M/s. Motif India Infotech Pvt.Ltd., Ahmedabad V. The Addl.CIT.,Range-4, Ahmedabad

ITA 3043/AHD/2010

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 73142 (ITAT-AHMEDABAD)
• Duration Of Justice: 3 year(s) 4 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-03-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 27-02-2014
• Assessment Year: 2006-2007
• Appeal Filed On: 09-11-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Transfer pricing; International transaction; Earning of tax free income; Advance ruling; Avoidance of tax
• Section: 92C; 92B; 10AA; 234B; 10B; 92

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, AHMEDABAD . . , , BEFORE SHRI N.S. SAINI, ACCOUNTANT MEMBER AND SHRI KUL BHARAT , JUDICIAL MEMBER ./ I T A NO . 3043 / AHD/20 1 0 / ASSESSMENT YEAR : 20 0 6 - 07 M/S. MOTIF INDIA INFOTECH PVT. LTD., 1/A, WALL STREET - II, NEAR GUJARAT COLLEGE, ELLISBRIDGE, AHMEDABAD PAN : AACCM 1005 A VS. THE A.C.I.T. RANGE 4, AHMEDABAD / APPELLANT / RESPONDENT ASSESSEE(S) BY : SHRI DHINAL SHAH, AR REVENUE BY : SHRI SUBHASH BAINS, CIT - D R / DATE OF HEARING : 27 / 0 2 /201 4 / DATE OF PRONOUNCEM ENT : 25 / 0 3 /201 4 / O R D E R PER SHRI N.S. SAINI , ACCOUNTANT MEMBER: THIS IS AN APPEAL FILED BY THE ASSESSEE AGAINST THE ORDER OF THE DISPUTE RESOLUTION PANEL, AHMEDABAD DATED 25.08.2010. 2. GROUND NO. 1 OF THE APPEAL READS AS UNDER: - 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED AO ERRED IN MAKING ADJUSTMENT OF RS.1,19,97,965 TO THE ARM S LENGTH PRICE DECIDED BY THE APPELLANT. IN THE FACTS AND CIRCUMSTANCES OF THE FACTS IT IS SUBMITTED THAT THE TRANSACTIONS EN TERED BETWEEN THE APPELLANT AND THE ASSOCIATED ENTERPRISES ARE AT ARM S LENGTH. ITA NO .3043 - AHD - 2010 AY 2006 - 07 MOTIF INDIA INFOTECH PRIVATE LTD - 2 - 1.1 ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED AO ERRED IN - (I) HOLDING THAT PROVISIONS OF TRANSFER PRICING IS APPLICABLE WHEN THE APPELLANT IS ELIGIBLE FOR THE TAX HOLIDAY UNDER SECTION 10A OF THE ACT; (II) CONSIDERING THE FINANCIAL DATA OF THE COMPARABLE COMPANIES ONLY FOR THE YEAR ENDED 31 MARCH, 2006 INSTEAD OF MULTIPLE YEAR DATA FOR DETERMINING THE ARM S LENGTH PRICE (III) REJECTING THE FOLLOWING COMPANIES FROM THE SET OF COMPARABLE COMPANIES: ACE SOFTWARE EXPORTS LIMITED ALLSEC TECHNOLOGIES LIMITED FORTUNE INFOTECH LIMITED GENESYS INTERNATIONAL CORPORATION LIMITED (CONSOLIDATED SEGMENTAL) MERCURY OUTSOURCING MANAGEMENT LIMITED NUCLEUS NETSOFT AND GIS (INDIA) LI MITED PENTASOFT TECHNOLOGIES LIMITED (SEGMENTAL) SPANCO TELESYSTEMS AND SOLUTIONS LIMITED (SEGMENTAL) TRICOM INDIA LIMITED WIPRO BPO SOLUTIONS LIMITED (IV) CARRYING OUT THE FRESH SEARCH AND SELECTING MAPLE ESOLUTIONS LIMITED AS COMPARABLE COMPANY THOUGH THE DAT A WAS NOT AVAILABLE IN THE PUBLIC DOMAIN AT THE TIME OF PREPARING THE TRANSFER PRICING DOCUMENTATION (V) INCORRECTLY COMPUTING THE MARGINS OF VISHAL INFORMATION TECHNOLOGIES LIMITED I.E. 61.81% INSTEAD OF 48.03 AND MAPLE ESOLUTIONS LIMITED I.E. 36.83% INSTEAD OF 31.41% 1.2 ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED AO ERRED IN COMPUTING THE ADJUSTMENTS TO THE ARM S LENGTH PRICE WITHOUT CONSIDERING +/ - 5% VARIATION FROM THE MEAN OF THE ARM S LENGTH PRICE. 3. AT THE TIME OF HEARING THE AR OF THE ASSESSEE HAS RAISED THE FOLLOWING ADDITIONAL GROUNDS OF APPEAL. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LEARNED ADDITIONAL COMMISSIONER OF INCOME - TAX, RANGE - 4, AHMEDABAD (HEREINAFTER REFERRED TO AS AO ) ERRED IN I) SELECTING MAPL E ESOLUTIONS LIMITED AS COMPARABLE COMPANY EVEN THOUGH DIRECTORS OF THIS COMPANY WERE INVOLVED IN A FRAUD; ITA NO .3043 - AHD - 2010 AY 2006 - 07 MOTIF INDIA INFOTECH PRIVATE LTD - 3 - II) SELECTING VISHAL INFORMATION TECHNOLOGIES LIMITED AS A COMPARABLE COMPANY EVEN THOUGH IT OUTSOURCED CONSIDERABLE PORTION OF ITS BUSINESS. 4. IT WA S SUBMITTED BY THE LD. AR OF THE ASSESSEE THAT IT HAS BEEN HELD BY THE CHANDIGARH SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF QUARK SYSTEMS PVT LTD V. DCIT (2010) 38 SOT 307 THAT . EVEN IF THE TAXPAYER OR ITS COUNSEL HAD TAKEN DATAMATICS AS COMPARABLE I N ITS IP AUDIT, THE TAXPAYER IS ENTITLED TO POINT OUT TO THE TRIBUNAL THAT ABOVE ENTERPRISE HAS WRONGLY BEEN TAKEN AS COMPARABLE. IN FACT THERE ARE VAST DIFFERENCES BETWEEN TESTED PARTY AND DATAMATICS. THE CASE OF DATAMATICS IS LIKE THAT OF IMERCIUS TECHNO LOGIES REPRESENTING EXTREME POSITIONS. IF IMERCIOUS TECHNOLOGIES HAS SUFFERED HEAVY LOSSES AND, THEREFORE, IT IS NOT TREATED AS A COMPARABLE BY THE TAX AUTHORITIES , THEY ALSO HAVE TO CONSIDER THAT DATAMATICS HAS EARNED EXTRAORDINARY PROFIT AND HAS A HUGE TURNOVER . (EMPHASIS SUPPLIED) 5. ON THE OTHER HAND, LD. DR VEHEMENTLY OBJECTED TO THE ADMISSION OF THE ABOVE ADDITIONAL GROUNDS OF APPEAL ON THE GROUND THAT THE ASSESSEE HAD ACCEPTED THE SAID COMPANIES AS COMPARABLE WITH THE ASSESSEE - COMPANY BEFORE THE LOWER AUTHORITIES. 