IN THE ITAT MUMBAI BENCH ‘K’
Willis Processing Services (I) (P.) Ltd.
Versus
Deputy Commissioner of Income-tax 2(3), Mumbai
IT Appeal Nos. 4429 & 4547 (Mum.) of 2012
[ASSESSMENT YEAR 2007-08]
MARCH 1, 2013
ORDER
Vijay Pal Rao, Judicial Member
These cross appeals are directed against the order dated 3.4.2012 of the CIT(A) for the AY 2007-08.
2. The assessee has raised the following grounds in this appeal:
1. Deduction under section 10A of the Act
1.1 The learned CIT(A) erred in confirming the disallowance of the deduction of Rs. 5,24,70,604/-claimed under section 10A of the Act.
1.2 The learned CIT(A) erred in stating that the conditions specified under section 10A(2)(ii) and (iii) of the Act are not satisfied.
1.3 The learned CIT(A) erred in confirming that the appellant company has not computed the deduction under section 10A of the Act in accordance with the provisions of subsection (4) of section 10A of the Act.
1.4 The learned CIT(A) erred in not providing an opportunity to the appellant company before disallowing the deduction under the provisions of section 10A(2)(ii) and 10A(2)(iii) of the Act.
1.5 The appellant prays that the Hon’ble ITAT direct the learned Assessing Officer to delete the disallowance under section 10A of the Act.
2. Deduction of Technical Fees and Satellite Link Charges from Export Turnover
2.1 The learned CIT(A) erred in contending that this ground is inconsequential once the appellant company is held not eligible for the said deduction.
2.2 The appellant prays that the learned Assessing Officer be directed not to exclude satellite charges, technical fees, interest earned on bank deposit and miscellaneous income from export turnover for the purpose of computing deduction under section 10A of the Act.
3. Transfer Pricing Adjustment
3.1 The learned CIT(A) erred in upholding adjustment of Rs. 7,52,20,419/- in respect of the Information Technology Enabled Services (“ITES”) rendered by the appellant u/s. 92CA(3) read with 92C(3) of the Income Tax Act, 1961 (“the Act”).
3.2 The learned CIT(A) erred in holding that the transactions entered into by the appellant with its Associated Enterprises (“AEs”) were not at arm’s length.
3.3 The learned CIT(A) erred in rejecting the benchmarking analysis performed by the appellant;
• The learned CIT(A) erred on the facts and circumstances of the case and in law, in partially rejecting the search process methodology followed by the appellant on erroneous grounds and conducting a new search process.
• The learned CIT(A) erred in rejecting the independent comparable companies selected by the appellant in its transfer pricing study report without providing any adequate reasons.
3.4 The learned CIT(A) erred in upholding that the fresh search process conducted by the Transfer Pricing Officer (“TPO”) is appropriate without appreciating the facts that there was no adequate reasons/need for conducting a new search process by the TPO. The range of comparable companies, 8 comparable companies, even after rejecting 3 comparable companies was adequate.
3.5 The learned CIT(A) erred in upholding the inappropriate benchmarking analysis adopted by the TPO;
• The learned CIT(A) erred in confirming the undertaking of fresh comparable companies search analysis which is against requirement under Rule 10D(4), that contemporaneous documentation as alone can be considered.
• The learned CIT(A) erred in law in not appreciating that, in conducting the fresh comparability analysis, the learned TPO has used the data which was not available as on the specified date (as defined in Section 92F(iv) of the Act).
• The learned CIT(A) erred in confirming that the learned TPO had not violated the rules of natural justice by not providing/sharing the complete details of the benchmarking analysis carried out by him.
• The learned CIT(A) erred in confirming TPO’s stand in applying the filters adopted in the fresh search.
3.6 The learned CIT(A) disregard of Rule 10B(2) and Rule 10B(3) of the Income Tax Rules, 1962;
• The learned CIT(A) erred in law and facts in disregarding the comparability factors specified under Rule 10B(2) of the Income-tax Rules, 1962 [‘the Rules’] and the provisions contained in Rule 1 OB(3) of the Rules which specifies that an adjustment should be made to account for differences between the transactions that may materially affect the price of such transactions.
• The learned CIT(A) erred in not considering the additional evidence relating to the grant of working capital adjustment on the margin of the comparable companies proposed by the TPO and which was granted to the appellant by the TPO in AY 2006-07.
• The learned CIT(A) erred in disregarding the differences in risk profile of the appellant (being a captive service provider) and the alleged comparable companies selected by TPO, by not allowing the risk adjustment made by the appellant.
3.7 The learned CIT(A) erred in not appreciating the fact that the margin earned by the appellant is reflective of the services rendered by a contract service provider.
3.8 The learned CIT(A) erred in confirming the selection of final comparable companies, selected by the TPO, without considering the differences in functional, risk and assets profile of the comparable companies vis-à-vis the appellant.
3.9 The learned CIT(A) erred in confirming the rejection of the use of multiple year data for computing the cost plus margins of the comparable companies.
3.10 The learned CIT(A) erred in not appreciating the fact that the TPO has taken recourse to the provisions of Section 133(6) of the Act for the purpose of ascertaining and identifying companies for comparability analysis.
3.11 The learned CIT(A) erred in not allowing the standard deduction of 5% as per the proviso to the section 92C(2) of the Act.
3.12 The learned CIT(A) has erred in not appreciating that the appellant is an entity registered under the Software Technology Parks of India (STPI) scheme and claims tax benefits under section 10A of the Act and has no reason to suppress its profits from its operations to manipulate the transfer prices.
3.13 The learned CIT(A) erred in not granting reasonable and adequate opportunity of being heard to the appellant.”
3. Ground no.1 is regarding denial of deduction u/s 10A.
3.1 The assessee company is engaged in the business of processing information relating to insurance claims received from Trinity Processing Services Ltd. (TSPL). Thus, the total income earned by the assessee is from the services rendered to TPSL, UK. During the year under consideration, the assessee claimed deduction of Rs. 5,24,70,604/- u/s 10A of the IT Act. The Assessing Officer noted from Form No.56F that the assessee has computed the deduction u/s 10A with reference to the number of employees as it was done in the last year and not as prescribed in sub. Sec. (iv) of sec. 10A of the Act. Thus, the Assessing Officer has observed that the claim is not in accordance with the provisions of sec. 10A and the same was disallowed as in the AY 2006-07. Apart from this, the Assessing Officer has also observed that the assessee has debited a sum of Rs. 50,00,615/- under the head ‘satellite link charges’ and Rs. 1.03,01,183/- under the head ‘technical service fees. The Assessing Officer asked the assessee as to why the same should not be excluded from the export turnover for the purpose of computing the deduction u/s 10A. The Assessing Officer held that the expenditure incurred towards insurance, freight, communication and expenses incurred in foreign exchange in providing the technical services outside India are to be excluded from the export turnover; but the same shall form part of the total turnover for the purpose of computation of deduction u/s 10A. Since the exclusion of technical service fee, satellite link charges, is an issue to be dealt with in ground no.2 raised by the assessee; therefore, ground no.1 is only with respect to the disallowance of deduction u/s 10A.
3.2 The CIT(A) held that the assessee does not fulfil all the conditions laid down u/s 10A(2) of the Act. Further, even the computation of so called eligible profit done by the assessee is not as per the provisions of sec. 10A(4). The CIT(A), apart from confirming the action of the Assessing Officer that the computation of the eligible profit by the assessee, is not as per the provisions of sec. 10A(4) has also held that the assessee has consolidated its SEEPZ unit at Andheri and its existing Vikroli unit. Such consolidation of existing unit would bring into existence of a consolidated unit and as such, the consolidated unit has come into existence, as a result of restructuring of business already in existence; thereby the conditions as prescribed under section 10A(2) are not satisfied.
4. Before us the ld. Sr. counsel for the assessee has submitted that the assessee had two units one at SEEPZ Andheri and other one at Vikroli. The unit at Vikroli qualifies for deduction u/s 10A of the Act for the year under consideration. The first unit of the assessee commenced business in the year 1993 and since then the deduction u/s 10A has been allowed by the Assessing Officer consistently so long it was eligible for deduction u/s 10A. The ld. Sr. counsel for the assessee has submitted that a new unit at Vikroli was set up by the assessee in the year 1999 and doing the same activity as in the first unit. The assessee claimed deduction u/s 10A for both the units for the AY 2000-01 and the Assessing Officer allowed the claim of deduction u/s 10A in respect of both the units for the AY 2000-01 onwards.
4.1 The ld. Sr. counsel has further submitted that for the AY 2004-05, the assessee claimed deduction u/s 10A only in respect of Vikroli unit. For the AY 2005-06 also the Assessing Officer has accepted the claim of deduction u/s 10A for the Vikroli unit. The employees of the first unit i.e, SEEPZ Andheri were transferred to Vikroli unit and the assessee used to reduce the claim to the extent of the employees transferred from Andheri unit to Vikroli unit w.e.f AY 2004-05.
4.2 The ld. Sr. counsel has further submitted that for the AY 2006-07, the Tribunal has allowed the claim of the assessee. He has further submitted that when the claim of the assessee was allowed in the earlier year, then the Assessing Officer cannot disallow the claim for the year under consideration. In support of his contention, he has relied upon the decision of the Hon’ble jurisdictional High Court in the case of CIT v. Paul Brother reported in 216 ITR 548 and submitted that the Hon’ble High Court has held that unless the relief granted to the assessee in the earlier year was withdrawn, the ITO could not disallow the relief granted in the subsequent years. He has also relied upon the decision of the Hon’ble Jurisdictional High Court in the case of CIT v. Western Outdoor Interactive P. Ltd. vide order dated 14.8.2010 in IT Appeal no.1150 of 2010 = (2012-TIOL-625-HC-MUM-IT)and submitted that by following the decision in the case of Paul Brothers (supra), the Hon’ble High Court has held that it is not necessary to decide whether SEEPZ was setup/formed by splitting up the first unit when the relief for the first assessment year has not been withdrawn, the ITO cannot withdraw the relief granted for the subsequent years. Thus, the ld. Sr. counsel has submitted that when the claim of the assessee was accepted for the AY 2000-01 onwards till AY 2005-06, then the Assessing Officer cannot withdraws the deduction in the subsequent years.
