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Income Tax Appellate Tribunal, “C” BENCH : BANGALORE
Before: SHRI SUNIL KUMAR YADAV & SHRI S. JAYARAMAN
Per Sunil Kumar Yadav, Judicial Member
These cross appeals are preferred by the assessee and the revenue against the order of CIT(Appeals) inter alia on the following grounds:-
IT(TP)A 439/Bang/2011 (Assessee’s appeal) “1. That the order of the learned Commissioner of Income-tax (Appeals) [hereinafter referred to as 'learned CIT(A)'] resulting in income of the Appellant being subject to tax, is bad in law, without application of mind and liable to be quashed. 2. (a) That the learned CIT(A) erred in confirming the order of Deputy Commissioner of Income-tax [hereinafter referred as 'learned AO'] in denying the deduction under Section 10A of the Act in relation to profits of the Appellant's STP undertaking m Bangalore. (b) That the authorities mentioned above erred in relying upon the assessment orders pertaining to different assessment years which are pending adjudication before the Hon'ble Income Tax Appellate Tribunal.
3. That the learned CIT(A) erred in confirming the order of learned AO in setting off the brought forward business loss amounting to Rs 4,873,401 and unabsorbed depreciation loss amounting to Rs 32,432 pertaining to AY 1999-00 before computing deduction under section 10A of the Act in relation to the Appellant's STP undertaking in Mumbai.
4. On the facts and in the circumstances of the case the learned CIT(A) erred in making adjustment to the transfer price of the Appellant by Rs. 9,167,881/-.
IT(TP)A Nos.439 & 452/Bang/2011 Page 3 of 15
5. That the learned Additional Director of Income Tax (Transfer Pricing - I), Bangalore ('Transfer Pricing Officer' or 'TPO') and the learned CIT(A) erred in not allowing the benefit of range of +/- 5% as provided in proviso to Section 92C(2) of the Act, while determining the arm's length price.
6. On the facts and circumstances of the case and in law, the learned CIT(A) erred in determining the arm's length mark up to be 21.41%. 7. That on the facts and circumstances of the case, the learned CIT(A) erred in upholding the rejection of Transfer Pricing ("TP") documentation by the learned TPO. 8. That the learned CIT(A) erred in upholding the rejection of comparability analysis carried in the TP documentation and conducting a fresh comparability analysis for determining the arm's length price by the learned TPO. 9. That the learned CIT(A) erred in not giving reasonable opportunity to the Appellant of refuting and rebutting the basis on which adjustment was proposed by the learned CIT(A) and in not admitting the contentions, arguments, and evidentiary data put forward by the Appellant. 10. That the learned CIT(A) failed to adjudicate on the disallowance of the marketing commission by the learned TPO. 11. That the Appellant craves leave to add to and/or to alter, amend, rescind modify the grounds herein above or produce further documents before or at the time of hearing of this Appeal.”
IT(TP)A No.452/B/11 (Revenue’s appeal) “1. The order of the Learned CIT (Appeals), in so far as it is prejudicial to the interest of revenue, is opposed to law and the facts and circumstances of the case. 2. The learned CIT (Appeals) was not justified in directing the AO to recompute the deduction allowable u/s. 10A of IT(TP)A Nos.439 & 452/Bang/2011 Page 4 of 15 I.T.Act, 1961 after reducing the telecommunication expenses incurred outside India amounting to Rs. 27,55,849-00 both from the export turnover and the total turnover, without appreciating the facts and circumstances of the case.
3. The learned CIT (Appeals) has erred in not appreciating that there is no provision in section 10A, which requires the telecommunication expenses reduced from the export turnover as per clause (iv) of Explanation 2 to section 10A, to be reduced from the total turnover also.
4. The Learned CIT (Appeals) was not justified in allowing relief of Rs. 61,13,513/- out of the adjustment of Rs.1,52,81,394/- made by the Assessing Officer u/s 92CA of the I.T. Act, 1961 in respect of the international transactions with parties located in countries other than the USA, without appreciating the facts and circumstances under which the adjustment was made.
5. The Learned CIT (Appeals) has erred in taking into consideration the profit margin of 21.41% being the average of the profit margin of 17.5% as determined by the MAP authorities in respect of the international transactions with the US companies and 25.32% adopted by the TPO/AO, without any basis.”