6. AFTER CONSIDERING THE RIVAL SUBMISSIONS, WE FOLLOWING THE DECISIONS OF CHANDIGARH SPECIAL BENCH OF THE TRIBUNAL QUOTED ABOVE ADMIT THE ABOVE ADDITIONAL GROUNDS OF APPEAL. 7. THE ASSESSEE HAS FURTHER RAISED THE FOLLOWING ADDITIONAL GROUNDS OF APPEAL BEFORE US: - ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW AND WITHOUT PREJUDICE TO OTHER GROUNDS OF APPEAL, THE LEARNED ADDITIONAL COMMISSIONER OF INCOME TAX, RANGE - 4, AHMEDABAD (HEREINAFTER REFERRED TO AS THE AO ) ERRE D IN I) NOT ALLOWING APPROPRIATE ADJUSTMENTS TO ACCOUNT FOR DIFFERENCES IN WORKING CAPITAL EMPLOYED BY THE APPELLANT VIS - - VIS THE COMPARABLE COMPANIES. II) NOT MAKING SUITABLE ADJUSTMENTS TO ACCOUNT FOR DIFFERENCES IN THE RISK PROFILE OF THE APPELLANT VIS - - VIS THE COMPARABLE ITA NO .3043 - AHD - 2010 AY 2006 - 07 MOTIF INDIA INFOTECH PRIVATE LTD - 4 - COMPANIES ON ACCOUNT OF THE FACT THAT THE APPELLANT IS A CAPTIVE SERVICE PROVIDER FOR ITS ASSOCIATED ENTERPRISES AND IS REMUNERATED ON A COST PLUS BASIS IRRESPECTIVE OF THE OUTCOME OF THE SERVICES PROVIDED AND HENCE UNDERTAKES NO MARKET RIS K, SERVICE LIABILITY RISK, CREDIT AND COLLECTION RISK AS AGAINST COMPARABLE COMPANIES THAT ARE THE FULL - FLEDGED RISK TAKING ENTREPRENEURS. 8. THE LEARNED AR OF THE ASSESSEE SUBMITTED THAT IN CASE IT IS HELD BY THE TRIBUNAL THAT THE DETERMINATION OF ARM S LENGTH PRICE BY THE AO IS CORRECT, THEN THE ABOVE ADDITIONAL GROUNDS RAISED BY THE ASSESSEE SHOULD BE CONSIDERED AND ADJUSTMENT TO THE ARM S LENGTH PRICE SHOULD BE MADE ON ACCOUNT OF RISK ADJUSTMENT AND WORKING CAPITAL ADJUSTMENT. 9 ON THE OTHER HAND, THE LD. DR VEHEMENTLY OBJECTED TO THE ADMISSION OF ABOVE ADDITIONAL GROUNDS OF APPEAL RAISED BY THE ASSESSEE ON THE GROUND THAT THESE GROUNDS WERE NOT TAKEN EITHER BEFORE THE AO OR BEFORE THE DRT AND THAT THE SAME WOULD REQUIRE INVESTIGATION INTO ADDITIONA L FACTS WHICH ARE NOT ON RECORD. 10. GROUND NO.1.1(I) OF THE APPEAL READS AS UNDER: - 1.1 ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED AO ERRED IN - (I) HOLDING THAT PROVISIONS OF TRANSFER PRICING IS APPLICABLE WHEN THE APPELLANT IS EL IGIBLE FOR THE TAX HOLIDAY UNDER SECTION 10A OF THE ACT; 11 . THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE IS AN OFFSHORE BUSINESS PROCESS OUTSOURCING SERVICE PROVIDER WHEREBY IT RENDERS DATA SUPPORT SERVICES (HEREINAFTER REFERRED TO A BPO SERVICES ). THE ASSESSEE HAS EXPERTISE IN BACK OFFICE TRANSACTION PROCESSING SERVICES AND PERSONALIZED CUSTOMER CARE SERVICES. IT HAS LEADING EDGE TECHNOLOGY TO PROVIDE 24X7 SERVICES TO COMPANIES IN THE US AND EUROPE. 12 . BEFORE THE TRANSFER PRICING OFFICER (IN S HORT TPO ), THE ASSESSEE SUBMITTED THAT TRANSFER PRICING LAWS ARE NOT APPLICABLE TO THE ASSESSEE AS ITA NO .3043 - AHD - 2010 AY 2006 - 07 MOTIF INDIA INFOTECH PRIVATE LTD - 5 - ITS INCOME WAS EXEMPT U/S 10A. THE ASSESSEE RELIED ON THE DECISION OF THE BANGALORE BENCH OF THE TRIBUNAL IN THE CASE OF PHILIPS SOFTWARE CENTRE (P.) LTD . V. ACIT (119 TTJ 721). 13 . THE TPO DID NOT ACCEPT THE CONTENTION OF THE ASSESSEE FOR THE FOLLOWING REASONS: - THE PROVISIONS OF SECTION 92C(4) ARE REPRODUCED AS UNDER: 92C(4) WHERE AN ARMS LENGTH PRICE IS DETERMINED BY THE ASSESSING OFFICER UNDER SU B - SECTION (3), THE ASSESSING OFFICER MAY COMPUTE THE TOTAL INCOME OF THE ASSESSEE HAVING REGARD TO THE ARMS LENGTH PRICE SO DETERMINED: PROVIDED THAT NO DEDUCTION UNDER SECTION 10A 18 (OR SECTION 10AA) OR SECTION 10B OR UNDER CHAPTER VI - A SHALL BE ALLOWED IN RESPECT OF THE AMOUNT OF INCOME BY WHICH THE TOTAL INCOME OF THE ASSESSEE IS ENHANCED AFTER COMPUTATION OF INCOME UNDER THIS SUB - SECTION: THE STATUTE HAS CLEARLY PROVIDED THAT NO DEDUCTION U/S 10A OR SECTION 10AA OR SEC 10B OR CHAPTER VI A SHALL BE AL LOWED IN RESPECT OF THE AMOUNT OF INCOME BY WHICH TOTAL INCOME OF THE ASSESSEE IS ENHANCED AFTER COMPUTATION OF ALP. WHEN THE STATUTE HAS CLEARLY PROVIDED THAT NO BENEFIT OF DEDUCTION UNDER ANY OF THE SECTION REFERRED THEREIN IS TO BE ALLOWED, THE ASSESSEE CANNOT ARGUE THAT TP PROVISIONS ARE NOT APPLICABLE TO A CASE CLAIMING DEDUCTION U/S 10A. FURTHER THE DECISION OF THE HON BLE ITAT, BANGALORE IN PHILIPS SOFTWARE HAS NOT BEEN ACCEPTED BY THE DEPARTMENT AND IT IS PENDING BEFORE HIGHER APPELLATE FORUMS. HENC E THE SUBMISSION OF THE ASSESSEE IS NOT ACCEPTABLE AND IS REJECTED. 