4.3 On the other hand, the ld. DR has submitted that the unit at SEEZP (Andheri) had been consolidated with Vikroli unit and there are no separate books of accounts maintained by the assessee for both the units after such consolidation; therefore, the deduction u/s 10A cannot be allowed to such a consolidated unit as there is no concept of highbird on the basis of which, a part of the unit can be considered as eligible and other part would be considered as not eligible. Thus, the entire claim of the assessee is liable to be rejected as held by the CIT(A). She has pointed out that the ld. CIT(A) has found that the undertaking has been formed by the assessee by restructuring of the business already in existence and therefore, the deduction u/s 10A is not available to such undertaking. She has relied upon the order of the CIT(A) and submitted that this is not the case of allocation of the expenses into the eligible and non-eligible units and then deriving the separate profits for the purpose of claiming deduction u/s 10A of the Act. In fact, there is only one consolidated unit which came into existence by reconstruction of the units already in existence and such consolidated unit was formed by even transfer of machinery previously used. The ld. DR has vehemently contended that the earlier years cannot operate as res-judicate because the new facts came into the knowledge of the Assessing Officer for the first time during the Assessment Year 2006-07 and therefore, there is no bar for deciding the issue of deduction u/s 10A on the basis of the facts came to the knowledge of the Assessing Officer.
4.4 In rebuttal, the ld. Sr. counsel for the assessee has submitted that these facts exited even at the time of first year when the claim of deduction u/s 10A in respect of the Vikroli unit. However, the Assessing Officer applied his mind and disallowed the claim for the first time only for the AY 2006-07 and this year. Therefore, the issue is covered by the decision of the Hon’ble jurisdictional High Court in the case of Paul Brothers (supra) as well as in the case of Western Outdoor Interactive P. Ltd. (supra) as well as the decision of the Tribunal for the AY 2006-07.
5. We have considered the rival submissions and relevant material on record. The Assessing Officer has disallowed the claim of deduction u/s 10A on the ground that the assessee has computed the deduction u/s 10A with reference to the number of employees which is not as per the provisions of sub. Sec 4 of sec. 10A of the Act. Thus, the Assessing Officer questioned the method adopted by the assessee for computation of the eligible profit of 10A unit on the basis of number of employees. Since no separate books of accounts are maintained for each unit one is eligible for deduction u/s 10A and another for not eligible unit.
5.1 At the outset, we note that an identical issue has been considered and decided by the Tribunal in assessee’s own case for the AY 2006-07 in para 9 to 9.3 as under:
9. We have considered the issue. AO relied on the provisions of section 10A(4) for disallowing the entire claim under section 10A, which was being allowed in earlier years without any dispute. Provisions of section 10A(4) are as under:
“10A(4): For the purposes of [sub-sections (1) and (1A)], the profits derived from export of articles or things or computer software shall be the amount which bears to the profits of the business of the undertaking, the same proportion as the export turnover in respect of such articles or things or computer software bears to the total turnover of the business carried on by the undertaking”.
9.1 As can be seen, it is only a method provided for arriving at the profits derived from export of articles or things of computer software and assessee has followed head count method for arriving at the export turnover and expenditure for the Vikroli unit in the absence of separate books of account. This is one of the methodologies adopted in arriving at the export turnover and the profits so as to work out the profits of the Units.