Ground Nos. 4 to 10 in the assessee’s appeal and ground Nos.4 & 5 of revenue’s appeal relate to the TP issues and in this regard the ld. Counsel for the assessee has invited our attention to the fact that during the pendency of the appeal before the CIT(Appeals), the assessee’s AE in USA approached the competent authority in USA for resolution of the TP adjustment issue insofar as it related to Software Development (SWD) provided by the assessee to its AE located in USA through Mutual Agreement Procedure (MAP) prescribed under Indo-US Double Taxation
IT(TP)A Nos.439 & 452/Bang/2011 Page 5 of 15 Avoidance Agreement (DTAA). Thereafter, the competent authority of India & USA issued a MAP resolution dated 21.05.2010 resolving that the TP adjustment issue arising in the appeal and shortly thereafter the terms thereof were accepted by the assessee. This fact was brought to the notice of CIT(Appeals) by the assessee during the proceedings before him and the assessee accordingly withdrew its appeal before the CIT(Appeals) insofar as it relate to software development services provided by the assessee to its AE in USA. Accordingly the appeal came to be partly allowed by the CIT(Appeals) vide his order dated 17.01.2011.
During the pendency of the above cross appeals before the Tribunal, the assessee’s AE in Canada approached the competent authority in Canada for resolution of TP adjustment issues insofar as it related to the software development services provided by assessee to its AE in Canada through MAP prescribed under Indo-Canada DTAA. Thereafter, the assessee was informed vide order dated 01.12.2015 that the competent authority of India & Canada DTAA has resolved the TP adjustment arising in the appeal insofar as it relates to Canada. The assessee thereafter accepted the terms of MAP resolution as per Rule 44H(4) of the I.T. Rules, 1962 and withdrew its appeal before this Tribunal insofar it relates to software development services provided by assessee to its AE in Canada vide its letter dated 09.02.2016.
IT(TP)A Nos.439 & 452/Bang/2011 Page 6 of 15
In view of the above, the cross appeals filed by the assessee before this Tribunal relate to TP adjustment made by the TPO survive only to the extent of transactions pertaining to software development services provided by the assessee to its AE located in countries other than USA & Canada i.e., in UK and Australia in FY 2004-05.
The ld. Counsel for the assessee has invited our attention to the letter written to the assessee with regard to MAP proceedings with its AE in Canada along with MAP proceedings in which the determined margin was agreed at 17.50%. Similarly, our attention was also invited to the other letter dated 16.01.2010 to the assessee with regard to MAP proceedings relating to transactions with its AE in USA in which the ALP for services was determined at 117.5%. Copy of this letter and MAP proceedings are available at page Nos.31 to 33 of the compilation.
Our attention was further invited to the total international transactions in this regard which is available at pages 621 of compilation in which it is clear that the maximum transactions were undertaken by the assessee with its AE in US & Canada. Only two transactions were undertaken by the assessee with its AEs in UK and Australia. The ld. Counsel for the assessee further contended that the ALP determined in the case of AEs of US & Canada be adopted in the case of UK and Australia also. The ld. Counsel further placed reliance upon the judgment
IT(TP)A Nos.439 & 452/Bang/2011 Page 7 of 15 of the Tribunal in the case of J P Morgan Services (P.) Ltd. V. DCIT (2016)
70 taxmann.com 228 (Mumbai – Trib.) in support of his contentions that once the assessee has gone in MAP with respect to maximum international transactions, the ALP determined therein be applied to other transactions of AEs of different countries.
The ld. DR, on the other hand, has opposed the contentions of the assessee with the submission that determination of ALP depends upon different facts and not on the determination of ALP in one transaction.
Having carefully examined the orders of authorities below in the light of rival submissions, we find that the TPO has not determined the ALP of different transactions undertaken with different AEs of different countries.
