699/Bang/2009 decisionof the co-ordinate bench of Tribunal in the case of 24/7 Customer.Com (P) Ltd. Vs. DCIT (supra).
On the other hand, the learned Departmental Representative has relied upon the orders of the authorities below and contended that some of the companies were found to be comparable by the co-ordinate bench in the case of 24/7 Customer.Com (P) Ltd. Vs. DCIT (supra). The learned Departmental Representative has pointed out that the company Ultra Marine Pigment Ltd., the Tribunal has found the same as comparable. Similarly in the case of Nucleus & GIS India Ltd., the comparability of the said company was not disputed.
Having considered the rival submissions as well as the relevant material on record, we find that the functional comparability as well as process of selection of the comparables by applying various filters has not been properly examined by the authorities below. Since it was an initial year of applying the TP provisions therefore some criteria evolved in the process of consideration and adjudication was not available to the benefit of the TPO. We further note that out of 8 comparables as selected by the TPO, the co-ordinate bench of this Tribunal in the case of 24/7 Customer.Com (P) Ltd. Vs. DCIT (supra) has found six companies
13 IT(TP)A No.699/Bang/2009 not functionally comparable and directed to exclude from the set of comparables. Therefore in the facts and circumstances of the case as well as in the interest of justice, we set aside this issue to the record of the TPO/A.O. for fresh consideration of the selection of comparable companies as well as determination of ALP. Accordingly, this ground of assessee's appeal is allowed for statistical purpose.
Ground No.1.3 is regarding Off-shore Division – Software Development Services 12.1 The assessee has earned revenue of Rs.84.50 Crores from off- shore development services. The assessee had remunerated on Cost + 10% basis in respect of these services. The assessee bench marked its international transactions by applying TNMM as MAM and claimed that its international transactions are at arm’s length. The TPO rejected the TP Study Analysis of the assessee on various grounds and carried out a fresh search and selected final set of 7 comparable companies as under :
14 IT(TP)A No.699/Bang/2009 Accordingly, the TPO has proposed an adjustment of Rs.22.26 Crores in this segment. The assessee challenged the action of the TPO/A.O. before the CIT (Appeals) who has accepted the mistake in the computation of mean margin of comparables and adopted the adjusted mean margin at 26.61% instead of 38% applied by the TPO. Accordingly, the CIT (Appeals) has revised the adjustment under Section 92CA to Rs.13,44,85,218 as against the adjustment proposed by the TPO ofRs.22.26 Crores. However, the CIT (Appeals) has not disturbed the comparability of companies selected by the TPO.
Before us, the learned Authorised Representative of the assessee is seeking exclusion of 5 companies from the set of 7 companies selected
15 IT(TP)A No.699/Bang/2009 by the TPO. We will deal with functional comparability of these companies one by one as under :
Virinchi Technologies Limited 13.1 The learned Authorised Representative of the as has referred to page 10 of the Annual Report of the company and submitted that this company is engaged in the R&D activity in software engineering technology and product. This company is also in the activity of products and solution & therefore it cannot be compared with the software development services provided by the assessee to its AE.The learned Authorised Representative has further submitted that this company has earned revenue of Rs.509.14 lakhs from export of software which shows that this company is a product company and not merely a software development services provider. Thus the learned Authorised Representative has submitted that this company is also engaged in the outsourcing activity and has intangibles therefore cannot be compared with the assessee.
13.2 On the other hand, the learned Departmental Representative has submitted that when this company is not showing any revenue from sale of product or stock in trade then it cannot be concluded from the 16 IT(TP)A No.699/Bang/2009 commentary in the Annual Report that the income earned by the assessee during the year is from sale of products.
13.3 We have considered the rival submissions as well as the relevant material on record. In the profit and loss account for the year ended on 31.3.2004, this company has shown income from operations without any segmental details. It is further noted that in the Director’s Report, the company has explained R&D and technology absorption as under :
“b) Research & Development and Technology Absorption :
Your company will continue to focus and invest in its R&D activities in software engineering, technologies and products. Your company leverages its excellence in technology for producing World Class Products and Solutions. The continual exposure to new technologies has helped maintain high motivation levels in employees and to generate higher levels of productivity, efficiency and quality. Your company continues to give due importance to research and development to maintain its leadership in the field of leading edge technologies.”
This company has also shown the earning from export of software of Rs.5.09 Crores. As per the notes forming part of the accounts, the company has stated that it is engaged in development of computer software and services though the production and sale of such software and service has not been expressed in any generic unit therefore quantitative details of sales as required under Schedule VI of the 17 IT(TP)A No.699/Bang/2009 Companies Act has not been provided. In view of the above facts as recorded in the Annual Report, we find that this company cannot be regarded as functionally comparable with the software service provider.
Accordingly, we direct the TPO/A.O. to exclude this company from the set of comparables.
Thirdware Solutions Limited 14.1 The learned Authorised Representative of the assessee has submitted that this company is functionally dissimilar and also having extra ordinary event during the year under consideration. He has referred to the Annual Report of this company and submitted that in Schedule 12, this company has reported sale of license, software services, export and revenue from subscription. Further the revenue from the software development and implementation is recognized and billed to the clients as per specific contract. This company also earned revenue from the sale of user license for software application as well as sale of investment. Therefore this company engaged in trading and development of software, production and sale of developed and traded software. The learned Authorised Representative has submitted that this company is also in the R&D activity for software engineering and 18 IT(TP)A No.699/Bang/2009 technology. Thus it is submitted that this company cannot be considered as functionally comparable with the assessee.
14.2 On the other hand, the learned Departmental Representative has relied upon the orders of the authorities below.
14.3 Having considered the rival submissions as well as the relevant material on record, we note that this company has stated in the Annual Report that its principle activity is software design and consultancy.
Further this company has reported that it is engaged in the trading and development of software. This company earned revenue from various diversified activities which comprise the revenue from subscription contracts, revenue from sale of user license for software application and revenue from sale of investment. Therefore in the absence of segmental data this company cannot be considered as functionally comparable.
Accordingly, we direct the TPO/A.O. to exclude this company from the set of comparables.
Gebbs Infotech Limited 15.1 The learned Authorised Representative of the assessee has submitted that this company is engaged in the software product development activity and therefore functionally not comparable. He has 19 IT(TP)A No.699/Bang/2009 referred to the Schedule J of the Balance Sheet and submitted that this company is having revenue from 3 segments namely export sale on site, export sale of off-shore and export of BPO services. However segmental results are not available therefore the margin from software development services cannot be computed. The TPO has taken into consideration the entire revenue of this company which cannot be compared.
15.2 On the other hand, the learned Departmental Representative has relied upon the orders of authorities below.
15.3 We have considered the rival submissions as well as the relevant material on record. As per Schedule ‘J’ forming part of the profit and loss account as on 31.3.2004, this company has reported sale from following :
(i) Export Sales – Onsite (ii) Export Sales – Offshore (iii) Exports – BPO Services.
This company is providing software development services as well as BPO services. However, the segmental operating margins are not available and therefore composite revenue of this company cannot be taken as 20 IT(TP)A No.699/Bang/2009 comparable to the assessee's software development services. Hence we direct the TPO/A.O. to exclude this company from the set of comparables.
16.1 The learned Authorised Representative of the assessee has submitted that this company is not functionally comparable with the assessee as this company is engaged in software product development.
He has referred to the Annual Report of this company and submitted that this company has earned revenue from technical services rendered, CAD convergent drawings and software services. Therefore this company is providing technical service which is not comparable with the assessee. He has further submitted that this company is mainly engaged in developing engineering software service product for export. The product description is also given in the notes on accounts. Thus the learned Authorised Representative has submitted that this company cannot be considered as a comparable with the assessee.
16.2 On the other hand, the learned Departmental Representative has relied upon the orders of authorities below.
21 IT(TP)A No.699/Bang/2009 16.3 We have considered the rival submissions as well as the relevant material on record. We note that this company has reported income from technical services rendered, CAD convergent drawings and software services. Therefore it is apparent from the profit and loss account as well as notes on accounts that this company has earned revenue by rendering technical services. In the absence of segmental details, composite income of this company cannot be considered as comparable with the assessee. Accordingly, we direct the TPO/A.O. to exclude this company from the set of comparables.
Transworld Infotech Limited 17.1 The learned Authorised Representative of the assessee has submitted that this company is engaged in web hoisting and cloud computing activity. He has also referred to the Related Party Transactions of this company and submitted that this company has failed the RPT filter. He has referred to the Annual Report of this company at page 10 as well as page 24 and submitted that this company has earned income from software services and products. Thus the learned Authorised Representative has submitted that this company cannot be considered as functionally comparable.
22 IT(TP)A No.699/Bang/2009 17.2 On the other hand, the learned Departmental Representative has relied upon the orders of authorities below.
17.3 We have considered the rival submissions as well as the relevant material on record. At the outset, we note that in the Annual Report of this company the profile has been discussed at page 10 as under :
“ The company commands good brand image in the IT segment it deals in with. The company’s ability to effectively deliver competitively priced and quality niche software solutions and products in the market would hold it in good stead in the years to come. The company has an ability to seamlessly provide offshore and onsite services for customers world over. It is this capability to offer blended services that provides a significant opportunity in this competitive market. The company’s revenue are generated primarily from the software and application development and consultancy services. Revenue recognition is done on the basis of the nature of work as may be specified in the Agreement or the Statement of work. This could be on time and material basis or on fixed basis or on attainment of certain milestones.”
Thus this company is engaged in the software solutions and products.
The company’s revenue is derived primarily from software, application development and consultancy services. As per the profit and loss account, this company has shown only one segment as income from operation. However as per the notes to accounts the earning in the foreign currency has been explained as income from software services
23 IT(TP)A No.699/Bang/2009 and products. Therefore there is a lack of clarity about the source of revenue as this company is showing the revenue from software services and products and further this company is also reported to have engaged in consultancy services; Hence, this company cannot be considered as a comparable in the absence of segmental details. Accordingly, we direct the TPO/A.O. to exclude this company from the set of comparables.
Since we have directed to exclude five companies out of seven companies and the assessee has not disputed the comparability of two companies apparently due to the reason that the remaining two companies are having very low profit margin. Therefore in view of the facts and circumstances of the case, we set aside this issue to the record of the TPO/A.O. for de novo exercise of selection of comparables as well as determination of ALP.
Ground Nos.2 to 5 are sequential to the Ground No.1, accordingly becomes infructuous.
Ground No.6 is regarding the setting of losses of Hyderabad STPI Unit against the profits of the Bangalore STPI Unit before allowing the deduction under Section 10A.
24 IT(TP)A No.699/Bang/2009 20.1 We have heard the learned D.R. as well as learned A.R. and considered the relevant material on record. At the outset, we note that this issue is covered in favour of the assessee and against the revenue by the decision of the Hon'ble jurisdictional High Court in the case of CIT Vs. Yokogawa India Ltd. 341 ITR 385 which has been upheld by the Hon'ble Supreme Court vide decision reported in 391 ITR 274 wherein the Hon'ble Supreme Court has held in paras 15 to 17 as under :
“ 15. Sub-section 4 of Section 10A which provides for pro rata exemption, necessarily involving deduction of the profits arising out of domestic sales, is one instance of deduction provided by the amendment. Profits of an eligible unit pertaining to domestic sales would have to enter into the computation under the head "profits and gains from business" in Chapter IV and denied the benefit of deduction. The provisions of Sub-section 6 of Section 10A, as amended by the Finance Act of 2003, granting the benefit of adjustment of losses and unabsorbed depreciation etc. commencing from the year 2001-02 on completion of the period of tax holiday also virtually works as a deduction which has to be worked out at a future point of time, namely, after the expiry of period of tax holiday. The absence of any reference to deduction under Section 10A in Chapter VI of the Act can be understand by acknowledging that any such reference or mention would have been a repetition of what has already been provided in Section 10A. The provisions of Sections 80HHC and 80HHE of the Act providing for somewhat similar deductions would be wholly irrelevant and redundant if deductions under Section 10A were to be made at the stage of operation of Chapter VI of the Act. The retention of the said provisions of the Act i.e. Section 80HHC and 80HHE, despite the amendment of Section 10A, in our view, indicates that some additional benefits to eligible Section 10A units, not contemplated by Sections 80HHC and 80HHE, was intended by the legislature. Such a benefit can only be understood by a legislative mandate to understand that the stages for working out the deductions under Section 10A and 80HHC and 80HHE are substantially different. This is the next aspect of the case which we would now like to turn to.
From a reading of the relevant provisions of Section 10A it is more than clear to us that the deductions contemplated therein is qua the eligible undertaking of an assessee standing on its own and without reference to the other eligible or non-eligible units or undertakings of the assessee. The benefit of deduction is given by the Act to the individual undertaking and resultantly flows to the assessee. This is also more than 25 IT(TP)A No.699/Bang/2009 clear from the contemporaneous Circular No. 794 dated 9.8.2000 which states in paragraph 15.6 that, "The export turnover and the total turnover for the purposes of sections 10A and 10B shall be of the undertaking located in specified zones or 100% Export Oriented Undertakings, as the case may be, and this shall not have any material relationship with the other business of the assessee outside these zones or units for the purposes of this provision."
If the specific provisions of the Act provide [first proviso to Sections 10A(1); 10A (1A) and 10A (4)] that the unit that is contemplated for grant of benefit of deduction is the eligible undertaking and that is also how the contemporaneous Circular of the department (No. 794 dated 09.08.2000) understood the situation, it is only logical and natural that the stage of deduction of the profits and gains of the business of an eligible undertaking has to be made independently and, therefore, immediately after the stage of determination of its profits and gains. At that stage the aggregate of the incomes under other heads and the provisions for set off and carry forward contained in Sections 70, 72 and 74 of the Act would be premature for application. The deductions under Section 10A therefore would be prior to the commencement of the exercise to be undertaken under Chapter VI of the Act for arriving at the total income of the assessee from the gross total income. The somewhat discordant use of the expression "total income of the assessee" in Section 10A has already been dealt with earlier and in the overall scenario unfolded by the provisions of Section 10A the aforesaid discord can be reconciled by understanding the expression "total income of the assessee" in Section 10A as 'total income of the undertaking'.”
By following the decision of Hon'ble Supreme Court cited supra, we decide this issue in favour of the assessee and against the revenue. The Assessing Officer is directed to allow the deduction under Section 10A before setting off of losses of other units.