9.2 Similar issue was considered by the Hon’ble Delhi High Court in the case of Commissioner of Income-tax v. EHPT India (P.) Ltd. (2011-TIOL-839-HC-DEL-IT) wherein the facts are that the assessee was operating two units, one software Technological Park unit (STP), which was engaged in the development of software and its export, and the other domestic unit (non-STP unit), which was engaged in the implementation of the telecom software for vendors and customers in India. In the returns filed for the years under appeal the assessee computed the profits from the STP unit by apportioning the indirect or common expenses on the basis of the head-count of the employees working in the said unit and the domestic unit and claimed deduction under section 10A in respect of STP unit accordingly. The Assessing Officer, however, took the view that the head count basis of apportionment of common expenses was not appropriate and it resulted in more profits being shown from the STP units. He adopted the basis of turnover of respective units for apportioning the common expenses. As a consequence of re-apportionment, common expenses attributable to the domestic unit came down by Rs 40 lakhs. The Assessing Officer, therefore, disallowed Rs.40 lakhs from domestic unit and allocated to STP Unit. On appeal, the Commissioner (Appeals) confirmed the order of the Assessing Officer. On second appeal, the Tribunal upheld methodology adopted by the assessee and deleted the addition made by the Assessing Officer. On further appeal, the Hon’ble Delhi High Court held:
“The fate of the appeals must depend upon the answer to the question whether the method adopted by the assessee, namely, that of apportioning the indirect expenses between the STP unit and the non- STP domestic unit on the basis of the ‘head-count’ is an unreasonable method and if it has been followed consistently by the assessee in the past and has also been accepted by the department, should the revenue authorities be permitted to disturb the same in the years under appeal. The settled position in such matters is to examine whether the method which is canvassed for acceptance is the one (a) which has been consistently accepted by both the parties, namely, the assessee and the revenue in the past; (b) which is a reasonable method having regard to the nature of the business and other relevant factors and (c) which does not distort the profits. There is no dispute that the head-count method has been consistently followed and accepted without demur in the past. A departure therefrom is sought to be made only in the years under consideration by the departmental authorities. That it is a reasonable method and fair to both sides is indicated by the conduct of the revenue authorities in accepting it in the past. The reasonableness or fairness of the method of head-count adopted by the assessee can be said to be indicated by the fact that in the assessment year 2002-03 the assessee apportioned more common expenses to the STP unit, thereby reducing its profits and consequently reducing the claim for deduction under section 10A and at the same time offering a higher income in the domestic unit than what would have been offered had the turnover method of apportionment adopted by the Assessing Officer been followed.
It was only as a matter of principle that the Commissioner (Appeals) upheld the method adopted by the Assessing Officer even though the result was in favour of the assessee. Neither the Assessing Officer nor the Commissioner (Appeals) has raised any serious questions about the validity of the head-count method adopted by the assessee nor have they pointed out any commercial accounting principle or accounting standard that repudiates the method. [Para 8]
Section 10A provides for deduction for profits derived from the export of software for a period of ten years. During the period of tax-holiday, it is desirable that the same method of computing the profits of the STP unit is adopted so that any distortion is avoided. It is not to be understood as laying down a proposition that in all cases arising under section 10A, where the question of apportionment of common/indirect expenses between the taxable and the exempt units arises, the head-count method is the most appropriate method. The question will have to depend, in the very nature of things, on the nature of the business and the facts of the particular case. Instant decision is confined to the facts of the present case. In the instant case, there is no finding by the revenue authorities that by adopting the head-count method which was hitherto being accepted by them there was a distortion of the profits nor have they said that the headcount method of accounting is not the correct method of accounting. All that they have said is that in their opinion the turnover basis of apportionment of the expenses is more logical and needs to be applied. In the instant case, the Assessing Officer has accepted the head-count method adopted by the assessee in the past but has rejected it only for the years under appeal. This would disturb or distort the profits. The question whether the head-count method is the most appropriate method has been raised by the Assessing Officer in the course of the assessment proceedings and it has been stated by the assessee that though the turnover basis preferred by the Assessing Officer may be more suited to manufacturing businesses, in the case of service industry such as the assessee’s case the headcount method would be more appropriate to be followed for the purpose of apportioning the indirect expenses. It appears to be a plausible view, though it can possibly also be a debatable view. But merely because there can be more than one method of apportioning the common expenses between the STP and domestic units it cannot be said that the method of head-count followed by the assessee should be discarded, that too mid-way, even though it was not questioned at any time in the past.
The provisions of sub-section (4) of section 10A, relied upon by the Assessing Officer, apply for the purpose of segregating the profits of the business into export profits and domestic profits. It is a statutory formula for ascertaining what are profits derived from the export of the eligible items. It has to be read with sub-section (1). It says that the export profits have to be apportioned on the basis of the ratio which the export turnover bears to the total turnover of all the businesses of the eligible undertaking. The instant case is not concerned with sub-section (4). That sub-section will apply when the combined profits – profits of the exempt unit and those of the non-exempt unit – have been ascertained; the next step will be to apportion them on the basis of the ratio which the export turnover bears to the total turnover. Instant case is concerned with the stage before that. Instant case is concerned with the method by which the indirect or common expenses – expenses which are incurred for both the exempt and taxable units – are to be apportioned between the two units. To apply the formula prescribed in sub-section (4) may be appropriate in a given case considering its peculiar facts. But applying the same formula to all cases of apportionment without having regard to the history of assessments and other relevant factors may not be justified.
In a case where alternative methods of apportionment of the expenses are recognized and there is no statutory or fixed formula, the endeavour can only be towards approximation without any great precision or exactness. If such is the endeavour, it can hardly be said that there is an attempt to distort the profits. On the contrary, distortion of profits may arise if the consistently adopted and accepted method of apportionment is sought to be disturbed in a few years, especially in a case such as the instant one where the deduction under section 10A is available over a period of ten years and only in some years the method of apportionment of income is disturbed. In other words, there is no ‘just cause’ made out for abandoning the past method.
The appeal filed by the revenue is accordingly dismissed.