He has taken the ALP of all transactions undertaken by the assessee with its AEs of different countries. Undisputedly, the dispute with regard to international transactions with its AEs of USA & Canada was resolved through MAP and ALP was determined at 117.5%. The international transactions with its AEs in USA & Canada are the maximum and the international transactions with its AEs of UK & Australia was minimal. The details of transactions are available at page 621 of the compilation and the same is reproduced as under:-
IT(TP)A Nos.439 & 452/Bang/2011 Page 8 of 15
IT(TP)A Nos.439 & 452/Bang/2011 Page 9 of 15
We have also carefully examined the order of Tribunal in the case of J P Morgan Services (P.) Ltd. V. DCIT (supra) in which the Tribunal has held that whatever margin has been applied through MAP with respect to major international transactions, the same should be applied for the remaining transactions. The relevant observations of the Tribunal is extracted hereunder for the sake of reference:-
“3.2. During the course of hearing, it has been submitted that the assessee company is providing IT Enabled Services to its AE’s. The assessee had shown a margin of 12.26%. The AO held and treated ITES business as ‘one’, and applied mark-up @ 21.58%. It is further submitted that out of the total transactions done by the AE’s world over, around 96 transactions were done with the entities based in USA and remaining 4% of the transactions done with other AE’s located elsewhere. The lower authorities did not make any distinction while applying mark-up and the entire turnover was treated as ‘one’ and accordingly mark up was applied. 3.3. It has been further submitted that out of the original TP addition of Rs.39,30,43,000/- (based on the applied mark-up of 21.58%), MAP has been concluded for Rs.37,65,35,194/- (95.80% of the Total TP addition ) at arm’s length mark-up of 14.38%. Accordingly, the above ground has been revised to cover only the remaining addition of Rs.1,65,07,806/- i.e. 4.20% of the total addition. 3.4. Before us, the main argument of the Ld. Counsel was that since the mark-up MAP has concluded the Arm’s Length mark- up at 14.38% for 96% of the total transactions done with the AE’s, then without prejudice to the other submissions, for remaining transactions of 4% also same treatment should be given, same bench marking should be done, and ALP mark-up of 14.38% should be applied, more particularly, because of the fact that the AO or DRP have not made any distinction between the ‘US’ entities and ‘non-US’ entities. It was further submitted that although the assessee can very well contest these additions, but this concession has come from the assessee’s side with a view to IT(TP)A Nos.439 & 452/Bang/2011 Page 10 of 15 bury the litigation, notwithstanding the facts that no addition should have been made as the case of the assessee falls within +/- 5% range. It was also submitted that the assessee reserves its right to contest the levy of any kind of penalty, as and when initiated, if any. Our attention has been drawn to the annual accounts of the company and orders of the lower authorities to show that no distinction has been made between the ‘96%’ and ‘4%’ transactions. 3.5. On the other hand, Ld. CIT-DR, vehemently opposing the arguments of the Ld. Counsel, submitted that there is no concept of determination of ALP under the Mutual Agreement Procedure. The rules and regulations of transfer pricing as prescribed u/s. 92C Chapter X of the Income Tax Act are not applicable under MAP, and therefore, no ALP was determined under MAP, and therefore, assessee cannot claim to take any benefit of the mark- up reached under MAP i.e. @ of 14.38%. Accordingly to him, the ALP should be computed freshly and independently for the remaining 4% transactions, and for this purpose this issue can be sent back to the lower authorities. 3.6 We have gone through the arguments made by both the sides and also the material placed before us for our consideration. It is noted that letter dated 9th April 2015 in Fno.480/13/2010- FTD-1 has been issued in the case of the assessee company under MAP proceedings for A.Y.2006-07 to 2010-111 by the DCIT(OSD), APA-I on behalf of the Foreign Tax and Tax Research Division -I, Central Board of Direct Taxes, New Delhi wherein it has been confirmed that for A.Y.2006-07, for US related transactions, the margin has been determined at 14.38% as against margin of 21.58%, as was determined by the Transfer pricing officer (TPO). It has been further clarified by way of note in the said letter that apportionment between ‘US’ and ‘non-US’ ALP and TP adjustment had been margined out by the APA section (of FT and TR Division) on the basis of ‘US’ and ‘non- US’ revenue. It is further noted from the perusal of the annual accounts of the assessee company that aggregate turnover has been shown at Rs.47,30,521/-, and no distinction has been made between the ‘US’ and ‘non-US’ transactions. Similarly in the orders passed by the lower authorities also no such distinction as ever been made by any of the authorities. Under these circumstances, in our considered view, whatever margin has been determined for the 96% of the transactions, same margin should
IT(TP)A Nos.439 & 452/Bang/2011 Page 11 of 15 be determined for the remaining 4% transactions as well. It is worth noting that, even before us, no distinction in facts or nature of transactions has been brought out on record. Therefore, in our considerate view, mark-up of 14.38% should be determined for the remaining 4% transactions pertaining to ‘non-US’ entities as well. The assessee gets part relief accordingly.”
In the instant case also, the maximum international transactions were undertaken by the assessee with its AEs of Canada as well as USA and only two transactions were undertaken with AEs of Australia and UK. Therefore the same ALP of 117.50% be applied with respect to remaining two international transactions. Accordingly, we set aside the order of CIT(Appeals) and direct the AO/TPO to apply the ALP of 117.50% with respect to the remaining transactions.
Ground No.2 in assessee’s appeal relate to deduction u/s. 10A of the Act and this issue is covered by the order of the Tribunal in assessee’s own case for the AY 2001-02 & 2002-03. Copy of the Tribunal’s order is placed on record and in para No.8, this issue was discussed. For the sake of reference, we extract the relevant portion of the order of Tribunal as under:- “8. From the above paras of the order of the ld. CIT(A) for the assessment year 1998-99, it is seen that the unit, for which the deduction is being claimed u/s. 10A of the Act, was first set up in assessment year 1996-97 and categorical finding has been given by the ld. CIT(A) that of the total value of the plant and machinery installed in the said unit, 80:80% comprised of plant and machinery transferred from its erstwhile units located at Mumbai and Trivandrum. Hence it is seen that the assessee has violated the conditions prescribed in clause (iii) of sub-sec.(2) of sec.10A of the IT Act and therefore, the assessee is not eligible
IT(TP)A Nos.439 & 452/Bang/2011 Page 12 of 15 for deduction u/s 10A of the IT Act, 1961 in respect of this unit atleast. As per judgment of the Hon’ble Karnataka High Court rendered in the case of Sami Labs Ltd., (Supra) on which reliance has been placed by the ld. DR of the revenue, it was held that conditions should be satisfied in initial year of manufacture or production and if the value of old machinery and plant in initial year of manufacture is more than 20% of the total value of machinery and plant then even if such percentage is reduced to less than 20% by making purchase of new plant and machinery in a subsequent year, even then the assessee will not be entitled to claim exemption u/s. 10B of the IT Act, 1961. The requirement of Sec.10A and 10B are similar and therefore, in view of this categorical finding of the ld. CIT(A) that in the initial year, the percentage of old and used plant and machinery was more than 20%, the assessee is not eligible for deduction u/s. 10A of the Act, in the initial year as well as in subsequent years. Therefore, we find no reason to interfere with the order of the ld. CIT(A) on this issue in any of these two years which are before us by respectfully following the judgment of the Hon’ble Karnataka High Court rendered in the case of Sami Labs Ltd. (Supra). Hence, we decline to interfere with the order of the ld. CIT(A) on this issue.
9. In although some other grounds are also raised as per grounds of appeal
reproduced above but no argument was advanced by the ld. AR of the assessee on any of these grounds and hence, we infer that the learned AR of the assessee has nothing to say on these grounds. In the absence of any contention of the learned AR of the assessee, we find no reason to interfere in the order of the CIT(A) on any such issue.
10. In the result, both these appeals of the assessee are dismissed.”
12. Since the impugned issue is squarely covered by the order of the Tribunal in assessee’s own case for the earlier years, we find no justification to take a contrary view in this appeal. Accordingly, following IT(TP)A Nos.439 & 452/Bang/2011 Page 13 of 15 the same, we decide this issue against the assessee and confirm the order of CIT(Appeals).
13. With regard to ground No.3, ld. Counsel for the assessee has contended that this issue is covered by the judgment of the Hon'ble jurisdictional High Court in the case of CIT v. Yokogawa India Ltd., 341 ITR 385 (Kar) in which Their Lordships have held that as the profits & gains u/s. 10A were not to be included in the income of the assessee at all, the question of setting off of loss of the assessee from any business against such profits & gains of the undertaking would not arise. Similarly, as per section 72(2), unabsorbed business loss is to be first set off and thereafter unabsorbed depreciation u/s. 32(2) is to be set off as deduction u/s. 10A has to be excluded from the total income of assessee, the question of unabsorbed business loss being set off against such profits & gains of undertaking would not arise. The judgment of Hon'ble jurisdictional High Court was also approved by the Hon’ble Apex Court vide its judgment dated 16.12.2016 reported at (2017) 77 taxmann.com 41 (SC).
Since the impugned issue is squarely covered by the aforesaid judgment of the Hon’ble Apex Court, we set aside the order of CIT(Appeals) and direct the AO to recompute the deduction u/s. 10A in terms of judgment of Hon’ble Apex Court in the case of CIT v. Yokogawa India Ltd. (supra).
IT(TP)A Nos.439 & 452/Bang/2011 Page 14 of 15
Ground Nos. 2 & 3 in the revenue’s appeal i.e., relate to the reduction of telecommunication expenses from the export turnover. This issue is also covered by the judgment of the Hon'ble jurisdictional High Court in the case of Tata Elxsi Ltd., 341 ITR 98 (Kar) in which it has been held that if certain expenses are excluded from the export turnover, the same should also be excluded from the total turnover. Since the CIT(Appeals) has decided the issue as per judgment of Hon'ble jurisdictional High Court in the case of Tata Elxsi Ltd. (supra), we find no infirmity in the order of CIT(Appeals). Accordingly, the order of CIT(Appeals) is confirmed.
In the result, the appeal of the assessee as well as revenue is partly allowed for statistical purposes.
Pronounced in the open court on this 21st day of April, 2017.