TaxTMI 
TaxTMI 
2011 (9) TMI 634
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....tions with its Associated Enterprises (AEs): * Provision of software services - Rs. 13,526,760. * Interest on loans provided to its AEs - Rs. 2,235,391; and * Corporate guarantee provided to banks on loans taken by its subsidiary - Rs. 26,179,350. (2) Erred in computing the correct net margin of the appellant under Transactional Net Margin Method (TNMM) and correctly determining the Transfer pricing and adjustment; (3) Without prejudice to Ground No. 2 erred in not applying TNMM to the internal uncontrolled transactions for determining the Arm's Length Price (ALP); (4) Erred in excluding foreign exchange fluctuation in computation of the operating margin under TNMM; (5) Erred in rejecting the contemporaneous data (i.e., data existing before the due date of filing of return of income) and in undertaking a fresh comparable search during the course of assessment proceedings using information/ data which was not available to the appellant at the time of satisfying the mandatory documentation requirements. (6) Erred in rejecting the use of multiple year data and using data for the FY 2005-06 only in determination o....
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....ds Double Taxation Avoidance agreement. (16) Erred in not taking into account the functional and risk differences between the international transactions of the appellant and the comparable transactions and not adjusting the net margins of the comparable companies for the same in accordance with the provisions of Rule 10B(1)(e) read with Rule 10B(2)(b); (17) Erred in not considering that the adjustment to the transfer price, if any, should be limited to the lower end of the 5 per cent range of the ALP as the appellant had the right to exercise this option under the proviso to section 92C(2) of the Act for the subject assessment year; (18) Erred in deducting the following expenses from the export turnover and further not reducing the same from the total turnover in the computation of deduction u/s. 10A of the Act; * Communication change of Rs. 4,167,242 considered as attributable to the delivery of software outside India. * Salaries and implementation expenses of Rs. 16,024,557 considered as expenses in foreign currency for providing technical services outside India. (19) Erred in determining the amount of expenditure relati....
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.... issued a proposed assessment order under section 144C of the Act on 21.12.2009. The Assessing Officer computed the total income of the assessee at Rs. 9,56,79,799/- by proposing the following additions, besides the issue relating to ALP, certain other additions and issues relating to non transfer pricing matters were also considered for assessment in the draft assessment order. i. Provision of software services Rs.2,35,70,348 ii. Interest on loans provided to its AEs Rs.2,23,92,553 iii. Corporate guarantee provided to banks on behalf of the subsidiary Rs.2,61,79,350 Total Rs.7,21,42,251 6. The Assessing Officer reduced the following expenses fromthe export turnover in the computation of deduction under section 10A of the Act: i. Communication charges considered as attributable to the delivery of software outside India Rs. 41,67,242 ii. Salaries and implementation expenses considered as expenses in foreign currency for providing technical services outside India; and Rs. 1,60,24,557 iii. Export turnover not realised during the year Rs. 1,41,51,830 Total Rs. 3,43,43,629 ....
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....ccepted sound TP principles. It is not justified to reject the TP analysis of the international transactions undertaken by the company in the absence of any information to the contrary. For the purpose the assessee relied on decision of Delhi High Court in the case of Sony India (P) Ltd. v. CBDT reported in 288 ITR 52 (Del) wherein it was held that acceptance of the ALP declared by the assessee is the rule and its rejection is the exception. It is submitted that since the transfer pricing in India being in a nascent stage, that there are varied interpretations as to what is the ALP. This is implicitly recognised the circular 12 of 2001 dated 23.8.2001 issued by the CBDT. For this purpose the learned counsel for the assessee relied on the decision of Delhi ITAT in the case of Mentor Graphics (Noida) (P) Ltd. vs. DCIT reported in 109 ITD 101. The learned counsel for the assessee contended that in the light of the above guidance, it would be against the provisions of the law to reject the TP analysis done by the assessee. 10. The learned counsel for the assessee also submitted that there are errors in computing the net margin of the assessee. He submitted that the TPO comput....
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....s. Hence, the same should not be included in the operating cost. It is also submitted that even if any of the grounds on the comparables and the filters is allowed by this Tribunal, the assessee's margin would fall within the range of ALP. It is also submitted that the TPO has also not justified in selecting the software product companies, higher turnover companies and higher margin companies as comparables. In the rejoinder, the learned counsel for the assessee submitted that the assessee company vide its submissions before the TPO dated 16-9-2009 has worked out margins separately in respect of AE and non-AE transactions and the TPO simply rejected the claim of the assessee company for the reason that those segmental details are not audited and no books of accounts are maintained separately. It is also submitted that TPO himself followed the segmental financials in respect of comparables like Infosis. Therefore, it is submitted that the plea of segmental financials to be adopted was taken both before the TPO as well as DRP. 13. On the other hand, the learned departmental representative while relying on the order of the AO and directions of the DRP, submitted that the ass....
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....margin of the assessee from the transactions with the associated enterprises in respect of software development services. The learned counsel for the assessee has also filed before us a comparative chart explaining the computation of Net Margin, excluding the bad debts and clearly demonstrated before us that if the bad debts/reimbursements are excluded for the purpose of computing the margins on the transactions relating to the associated enterprises, the net margin comes to 19.07%, which is well comparable with the Arms Length Margin of 19% determined by the Transfer Pricing Officer. In our considered view, for computing the net margin of the assessee for the purposes of transfer pricing, only the cost related to the transaction with the Associated Enterprises has to be considered and accordingly, we approve that segmental financials is to be considered for the purpose of arriving at the net margin on the international transaction with the assessee's enterprise in respect of software development services. In that process, bad debts/reimbursements has to be excluded and segmental profitability has to be adopted. We find support in this behalf from various decisions of the Tribunal ....
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....e margin declared by the assessee company in relation to software development services, the other grounds raised in the present appeal, related to software development services, i.e., ground Nos.2,3,4,5,6,7,8,9,10,11,12,16 and 17 have become redundant, being only of academic nature, and hence, we are not inclined to go into the merits of the same. They are accordingly disposed off. 18. Now, we will take up the next issue [Ground No.13] relating to loan to its subsidiary company, 4S BV, Netherlands. The learned counsel for the assessee submitted that the DRP has taken the LIBOR at 5.78% for the TP adjustment in respect of loan transactions, whereas the actual average LIBOR rate for the year is only 4.42%. For these propositions, he relied on the decision of the Madras Bench in the case of Siva Industries and Holdings Limited in ITA No.2148/mad/2010 for the same year under consideration and submitted that the Tribunal approved the LIBOR rate at 4.42% as bench mark for determination of the Arms length interest rate. It is also submitted that, in Netherlands, the bank lending rates are based on the European inter-bank offer rates, that is, EURIBOR and hence, the EURIBOR of 2006 at 3....
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....e provided by the assessee company on behalf of its subsidiary. The assessee company provided corporate guarantee to ICICI bank UK and also DCS Group. The TPO held that guarantee is an obligation and if the principal debtor fails to honour the obligation, the guarantor is liable for the same and hence, the TPO determined a commission at the rate of 3.75% as the ALP under CUP method on the basis of the commission charged by the ICICI bank as bench mark. The DRP confirmed the action of the TPO. Hence, the assessee is in appeal before us. The learned counsel for the assessee submitted that TP legislation provides for computation of income from international transaction as per Section 92B of the Act. The corporate guarantee provided by the assessee company does not fall within the definition of international transaction. The TP legislation does not stipulate any guidelines in respect to guarantee transactions. In the absence of any charging provisions, the lower authorities are not correct in bringing aforesaid transaction in the TP study. The learned counsel for the assessee made elaborate discussions on several points that include normal practice followed by the companies in providin....
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....arely covered in favour of the assessee by the decision of Chennai Special Bench in the case of Sak Soft Limited reported in 313 ITR (AT) 353 and accordingly we held that the telecommunication charges and implementation expenses incurred by the assessee company, which has been excluded by the assessing officer from export turnover, has to be excluded from the total turnover also, while computing the admissible deduction 10A of the Act. We direct accordingly. Hence, the ground raised by assessee is allowed. 23. The Ground No.19 relates to disallowance of expenditure under section 14A of the Act. This issue is covered by the judgement of the Bombay High Court in the case of Godrej & Boyce vs. DCIT reported in 328 ITR 81 wherein it was held that Rule 8D read with section 14A[2] of the Act is not arbitrary or unreasonable but can be applied only if assessee's method is not satisfactory. Rule 8D is not retrospective in nature and the same has to be applied from the assessment year 2008- 09. For the earlier assessment years, disallowance has to be worked out on "reasonable basis" under section 14A [2] of the Act. Accordingly, we restore this issue to the file of the assessing o....