9.3 Respectfully following the above principles laid down, we are of the opinion that there is no need to disturb the method of apportionment of expenditure and turnover which were accepted by AO in earlier years. Assessee is eligible for deduction under section 10A and the reason for disallowing entire claim cannot be accepted. Even the DRP was not correct in rejecting the assessee objection stating that the issue is pending before the ITAT, the fact of which is not correct. However, in the anxiety of disallowing the entire claim, AO has not examined the apportionment of export turnover and expenses of units. Therefore, as this aspect was not examined by AO, for examination of the actual apportionment and arriving at the profits of the units the matter is restored to the file of AO. AO is free to examine the issue of deriving at the profits of eligible unit. While considering, the submissions with reference to the non-claiming of deduction on employees transferred from SEEPZ to Vikroli should also be examined. Assessee should be given due opportunity. We make it clear that the deduction of claim under section 10A is eligible on Vikroli unit and AO is only directed to examine the quantum of deduction. This quantum of deduction may also depend on the issues in other grounds which are dealt with later. The ground No.1 is considered allowed.”
5.2 Thus, it is clear that for the Assessment Year 2006-07, this Tribunal has held that the Assessing Officer is not justified in rejecting the claim of the assessee for deduction u/s 10A. However, the Assessing Officer has not examined the apportionment of export turnover and expenses of the units and accordingly, set aside the issue to examine the quantum of deduction after examination of the actual apportionment and profit of the units eligible for deduction u/s 10A and non eligible unit respectively.
5.3 The CIT(A) has added one more reason for disallowance of the deduction u/s 10A that the assessee does not fulfil the condition as laid down u/s 10A(2) of the I T Act because the assessee has consolidated two existing units into one and thereby a consolidated unit came into existence by reconstruction of the already existing unit. Thus, the CIT(A) has made out a case that two existing units; one eligible for deduction u/s 10A; and another non eligible unit were consolidated and by virtue of this consolidation, the new consolidated unit came into existence by reconstruction of the existing unit. Hence, it violates the conditions as prescribed under 10A(2)(ii)&(iii) of the Act.
5.4 There is no dispute on the legal proposition on the issue of denial of the deduction, if the deduction was allowed in the first year, then for the subsequent Assessment Year, the Assessing Officer cannot disallow the claim of the assessee without disturbing the order of the earlier year, more specifically first year, when eligibility of the new establishment/unit has to be tested.
5.5 The Hon’ble jurisdictional High Court in the case of Paul Brothers (supra) has observed and held in paras 3 to 6 as under:
“3. The Tribunal allowed the appeals. It held that : (i) since the assessment order for the year 1981-82 was merged in the appellate order, revisional jurisdiction could not be exercised ; (ii) the Assessing Officer’s order based on a binding decision of the High Court could not be interfered with in revisional jurisdiction ; (iii) unless deductions allowed for the assessment year 1980-81 on the same ground were withdrawn, they could not be denied for the subsequent years.
4. That in view of the merger of the Income-tax Officer’s order for the assessment year 1981-82 in appeal, revisional jurisdiction could not be exercised is a settled position having been concluded against the Revenue by several decisions of this court including CIT v. P. Muncherji and Co. [1987] 167 ITR 671.
5. The Calcutta High Court in the case of Russell Properties Pvt. Ltd. v. A. Chowdhury, Addl. CIT [1977] 109 ITR 229 and the Allahabad High Court in K. N. Agrawal v. CIT [1991] 189 ITR 769 have held that where the Income-tax Officer’s order is passed on the basis of a binding decision, revisional power under section 263 cannot be exercised to undo the said order. The Income-tax Officer is a quasi-judicial authority and the principle laid down is sound. We endorse the same.
6. Either in section 80HH or in section 80J, there is no provision for withdrawal of special deduction for the subsequent years for breach of certain conditions. Hence unless the relief granted for the assessment year 1980-81 was withdrawn, the Income-tax Officer could not have withheld the relief for the subsequent years. [See Gujarat High Court decision in the case of Saurashtra Cement and Chemical Industries Ltd. v. CIT [1980] 123 ITR 669].”
6. Following the decision in the case of Paul Brothers (supra), the Hon’ble High Court has again reiterated the legal proposition in the case of CIT v. Western Outdoor Interactive P. Ltd. (supra) in para 6 as under;
“(6) We have considered the submissions. We find that the submissions made by Mr. Pardiwalla on the basis of the decision of this Court in the matter of Paul Brothers (supra) and Director of Information Pvt. Ltd. (supra) merits acceptance. Therefore, in this case, it is not necessary for us to decide whether SEEPZ unit was set up/formed by splitting up of the first unit. In both the above decisions, this Court has held that where a benefit of deduction is available for a particular number of years on satisfaction of certain conditions under the provisions of the Income Tax Act, then unless relief granted for the first assessment year in which the claim was made and accepted is withdrawn or set aside, the Income Tax officer cannot withdraw the relief for subsequent years. More particularly so, when the revenue has not even suggested that there was any change in the facts warranting a different view for subsequent years. In this case for the assessment years 2000-01 and 2001-02 the relief granted under Section 10A of the Act to SEEPZ unit has not been withdrawn. There is no change in the facts which were in existence during the assessment year 2000-01 vis-a-vis the claim to exemption under section 10A of the Act. Therefore, it is not open to the department to deny the benefit of Section 10A for subsequent assessment years i.e. assessment years 2002-03 and 2003-04 and 2004-05. Besides that, on consideration of the facts involved both the Commissioner of Income Tax (Appeals) and the Tribunal have recorded a finding of fact that the SEEPZ unit is not formed by splitting up of the first unit.”
7. Thus, it is clear that, if the claim of the assessee was allowed for the first year, then without withdrawing the claim granted for the earlier AY, the revenue cannot deny the benefit of sec. 10A of the subsequent years, if there is no change in the facts and circumstances, which were in existence during the first Assessment Year and the assessment in which the claim has been denied. Hence, in case there is no change in the facts and circumstances subsequent to first year which could have rendered the assessee ineligible for deduction u/s 10A, the claim of the assessee cannot be denied in the subsequent Assessment Year when the claim is accepted for the first Asst Year.
7.1 However, in the case of the assessee, the CIT(A) has pointed out a new aspect to the issue for the first time during the AY under consideration that the assessee has formed a consolidated unit by restructuring of two existing units. But this fact is not clear from the record whether this new development had occurred during the year under consideration or it was already in existence right from the first year of assessment.
8. Since it is not clear whether the non-eligible unit at Andheri was still in existence or closed by the assessee to bring into existence the alleged consolidated unit as held by the CIT(A); therefore, this fact is required to be examined by considering inter-alia the number of employees working in the two units when the new unit was established by the assessee at vikroli only after comparing the number of employees and machinery installed in both the units, it can be determined whether the two existing units were merged and consolidated to bring into existence a new unit and thereby a new unit has been set up by restructuring of the existing unit during the year under consideration. Accordingly, on both the aspects; one considered by the Tribunal in the AY 2006-07; and the other one which has been brought out by the CIT(A) for the first time during the year under consideration, the matter is remanded to the records of the Assessing Officer for examination, verification and then decide the issue as per law.
8.1 Ground no.2 is regarding technical fee and satellite link charges excluded from export turnover.
8.2 Though the Assessing Officer denied the claim of deduction u/s 10A; however, alternatively, the Assessing Officer has also reduced the satellite link charges of Rs. 50,00,615/- and technical service fee of Rs. 1,03,01,183 from export turnover while computing the deduction u/s 10A. The CIT(A) has held that once the issue of deduction u/s 10A has been decided against the assessee, then this ground of appeal has become consequential.
9. We have heard the ld. Sr. counsel for the assessee as well as the ld. DR and considered the relevant material on record. At the outset, we note that this issue has been considered and decided by this Tribunal in assessee’s own case for the AY 2006-07 in para 10 to 11.2 as under;
“10. Ground no.2 is on the issue of reduction of technical fees and satellite link charges from export turnover. Assessing Officer while rejecting the entire claim of section 10A however alternatively also reduced the technical fees and satellite link charges of Rs.1,73,59,069and Rs.2,02,10,562 respectively from export turnover for the purpose of computing the deduction under section 10A thereby restricting the computation under section 10A. As stated in Ground No.1, the DRP declined to interfere as the matter was pending before the ITAT on this issue.
11. The DRP was not correct fully as the issue on ‘technical fees’ was not pending before the ITAT as the Revenue seems to have accepted the decision of the CIT(A) in AY 2004- 05 and 2005-06. There is only an appeal on the issue of ‘satellite charges’. Be that as it may, the issue arises as under. Assessee processes raw data received from TPSL UK and sends them back to UK via computers. To ensure consistent delivery of the above mentioned services, TPSL is providing training of employees to assessee in India for implementation of new process and changes to the existing process. In view of the services rendered by TPSL UK assessee made payment of technical fees to TPSL, UK. At the time of making payment, it was the submission of assessee that the reduction of expenditure incurred in respect of technical fees in foreign exchange from export turnover arises only when assessee provides technical services outside India. Relying on the explanation to Clause-4 of section 10A, it was the submission that the entire processing of data takes place in India and therefore, there is no need to exclude the technical service fees. The learned CIT(A) in assessment year 2004-05 examined this issue elaborately and gave an opportunity to AO. After considering the report of AO and the facts of the case, the CIT(A) deleted the said adjustment made to the export turnover holding as under:
“6.2 However, the submissions relating to technical fees are found to be having some force and merit in view of the fact that for excluding the expenses relating to technical services from the export turnover as per above definition the conditions required to be fulfilled are that the expenses, if any, has been incurred in foreign exchange in providing technical services outside India. As the claim of the appellant that the technical services were not provided outside India is found to be factually correct, therefore, the expenses relating to technical services is not required to be deducted. Accordingly AO is directed not to deduct this amount from the export turnover. To this extent the appellant gets relief. Therefore, Ground No.1 is partly allowed in favour of the appellant”.
