TaxTMI 
TaxTMI 
2012 (5) TMI 153
X X X X Extracts X X X X
X X X X Extracts X X X X
....Dispute Resolution Panel also being jurisdictional Commissioner/Directors of Income Tax of the appellant, the constitution of the Dispute Resolution Panel is bad in law. 5. not appreciating that the charging or computation provision relating to income under the head "Profits & Gains of Business or Profession" do not refer to or include the amounts computed under Chapter X' and therefore addition under Chapter X is bad in law. 6. adopting a flawed process of issuing notices u/s 133(6) and relying on the same without providing complete information and opportunity to cross examine to the appellant. 7. rejecting multiple year data, comparables and transfer pricing analysis of the appellant on unjustifiable grounds. 8. not appreciating that the law does not compel adopting many (or any minimum) companies as comparables and that the appellant could justify the price paid/charged on the basis of anyone comparable only. 9. doing fresh transfer pricing analysis, adopting current year data and inappropriate filters in such analysis. 10. Considering the data which was not available to the appellant at the time of complying with the TP ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....icing Officer (TPO), who determined the arms' length price (ALP) after obtaining necessary approval of the CIT, Bangalore-I, Bangalore u/s. 92CA of the Act and as per the order of the TPO dated 26.10.2009, an adjustment of Rs. 1,19,16,091 was required to be made to the income of the assessee consequent to the determination of ALP. 5. The AO forwarded the draft assessment order dated 17.12.2009 to the assessee to file its objection before the Dispute Resolution Panel (DRP), who directed to complete the assessment after taking into consideration the detailed discussions on various issues vide its directions issued under sub-section 5 of section 144C of the Act r.w. sub-section 8 of section 144C of the Act. The DRP directed to modify the assessment order after re-working the correct margin at 51.73% as against 52.74%. The AO adopted the adjustment at Rs. 1,18,78,437 as against the earlier adjustment amounting to Rs. 1,19,16,091. Now the assessee is in appeal. 6. The ld. counsel for the assessee submitted that the assessee operated as a dedicated development centre for its associated enterprise (AE) Insilica Inc. USA and was compensated on cost plus basis for its services. Th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....l adjustment of 2.02%, the adjusted arithmetic mean was determined at 18.46%. Accordingly the transfer pricing adjustment for software development services was determined by the TPO at Rs. 1,19,16,091. It was further submitted that the assessee filed detailed objection with the Dispute Resolution Panel (DRP) on 18.01.10, but those objections had been rejected by the DRP, except for correcting an error in the margin computation of one comparable viz., Megasoft and the order of the DRP was brief and cryptic. However, the AO while determining the total income incorporated the TP adjustment as per the directions of the DRP. 8. It was further contended that the assessee in its transfer pricing analysis applied turnover filter of Rs. 5 crores to Rs. 250 crores, but the TPO applied lower turnover filter of Rs. 1 crore and had not applied the upper turnover limit on the ground that there was no relationship between sales and margins. It was submitted that size of the comparable is an important factor in comparability and this also had been recognized by the statute especially in Rule 10B(3) of the Income-tax Rules, 1962 which lays down guidelines for comparing an uncontrolled transactio....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ing Guidance Note, wherein it has been observed that a transaction entered into by a Rs. 1000 crores company cannot be compared with the transaction entered into by a Rs. 10 crore company. It was contended that the TPO's range (Rs.1 crore to infinity) had resulted in selection of companies like Infosys which is 918 times bigger than the assessee (turnover of Rs. 9,028 crores as compared to Rs. 9.83 crores of assessee's AE transactions). It was accordingly submitted that a proper turnover range should have been applied in selecting comparable uncontrolled companies. It was further submitted that in assessee's case, the turnover range of Rs. 1 crore at the lower end to Rs. 200 crores at the higher end may be adopted while choosing the comparables. Reliance was placed on the decision of this Bench of the Tribunal in the case of Genesis Integrating Systems (India) (P.) Ltd. v. DCIT in ITA No.1231/Bang/2010. Alternatively, it was submitted that a selection on the basis of size may be made based on the NASSCOM categorization which recognizes following three categories based on turnover: Tier I : Greater than USD 1 billion (approx. Rs. 5,000 crores) Tier II: betwee....
