Willis Processing Services (I) (P.) Ltd. v. Dy. CIT

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The Tax Publishers2013 TaxPub(DT) 1369 (Mum-Trib) : (2013) 051 (II) ITCL 0378 : (2013) 057 SOT 0339 : (2014) 030 ITR (Trib) 0039 INCOME TAX ACT, 1961 --Deduction under section 10AComputation Condition precedent--Assessee-company was engaged in business of processing information relating to insurance claims received from TSPL. Total income earned by assessee was from services rendered to TPSL, UK. From Form 15F it was observed by assessing officer that assessee had not computed deduction under section 10A in accordance with clause (iv) of section 10. Assessing officer disallowed said deduction which was upheld by Commissioner (Appeals) on ground that conditions land down under section 10(2)(4) were not fulfilled. *Held:* Not justified. In view of Tribunal's earlier year's order in assessment year 2006-07, assessing officer was not justified in rejecting claim of assessee rejecting deduction under section 10A. Further, Commissioner (Appeals) had also held that assessee's two units (one eligible other non-eligible) have consolidated, therefore, if the deduction was allowed in first year, then for subsequent assessment year, assessing officer could not disallow claim of assessee without disturbing order of earlier year, more specifically first year, when eligibility of the new establishment/unit had to be tested. 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 under section 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 under section 10A and non-eligible unit respectively. [Para 5.2] The Commissioner (Appeals) has added one more reason for disallowance of the deduction under section 10A that the assessee does not fulfill the condition as laid down under section 10A(2) 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 Commissioner (Appeals) has made out a case that two existing units; one eligible for deduction under section 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). [Para 5.3] 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. [Para 5.4] 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 assessment year, the revenue cannot deny the benefit of section 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 under section 10A, the claim of the assessee cannot be denied in the subsequent assessment year when the claim is accepted for the first assessment year. [Para 7] However, in the case of the assessee, the Commissioner (Appeals) has pointed out a new aspect to the issue for the first time during the assessment year 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. [Para 7.1] 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 Commissioner (Appeals); 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 assessment year 2006-07, and the other one which has been brought out by the Commissioner (Appeals) 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. [Para 8] Income Tax Act, 1961, Section 10A INCOME TAX ACT, 1961 --Deduction under section 10AComputation Treatment of satellite-link charges and technical fee--Though assessing officer denied claim of deduction under section 10A. However, alternatively, assessing officer has also reduced satellite-link charges and technical service fee from export turnover while computing deduction under section 10A. Commissioner (Appeals) upheld order of assessing officer. *Held:* In view of Tribunal's order in assessee's own case, it is held that satellite-link charges and technical fee would not be reduced from export turnover while allowing deduction under section 10A. Income Tax Act, 1961, Section 10A INCOME TAX ACT, 1961 --Transfer pricing--Computation of ALP Selection of comparable companies vis-a-vis fresh search for comparables--Assessee was providing information technology enabled service (ITES) to AES namely TPSK U.K. and WPS, USA. Assessee furnished TP study adopting TNM method and selecting 11 comparable companies and cost plus margin was 10.54 per cent which was more than comparables cost plus margin of 9.90 per cent and accordingly, its international transaction was at ALP. TPO did not agree with computation of margin of comparables by considering three years weighted average cost plus margin and proposed to consider updated single year data of comparable which gives average margin of 16.82 per cent. TPO had also found only 8 comparables companies as suggested by assessee. TPO was of view that 8 companies provided in TP study were not adequate and reasonable number of comparables and accordingly for broad level of comparability allowed under TNMM a fresh search was carried out by TPO. Consequently TPO selected a set of 25 comparables of ITES purported to have been performed functions broadly comparable to activity of assessee related to ITES. After rejecting objections of assessee TPO determined ALP of international transactions by applying arithmetic margin 28.47 per cent. Accordingly adjustment was made by TPO and Commissioner (Appeals) upheld order of TPO. *Held:* Sufficient number of comparables depends upon facts and circumstances of each case and there could not be a fixed criteria or parameter for number of comparables, which can be universally applied to each and every case for determination of the ALP. The assessee has challenged the action of the TPO on the ground that after accepting 8 comparables selected by the assessee, the TPO is not justified in carrying out fresh search and adding 22 more comparables. The contention of the counsel is based on the logic that the 8 comparables, as selected by the assessee and accepted by the TPO, are more than sufficient for determination of the ALP and therefore, there was no requirement, which justified the fresh search carried out by the TPO in inclusion of 22 more comparables. [Para 14.2] There cannot be a fixed number of comparables to be considered as sufficient or appropriate number for determination of the ALP as a general parameter. Sufficient number of comparables depends upon the facts and circumstances of the each case and there cannot be a fixed criteria or parameter for number of comparables, which can be universally applied to each and every case for determination of the ALP. It is an accepted rule of sampling that larger size of sample would better and adequate represent the lot or population to which the sample belongs. Therefore, to get an adequate result and better representation, the size of sample must be large enough. The same rule is applicable in the case of number of comparables selected for representing the true and correct ALP in relation to the international transaction. The endeavour should be made to bring more and more comparables so that a proper and realistic price can be determined which represents the price prevailing in the open market. [Para 14.3] Under the Transfer Pricing Regulations, the number of comparables may be one or more than one, but there is no upper limit prescribed under section 92C. However, the first proviso to section 92(2) indicates that more than one price can be considered for determination of ALP and in such a case, the ALP shall be taken to be arithmetic mean of such price. Therefore, the size of number of comparables has not been prescribed under the provisions of TP Regulations provided under the Income Tax Act. However, the sufficiency of number depend largely on the availability of the comparables where the number of comparables available is large, then it is always better to consider as many as possible number of comparables which can give an adequate and proper representation of the price prevailing in open market in the said industry, business, trade, etc., to which the comparables and international transactions belong. [Para 14.4] SUBSCRIBE FOR FULL CONTENT

The Tax Publishers2013 TaxPub(DT) 1369 (Mum-Trib) : (2013) 051 (II) ITCL 0378 : (2013) 057 SOT 0339 : (2014) 030 ITR (Trib) 0039

INCOME TAX ACT, 1961

--Deduction under section 10AComputation Condition precedent--Assessee-company was engaged in business of processing information relating to insurance claims received from TSPL. Total income earned by assessee was from services rendered to TPSL, UK. From Form 15F it was observed by assessing officer that assessee had not computed deduction under section 10A in accordance with clause (iv) of section 10. Assessing officer disallowed said deduction which was upheld by Commissioner (Appeals) on ground that conditions land down under section 10(2)(4) were not fulfilled. Held: Not justified. In view of Tribunal's earlier year's order in assessment year 2006-07, assessing officer was not justified in rejecting claim of assessee rejecting deduction under section 10A. Further, Commissioner (Appeals) had also held that assessee's two units (one eligible other non-eligible) have consolidated, therefore, if the deduction was allowed in first year, then for subsequent assessment year, assessing officer could not disallow claim of assessee without disturbing order of earlier year, more specifically first year, when eligibility of the new establishment/unit had to be tested.

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 under section 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 under section 10A and non-eligible unit respectively. [Para 5.2] The Commissioner (Appeals) has added one more reason for disallowance of the deduction under section 10A that the assessee does not fulfill the condition as laid down under section 10A(2) 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 Commissioner (Appeals) has made out a case that two existing units; one eligible for deduction under section 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). [Para 5.3] 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. [Para 5.4] 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 assessment year, the revenue cannot deny the benefit of section 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 under section 10A, the claim of the assessee cannot be denied in the subsequent assessment year when the claim is accepted for the first assessment year. [Para 7] However, in the case of the assessee, the Commissioner (Appeals) has pointed out a new aspect to the issue for the first time during the assessment year 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. [Para 7.1] 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 Commissioner (Appeals); 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 assessment year 2006-07, and the other one which has been brought out by the Commissioner (Appeals) 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. [Para 8]

Income Tax Act, 1961, Section 10A

INCOME TAX ACT, 1961

--Deduction under section 10AComputation Treatment of satellite-link charges and technical fee--Though assessing officer denied claim of deduction under section 10A. However, alternatively, assessing officer has also reduced satellite-link charges and technical service fee from export turnover while computing deduction under section 10A. Commissioner (Appeals) upheld order of assessing officer. Held: In view of Tribunal's order in assessee's own case, it is held that satellite-link charges and technical fee would not be reduced from export turnover while allowing deduction under section 10A.

Income Tax Act, 1961, Section 10A

INCOME TAX ACT, 1961

--Transfer pricing--Computation of ALP Selection of comparable companies vis-a-vis fresh search for comparables--Assessee was providing information technology enabled service (ITES) to AES namely TPSK U.K. and WPS, USA. Assessee furnished TP study adopting TNM method and selecting 11 comparable companies and cost plus margin was 10.54 per cent which was more than comparables cost plus margin of 9.90 per cent and accordingly, its international transaction was at ALP. TPO did not agree with computation of margin of comparables by considering three years weighted average cost plus margin and proposed to consider updated single year data of comparable which gives average margin of 16.82 per cent. TPO had also found only 8 comparables companies as suggested by assessee. TPO was of view that 8 companies provided in TP study were not adequate and reasonable number of comparables and accordingly for broad level of comparability allowed under TNMM a fresh search was carried out by TPO. Consequently TPO selected a set of 25 comparables of ITES purported to have been performed functions broadly comparable to activity of assessee related to ITES. After rejecting objections of assessee TPO determined ALP of international transactions by applying arithmetic margin 28.47 per cent. Accordingly adjustment was made by TPO and Commissioner (Appeals) upheld order of TPO. Held: Sufficient number of comparables depends upon facts and circumstances of each case and there could not be a fixed criteria or parameter for number of comparables, which can be universally applied to each and every case for determination of the ALP.

The assessee has challenged the action of the TPO on the ground that after accepting 8 comparables selected by the assessee, the TPO is not justified in carrying out fresh search and adding 22 more comparables. The contention of the counsel is based on the logic that the 8 comparables, as selected by the assessee and accepted by the TPO, are more than sufficient for determination of the ALP and therefore, there was no requirement, which justified the fresh search carried out by the TPO in inclusion of 22 more comparables. [Para 14.2] There cannot be a fixed number of comparables to be considered as sufficient or appropriate number for determination of the ALP as a general parameter. Sufficient number of comparables depends upon the facts and circumstances of the each case and there cannot be a fixed criteria or parameter for number of comparables, which can be universally applied to each and every case for determination of the ALP. It is an accepted rule of sampling that larger size of sample would better and adequate represent the lot or population to which the sample belongs. Therefore, to get an adequate result and better representation, the size of sample must be large enough. The same rule is applicable in the case of number of comparables selected for representing the true and correct ALP in relation to the international transaction. The endeavour should be made to bring more and more comparables so that a proper and realistic price can be determined which represents the price prevailing in the open market. [Para 14.3] Under the Transfer Pricing Regulations, the number of comparables may be one or more than one, but there is no upper limit prescribed under section 92C. However, the first proviso to section 92(2) indicates that more than one price can be considered for determination of ALP and in such a case, the ALP shall be taken to be arithmetic mean of such price. Therefore, the size of number of comparables has not been prescribed under the provisions of TP Regulations provided under the Income Tax Act. However, the sufficiency of number depend largely on the availability of the comparables where the number of comparables available is large, then it is always better to consider as many as possible number of comparables which can give an adequate and proper representation of the price prevailing in open market in the said industry, business, trade, etc., to which the comparables and international transactions belong. [Para 14.4]