Following the above findings in assessment year 2004-05 which the Revenue accepted, the CIT(A) in assessment year 2005-06 also deleted the same. Even in AY 2005-06 there is no appeal by the Revenue to ITAT. Therefore, since the issue was already held in favour of assessee on facts, we are of the opinion that the principles of judicial consistency require that AO should not have excluded the amount from the export turnover. The DRP also was not correct in rejecting the issue. In view of this, we allow the ground raised by assessee on this issue of expenses for ‘technical services’.
11.1 The other amount involved in Ground No.2 is with reference to the ‘satellite expenses’. AO excluded this amount also to arrive at the export turnover as defined under section 10A(4). After considering the submissions in assessment year 2004-05, the ITAT in ITA No.4329/Mum/08 2010-TI0L-576-ITAT-MUM held in favour of assessee as under:
“7. However, while completing the assessment the A.O. treated the above satellite link charges as part of telecommunication charges. This issue was discussed elaborately by the Coordinate Bench in the case of Patni Telecom (P.) Ltd. v. ITO (wherein one of us, the J.M. was a member) 22 SOT 26 (Hyd) = (2008-TIOL-665-ITAT-HYD) wherein on similar facts the issue was considered with reference to export turnover as defined in clause (iv) of section 10A and held as under:
“Export turnover has been defined in clause (iv) of the Explanation 2 to sec 10A. The meaning of ‘export turnover’ is also provided in other sections of the Act, say clause(c) of section 80HHE and Explanation (b) to section 80HHC. According to Explanation (b) to section 8OHHC, export turnover means the sale proceeds receivable in foreign exchange as per sub-section 2(a) of section 80HHC of all goods which are exported out of India, but which does not include freight and insurance. Similarly, total turnover for the purpose of deduction under section 80HHC, which is defined in Explanation (ba) at the end of section 80HHC in the negative term, means as not including freight and insurance attributable to transport of goods or merchandise beyond the custom station and profit on sale of licence, cash assistance, duty drawback, etc. Thus, the term ‘export turnover’ does not include freight and insurance attributable to transport. Explanation (c) to section 80HHE is similar to clause (iv) of Explanation 2 to section 10A.
On an analysis of definition of ‘export turnover’ as provided in clause (iv) of the Explanation 2 to section 10A, it is clear that for the purpose of not including in the consideration received in or brought into India in convertible foreign exchange there are two types of expenditures. The first type of expenditure is freight, telecommunication charges, or insurance attributable to the delivery of article or thing or computer software out of India. The second type of expenditure is expenditure, if any, incurred in foreign exchange in providing technical services outside India. The basic idea or intention for deducting the first type of expenditure, i.e. freight, telecommunication charges, or insurance charges is that delivery of goods should be Free on Board (FoB). The CBDT vide its Circular No. 564, dated 5-7-1990 clarified this aspect in respect of deduction under section 8OHHC. On the basis of the above discussion, it can be said that only those freight, communication charges of insurance attributable to delivery of goods out of India are to be considered while reducing from consideration received in convertible foreign exchange. Thus, if such expenses are not attributable to delivery of goods outside India, such expenses are not required to be deducted from the consideration. Normally, in a transaction of purchase and sale, there are two types of conditions between the parties. One is where price quoted of goods is inclusive of all expenses or in other words price quoted is only in respect of goods. Another condition is where price of goods and charges of expenses are separately stated. In a case where such expenses are to be separately charged, invoices are prepared showing value of the goods and such expenses. If the quoted price is inclusive of such expenses, then consolidated value of the goods is only mentioned in the invoice. In a case where only value of goods is quoted, expense is borne by the supplier. In cases where expenses have not been separately charged, the convertible foreign exchange received is consideration of the goods only. Where such expenses are separately charged in the invoices, the consideration received in convertible foreign exchange includes the value of the goods and such expenses. If the consideration received is only against the goods, then there is no need to deduct such expenses from the consideration received in convertible foreign exchange. In case where such expenses are separately charged, the expenses are required to be reduced from the consideration received for the purpose of arriving at the export turnover. The logic and reason behind this have been explained by the CBDT vide its Circular No. 564, dated 5- 7-1990, that the delivery of the goods should be Free on Board (FoB). The goods exported at FOB is important in the sense that deduction under section 10A is permissible only in respect of consideration received against goods and not for the consideration received against freight, etc. All the assessees should get deduction under section 10A on consideration received against supply of goods at FoB. Therefore, the condition of delivery of goods at FoB has been put and the definition of ‘export turnover’ as provided in clause (iv) of the Explanation 2 to section 10A is required to be interpreted accordingly.
In the instant case, the Assessing Officer had deducted the ISP expenses from foreign exchange consideration treating it as communication charges. The said expenditure on ‘Internet Service Provider (ISP)’ does not come within the scope of telecommunication charges as provided in clause (iv) of Explanation 2 to section 10A, because ISP is for transmitting the data, i.e., software developed by the assessee. The ISP expenses incurred were in respect of development of software, i.e., goods. The ISP expenses were not attributable to the delivery of computer software, outside India and, therefore, such expenses need not be excluded from consideration in foreign exchange. However, if for the sake of arguments it was presumed that the expenditure incurred was attributable to delivery of goods outside India even though same was not to be excluded. The words ‘received’ and ‘but not include’ used in clause (iv) of Explanation 2 to section 10A are significant. What is to be excluded is out of what is received. In the instant case, the assessee received consideration against software, i.e., goods. For this purpose, the assessee had demonstrated by referring to invoices and agreement. The agreement, invoices and the turnover clearly showed that the assessee did not recover any such expenditure. Therefore, there was no scope for any exclusion from the export turnover on account of such expenses. If at all on presumption, it was to be excluded for the purpose of ‘export turnover’, then on the same assumption, reason and analogy it should be excluded from ‘total turnover’. Therefore, the Assessing Officer was not correct in excluding ISP expenses from consideration received in convertible foreign exchange while calculating export turnover for the purpose of section 10.”
8. The ISP expenses considered in the above said decision are similar to the satellite link charges paid by the assessee. As seen from the bills placed on record before the authorities the assessee has paid satellite link charges to VSNL, MTNL and also to Software Technology Park India (STPI) towards bi- monthly half circuit charges/international half circuit charges and rent for TMI – Frame Relay CCT charges including port charges. The port charges, however, were calculated on the basis of USD per annum basis where as rest of the charges were paid on annual lease agreement periodically and these are fixed charges not connected with the delivery attributable to the export of goods. Even though the assessee has utilized the satellite link for receiving data and also for transferring data this cannot be considered as telecommunication charges for delivery of goods on FOB basis. Not only that what the assessee was getting was a fixed service charge for processing data from the foreign company, Trinity Processing Services Ltd. on a monthly basis in terms of the agreement dated 16th October 2001. There are no separate charges recovered from the foreign company towards telecommunication charges which can be considered as amount recovered in foreign exchange from the foreign party. Since no such amount is recovered or included in the turnover, question of exclusion from the export turnover also does not arise on the facts of the case.
9. Assessee has made an alternate contention that the satellite link charges, in case they are considered as telecommunication charges this should also be excluded from the total turnover as considered by the Special bench in the case of ITO v. Sak Soft Ltd. 313 ITR 353 (AT)(SB) – 2009-TIOL-187-ITAT-MAD-SB wherein it was held that parity to be maintained with export turnover to that of total turnover and where expenses on telecommunication charges or insurance attributable to delivery of articles or things or computer software outside India or expenses incurred in foreign exchange in providing technical services outside India required to be excluded from export turnover, they are also to be excluded from total turnover. Since we have considered that the satellite link charges cannot be considered as telecommunication charges to be excluded as per the definition of export turnover there is no need to consider the alternate contention. Accordingly, this alternate ground raised is not considered as it becomes academic in nature.
10. After considering the facts of the case and the principles established by the Coordinate bench in the case of Patni Telecommunication (P) Ltd. v. ITO 22 SOT 26 (Hyd) – 2008-TIOL-665-ITAT-HYD, it is held that the expenses on satellite link charges does not come within the scope of ‘telecommunication charges’ as provided in clause (iv) of Explanation 2 to section 10A and accordingly, the A.O. is directed not to exclude the same from export turnover A.O. is directed to recalculate the deduction under section 10A. Assessee’s grounds are considered allowed”.
11.2 As seen from the order of the CIT(A) in assessment year 2005-06, it is noticed that the CIT(A) has followed the above order of the ITAT while giving relief on ‘satellite charges’. In view of the order of the ITAT in assessment year 2004-05, we hold that the satellite charges cannot be considered as ‘telecommunication charges’ so as to exclude from the export turnover. We accordingly uphold assessee’s grievance on this issue. Ground No.2 is allowed.”
9.1 Following the earlier order of this Tribunal, we decide this issue in favour of the assessee and against the revenue.
10. Ground no.3 is regarding transfer pricing adjustment in respect of services rendered by the assessee to its Associated Enterprise (AE).
10.1 The assessee is providing/rendering information Technology enabled Services (ITES) to its overseas affiliates/AEs namely Tyrinty Processing Services Ltd. (TPSL), UK and Willis Processing Services Inc., USA. ITES provided by the assessee to its AE includes;
(i) processing of insurance claims, premiums, and treaties;
(ii) Accounting for insurance underwriters and clients;
(iii) Insurance accounting support services and
(iv) data processing.
10.2 The assessee furnished Transfer Pricing report in support of the arm’s length price (ALP) of 10.54% by adopting TNMM as the most appropriate method and using PLI as operating profit to cost for benchmarking its international transactions after considering the three years weighted average margins which comes to 9.90%. The assessee carried out the search from Prowess and Capitaline databases and selected 11 companies as comparables as under:
