TaxTMI 
TaxTMI 
2011 (5) TMI 107
X X X X Extracts X X X X
X X X X Extracts X X X X
.... in relation to rendering of marketing support services even though, the Appellant had earned more than 50% of the sales revenue generated for associated enterprise during the year ended 31st March, 2006; which did not warrant any transfer pricing adjustment. 3. Use of contemporaneous data Erred in computing the arm's length price using the financial information of the comparable companies available at the time of assessment, although such information was not available at the time when the Appellant complied with these regulations. 4. Use of multiple year data Erred in considering the operating margins earned by comparable companies based on the financial data pertaining to the year ended 31st March, 2006 only and rejecting the financial data of comparable companies for prior two years. 5. Application of turnover filter for identification of comparable companies Erred in rejecting application of turnover filter for identification of comparable companies thereby accepting comparable companies of all sizes irrespective of their scale of operations. 6. Adjustment for difference in functional and risk profile of comparable companies vis-à-vis of the Appellan....
X X X X Extracts X X X X
X X X X Extracts X X X X
....siness loss." 3. Ground Nos. 1 to 8 regarding transfer price adjustment to the international transactions. 3.1 The assessee is engaged in the business of providing technical and marketing, pre-sale and after sales support of Veritas group products in India. The assessee filed its return of income on 29-11-2006 declaring total income of Rs. 75,88,386. Since the assessee had international transaction the reference was made under section 92CA(1) of the Act to the transfer pricing officer for computation of Arms Length Price in relation to international transactions vide order dated 18-8-2008. The transfer pricing officer made transfer pricing adjustment of Rs. 2,54,27,043 vide order dated 15-10-2009. The Assessing Officer prepared the draft order under section 143(3)(ii) r.w.s.144C of the I.T. Act dated 27-11-2009 whereby proposed disallowance/addition including transfer pricing adjustment of Rs. 2,54,27,043. The assessee filed its objections along with Form No.35A in respect of various additions and disallowance made by the Assessing Officer in the draft order before the Dispute Resolution Panel (DRP). The DRP after considering the contention of the assessee passed the directio....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sp;(c) The use of multiple year data should be allowed since it would capture market cycles and reduce the variability /distortions in the financial results arising from the use of single year data. (d) There is a change in the nature of business activities of Epic Energy Ltd. and Rata Glitter Industries Ltd. during FY 2005-06, due to which these companies cannot be considered to be comparable for FY 2005-06. (e) Turnover filter should be applied for selection of comparable companies in light of the judicial guidance available subsequent to the date of transfer pricing study. (f) Adjustment for differences in functional and risk profile should be granted in view of the fact that the assessee is a captive risk mitigated entity whereas comparables are full fledged risk bearing entities. (g) During the relevant year the assessee had reduced proportionate expenses for upgrading the Oracle software, which is used for accounting purposes. These expenses were incurred in earlier year. This amount was fully debited to Profit & Loss account in the earlier year and as such, in earlier year, the TPO had reduced full amount of ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... shows that records must be maintained of the economic analysis, market analysis, uncontrolled transaction, evaluation of comparability, actual working, etc. This documentation requirement under section 92B read with Rule 10D(1) is required to be complied with before the due date for filing of the return of income. It is beyond any principle of justice to reject the analysis undertaken by the assessee merely for the reasons that data for same year as the international transactions has not been used, without realizing the practical difficulties that could arise by such interpretation of law. (b) The provisions of section 92CA(3) read with section 92C(3), in terms of which the Transfer pricing officer is authorized to determine the arm's length price on the basis of information or document available with him. The various conditions have been specified in section 92C(3), which need to be satisfied in case the Transfer Pricing officer has to determine the information available with him for determining the arm's length price. Thus, even if the Transfer Pricing Officer has to deviate from the analysis conducted by the assessee the same can only be to the extent the assesse....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... by using the updated data/information through only for the F.Y.06-07 as against 3 financial years information taken into account by the assessee, the transfer pricing officer as well as Assessing Officer has added in determining the arm's length price. (f) The AR of the assessee further contended that the TPO, the DRP as well as Assessing Officer failed to appreciate and considered the contention of the assessee regarding the adjustment for difference in functional and risk profile. The learned AR has submitted that it was clear from the functional analysis submitted to the learned TPO that the assessee is a risk mitigated entity since risks such as market risk, warranty risk, credit and collection risk, etc are not borne by the assessee vis-a-vis the comparable companies which transact with independent entities and are not protected from these risks. Although it is evident from the functional analysis document submitted that the assessee is risk mitigated entity, the same has not been taken into consideration by the learned TPO. (g) The next contention of the learned AR is regarding turnover filtration. The ld. AR of the assessee has submitted that ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....en the material from the official website of ministry of corporation affairs. He has relied upon the decision of the Hon'ble Jurisdictional High Court in the case of Smt. Prabhavati S. Shah v. CIT [1998] 231 ITR 1/100 Taxman 404 (Bom.) and the decision of the Hon'ble Supreme Court in the case of K. Venkataramiah v. A Seetharama Reddy AIR 1963 SC 1526. The ld. AR has submitted that the additional evidence is necessary in the interest of justice and for proper adjudication of the dispute involved in grounds of appeal 1 to 3 and therefore, the same may be admitted. 6.1 On the other hand, the ld. DR has vehemently objected to the prayer of the assessee for admission of the additional evidence at this stage. He has submitted that Rule 29 does not confer any right on the parties to produce additional evidence. The assessee has filed additional evidence first time before the Tribunal in the form of paper book No.2 without explaining the reasonable cause as to why the said evidence has not been produced before the lower authorities. He has further submitted that the additional evidence filed by the assessee is required to be verified and examined and therefore, facts are required to be ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rrent year updated data and the assessee was having no such objection, if the data, which has taken into account in the TP study would have been accepted by the TPO. The TPO has not taken into consideration any new comparable but all the comparables selected by the assessee are considered while determining the ALP except using updated current year data of the comparables selected by the assessee. Thus, the objection taken by the assessee is baseless and an afterthought. 7.1 The ld. DR has then referred the asseessee's contention that the assessee is getting cost +2% net revenue of the AE for marketing support services and that would be more than 50% of the sale revenue of the AE and no further adjustment is required. He has emphasized that it is the margin of the assessee on the international transactions, which is relevant and not the percentage of the AE's revenue out of the transactions. 7.2 The ld. DR has further pointed out that while determining the ALP, TPO has the power and authority to consider the data which are available at the time of such calculation. The department has not imposed its choice of comparable; but all the comparables were chosen by the assessee. He ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e ld. DR thus pointed out that in case of Quark Systems (P.) Ltd. (supra), as relied upon by the ld. AR of the assessee, the Chandigarh Special Bench of the Tribunal has observed in para 9 that there was an error on account of which the operating expenses of Rs. 579 crores were not taken into account, which resulted an abnormal profit in case of Datamatics Technologies Ltd., one of the comparables. Thus, the Special Bench has held that the said company should be excluded from the comparables. He has pointed out that no such abnormal profit has been pointed by the assessee in case of comparables selected by the assessee and objected before the TPO. Therefore, the objection of the assessee is only to exclude the comparables which are having higher profit margin. 7.7 The ld. DR then pointed out that in case of Abode Systems India (P.) Ltd. (supra), the Delhi Bench of the Tribunal has observed that some of the cases of the comparables taken into consideration by the TPO are supernormal profit making companies and should be excluded from the comparables set. Whereas in the case in hand, it was not the case of the comparables are having supernormal. He has further pointed out that com....
X X X X Extracts X X X X
X X X X Extracts X X X X
....uch Enterprises. 9.1 Section 92C(1) prescribes the computation of ALP in regard to an international transaction and has to be determined by any of the method prescribed in the said sections being the most appropriate method, having regard to the nature of the transaction or class of transaction. 9.2 Section 92F(ii) defines ALP, a price which is applied or proposed to be applied in regard to the transaction between persons other than AE, in uncontrolled conditions. 9.3 Rule 10B (1) of the I T Rules prescribed the manner in which ALP in relation to international transaction has to be determined by applying most appropriate method as prescribed under section 92C. Rule 10B(1)(e) specifically mentioned the method/manner for determining all the ALPs by applying net Transactional Net Margin Method (TNMM). "(i) the net profit margin realized by the enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or ales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base. (ii) the net profit margin realized by the enterprise or by a....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... margin of the assessee from both transactions with operating margin of the comparables at enterprise level. However, the revenue has not raised such objection while determining the ALP and adopting TNMM method, the TPO has accepted the comparables as well as the margins as per the TP report except taken into account the updated data of only current year instead of three years data considered by the assessee in the TP study. Therefore, this issue has not been raised before us and we do not propose to go into the correctness of the comparison of operating margins of the assessee with the margins of the comparables except the specific issue raised before us. 11. The main objection raised by the assessee before us is against use of financial information of the comparables at the time of assessment but such information was not available at the time of TP study done by the assessee as well as use of financial data of the comparables for the FY 2005-06 instead of three years taken by the assessee. It is to be noted that the updated financial information and data were provided by the assessee during the assessment proceedings and particularly during the proceedings before the TPO. It i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....2C, the data to be used in analysing any comparability of uncontrolled transaction with an international transaction shall be the data relating to the Financial Year in which the international transaction has been entered into. Thus, it is manifest from the sub-rule (4) of Rule 10B that generally the data of the financial year in which the international transaction has been entered into to be used for analysing comparability of uncontrolled transaction in order to determine the ALP. The proviso to sub-rule (4) of Rule 10B provides the option for considering the data relating to the period other than the financial year in which the international transaction has been entered into; but not being more than two years prior to such financial year. As per proviso to Rule 10B, the data of earlier years reveal facts which could have influence on the current year/single year data of the comparables then the date of other two prior years may also be taken into consideration to determine the TP. 11.5 The proviso to sub-Rule 4 of Rule 10B does not mandate to always consider two more years' data of comparables in such analysis; but has a limited role only when the data of earlier years reveal....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ing the ALP, the assessee raised these objections. There is no quarrel on the point that if the comparables proposed to be taken into consideration by the TPO are having an abnormal differences of turnover in comparison to the turnover of the assessee, and if it is apparent due to such abnormal difference in the turnover, the operating profits of the comparables is got distorted then in such a case, those comparables should be excluded from the list of the ALP. 15. In the case in hand, the assessee raised these objections only because some of the comparables are having high profit and also high difference in the turnover and not because of the high or low turnover has influenced the operating margin of the comparables. All the objections and contentions raised by the assessee in respect of this issue are general in nature and no specific fact has been brought on record to show that due to the difference in turnover the comparables become non-comparables. The assessee has not demonstrated as to how the difference in the turnover has influenced the result of the comparables. It is accepted economic principles and commercial practice that in highly competitive market condition, one....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ices is more than 60% of the sale revenue of the AE is totally irrelevant because the ALP is a deemed price as, if the transaction between the two unrelated and uncontrolled parties. The price is compared in the contest of margin/profit of the assessee in relation to international transaction and not the share in the revenue of the AE. If net revenue of the AE is negative then the assessee would get no remuneration, which is however, irrelevant for the purpose of ALP determination. Thus, what is relevant is the margin/profit the assessee earned from international transaction and comparison of the same with the uncontrolled transactions. 18. Next issue relates to applicability of +/- 5% variation from the arithmetic mean of the ALP. 19. The lower authorities denied the claim of the assessee on the ground that the amendment made in the said provision w.e.f. 1-10-2009 is clarificatory and procedural in nature. 20. We have heard the ld. AR of the assessee and ld. DR and considered the relevant records available on record. Since the provisions has been amended and substituted by Finance Act 2009 w.e.f. 1-10-2009; therefore, the legislature has specifically given the date from w....
X X X X Extracts X X X X
X X X X Extracts X X X X
....k at the language in which the proviso is expressed. Only in cases of ambiguity, it is permitted to go beyond the language and consider the intention of the legislation. As far as the first limb of proviso is concerned, the same has general application. The controversy is relating to the second limb/portion of the proviso to section 92C(2) where "an option" is given to the taxpayer to take ALP which may vary from the arithmetic mean by an amount not exceeding 5% of such arithmetic mean. Hence again, there is no controversy that taxpayer can take ALP which is not exceeding 5 per cent of the arithmetic mean. The 'option', as is clear from the language is to take ALP which is not in excess of 5 per cent of the said mean. The word 'option' as per the Law Lexicon is synonymous with 'choice' or 'preference'. Therefore, it is the choice of the assessee to take ALP with a marginal benefit and not the arithmetical mean determined by the most appropriate method. There is nothing in the language to restrict the application of the provision only to marginal cases where price disclosed by the assessee does not exceed 5 per cent of the arithmetic mean. The ALP determined on application of most a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e tax on the estimated income in accordance with law that was in force at that point of time. The relevant portion of the said decision of the jurisdictional High Court in paras 7 to 9 read as under: "Now, if in the light of these rival submissions the provisions of under law are perused, it becomes clear that the appellant would not be liable to pay interest section 234B of the Act. Section 234B, especially sub-section 1 thereof which is relevant for our purpose reads as under: "234B(1) subject to the other provisions of this section, where, in any financial year, an assessee who is liable to pay advance tax under section 208 has failed to pay such tax or, where the advance tax paid by such assessee under the provisions of section 210 is less than ninety per cent of the assessed tax, the assessee shall be liable to pay simple interest at the rate of (one) per cent for very month or part of a month comprised in the period from the 1st day of April next following such financial year (to the date of determination of total income under sub-section (1) of section 143 and where a regular assessment is made, to the date of such regular assessment, on an amount) equal to the assesse....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... of advance tax is condition precedent. Perusal of the judgment of the Delhi High Court, which is relied on by the ld. counsel appearing for the respondent, shows that in that case also the Delhi High Court has held that for charging of interest establishment of default in payment of advance tax is necessary. In the present case, it is nobody's case that the appellant at the time of payment of advance tax has committed any default or that payment of advance tax made by the appellant was not in consonance with law. The Division Bench of this court in its judgment in the case of the appellant, referred to above, has held that the return filed by the appellant was in consonance with law and there was only a formal defect and the moment that defect was cured, the return related back to the original date. In our opinion, when the Supreme Court in Ghaswala's case says that charging of interest under section 234B is mandatory, what it really means is that once the assessee is found liable to pay interest, then recovery of interest is mandatory and recovery of that interest cannot be waived for any reason. But for charging interest under that section, it has to be established that the asse....
X X X X Extracts X X X X
X X X X Extracts X X X X
....f the assessee is allowable as business loss. 28.1 The ld. AR of the assessee further pointed out that since the commission was already taken into account in the P&L account and offered for taxation in earlier year. Therefore, the assessee has otherwise fulfilled the conditions under section 36(1)(vii) of the I.T. Act. 28.2 The ld. DR on the other hand supported the orders of the authorities below. 29. We have considered the rival arguments of both the parties and perused the relevant material on record. The commission received has been offered by the assessee for taxation was subjected to the provisions of Chapter X and particularly section 92 for computation of income from international transaction. Therefore, whether the assessee charged the excess commission or less is not relevant and material once the income is subjected to the provisions of Chapter X being related to the international transaction. If the claim of the assessee is allowed, it will defeat the very object and purpose of the provisions of Chapter X. It is irrelevant for the purposes of ALV for international transaction whether the actual price charged by the assessee in relation to the international tran....