14 . BEING AGGRIEVED, THE ASSESSEE FILED APPEAL BEFORE THE DRP. 15 . THE DRP, AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE, HELD AS UNDER: - 05. WE HAVE GONE THROUGH THE DRAFT ASSE SSMENT ORDERS AND THE OBJECTIONS OF THE ASSESSEE. IN THE FIRST GROUND OF OBJECTION, IT IS STATED THAT THE COMPANY WAS ENJOYING BENEFIT U/S 10A OF THE ACT, THERE COULD BE NO REASON FOR TRANSFER OF PROFIT FROM INDIA BEING NON TAXABLE PROFIT. IT WAS STATED T HAT THERE COULD NOT BE ANY AVOIDANCE OF TAX TO APPLY SECTION 92 OF THE ACT. RELIANCE WAS PLACED ON PHILIP SOFTWARE PVT. LTD. VS. ACIT ITA NO .3043 - AHD - 2010 AY 2006 - 07 MOTIF INDIA INFOTECH PRIVATE LTD - 6 - (119 - TTJ - 721)(BANGALORE). PICKER INDIA LTD. VS. DCIT (117 - TTJ - 650 (DEL.) & ORACLE INDIA PVT. LTD. VS. DCIT (118 - TTJ - 812 (D EL.) .. 12. IN THE CASE OF MSS INDIA PVT. LTD. (2009 - TIOL - 416 - ITAT - PUNE) THE HON BLE PUNE BENCH OF THE ITAT AFTER REFERRING TO THE DECISION OF THE BANGALORE DIVISION BENCH IN PHILIPS CASE (SUPRA), WHEREIN IT WAS HELD THAT SINCE THE BASIC INTENTION BEHI ND INTRODUCING THE TRANSFER PRICING PROVISIONS IN THE ACT IS TO PREVENT SHIFTING OF PROFITS OUTSIDE INDIA AND THE ASSESSEE IS CLAIMING BENEFIT U/S 10A OF THE ACT, THE TRANSFER PRICING PROVISIONS OUGHT NOT TO BE APPLIED TO THE ASSESSEE HELD THAT THIS VIEW OF THE DIVISION BENCH WAS DIAMETRICALLY OPPOSITE TO THE VIEWS OF 5 MEMBER SPECIAL BENCH IN THE CASE OF AZTEC SOFTWARE (SUPRA), WHEREIN THE LARGER BENCH OBSERVED THAT THE LEGISLATURE WHILE INTRODUCING THE ENACTMENT DID COMPREHEND A SITUATION, WHERE AN ADDIT ION WOULD BE MADE IN ALP WHILE BENEFIT U/S 10A ETC. WAS ALSO ALLOWABLE. IN VIEW OF THIS SPECIFIC PROVISION, IT WAS DIFFICULT TO CONTEND THAT ALP COULD NOT BE DETERMINED U/S 92C OR 92CA OF THE ACT, WHERE THE ASSESSEE WAS ENTITLED TO BENEFIT OF THE ABOUT SEC TIONS. RELYING UPON VARIOUS DECISIONS REFERRED IN PARA 16 OF THE ORDER, THE ITAT HELD THAT THE FIVE MEMBER SPECIAL BENCH DECISION IN THE CASE OF AZTEC SOFTWARE WAS REQUIRED TO BE ADOPTED IN PREFERENCE TO THE DIVISION BENCH DECISION IN PHILIPS CASE. 13. T HE PUNJAB & HARYANA HIGH COURT IN THE CASE OF COCA COLA INDIA INC. VS. ACIT (221 - CTR - 225) HAS RULED AGAINST COCA - COLA INDIA S CONTENTION THAT THE PROOF OF PROFIT TRANSFER OUTSIDE INDIA IS A PRECONDITION FOR APPLYING TRANSFER PRICING RULES. COCA - COLA HAD AP PROACHED THE HIGH COURT AFTER IT WAS SERVED A NOTICE ON TRANSFER PRICING. THE SOFT DRINK COMPANY HAD AN AGREEMENT TO OFFER ADVISORY SERVICES TO BRITCO AT THE RATE OF COST PLUS 5%. COCA - COLA S MAIN CONTENTION WAS THAT TRANSFER PRICING RULES WERE MEANT TO CH ECK PROFIT EROSION OUTSIDE INDIA AND, THEREFORE, COULD NOT BE APPLIED IN CASES WHERE THERE WAS NO PRIMA FACIE EVIDENCE OF PROFIT TRANSFER OUTSIDE THE COUNTRY. ACCORDING TO COCA - COLA, THE TRANSFER PRICING PROVISIONS HAVE BEEN INCORPORATED IN THE INCOME - TAX ACT BY THE FINANCE ACT 2001 AND THE APPLICABILITY OF THESE PROVISIONS HAS BEEN LIMITED TO SITUATIONS INVOLVING PROFIT DIVERSION OUTSIDE INDIA. 14. DISMISSING THE PETITION, IT WAS HELD THAT THERE IS NO LACK OF LEGISLATIVE COMPETENCE IN ENACTING THE TRANSF ER PRICING PROVISIONS AND MAKING THEM APPLICABLE TO FOREIGN COMPANIES. THE PROVISIONS SEEK TO REMEDY THE MISCHIEF OF MULTINATIONAL COMPANIES OF ALLOCATING PROFITS IN INTRA GROUP TRANSACTIONS TO OUTSIDE JURISDICTION RESULTING IN TAX EVASION; THE TRANSFER PR ICING PROVISIONS ARE APPLICABLE TO A WELL DEFINED CLASS WHICH MEETS THE TEST OF INTELLIGIBLE DIFFERENTIA. IT ALSO MEETS THE TEST OF ITA NO .3043 - AHD - 2010 AY 2006 - 07 MOTIF INDIA INFOTECH PRIVATE LTD - 7 - RATIONAL RELATIONSHIP TO THE OBJECT I.E. TO DETERMINE THE REAL INCOME. THERE IS NO AMBIGUITY OR ABSURD CONSEQUENCE OF APPLIC ATION OF CHAPTER X TO PERSONS WHO ARE SUBJECT TO JURISDICTION OF TAXING AUTHORITIES IN INDIA; THERE IS NO REQUIREMENT TO ESTABLISH TRANSFER OF PROFITS OUTSIDE INDIA OR EVASION OF TAX BEFORE APPLYING THE TRANSFER PRICING PROVISIONS; THE FACT THAT UNDER THE FERA RBI, APPROVAL THE ASSESSEE CANNOT CHARGE MORE THAN PARTICULAR PRICE CANNOT CONTROL THE ARMS LENGTH PRICE; THERE IS NO REQUIREMENT TO GIVE A HEARING AT THE STAGE OF MAKING REFERENCE UNDER SECTION 92 CA OF THE ACT BECAUSE THE DECISION TO MAKE A REFER ENCE DOES NOT VISIT THE ASSESSEE WITH ANY CIVIL CONSEQUENCE. 15. IN THE CASE OF GHARDA CHEMICALS LTD. VS. DCIT (ITAT) MUMBAI [2009 - TIOL - 790 - ITAT - MUMBAI] IT WAS CONTENDED ON BEHALF OF THE ASSESSEE THAT TRANSFER PRICING PROVISIONS WERE NOT APPLICABLE, AS T HERE WAS NO REDUCTION IN THE TAX LIABILITY OF THE ASSESSEE. IT WAS ARGUED THAT THE ASSESSEE HAD NOT TRIED TO REDUCE ANY INCOME OR THE INCIDENCE OF TAX. REJECTING THE CLAIM OF THE ASSESSEE, IT WAS HELD THAT WHERE THERE WAS AN INTERNATIONAL TRANSACTION AS PE R SECTION 92B OF THE ACT, COMPUTATION OF ALP WAS REQUIRED TO BE MADE ACCORDING TO THE PROVISIONS OF SECTION 92C. THE RATIONALE BEHIND THE TRANSFER PRICING PROVISIONS IS TO CURTAIL THE AVOIDANCE OF TAX IN INDIA. IT WAS STATED THAT THE INTENT AND PURPOSE OF THE PROVISIONS WAS NOT TO ENSURE THAT THERE WAS NO DIMINUTION IN THE TAX LIABILITY OF THE INDIAN ENTERPRISE AS WE LL AS ITS AE ON A TOTAL BASIS. RATHER THE LOGIC WAS TO MAKE CERTAIN THAT THE TRANSACTIONS BETWEEN THE AES SHOULD NOT BE ARRANGED IN SUCH A WAY THAT THE ULTIMATE TAX PAYABLE IN INDIA IS ARTIFICIALLY REDUCED. HOW MUCH TAX IS PAID BY THE FOREIGN AE IS NOT RELEVANT IN THE DETERMINATION OF CORRECT TAX LIABILITY IN THE HANDS OF THE INDIAN ENTERPRISE. WHAT IS MATERIAL IS THAT RIGHTFUL TAX PAYABLE IN IND IA SHOULD SUFFER DUE TO THE ADJUSTMENT OF PRICE FOR GOODS OR SERVICES BETWEEN THE RELATED PARTIES. THE PAYMENT OF TAX BY THE AE ABROAD DOES NOT CONTRIBUTE ANYTHING TO THE INDIAN EXCHEQUER. IMPORTANT FACTOR IS THE PAYMENT OF TAX QUA INDIA AND NOT QUA, THE A SSESSEE ALONGWITH ITS AE ON A WHOLE. THE AUTHORITY FOR ADVANCE RULING (AAR) HAS IN CANORO RESOURCES LTD. IN RE [2009] 180 TAXMAN 220 (NEW DELHI), RULED THAT TRANSFER PRICING PROVISIONS WOULD HAVE PRIORITY OVER OTHER TAX PROVISIONS ON THE APPLICATION OF T HE LEGAL MAXIM LEGES POSTERIORES PRIORES CONTRARIAS ABORGANT WHICH MEANS THAT THE LATEST RULE WOULD PREVAIL. THE DELHI TRIBUNAL ORACLE INDIA ITA NO. 2242/MUM/06 ASSESSMENT YEAR 2002 - 03, RULED THAT TRANSFER PRICING PROVISIONS BEING SPECIFIC IN NATURE WO ULD OVERRIDE OTHER GENERAL TAX PROVISIONS. IN VIEW OF THE ABOVE, THE CONTENTION OF THE ASSESSEE REGARDING THE FULFILLMENT OF TWIN CONDITIONS OF MANIPULATION OF PRICES AND MOTIVE FOR SHIFTING PROFITS OUT OF INDIA ARE NOT ACCEPTABLE . ITA NO .3043 - AHD - 2010 AY 2006 - 07 MOTIF INDIA INFOTECH PRIVATE LTD - 8 - 16 . THE LD. AR OF THE ASSESSEE SUBMITTED THAT THE ASSESSEE IS ELIGIBLE FOR THE TAX HOLIDAY UNDER SECTION 10A OF THE ACT, HENCE IT WOULD BE DEVOID OF LOGIC TO ARGUE THAT IT HAD MANIPULATED PRICES AND SHIFTED PROFITS TO AN OVERSEAS JURISDICTION FOR AVOIDING TAXES IN INDIA. HENCE , TRANSFER PRICING PROVISIONS SHOULD NOT BE APPLICABLE TO THE ASSESSEE. FURTHER THE PARENT COMPANY, TO WHOM THE SERVICES ARE RENDERED IS BASED IN USA WHERE THE TAX RATE IS MORE THAN 30%. HENCE THERE CANNOT BE ANY INTENTION TO SHIFT PROFITS. 1 7 . THE LD. A R OF THE ASSESSEE RELIED ON THE DECISION OF THE AHMEDABAD BENCH OF THE TRIBUNAL IN THE CASE OF MASTEK LTD. VS . ADDITIONAL COMMISSIONER OF INCOME - TAX, RANGE - 4, AHMEDABAD , REPORTED IN [2012] 21 TAXMANN.COM 173 (AHD.) , WHEREIN IT WAS HELD AS UNDER: - 14. A N ANOTHER ARGUMENT HAS ALSO BEEN RAISED THAT THERE WAS NO ADVANTAGE IN SHIFTING OF PROFIT FROM INDIA TO UK. A VEHEMENT CONTENTION WAS RAISED THAT ONCE THE ENTIRE INCOME OF MIL IS SUBJECT TO SPECIAL BENEFIT AS PRESCRIBED U/S.10A AND THERE WAS NIL INCIDENCE OF TAX, THEN THERE WAS NO JUSTIFIABLE REASON TO PARK THE PROFITS IN UK. IT WAS INFORMED BY THE LD.AR THAT IN UK THE ASSESSEE WOULD SUFFER TAX @ 30%, HENCE THERE WAS NO LOGIC TO SHIFT THE PROFIT. AT THAT JUNCTURE, LD. CIT DR MR. V.K. GUPTA HAS REFERRED AZTE CH SOFTWARE & TECHNOLOGY SERVICES LTD. (SUPRA) REPORTED AS ( 109 TTJ 892 ) ( 107 IT D 141 )(BANG)(SB) FOR A LEGAL PROPOSITION THAT ANY ADJUSTMENT ON ACCOUNT OF TRANSFER PRICING WOULD NOT QUALIFY FOR THE SPECIAL BENEFIT PRESCRIBED U/S.10A OF I.T. ACT. LD. AR HAS OPPOSED AND PLEADED THAT ONCE THE TRANSACTION WAS ALP TRANSACTION, THEN THERE WAS NO REQUIREMENT OF ANY ADJUSTMENT AND HENCE THERE WAS NO REQUIREMENT OF REJECTION OF BENEFIT OF SECTION 10A OF I.T. ACT. THIS ARGUMENT HAS FORCE BECAUSE BY APPLYING A VERY COMMON LOGIC NO BUSINESS MAN WILL SHIFT THE PROFITS FROM A COUNTRY WHERE SUCH PR OFITS ARE EXEMPT OR HAVING LOWER INCIDENCE OF TAX. RATHER REVENUE WAS UNABLE TO ANSWER THE QUESTION THAT WHY AT ALL THIS ASSESSEE HAS SHIFTED ITS BUSINESS PROFIT TO UK WHERE RATE OF TAX IS SAID TO BE 30% AS AGAINST NIL RATE OF TAX IN INDIA. NATURALLY, THE DECISION OF MOSER BEAR INDIA LTD. (SUPRA), GLOBAL VANTEDGE (P.) LTD. (SUPRA), ANDASSTT. CIT V. MSS INDIA (P.) LTD. [2009] 32 SOT 132 (PUNE) ARE WORTH FOR REFERENCE. 14. 1. THIS VERY QUESTION HAD RAKED UP IN THE CASE OF ITO V. ZYDUS ALTANA HEALTHCARE (P.) LTD. [2010] 44 SOT 132 (MUM.) THAT WHERE ASSESSEE'S INCOME IS EXEMPT U/S.10B, WHETH ER THE TPO WAS JUSTIFIED IN TAKING HIGHER MARK - UP THAN THE ONE DECLARED BY THE ASSESSEE. IN THE ITA NO .3043 - AHD - 2010 AY 2006 - 07 MOTIF INDIA INFOTECH PRIVATE LTD - 9 - SAID CASE, IN REGARD TO CLINICAL TRIAL SERVICES PERFORMED BY THE ASSESSEE, THE TPO AFTER EXAMINING THE VARIOUS ASPECTS, CONCLUDED THAT THE MARK UP TO 5% OVER CO ST WAS NOT AS PER ARM'S LENGTH PRICE AND AS PER TPO THE SAME SHOULD HAVE BEEN 17.14% ON THE BASIS OF COMPARABLES. THE ASSESSEE HAD ADOPTED TRANSACTIONAL NET MARGIN METHOD (TNMM) AND IN ORDER TO EXAMINE THE APPROPRIATENESS OF THIS METHOD THE TPO RESORTED TO COMPARABLE UNCONTROLLED PRICE METHOD (CUP) ALONG WITH TNMM.(IDENTICAL IS POSITION IN THE PRESENT APPEAL AS ARGUED BEFORE US.) THE FIRST APPELLATE AUTHORITY HAS HELD THAT 17.14% MARK UP WAS REQUIRED TO BE ADJUSTED BEFORE IT COULD BE MADE APPLICABLE FOR DET ERMINING THE ARM'S LENGTH PRICE IN REGARD TO INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE ASSESSEE. WHEN THE MATTER WAS CARRIED BEFORE THE TRIBUNAL, IT WAS HELD THAT THE PROFITS WERE EXEMPT U/S.10B AND IN NO WAY BENEFITTED BY CHARGING 5% MARK UP AS AGAIN ST 17.14% FIXED BY THE TPO AND THAT THE PROFITS OF THE AES BEING SUBJECT TO TAX OUT OF COUNTRY'S JURISDICTION, THEREFORE THERE WAS NO NECESSITY FOR THE ASSESSEE TO TRANSFER THE PROFITS IN ANY OVERSEAS JURISDICTION. WE HAVE ALSO NOTICED THAT IN AN UNEQUIVOC AL TERMS IT IS PRONOUNCED, QUOTE 'THAT SINCE THE PROFITS BY THE AES HAVE BEEN SUBJECTED TO TAX IN THE RESPECTIVE OVERSEAS JURISDICTION, THERE WAS NO NECESSITY FOR THE ASSESSEE TO TRANSFER THE PROFITS IN ANY OVERSEAS JURISDICTION' UNQUOTE. 1 8 . THE LD. A R OF THE ASSESSEE FURTHER RELIED ON THE CBDT CIRCULAR NO.14 OF 2001 DATED 09.11.2001 , ESPECIALLY PARAGRAPH 55.5 WHICH READS AS UNDER: - 55.5 THE NEW PROVISION IS INTENDED TO ENSURE THAT PROFITS TAXABLE IN INDIA ARE NOT UNDERSTATED (OR LOSSES ARE NOT OVERS TATED) BY DECLARING LOWER RECEIPTS OR HIGHER OUTGOINGS THAN THOSE WHICH WOULD HAVE BEEN DECLARED BY PERSONS ENTERING INTO SIMILAR TRANSACTIONS WITH UNRELATED PARTIES IN THE SAME OR SIMILAR CIRCUMSTANCES. THE BASIC INTENTION UNDERLYING THE NEW TRANSFER PRIC ING REGULATIONS IS TO PREVENT SHIFTING OUT OF PROFITS BY MANIPULATING PRICES CHARGED OR PAID IN INTERNATIONAL TRANSACTIONS, THEREBY ERODING THE COUNTRY S TAX BASE. THE NEW SECTION 92 IS, THEREFORE, NOT INTENDED TO BE APPLIED IN CASES WHERE THE ADOPTION OF THE ARM S LENGTH PRICE DETERMINED UNDER THE REGULATIONS WOULD RESULT IN A DECREASE IN THE OVERALL TAX INCIDENCE IN INDIA IN RESPECT OF THE PARTIES INVOLVED IN THE INTERNATIONAL TRANSACTIONS. 1 9 . THE LD. DR SUPPORTED THE ORDERS OF THE LOWER AUTHORITIES. 20 . AFTER HEARING THE RIVAL SUBMISSIONS AND PERUSING THE MATERIALS AVAILABLE ON RECORD, WE FIND THAT THE ASSESSEE IS ENGAGED IN OFFSHORE ITA NO .3043 - AHD - 2010 AY 2006 - 07 MOTIF INDIA INFOTECH PRIVATE LTD - 10 - BUSINESS PROCESS OUTSOURCING SERVICE PROVIDER WHEREBY IT RENDERS DATA SUPPORT SERVICES (HEREINAFTER REFERRED TO A B PO SERVICES ). IT IS NOT IN DISPUTE THAT THE ASSESSEE S ENTIRE INCOME DERIVED FROM THE ABOVE BUSINESS IS EXEMPT U/S 10A OF THE INCOME - TAX ACT. DURING THE YEAR THE ASSESSEE CLAIMED TO HAVE EARNED INCOME OF RS.2,24,24,801/ - AS DERIVED FROM THE SAID BUSINESS AND CLAIMED EXEMPTION U/S 10A. APART FROM THIS, THE ASSESSEE ALSO EARNED INTEREST AND OTHER INCOME OF RS.32,61,593/ - AND AFTER CLAIMING DEDUCTION UNDER CHAPTER VI - A, TOTAL INCOME WAS DISCLOSED AT RS.35,31,098/ - . 21 . DURING THE ASSESSMENT AS THE ASSESSEE H AD INTERNATIONAL TRANSACTION WITH ITS ASSOCIATED ENTERPRISE, THE MATTER WAS REFERRED TO TRANSFER PRICING OFFICER (TPO). THE TPO HELD THAT THE ASSESSEE HAD DISCLOSED ITS PROFIT DERIVED FROM THE SAID BUSINESS AT THE RATE 17.89%, WHEREAS ON THE BASIS OF SOME COMPARABLE CASES TPO DETERMINED THE SAME AT 34.26% . THEREFORE, TPO OPINED FOR ENHANCEMENT OF THE PROFIT DERIVED BY THE ASSESSEE FROM THE SAID BUSINESS BY RS. 1,19,97,965/ - WHICH WAS ACCEPTED BY THE AO. 22 . THE ASSESSEE CLAIMED BEFORE THE TPO THAT AS ITS I NCOME DERIVED FROM THE SAID BUSINESS IS EXEMPT FULLY U/S 10A AND THEREFORE IT CANNOT BE ALLEGED IN THE INSTANT CASE THAT THE ASSESSEE HAS ARRANGED ITS AFFAIRS IN SUCH A MANNER SO AS TO HAVE LESSER INCOME IN INDIA AND CONSEQUENTLY PROVISIONS OF TRANSFER PRI CING ARE NOT APPLICABLE IN THE INSTANT CASE. 23 . THE TPO HELD THAT THE STATUTE PROVIDES THAT NO DEDUCTION U/S 10A OR 10AA OR 10B OR CHAPTER VIA SHALL BE ALLOWED IN RESPECT OF THE AMOUNT OF ADDITION MADE ON ACCOUNT OF TRANSFER PRICING ADJUSTMENTS. ACCORD INGLY, WHERE NO BENEFIT OF DEDUCTION HAS BEEN ALLOWED BY THE STATUTE, THE ASSESSEE CANNOT ARGUE THAT THE TRANSFER PRICING PROVISIONS ARE NOT APPLICABLE WHERE THE ASSESSEE IS CLAIMING DEDUCTION U/S 10A. FURTHER THE DECISION OF HON BLE BANGALORE ITAT IN PHI LIPS SOFTWARE CENTRE (P.) LTD. , RELIED ON BY THE ASSESSEE, HAS NOT BEEN ACCEPTED BY THE TAX DEPARTMENT AND IS PENDING ITA NO .3043 - AHD - 2010 AY 2006 - 07 MOTIF INDIA INFOTECH PRIVATE LTD - 11 - BEFORE THE HIGHER FORUMS AND THEREFORE REJECTED THE ABOVE CONTENTIONS OF THE ASSESSEE. 24 . BEING AGGRIEVED, THE ASSESSEE FILED APPEAL BE FORE THE DISPUTE RESOLUTION PANEL (IN SHORT DRP ). THE DRP DEALING WITH THE ABOVE CONTENTION OF THE ASSESSEE HELD THAT THE DECISION OF HON BLE BANGALORE ITAT IN PHILIPS SOFTWARE, RELIED ON BY THE ASSESSEE, HAS BEEN STAYED BY THE KARNATAKA HIGH COURT. THE BASIC INTENTION OF THE UNDERLYING TRANSFER PRICING REGULATION IS TO PREVENT THE SHIFTING OF PROFITS AND MANIPULATING THE PRICES CHARGED OR PAID IN INTERNATIONAL TRANSACTION, THEREBY ERODING THE COMPANY S TAX BASE. IN THE DECISION OF HON BLE MUMBAI TRIBU NAL IN THE CASE OF GHARADA CHEMICALS V. DCIT, 2009 - TIOL - 790 - ITAT - MUMBAI, THE RATIONALE BEHIND THE TRANSFER PRICING PROVISIONS IS TO CURTAIL THE AVOIDANCE OF TAX IN INDIA. THE INTENT AND THE PURPOSE OF THE PROVISIONS WAS NOT TO ENSURE THAT THERE WAS NO DIMI NUTION OF THE TAX LIABILITY OF THE INDIAN ENTERPRISE AS WELL ITS ASSOCIATE ENTERPRISE ON A TOTAL BASIS. THE LOGIC WAS TO MAKE CERTAIN THAT THE TRANSACTIONS BETWEEN THE AES SHOULD NOT BE ARRANGED IN SUCH A WAY THAT THE ULTIMATE TAX PAYABLE IN INDIA IS ARTIF ICIALLY REDUCE D . 25 . BEFORE US, THE LD. AR OF THE ASSESSEE MADE SIMILAR ARGUMENTS AS WERE MADE BEFORE THE TPO AND DRP. THE LD. AR CONTENDED THAT DRP WAS NOT CORRECT IN OBSERVING THAT THE DECISION OF THE TRIBUNAL IN THE CASE OF PHILIPS SOFTWARE CENTRE (P. ) LTD. (SUPRA) WAS STAYED BY THE HON BLE KARNATAKA HIGH COURT. 26 . HE FURTHER CONTENDED THAT DRP ITSELF ADMITTED THAT THE OBJECT OF PROVISIONS OF TRANSFER PRICING WAS TO ENSURE THAT NO TAX BASE IN INDIA IS ERODED BECAUSE OF INTERNATIONAL TRANSACTIONS WI TH AE. IN VIEW OF THIS THE DRP SHOULD HAVE ACCEPTED THE ASSESSEE S CONTENTION THAT IN THE INSTANT CASE AS THE ENTIRE INCOME DERIVED BY THE ASSESSEE FROM THE BUSINESS IS EXEMPT U/S 10A AND THEREFORE PROVISIONS OF TRANSFER PRICING SHOULD NOT BE INVOKED BY ITA NO .3043 - AHD - 2010 AY 2006 - 07 MOTIF INDIA INFOTECH PRIVATE LTD - 12 - AS SUMING THAT ANY ARRANGEMENT WAS MADE BY THE ASSESSEE SO AS TO ERODE ANY TAX BASE IN INDIA. 27 . THE LD. AR OF THE ASSESSEE ALSO RELIED UPON PARAGRAPH 55.5 OF THE CBDT CIRCULAR NO.14 OF 2001, DATED 09.11.2001, WHEREIN THE OBJECT BEHIND THE INSERTION OF THE PROVISIONS OF TRANSFER PRICING IN THE ACT WAS EXPLAINED. 28 . ON THE OTHER HAND, THE LD. DR SUPPORTED THE ORDERS OF THE LOWER AUTHORITIES. THE LD. DR COULD NOT CONTROVERT THE SUBMISSIONS OF THE ASSESSEE THAT THE DECISION OF THE TRIBUNAL IN THE CASE OF PH ILIPS SOFTWARE CENTRE ( P.) LTD. VS. ACIT, [2008] 26 SOT 226 (BANG.) , WAS NOT STAYED BY THE HON BLE KARNATAKA HIGH COURT. 29 . WE FIND THAT CBDT VIDE ITS CIRCULAR NO.14 OF 2001, DATED 09.11.2001, VIDE PARAGRAPH NO.55.5 EXPLAINED AS UNDER: - 55.5 THE NEW PROVISION IS INTENDED TO ENSURE THAT PROFITS TAXABLE IN INDIA ARE NOT UNDERSTATED (OR LOSSES ARE NOT OVERSTATED) BY DECLARING LOWER RECEIPTS OR HIGHER OUTGOINGS THAN THOSE WHICH WOULD HAVE BEEN DECLARED BY PERSONS ENTERING INTO SIMILAR TRANSACTIONS WITH U NRELATED PARTIES IN THE SAME OR SIMILAR CIRCUMSTANCES. THE BASIC INTENTION UNDERLYING THE NEW TRANSFER PRICING REGULATIONS IS TO PREVENT SHIFTING OUT OF PROFITS BY MANIPULATING PRICES CHARGED OR PAID IN INTERNATIONAL TRANSACTIONS, THEREBY ERODING THE COUNT RY S TAX BASE. THE NEW SECTION 92 IS, THEREFORE, NOT INTENDED TO BE APPLIED IN CASES WHERE THE ADOPTION OF THE ARM S LENGTH PRICE DETERMINED UNDER THE REGULATIONS WOULD RESULT IN A DECREASE IN THE OVERALL TAX INCIDENCE IN INDIA IN RESPECT OF THE PARTIES IN VOLVED IN THE INTERNATIONAL TRANSACTIONS. 30 . THE TRIBUNAL IN THE CASE OF PHILIPS SOFTWARE CENTRE ( P.) LTD. VS. ACIT, [2008] 26 SOT 226 (BANG.) , HAS HELD AS UNDER: - 5.1 WE HAVE HEARD THE RIVAL CONTENTIONS AND WE PROCEED TO ADJUDICATE ON THE ISSUES I N THE SEQUENCE WHICH HAS BEEN ARGUED BY THE RIVAL PARTIES BEFORE US. THE LEARNED COUNSEL FOR THE ASSESSEE HAS ARGUED THAT THE TAX PAYABLE BY IT IN INDIA IS LOWER THAN THE TAX RATE APPLICABLE TO ITS AE IN THE NETHERLANDS. SINCE THE ASSESSEE IS AVAILING THE BENEFIT UNDER S. 10A OF THE ACT, ONE CANNOT TAKE A SIMPLISTIC VIEW ON THE MATTER OF TAX AVOIDANCE. IN THIS CONNECTION THE LEARNED DEPARTMENTAL ITA NO .3043 - AHD - 2010 AY 2006 - 07 MOTIF INDIA INFOTECH PRIVATE LTD - 13 - REPRESENTATIVE HAS DRAWN REFERENCE TO THE PROVISO TO S. 92C(4). RELYING ON OECD GUIDELINES, THE DEPARTMENTAL REP RESENTATIVE HAS MENTIONED THAT THE CONSIDERATION OF TRANSFER PRICING SHOULD NOT BE CONFUSED WITH THE CONSIDERATION OF PROBLEMS OF TAX AVOIDANCE, EVEN THOUGH TRANSFER PRICING POLICIES MAY BE USED FOR SUCH PURPOSES. IN THIS CONNECTION, IT WAS POINTED OUT THA T BY NOT DECLARING PROPER PROFITS IN INDIA, THE ASSESSEE IS INDIRECTLY REDUCING ITS LIABILITY TO DDT. THE SPECIAL BENCH OF THE TRIBUNAL, IN THE CASE OF AZTEC SOFTWARE (SUPRA), HAS CONCLUDED THAT THE AO/TPO NEED NOT PROVE THE MOTIVE OF SHIFTING OF PROFITS O UTSIDE INDIA FOR MAKING A TRANSFER PRICING ADJUSTMENT. THE ASSESSEE HAD GENERALLY ARGUED THAT ONE OF THE FACTORS DRIVING ANY MOTIVE FOR SHIFTING PROFITS WOULD BE THE DIFFERENCE IN THE TAX RATE IN INDIA AND THE TAX RATE APPLICABLE TO THE AE IN THE OVERSEAS JURISDICTION. IN THE INSTANT CASE, SINCE THE ASSESSEE WAS AVAILING THE BENEFIT UNDER S.10A OF THE ACT, IT WOULD BE DEVOID OF LOGIC TO ARGUE THAT THE ASSESSEE HAD MANIPULATED PRICES (AND SHIFTED PROFITS) TO AN OVERSEAS JURISDICTION FOR THE PURPOSE OF AVOIDI NG TAX IN INDIA. 31 . THUS, WE FIND FROM THE ABOVE EXPLANATION OF THE CBDT AND THE DECISION OF THE TRIBUNAL THAT THE PROVISIONS OF THE TRANSFER PRICING WERE INTRODUCED IN THE STATUTE TO ENSURE THAT DUE TO ANY ARRANGEMENT MADE BY THE ASSESSEE WITH ITS AE I N THE COURSE OF AN INTERNATIONAL TRANSACTION INCOME TAXABLE IN INDIA IS NOT REDUCED FOR A NY REASON. FURTHER IN A CASE WHERE THE INCOME DERIVED FROM AN INTERNATIONAL TRANSACTION IS EXEMPT FROM TAX IN INDIA BECAUSE OF PROVISIONS OF SECTION 10A, THEN IT CANNO T BE HELD THAT BECAUSE OF AN ARRANGEMENT BETWEEN THE ASSESSEE AND ITS AE ANY INCOME TAXABLE IN INDIA HAD BEEN UNDER REPORTED. 32 . AT THE SAME TIME, WE FIND THAT THERE IS NO PROVISION IN THE STATUTE TO SHOW THAT IN CASE OF AN ASSESSEE WHOSE INCOME IS EXEM PT U/S 10 A AND INTERNATIONAL TRANSACTION MADE WITH AN AE SHOULD NOT BE BENCHMARKED WITH ALP DETERMINED ON THE BASIS OF THE PROVISIONS OF TRANSFER PRICING. 33 . TPO HAS NOT ACCEPTED THE CONTENTION OF THE ASSESSEE ON THE GROUND THAT THE PROVISIONS OF SECTIO N 92C (4) ENVISAGED A SITUATION WHEREIN IT HAS BEEN PROVIDED THAT NO DEDUCTION U/S 10A ETC. WILL BE ALLOWED TO THE ASSESSEE IN RESPECT OF TOTAL INCOME WHICH IS ENHANCED BECAUSE OF PROVISIONS OF ITA NO .3043 - AHD - 2010 AY 2006 - 07 MOTIF INDIA INFOTECH PRIVATE LTD - 14 - TRANSFER PRICING. THUS, IT IS OBSERVED AS PER THE CBDT S EXPLA NATION, PROVISIONS OF TRANSFER PRICING HAS BEEN ENACTED TO ENSURE NO INCOME OTHERWISE TAXABLE IN INDIA IS REDUCED AND EVEN IN CASE A TRANSACTION RESULTING IN EXEMPT INCOME IS ALSO SUBJECTED TO PROVISIONS OF TRANSFER PRICING. 34 . IN SUCH CIRCUMSTANCES WE ARE CONFRONTED WITH THE ISSUE THAT HOW AND WHY THE PROVISIONS OF TRANSFER PRICING SHOULD BE APPLIED IN RESPECT OF AN INTERNATIONAL TRANSACTIONS GIVING RISE TO EXEMPT INCOME IN THE HANDS OF THE ASSESSEE. 35 . IN SUCH CIRCUMSTANCES WHERE THE INCOME DERIVED FROM INTERNATIONAL TRANSACTIONS IS EXEMPT FROM TAX IN INDIA, IT CANNOT BE ALLEGED THAT THE ASSESSEE HAD ARRANGED ITS AFFAIRS IN SUCH A MANNER SO AS TO SHOW LESSER TAXABLE INCOME IN INDIA BUT IT CAN BE ALLEGED THAT THE ASSESSEE HAS ARRANGED ITS AFFAIRS IN S UCH A MANNER SO AS TO REFLECT MORE EXEMPT INCOME IN INDIA. 36 . THEREFORE, WE FIND THAT A HARMONIOUS READING CAN BE CONSTRUED IN THE PROVISIONS OF SECTION 92C(4) AND THE OBJECT AND PURPORT OF INSERTION OF THE PROVISIONS OF TRANSFER PRICING AS EXPLAINED B Y THE HON BLE CBDT. 37 . IN OUR CONSIDERED OPINION , IN A CASE WHERE THE INTERNATIONAL TRANSACTION ENTERED INTO BY THE ASSESSEE WITH THE AES GIVING RISE TO EXEMPT INCOME IN THE HANDS OF THE ASSESSEE IS TO BE BENCHMARKED WITH THE ALP DETERMINED IN ACCORDANC E WITH THE PROVISIONS OF TRANSFER PRICING TO ENSURE THAT NO EXCESS EXEMPT INCOME IS DISCLOSED BY THE ASSESSEE AND ASSESSEE IS ENTITLED FOR EXEMPTION OF INCOME U/S 10A OF THE TOTAL INCOME DETERMINED AS PER THE TRANSFER PRICING PROVISIONS ONLY AND WHERE THE ASSESSEE HAS CLAIMED MORE EXEMPT INCOME , THEN EXEMPTION U/S 10A SHALL BE ALLOWED IN ACCORDANCE WITH THE PROFIT COMPARED AS PER ALP ONLY. 38 . KEEPING IN VIEW THE ABOVE IN MIND IN THE INSTANT CASE WE FIND THAT AS PER THE DECISIONS OF THE LOWER AUTHORITIES THE ASSESSEE HAS NOT REPORTED ANY ITA NO .3043 - AHD - 2010 AY 2006 - 07 MOTIF INDIA INFOTECH PRIVATE LTD - 15 - EXCESS EXEMPT INCOME FROM ITS INTERNATIONAL TRANSACTIONS WITH AE. ON THE OTHER HAND AS PER THE OPINION OF THE LOWER AUTHORITIES IN THE INSTANT CASE EXEMPT INCOME DECLARED BY THE ASSESSEE WHEN BENCHMARKED WITH THE ALP DETE RMINED IN ACCORDANCE WITH THE PROVISIONS OF TRANSFER PRICING, THE ASSESSEE HAS DECLARED LESSER EXEMPT INCOME AND THEREBY NO TAXABLE BASE IN INDIA WAS ERODED. THEREFORE, IN OUR CONSIDERED OPINION NO ADJUSTMENT WITH THE EXEMPT INCOME OF THE ASSESSEE WAS REQU IRED TO BE MADE AS PER PROVISIONS CONTAINED IN CHAPTER X OF THE ACT. 39. BEFORE PARTING WITH THIS ISSUE, WE WOULD LIKE TO OBSERVE THAT THE DECISION IN THE CASE OF GHARADA CHEMICALS V. DCIT, 2009 - TIOL - 790 - ITAT - MUMBAI, RELIED UPON BY THE DRP IS NOT APPLICA BLE FOR DECIDING THE ISSUE WITH WHICH WE ARE CONFRONTED WITH BECAUSE IN THAT CASE IT WAS NOT THE CLAIM OF THE ASSESSEE THAT THE INCOME DERIVED BY IT IN THE INTERNATIONAL TRANSACTION WITH ITS AE WAS EXEMPT FROM TAX UNDER THE PROVISIONS OF THE INCOME - TAX ACT . THUS, THE TRIBUNAL IN THAT CASE WAS NOT CONFRONTED WITH THE ISSUE AS TO HOW THE PROVISIONS OF TRANSFER PRICING SHOULD BE APPLIED IN A CASE WHERE INTERNATIONAL TRANSACTION GIVE RISE TO INCOME WHICH IS EXEMPT FROM INCOME - TAX IN INDIA IN THE HANDS OF THE AS SESSEE. 40. IN VIEW OF THE ABOVE, WE ALLOW THIS GROUND OF THE APPEAL OF THE ASSESSEE AND DIRECT THE AO TO TREAT THE INCOME DECLARED FROM THE BUSINESS IN QUESTION AT THE AMOUNT AS SHOWN BY THE ASSESSEE IN ITS RETURN OF INCOME. 41. IN VIEW OF OUR ABOVE D ECISION IN RESPECT OF GROUND NO.1.1(I) OF THE APPEAL OF THE ASSESSEE, THE OTHER GROUNDS OF APPEAL TAKEN BY THE ASSESSEE IN GROUND NOS. 1.1 (II), (III), (IV) AND (V) AND ADDITIONAL GROUNDS OF APPEAL TAKEN AS STATED IN PARA NOS. 3 & 7 ABOVE IN THIS ORDER BEC OME INFRUCTUOUS AND ONLY ACADEMIC IN NATURE. WE, THEREFORE, REFRAIN OURSELVES FROM ADJUDICATING THOSE GROUNDS. 42. GROUND NO.2 OF THE APPEAL READS AS UNDER: - ITA NO .3043 - AHD - 2010 AY 2006 - 07 MOTIF INDIA INFOTECH PRIVATE LTD - 16 - 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE THE LEARNED AO ERRED IN LEVYING INTEREST UNDER SECTION 234B AND SECTION 234C OF THE ACT FOR RS.2,369,541 AND RS.32,241 RESPECTIVELY. 43. NO SUBMISSIONS WERE MADE BY THE LD. AR OF THE ASSESSEE ON TH IS GROUND OF APPEAL. W E HOLD THAT CHARGING OF INTEREST IS CONSEQUENTIAL AND ACCORDINGLY DISPOSE O F THIS GROUND OF APPEAL. 44. GROUND NO.3 OF THE APPEAL READS AS UNDER: - 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE THE AO ERRED IN PROPOSING TO INITIATE PENALTY PROCEEDINGS UNDER SECTION 271(1)(C) OF THE ACT. 45. NO SUBMISSIONS WERE MADE O N THIS GROUND OF APPEAL ALSO. WE HOLD THAT THIS GROUND OF APPEAL IS PREMATURE AND HENCE DISMISSED. 42. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE COURT ON TUESDAY , T HE 25 TH OF M ARCH , 2014 AT A HMEDABAD. SD/ - SD/ - ( KUL BHARAT ) JUDICIAL MEMBER ( N.S. SAINI) ACCOUNTANT MEMBER AHMEDABAD; DATED 25 / 0 3 /20 1 4 BT* TRUE COPY / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. / CONCERNED CIT 4. ( ) / THE CIT(A) - III, AHMEDABAD 5. , , / DR, ITAT, AHMEDABAD 6. / GUARD FILE . / BY ORDER, / ( DY./ASSTT.REGISTRAR) , / ITAT, AHMEDABAD