IN THE ITAT MUMBAI BENCH ‘K’
SITEL India (P.) Ltd.
Versus
Assistant Commissioner of Income-tax
IT Appeal Nos. 3535 & 4073 (Mum.) of 2009
[Assessment year 2004-05]
DECEMBER 5, 2012
ORDER
1. These are cross appeals by Assessee and Revenue against the order of the CIT (A)-32 Mumbai dated 27.02.2009. Assessee has raised five grounds in its appeal, whereas the Revenue has raised only one ground in its appeal. Assessee’s ground No.2 and Revenue’s appeal are with reference to the transfer pricing adjustment made by the TPO which was partly confirmed by the CIT (A). The rest of the grounds are on other issues on assessment of total income.
2. We have considered the arguments of the learned Counsel Shri Sunil M Lala and the learned CIT (DR) Shri Ajeet Kumar Jain and their arguments were incorporated wherever required. First we will take up assessee’s appeal in ITA No.3535/Mum/2009.
3. Ground No.1 is general in nature which does not require any adjudication.
4. Ground No.2 is with reference to the transfer pricing. The Revenue ground is also on the same issue. Both the grounds of assessee and the Revenue are as under:
Assessee’s Ground No.2:
“Transfer Pricing: The learned CIT (A) erred on facts and in law by allowing only partial relief to the adjustments made by AO in relation to transfer pricing matters. The Appellant therefore, prays that the adjustments in relation to transfer pricing matters made by the CIT (A) be deleted”.
Revenue’s Ground:
“On the facts and in the circumstances of. the case and in law, the learned CIT (A) erred in deleting the addition made by AO on the basis of working provided by the TPO where the operating margin was taken at 11.96% instead of 9.47% taken by assessee without appreciating the facts of the case. The appellant prays that the order of the CIT (A) on the above ground be set aside and that of the ITO/ACIT/DCIT be restored”.
5. Briefly stated, assessee is a domestic company formed by a shareholding between Sitel Group & TATA group with 50% stake each. Assessee has provided software development services to its overseas enterprise. Assessee in the TP study used TNM method to benchmark its ALP for its transaction with AE and has computed the profit margin of com parables and compared with its own margins. While calculating the operating profit margins the assessee has excluded the idle capacity cost. Since no basis has been provided by the assessee as to why the same has been excluded, the TPO did not allow the idle capacity cost and on the basis of the OP margin of the com parables provided by assessee, fixed the arm’s length margin at 11.96% on the operating cost of Rs. 55,82,69,000 and accordingly arms length price was arrived at Rs. 6,67,88,000. Assessee’s margin and cost was less, adjustment of amount of Rs. 5,11,22,000 was made for the impugned assessment year. AO having regard to the order of the TPO made the said addition in the assessment.
6. Before the CIT (A), assessee has raised many objections, though first objection is with reference to arriving at the operating margin of 11.96%. The comparable arm’s length range is from (-) 6.04% to 19.02% of operating margins with arithmetic mean 9.47% in respect of the comparable instances. There is no discussion in the assessment order or in the order of the TPO as to why and how the operating margin of 11.96% was arrived at. It was also the contention before the CIT (A) that assessee is a provider of software development services and is basically engaged in providing contract center services in the form of voice, web chat and email. It was further submitted that there is average reduction in operating profit earned by assessee as there was reduction of gross revenue earned during the year on account of withdrawal of substantial business by its major client. Similarly increase in the number of employees as a strategic method to develop its business in the long run and therefore, assessee has provided idle cost adjustment to make it comparable with the other companies. It was also further submitted that assessee was 50:50 joint venture between the SITEL Netherlands and Tata Group (comprising of Tata Info Tech Limited holding 40% and Tata International Limited holding 10%). Therefore, since controlling interest was held by the third party, there is no need for any arms length adjustment. Further it was submitted that assessee’s profits were totally exempt under section 10A, therefore, shifting of profits does not arise. In the course of appellate proceedings, assessee also furnished additional evidence of the gross revenue earned by the AEs from the contract executed with the end customers. It was the submission of assessee that the AEs retained part of the revenues varying from 0 to 26% and passed on the balance to assessee. Therefore, adjustment so proposed by the TPO does not arise.
7. The learned CIT (A) discussed these objections elaborately vide Para 3 of the order item-wise and vide Para 3.11 to 3.13 decided the issue as under:
“3.11. I have perused the order of the TPO and considered all the above submissions/contentions of the Appellant. I have also perused the remand report received from the AO vide letter dated 11.06.2007 and another report dated 27.02.2008 received from TPO. At the outset, the Appellant has prayed for admission of additional evidence on the above grounds relating to transfer pricing adjustment. I have perused the additional evidence filed by the Appellant and find it appropriate to take cognizance of the same and accept it under Rule 46A, as the appellant did not have sufficient opportunity during the course of the assessment proceedings to produce the above documentary evidence. Looking at the evidence received from the AEs providing details of revenue, costs, profit/loss margin earned by the AEs, it is clear that the AEs have retained an amount of Rs 54,389,700, representing 0% to 26% of the gross revenue earned from the end customers for various projects. The Table below shows the project-wise profitability for the AEs for the year:
