Interra Information Technologies India Pvt. Ltd., Delhi V. DCIT, New Delhi

ITA 6354/DEL/2012

• Counselvise Citation: [2015] 121 COUNSELVISE.COM (IT) 1843 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-12-2015
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I1
• Next Hearing Date: 30-09-2015
• Assessment Year: 2008-2009
• Appeal Filed On: 24-12-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: AMRENDRA KUMAR
• Keywords: Transfer pricing; International transaction; Wholly owned subsidiary
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH I-1 : NEW DELHI) BEFORE SHRI S.V.MEHROTRA, ACCOUNTANT MEMBER AND SHRI A.T. VARKEY, JUDICIAL MEMBER ITA NO.5620/DEL./2012 (ASSESSMENT YEAR : 2008-09) INTERRA INFOTECH (INDIA) PVT. LTD., VS. ITO, 5/207, GUPTA ARCADE, WARD-11(4), LSC SHRESTHA VIHAR, NEW DELHI. DELHI 110 092. (PAN : AABCI2814A) ITA NO.6354/DEL/2012 (ASSESSMENT YEAR : 2008-09) INTERRA INFORMATION TECHNOLOGIES INDIA PVT. LTD, V S. DCIT, 5/207 GUPTA ARCADE, CIRCLE-11(1), LSC SHRESTHA VIHAR, NEW DELHI DELHI 110 092. (PAN : AABCI1895H) (APPELLANT) (RESPONDENT) ASSESSEE BY : S/SHRI NEERAJ JAIN, ADVOCATE & ABHIS HEK AGARWAL, CA REVENUE BY : SHRI AMRENDRA KUMAR, CIT, DR. O R D E R PER A.T. VARKEY, JUDICIAL MEMBER : THESE APPEALS INVOLVING CONSIDERATION OF COMMON IS SUE ARE DIRECTED AGAINST ORDERS PASSED U/S 143(3) READ WITH SECTION 144C OF THE INCOME TAX 2 ITA NO.5620/DEL/2012 ITA NO.6354/DEL/2012 ACT, 1961 (HEREINAFTER THE ACT) AND ARE IN RELATI ON TO ASSESSMENT YEAR 2008-09. 2. TO APPRECIATE THE CONTROVERSY WE TAKE UP THE APPEAL OF M/S INTERRRA INFOTECH INDIA (P) LTD. IN ITA NO. 5620/D/2012. TH E GROUNDS RAISED BY THE APPELLANT IN THIS APPEAL ARE AS UNDER:- 1. THAT THE ASSESSING OFFICER ERRED ON FACTS AND I N LAW IN COMPLETING ASSESSMENT UNDER SECTION 144C/143(3) OF THE INCOME- TAX ACT, 1961 (THE ACT) AT AN INCOME OF RS. 3,07,03,338 AS AGAINST TH E INCOME OF RS. 78,048 RETURNED BY THE APPELLANT. 2. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN MAKING ADDITION OF RS. 3,06,25,340 OF THE ALLEGED DIFFEREN CE IN THE ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS OF PROVIS IONS OF PROVISION OF SOFTWARE DESIGN AND DEVELOPMENT SERVICES ON THE BAS IS OF THE ORDER PASSED UNDER SECTION 92CA(3) OF THE ACT BY THE TPO. 2.1 THAT THE ASSESSING OFFICER/TPO ERRED ON FACTS A ND IN LAW IN APPLYING ADDITIONAL FILTERS OF PERCENTAGE OF WAGES TO SALE, PERSISTENT LOSSES, DECLINING REVENUE AND ONSITE REVENUE NOT AP PRECIATING THAT THE SELECTION OR REJECTION SHOULD BE BASED ON FAR ANALY SIS AND NOT ON FINANCIAL RESULTS. 2.2 THAT THE ASSESSING OFFICER/TPO ERRED ON FACTS A ND IN LAW IN APPLYING INCONSISTENT APPROACH BY ELIMINATING LOS M AKING COMPANIES OR COMPANIES WITH DECLINING REVENUE WITHOUT ELIMINATIN G THE COMPANIES HAVING SIGNIFICANTLY HIGH MARGINS OR HIGH GROWTH RA TE IN SALE. 2.3 THAT THE ASSESSING OFFICER/TPO ERRED ON FACTS A ND IN LAW IN RELYING UPON THE INFORMATION OBTAINED UNDER SECTION 133(6), NOT APPRECIATING THAT SUCH INFORMATION IS NOT AVAILABLE IN PUBLIC DOMAIN AND THEREFORE COULD NOT HAVE BEEN RELIED UPON BY THE APPELLANT. 2.4 THAT ASSESSING OFFICER/TPO ERRED ON FACTS AND I N LAW IN CONSIDERING INFOSYS LTD. AND WIPRO LTD. HAVING HIGH TURNOVER AS COMPARED TO THE APPELLANT WITHOUT TAKING INTO CONSIDERATION THE RAT IO OF JUDGMENTS 3 ITA NO.5620/DEL/2012 ITA NO.6354/DEL/2012 PRONOUNCED IN THIS REGARD THAT HIGH TURNOVER COMPAN IES NEED TO BE REJECTED FROM LIST OF COMPARABLES. 2.5 THAT THE ASSESSING OFFICER/TPO ERRED IN REJECTI NG MAARS SOFTWARE INTERNATIONAL AND COMPULINK SYSTEMS LTD. AS COMPARA BLE ON THE BASIS THAT THEY RENDER ONSITE SERVICE. 2.6 THAT THE ASSESSING OFFICER/TPO ERRED IN SELECTI NG COMPANIES FUNCTIONALLY NOT COMPARABLE FOR THE PURPOSE OF BENC HMARKING THE INTERNATIONAL TRANSACTIONS WHICH ARE UNDERTAKEN BY THE APPELLANT. 2.7 THAT THE ASSESSING OFFICER ERRED ON FACTS AND I N LAW IN NOT ALLOWING THE ADJUSTMENT ON ACCOUNT OF LOW CAPACITY UTILIZATI ON OF THE APPELLANT. 2.8 THAT THE ASSESSING OFFICER/TPO ERRED ON FACTS A ND IN LAW IN NOT APPRECIATING THAT THE APPELLANT IS ENGAGED IN THE B USINESS OF RENDERING LOW END SOFTWARE MAINTENANCE SERVICES RESULTING IN LOW COMBINED PROFITABILITY OF THE APPELLANT AND ITS ASSOCIATED ENTERPRISE. 2.9 THAT THE ASSESSING OFFICER/TPO ERRED ON FACTS A ND IN LAW IN NOT APPRECIATING THAT THE ASSOCIATED ENTERPRISE OF THE APPELLANT HAS INCURRED LOSSES DUE WHEREAS THE APPELLANT HAS CONSISTENTLY B EEN EARNING PROFITS. 2.10 THAT THE ASSESSING OFFICER/TPO ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT THE APPELLANT OPERATES AS A LOW-R ISK BEARING CONTRACT SERVICE PROVIDER AND AN APPROPRIATE RISK ADJUSTMENT IS WARRANTED. 3. BRIEFLY STATED, THE FACTS OF THE CASE ARE THAT ASSE SSEE COMPANY IS A 100% SUBSIDIARY OF INTERRA INFORMATION TECHNOLOGY I NC., USA. IT IS A CONTRACT SERVICE PROVIDER RENDERING OFFSHORE SERVIC ES TO ITS PARENT COMPANY, INTERRA INFORMATION TECHNOLOGY INC (INTERR A IT INC. OR AE) AND CERTAIN OTHER UNRELATED ENTITIES. IT HAS A SOF TWARE DEVELOPMENT UNIT ESTABLISHED IN SEZ AND IS ENTITLED TO EXEMPTION UND ER SECTION 10A OF THE ACT. DURING THE RELEVANT PREVIOUS YEAR THE ASSESSE E RECEIVED A TOTAL 4 ITA NO.5620/DEL/2012 ITA NO.6354/DEL/2012 CONSIDERATION OF RS. 15,07,01,606/- (ON COST PLUS B ASIS) IN RESPECT OF THE INTERNATIONAL TRANSACTIONS OF PROVISION OF SOFTWARE DEVELOPMENT SERVICES TO INTERRA IT INC. THE MARGIN EARNED BY THE ASSESSEE IS OF COST PLUS 8% ON PROVISIONS OF SERVICES TO ITS AE. THE ASSESSEE COM PANY IN ORDER TO DETERMINE THE ARMS LENGTH PRICE OF INTERNATIONAL T RANSACTIONS APPLIED TRANSACTIONAL NET MARGIN METHOD (TNMM) AS THE MOS T APPROPRIATE METHOD. FOR APPLICATION OF TNMM, OPERATING PROFIT/ TOTAL COST RATIO WAS BENCHMARKED WITH OPERATING PROFIT MARGIN I.E. OPERA TING PROFIT/TOTAL COST OF 8.64% EARNED BY THE 57 COMPARABLE UNCONTROLLED ENTE RPRISES. SINCE THE OPERATING PROFIT RATIO OF THE ASSESSEE ON CONTROLLE D TRANSACTIONS WAS 8.00% AND THE SAME FELL WITHIN THE 5% RANGE OF 8.64% EARN ED BY THE COMPARABLE COMPANIES, THE INTERNATIONAL TRANSACTIONS OF PROVIS ION OF SOFTWARE DEVELOPMENT SERVICES ENTERED INTO BY THE ASSESSEE W ITH INTERRA IT WERE THEREFORE CONSIDERED AT ARMS LENGTH. 4. DURING THE COURSE OF TP ASSESSMENT PROCEEDINGS, THE TRANSFER PRICING OFFICER'S (HEREINAFTER REFERRED TO AS 'TPO' ) FURTHER CARRIED OUT FRESH SEARCH OF COMPARABLES AND SELECTED A SET OF 19 COMP ARABLE COMPANIES, EARNING A MEAN OPERATING MARGIN OF 26.16% AS FOLLOW S: 5 ITA NO.5620/DEL/2012 ITA NO.6354/DEL/2012 SR. NO. COMPANY NAME OP/OC% 1 AVANI CINCOM TECHNOLOGIES 21.65% 2 BODHTREE CONSULTING LTD 19.14% 3 CELESTIAL BIO LABS 87.94% 4 E-ZEST SOLUTIONS 28.95% 5 FLEXTRONICS 9.58% 6 IGATE GLOBAL SOLUTIONS 13.9% 7 INFOSYS 40.41% 8 KALS INFORMATION SYSTEMS LTD. (SEG) 41.94% 9 LGS GLOBAL LTD 26.64% 10 MINDTEE LTD (SEG) 17.51% 11 PERSISTENT SYSTEMS LTD 27.23% 12 QUINTEGRA SOLUTIONS LTD 21.74% 13 R SYSTEMS INTERNATIONAL (SEG) 15.30% 14 RS SOFTWARE INDIA LTD 6.46% 15 SASKEN COMMUNICATION TECHNOLOGY LTD (SEG) 13.44% 16 TATA ELXSI (SEG) 18.97% 17 THIRDWARE SOLUTIONS LTD. 18.01% 18 WIPRO LTD (SEG) 28.38% 19 SOFTSOL INDIA LTD 42.15% AVERAGE PLI (OP/OC %) 26.16% 5. THE TRANSFER PRICING OFFICER IN THE ORDER PASSED UNDER SECTION 92CA(3) OF THE ACT ACCORDINGLY COMPUTED AN ADJUSTME NT OF 6 ITA NO.5620/DEL/2012 ITA NO.6354/DEL/2012 RS.3,52,02,752 ON ACCOUNT OF THE DIFFERENCE IN THE MARGIN OF THE COMPARABLE COMPANIES AND ASSESSEE COMPANY AS FOLLOW S: 21 COMPUTATION OF ARMS LENGTH PRICE: THE ARITHMETIC MEAN OF THE PROFIT LEVEL INDICATORS IS TAKEN AS THE ARMS LENGTH MARGIN. BASED ON THIS, THE ARMS LENGTH PRIC E OF THE SOFTWARE DEVELOPMENT SERVICES RENDERED BY THE TAXPAYER TO IT S AE(S) IS COMPUTED AS UNDER: ARITHMETIC MEAN PLI 26.16% LESS: WORKING CAPITAL ADJUSTMENT (ANNEXURE-C) -(0.96)% ARMS LENGTH MARGIN 27.12% ARMS LENGTH PRICE OPERATING COST 14,62,43,202 ARMS LENGTH MARGIN 127.12% OF THE OPERATING COST ARMS LENGTH PRICE @ 127.12% OF OPERATING COST RS. 18,59,04,358 PRICE CHARGED IN INTERNATIONAL TRANSACTION RS. 15,0 7,01,606 ADJUSTMENT U/S 92CA RS. 3,52,02,752 6. THE OBJECTIONS FILED BY THE ASSESSEE WERE SUBSTA NTIALLY REJECTED BY DRP (OTHER THAN EXCLUDING THE COMPARABLE CELESTIAL BIO LABS) IN AN ORDER DATED 14.8.2012 U/S 144C(2)(B) OF THE ACT AN D PURSUANT THERETO AO IN THE ORDER DATED 7.9.2012 COMPUTED INCOME OF THE APP ELLANT AT RS. 3,52,280,810/- BY MAKING AN ADDITION OF RS. 3,52,02 ,752/- ON ACCOUNT OF 7 ITA NO.5620/DEL/2012 ITA NO.6354/DEL/2012 TRANSFER PRICING ADJUSTMENT U/S 92CA OF THE ACT, WH ICH LATER IT APPEARS WAS RESTRICTED TO RS. 3,06,25,340/- 7. BEFORE US THE LEARNED COUNSEL PLACED ON RECORD A CHART, WHICH IS AS UNDER:- PARTICULARS OFFSHORE (USD) OFFSHORE (INR CONVERTED AT 39.90/USD) REMARKS REVENUE CHARGED BY AE TO THIRD PARTY CUSTOMER $6,674,963 26,63,31,024 COST-DIRECT (VALUE OF INVOICE RAISED BY THE APPELLANT ON THE BASIS OF COST PLUS 8% MARKUP) $6,545,000 26,11,45,500 RS. 11,08,54,524 RAISED BY INTERRA INFORMATION AND RS. 15,07,01,606 RAISED BY THE APPELLANT BEING 98.05% OF THE TOTAL REVENUE CHARGED FROM THIRD PARTY CUSTOMER BALANCE REVENUE RETAINED BY AE $129963 51,85,524 AE HAS RETAINED ONLY 1.95% OF THE TOTAL REVENUE CHARGED FROM END CUSTOMER COST-G&A (COST INCURRED BY AE, INTERRA INC., USA) $1,219,282 4,86,49,352 PROFIT ($1,089,318) (4,34,63,788) AE HAS ONLY INCURRED LOSS PROFITABILITY % -14.03% 8 ITA NO.5620/DEL/2012 ITA NO.6354/DEL/2012 PARTICULARS AMOUNT (INR) INVOICE RAISED BY INTERRA INFORMATION TECHNOLOGIES INDIA AND APPELLANT 26,11,45,500 ADDITION MADE BY THE TPO IN THE CASE OF INTERRA INFORMATION TECHNOLOGIES INDIA (DISPUTED IN ITA NO. 6354/D/2012) 2,03,77,077 ADDITION MADE BY THE TPO IN THE CASE OF APPELLANT (DISPUTED IN ITA NO. 5620/D/2012) 3,06,25,340 TOTAL ARMS LENGTH VALUE OF TRANSACTION AS PER TPO 3 1,21,47,917 REVENUE CHARGED BY AE TO THIRD PARTY CUSTOMER 26,63 ,31,024 NOTIONAL ADDITION MADE BY THE TPO 4,58,16,893 8. ON THE BASIS OF THE ABOVE IT WAS SUBMITTED THAT THE AE HAS RETAINED MEAGER MARGIN OF 1.95% OF THE TOTAL REVENUE AND HAS , IN FACT, INCURRED LOSS OF 14.03% FROM ITS OFFSHORE ACTIVITIES, WHICH RELAT ES TO THE SALE OF SOFTWARE SERVICES RENDERED BY THE APPELLANT. IT WAS THUS CO NTENDED THAT THE TRANSFER PRICING ADJUSTMENT MADE IN THE CASE OF THE APPELLAN T OF RS. 3,06,25,340 AND RS. 2,03,77,077 IN THE CASE OF INTERRA INFORMAT ION TECHNOLOGIES INDIA (P) LTD. ARE ADDED TO THE AMOUNT PAID BY THE AE TO THE APPELLANT AND INTERRA INFORMATION TECHNOLOGIES INDIA (P) LTD., TH E TOTAL REVENUE SO ARRIVED WOULD EXCEED THE REVENUE EARNED BY THE AE F ROM THIRD PARTIES, BY A SUM OF RS. 4,58,16,893/-. IT WAS THEREFORE SUBMI TTED THAT THERE WAS NO TRANSFER OF PROFIT BY THE APPELLANT O R INTERRA INFORMATION TECHNOLOGIES 9 ITA NO.5620/DEL/2012 ITA NO.6354/DEL/2012 INDIA (P) LTD. TO THE AE AND THEREFORE, NO TRANSFER PRICING ADJUSTMENT WAS WARRANTED AND AS SUCH, MAKING ANY TRANSFER PRICING ADJUSTMENT UNDER THE CIRCUMSTANCES WOULD AMOUNT TO TAXING OF NOTIONAL IN COME, WHICH IS OUTSIDE THE SCOPE OF SECTION 4 OF THE ACT. RELIANC E WAS PLACED ON THE FOLLOWING JUDGMENTS: - GLOBAL VANTEDGE P. LTD. VS DCIT 37 SOT 1 (DEL) - GLOBAL VANTEDGE P. LTD. VS. DCIT (ITA NO. 116 & 3 23/DEL/10) - HYPER QUALITY INDIA PVT. LTD. VS. ACIT (ITA NO. 5630/DEL/2011) - CIT VS. A. RAMAN & CO. 67 ITR 11 (SC) - SONY INDIA (P) LTD. S. CBDT 288 ITR 52 (DEL) 9. THE LD. DR SUPPORTED THE ADJUSTMENT MADE BY THE AO IN PURSUANT TO THE ORDER MADE BY TPO U/S 92CA(3) OF THE ACT AND DI RECTIONS OF DRP U/S 144C(5) OF THE ACT 10. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PE RUSED THE MATERIAL PLACED ON RECORD. WE TAKE NOTE THAT THE APPELLANT IN THE PROCEEDINGS BEFORE TPO HAD SPECIFICALLY SUBMITTED AS UNDER: IX PROFITABILITY OF ASSOCIATED ENTERPRISES: THE OPERATING PROFIT OF THE ASSOCIATED ENTERPRISE, INTERRA INC., USA FOR THE YEAR ENDED 31-03-2008, ARE SUMMARIZED AS FOLLOW S: 10 IT A NO.5620/DEL/2012 ITA NO.6354/DEL/2012 (AMOUNT IN DOLLARS) PARTICULARS YEAR ENDED 31.03.2008 NET REVENUES 18,986,509 COST OF REVENUES 15,180,000 GROSS PROFIT 3,806,509 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 3,468, 169 INCOME/(LOSS) FROM THE OPERATIONS 338,340 FURTHER, THE AUDITED PROFIT AND LOSS ACCOUNT FOR TH E YEARS ENDED 31-12-2007 AND 31-12-2008 OF INTERRA INFORMATION TECHNOLOGIES, INC. IS EXTRACTED AS HEREUNDER: (USD IN THOUSAND) PARTICULARS YEAR ENDED 31.12.2007 31.12.2008 NET REVENUES 19,939 19091 COST OF REVENUES 13,533 11892 GROSS PROFIT 6,406 7,199 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 5,401 INCOME/(LOSS) FROM THE OPERATIONS 1,005 1,108 FROM THE ABOVE, IT IS EVIDENT THAT THE ASSOCIATED E NTERPRISES HAS INCURRED A MERE RETURN OF 1.81% ON ITS COST AND HAS IN FACT EARNED A LOSS OF 16.23% ON ITS OFFSHORE ACTIVITIES, THUS IT MAY BE 11 IT A NO.5620/DEL/2012 ITA NO.6354/DEL/2012 SAFELY CONCLUDED THAT THERE WAS NO TRANSFER OF PROF IT BY THE ASSESSEE TO THE ASSOCIATED ENTERPRISES IN OTHER JUR ISDICTIONS . THE HONBLE DELHI HIGH COURT IN THE CASE OF SONY IN DIA P. LTD. VS. CBDT (DELHI); 288 ITR 52 HAS AT PAGES 61-62, OB SERVED AS UNDER: THE CONCEPT OF TRANSFER PRICING LEADING TO TAX AVO IDANCE HAS BEEN ACKNOWLEDGED IN THE ACT ONLY RECENTLY. IT IS A CONCOMITANT OF THE OPERATIONS OF MULTINATIONAL CORPORATIONS (MN CS) THAT SET UP BASE BY INCORPORATING A LOCAL SUBSIDIARY IN A CO UNTRY WHERE THEY SEEK TO OPERATE. IT IS OFTEN SEEN THAT THE MNC TRANSFERS GOODS AND SERVICES TO ITS LOCAL SUBSIDIARY AT A PRI CE NOT REFLECTIVE OF THE MARKET PRICE (OR ARM'S LENGTH PRICE AS IT IS REFERRED TO IN THE PRESENT CONTEXT) AND IN TURN THE SUBSIDIARY IS ABLE TO AVOID, PARTLY OR WHOLLY, PAYMENT OF THE LOCAL TAX. ALTHOUG H THE EXPRESSION `TRANSFER PRICE' HAS NOT BEEN DEFINED IN THE ACT, IT IS UNDERSTOOD TO MEAN 'THAT PRICE WHICH IS ARRIVED AT WHEN TWO ASSOCIATED OR RELATED ENTERPRISES DEAL WITH EACH OT HER' [KANGA, PALKHIVALA AND VYAS, THE LAW AND PRACTICE OF INCOME TAX, NINTH EDITION (2004) P. 1532]. IT WAS ACKNOWLEDGED BY THE FINANCE MINSTER IN THE BUDGET SPEECH FOR THE YEAR 2 001 THAT 'THE PRESENCE OF MULTINATIONAL ENTERPRISES IN INDIA AND THEIR ABILITY TO ALLOCATE PROFITS IN DIFFERENT JURISDICTIONS BY CONT ROLLING PRICES IN INTRA-GROUP TRANSACTIONS HAS MADE THE ISSUE OF TRAN SFER PRICING A MATTER OF SERIOUS CONCERN.' THE PURPOSE OF INSERTIN G THESE PROVISIONS IS THEREFORE TO DETERMINE THE ARM'S LENG TH PRICE (ALP) OF AN INTERNATIONAL TRANSACTION INVOLVING AN MNC AN D ITS LOCAL ASSOCIATE . ATTENTION IS ALSO INVITED TO THE DECISION OF THE HO NBLE BANGALORE BENCH OF THE TRIBUNAL IN THE CASE OF PHIL LIPS SOFTWARE CENTRE PRIVATE LTD. VS. ACIT (ITA NO. 218 (BNG.)/20 08)(COPY ENCLOSED) WHEREIN IT IS HELD THAT- QUOTE 12 IT A NO.5620/DEL/2012 ITA NO.6354/DEL/2012 THE BASIC INTENTION BEHIND INTRODUCING THE TRANSFE R PRICING PROVISIONS IN THE ACT IS PREVENT SHIFTING OF PROFIT S AND THE ASSESSEE IS CLAIMING BENEFITS U/S 10A OF THE ACT, T HE TRANSFER PRICING PROVISIONS OUGHT NOT TO BE APPLIED TO THE A SSESSEE. UNQUOTE IN VIEW OF THE FACT THAT THE OVERSEAS ASSOCIATED EN TERPRISE ARE ONLY INCURRING LOSS AND NOT EVEN EARNING PROFIT, WH ICH IS COMMENSURATE WITH THE FUNCTIONS PERFORMED AND RISKS ASSUMED BY THE CONCERNED ENTITY, THERE CANNOT BE A POSSIBIL ITY OF SHIFTING OF PROFITS FROM INDIA TO THE RESPECTIVE AES. FURTH ER, SINCE THE ASSESSEE IS ENTITLED TO DEDUCTION U/S 10A OF THE AC T, IT HAD NO MOTIVE TO CHARGE A PRICE WHICH IS LESS THAN THE ARM S LENGTH PRICE FROM ITS ASSOCIATED CONCERN. X. ADJUSTMENT AT BEST CANNOT EXCEED THE AMOUNT OF M ARGIN RETAINED BY THE ASSOCIATED ENTERPRISE. FURTHER, IT WOULD BE APPRECIATED THAT THE ADJUSTMEN T COMPUTED AS AFORESAID IN THE ORDER PASSED UNDER SECTION 92CA(3) OF THE ACT AT BEST CANNOT EXCEED THE MARGIN, I.E., GROSS REVENUE RECEIVED FROM THE END CUSTOMERS LESS AMOUNT PAID TO THE ASSESSEE RETAINED BY THE ASSOCIATED ENTERPRISES IN RESPECT OF INTERNATIO NAL TRANSACTIONS. IN PRESENT CASE, THE ASSOCIATED ENTERPRISE HAS ONLY INCURRED LOSS IN RESPECT OF THE INTERNATIONAL TRANSACTIONS UNDERTAKE N WITH THE ASSESSEE, AS UNDER: PARTICULARS OFFSHORE TOTAL REVENUE $6,674,963 $18,986,509 COST-DIRECT $6,545,000 $15,180,000 COST-G&A $1,219,282 $3,468,169 PROFIT ($1,089,318) $338,340 PROFITABILITY% -14.03% 1.81% 13 IT A NO.5620/DEL/2012 ITA NO.6354/DEL/2012 RELIANCE IS PLACED IN THIS REGARD ON THE RECENT DEC ISION OF DELHI BENCH OF THE TRIBUNAL IN THE CASE OF GLOBAL VANTEDG E P. LTD. VS. DCIT (ITA NO. 2763 & 2764/DEL/09) WHEREIN THE HONB LE TRIBUNAL HELD THAT ADJUSTMENT ON ACCOUNT OF ARMS L ENGTH PRICE OF INTERNATIONAL TRANSACTIONS CANNOT EXCEED THE MAX IMUM ARMS LENGTH PRICE, I.E., THE AMOUNT RECEIVED BY THE ASSO CIATED ENTERPRISE FROM THE CUSTOMER AND THE ACTUAL VALUE O F INTERNATIONAL TRANSACTIONS, I.E., THE AMOUNT RECEIV ED BY THE ASSESSEE IN RESPECT OF SUCH INTERNATIONAL TRANSACTI ONS . THE TRIBUNAL FURTHER, IN THAT CASE, HELD THAT THE ASSOC IATED ENTERPRISE PERFORMING THE MARKETING ACTIVITIES WOULD BE ENTITL ED TO RECEIVE A FAIR AMOUNT OF COMPENSATION FOR THE SERVICES PERF ORMED AT THEIR END. ACCORDINGLY, IN TERMS OF THE AFORESAID DECISION OF THE TRIBUNAL, FROM THE NET AMOUNT RETAINED BY THE ASSOCIATED ENTE RPRISE, EXPENSES INCURRED IN PERFORMING THEIR OPERATION/REN DERING MARKETING SERVICES, IS TO BE PERMITTED TO BE RETAIN ED BY THE ASSOCIATED ENTERPRISE. IN OTHER WORDS, THE ADJUSTME NT PROPOSED BY YOUR HONOUR CAN, IN NO CASE, EXCEED THE NET PROF IT MARGIN EARNED BY THE ASSOCIATED ENTERPRISE. IN VIEW OF THE AFORESAID, TOO, IT WOULD BE APPRECIA TED THAT THE ASSOCIATE ENTERPRISE HAS ONLY INCURRED LOSS FROM TH E TRANSACTIONS UNDERTAKEN WITH THE ASSESSEE. THERE CANNOT BE AN AL LEGATION AS TO TRANSFER PRICING AND THE ADJUSTMENT MADE BY THE TPO IS LIABLE TO BE DELETED. 11. THE TPO HOWEVER HAD REJECTED THE ABOVE ARGUMENT BY OBSERVING AS UNDER: THE TAXPAYER HAS CONTENDED THAT THE OVERSEAS ASSOC IATED ENTERPRISE HAS EARNED 1.81% ON COST AND HAS BOOKED A LOSS OF 16.23% ON ITS OFFSHORE OPERATIONS. I HAVE CALLED FO R THE ANNUAL REPORT OF THE OVERSEAS ASSOCIATE AND EXAMINED THE S AME. THE 14 IT A NO.5620/DEL/2012 ITA NO.6354/DEL/2012 CONTENTION OF THE ASSESSEE IS WRONG. THE OVERSEAS E NTITY HAS, FOR THE PERIOD ENDING DECEMBER; 2007 EARNED A PROFIT OF 6.42% ON COST BEFORE TAX. HENCE, THE PROFITABILITY OF THE OV ERSEAS AE IS CERTAINLY MORE THAN THAT OF THE ASSESSEE. THERE IS NOTHING IN ACCOUNTS TO DEMONSTRATE THAT SEGMENTAL ACCOUNTS HAD BEEN PREPARED. HENCE THE OFFSHORE BUSINESS LOSS AS CLAIM ED BY THE ASSESSEE GOES UNSUBSTANTIATED. THEREFORE, THE ARGUM ENTS OF THE ASSESSEE IN THIS REGARD CANNOT BE ACCEPTED TO. 12. ACCORDINGLY BY GROUND NO. 8, THE APPELLANT HAD REITERATED ITS OBJECTION BEFORE DRP AND IT WAS INTER-ALIA SUBMITTE D AS UNDER: FURTHER RELIANCE IN THIS REGARD IS PLACED ON THE F OLLOWING OBSERVATION OF THE HONBLE DELHI BENCH OF THE TRIBU NAL IN THE CASE OF LI & FUNG (INDIA) PVT. LTD. VS DCIT (ITA NO . 5156/D/2010) IN VIEW OF THESE FACTS, WE ARE OF THE VIEW THAT TH E AMOUNT OF ADJUSTMENT SO COMPUTED SHOULD NOT EXCEED THE AMOUNT RECEIVED BY THE ASSOCIATED ENTERPRISE. ACCORDINGLY, IN TERMS OF THE AFORESAID DECISION OF THE TRIBUNAL FROM THE NET AMOUNT RETAINED BY THE ASSOCIATED ENTE RPRISE, EXPENSES INCURRED IN PERFORMING THEIR OPERATION/REN DERING MARKETING SERVICES, IS TO BE PERMITTED TO BE RETAIN ED BY THE ASSOCIATED ENTERPRISE. IN OTHER WORDS, THE ADJUSTM ENT MADE BY THE TPO CAN, IN NO CASE, EXCEED THE NET PROFIT MARG IN EARNED BY THE ASSOCIATED ENTERPRISE. IN VIEW OF THE AFORESAID TOO, IT WOULD BE APPRECIAT ED THAT THE ASSOCIATED ENTERPRISE HAS ONLY INCURRED LOSS FROM T HE TRANSACTIONS UNDERTAKEN WITH THE ASSESSEE. THERE CANNOT BE ALLE GATION AS TO TRANSFER PRICING AND THE ADJUSTMENT MADE BY THE TPO IS LIABLE TO BE DELETED. 15 IT A NO.5620/DEL/2012 ITA NO.6354/DEL/2012 13. HOWEVER DRP/AO HAVE NOT ACCEPTED THE ABOVE CONT ENTION. WE TAKE NOTE THAT AS PER THE CHART PLACED ON RECORD AE HAS CHARGED REVENUE OF RS. 26.63 CRORES FROM THE CUSTOMER, WHEREAS VALUE OF AL P AS DETERMINED BY THE TPO CONSIDERING THE ADJUSTMENT IN THE CASE OF A PPELLANT AND M/S INTERRA INFORMATION TECHNOLOGIES INDIA (P) LTD. IS RS. 31.21 CRORES. THUS TOTAL VALUE OF ALP EXCEEDS THE REVENUE CHARGED BY A E FROM CUSTOMER. MOREOVER IT IS ALSO NOTICED THAT AE HAS INCURRED LO SS OF RS. 4.34 CRORES AND THERE IS NO MARGIN RETAINED AT THE END OF AE ON VAL UE OF INTERNATIONAL TRANSACTIONS. 14. HAVING REGARD TO THE ABOVE FACTUAL BACKDROP WE FIND THAT COORDINATE BENCH OF TRIBUNAL IN THE CASE OF ACIT VS. GLOBAL VA NTEDGE (P) LTD. ITA NO. 116 & 323/D/2010 HAS HELD AS UNDER: FROM THE AFORESAID RECOMPUTATION OF ALP DONE BY TH E LEARNED CIT(A), IT IS SEEN THAT ALP WAS DETERMINED AT RS. 70,65,63,329 /-, WHICH EXCEEDED THE TOTAL REVENUE EARNED BY THE GROUP AS A WHOLE. THEREFORE, IN THE LIGHT OF HIS DECISION ON ISSUE NO. 3, THE LEARNED CIT(A) HELD THAT THE ALP CANNOT EXCEED RS. 60,32,18,954/- (RS. 61,17,83,929/ 98.6%). HE, THEREFORE, DETERMINED THE ALP AT RS. 60,32,18,954/- . HE THEREFORE, CONFIRMED THE ADDITION TO THE EXTENT OF RS. 2,90,74 ,219/- BEING THE DIFFERENCE OF RS. 60,32,18,954/- (MAXIMUM ALP) LESS RS. 57,41,44,735/- BEING THE ACTUAL VALUE OF INTERNATIONAL TRANSACTION S ENTERED INTO WITH ASSOCIATED ENTERPRISES BY THE ASSESSEE. 15. THE HONBLE DELHI HIGH COURT HAS UPHELD THE ABO VE DECISION OF THE TRIBUNAL IN A JUDGMENT DATED 14.3.2013 IN ITA NO. 1 828/2010, 1829/2010 16 IT A NO.5620/DEL/2012 ITA NO.6354/DEL/2012 AND 1254/2011 AND AGAINST WHICH SLP FILED BY REVENU E BEFORE APEX COURT STANDS DISMISSED VIDE JUDGMENT DATED 2.1.2014. 16. WE THEREFORE HOLD THAT ADJUSTMENT IN NO CASE CA N EXCEED THE AMOUNT RECEIVED BY THE AE FROM THIRD PARTY. HOWEVER SINCE THE DETAILS OF AE AVAILABLE ON RECORD ARE ONLY UPTO 31.3.2007 AND NOT UPTO 31.3.2008, WE RESTORE THE MATTER TO THE FILE OF THE AO SINCE THE LEARNED COUNSEL HAS DURING THE COURSE OF HEARING STATED THAT APPELLANT COMPANY WILL COOPERATE AND PROVIDE ALL DOCUMENTS TO FIND OUT THE REVENUE EARNE D BY THE AE UPTO 31.3.2008 INCLUDING PRODUCTION OF BOOKS OF ACCOUNTS . 17. ACCORDINGLY AO IS DIRECTED TO VERIFY THE ACTUAL MARGIN EARNED BY AE AND MAKE AN ADDITION, IF ANY CONSIDERING THE PRINCI PLE STATED ABOVE. THE APPELLANT COMPANY IS DIRECTED TO PRODUCE THE ENTIRE ACCOUNTS OF AE FOR VERIFICATION OF ITS INCOME. NEEDLESS TO STATE FAIR AND PROPER OPPORTUNITY WILL BE PROVIDED BY TPO/AO TO THE APPELLANT COMPANY . GROUND NO. 2.9 IS THEREFORE ALLOWED FOR STATISTICAL PURPOSES. THE RE MAINING GROUNDS ARE NOT BEING ADJUDICATED, AS THEY HAVE NOT BEEN ARGUED AND , OTHERWISE TOO ARE OF ACADEMIC SIGNIFICANCE. 17 IT A NO.5620/DEL/2012 ITA NO.6354/DEL/2012 M/S INTERRA INFORMATION TECHNOLOGIES INDIA PVT. LTD . (ITA NO. 6354/D/2012) 18. GROUND NO. 2.12 IN ITA NO. 6354/D/2012 ALSO RAI SES ON IDENTICAL ISSUE AS RAISED IN GROUND NO. 2.9 IN ITA NO. 5620/D /2012. WE HAVE ALREADY RESTORED THE SAID ISSUE TO THE FILE OF AO W ITH THE SPECIFIC DIRECTION. ACCORDINGLY, THE INSTANT APPEAL IS ALSO RESTORED TO THE FILE OF AO TO BE DECIDED IN LIKE MANNER. GROUND NO. 2.12 IS THEREFO RE ALLOWED FOR STATISTICAL PURPOSES. THE REMAINING GROUNDS ARE NO T BEING ADJUDICATED, AS THEY HAVE NOT BEEN ARGUED AND, OTHERWISE TOO ARE OF ACADEMIC SIGNIFICANCE 19. IN THE RESULT, THE APPEALS OF THE ASSESSEE ARE ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN OPEN COURT ON THIS DAY OF 28 TH DECEMBER, 2015. SD/- SD/- (S.V.MEHROTRA) (A.T.VARKEY) ACCOUNRANT MEMBER JUDICIAL MEMBER DATED THE 28 TH DAY OF DECEMBER, 2015 TS COPY FORWARDED TO: 1.APPELLANT 2.RESPONDENT 3.CIT 4.CIT(A) 5.CIT(ITAT), NEW DELHI. AR, ITAT NEW DELHI.