X X X X Extracts X X X X
X X X X Extracts X X X X
....on specified shall be supported by authentic documents, but in the assessee's case, the TPO had not established whether the information obtained by way of notice u/s. 133(6) of the Act was authentic and complete, particularly when there were differences between the Annual Reports of the comparables and the replies received u/s. 133(6) of the Act. It was emphasized that in spite of differences, the TPO relied and completed assessment based on replies u/s. 133(6) of the Act, in preference to annual reports of the companies which were audited by professionally qualified Chartered Accountant and approved by the Board of Directors, an instance was quoted for M/s. Sankhya Infotech, which was selected as comparable in the preceding assessment year on the ground that it was software development company despite the objection of the assessee that it was a product company and for the year under consideration the said company, i.e., M/s. Sankhya Infotech had been rejected on the ground that it was a software product company (based on reply u/s. 133(6) of the Act), therefore the inconsistency raised doubts as to whether the entire process was transparent as also fair. It was contended that ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the final order passed u/s. 92CA of the Act without giving an opportunity of being heard to the assessee, the margin of this company was adopted at 52.74% in the final computation of the arms' length price. The ld. counsel for the assessee further submitted that before the DRP it was submitted that this company was having revenues from software products as well as software revenues. The said contention was fortified by the reply received from the company, M/s. Megasoft Ltd. A reference was made to page 40 of PB-II which is a copy of the reply given by M/s. Megasoft Ltd. It was emphasized that the DRP rejected the assessee's contention and concluded that 65% of the efforts of the product division could be categorized as resulting to software services, the residual product efforts, performance and revenues comprised only of 23% of the total revenues. The contribution of the product division to the overall revenues under such analysis being less than 25% of the company in the opinion of the DRP, was to be regarded as predominantly software service company and hence eligible being adopted as a comparable and that the product segment in the case of M/s. Megasoft Ltd. had an empl....
X X X X Extracts X X X X
X X X X Extracts X X X X
....such those should have been rejected as comparables and if those companies considered by the TPO and the DRP were to be removed from the list of comparables, then the margins that remained after excluding the companies did not deserve to be made as comparables. It was contended that the assessee's margins after excluding non-operating costs was 11.55% which was higher as compared to the adjusted margin of the comparables using turnover filter of Rs. 1 crore to Rs. 200 crores after eliminating KALS, Tata Elxsi and Accel Transmatics Ltd. and the margin of the assessee was equal to the adjusted margin of the comparables using turnover filter of Rs. 1 crore to Rs. 500 crores after eliminating KALS, Tata Elxsi and Accel Transmatics Ltd. 15. It was further stated that even at the unadjusted level and without eliminating KALS, Tata Elexsi, Accel, Infosys Technologies, the differential was within the permissible 5% bandwidth, the benefit of which was available to the assessee as per Circular No.12 of 2001. Accordingly it was submitted that the assessee's international transactions relating to software development services were at arms' length, therefore addition made by the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed by the TPO as comparables without affording opportunity to the assessee to present its objections to their adoption. It is well settled that nobody should be condemned unheard as per the maxim audi alteram partem, but in the present case nothing is brought on record to substantiate that the TPO/AO while adopting additional comparables had provided opportunity of being heard to the assessee. Therefore this issue deserves to be set aside to be decided afresh at the level of the Assessing Officer. For the aforesaid view, we are fortified by the order dated 31.01.2012 of the ITAT 'A' Bench Bangalore in the case of Genesis Microchip (I) (P.) Ltd. [It Appeal No. 1254 (Bang.) of 2010, dated 30-1-2012. 19. In the present case, the AO adopted M/s. Infosys Technologies Ltd., KALS Information System Ltd., Accel Transmatics Ltd. and Tata Elxsi Ltd. as comparables on the basis of data which was obtained by him in response of the notices issued u/s. 133(6) of the Act, however no opportunity of being heard was provided to the assessee for rebuttal, therefore the Assessing Officer was not justified in considering those comparables while working out the ALP in assessee's case. In ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Dy. CIT [2011] 45 SOT 78 (Pune) (URO) (10.) TNT India (P.) Ltd. v. Asstt. CIT [2011] 45 SOT 471/10 taxmann.com 161 (Bang.) (11) Abhishek Auto Industries Ltd. v. Dy. CIT [IT Appeal No. 1433 (Delhi) of 2009, dated 12-11-2010] (12) Tecnimount ICB (P.) Ltd. v. Asstt. CIT [2011] 11 taxmann.com 49 (Mum.) (13) Tatra Vectra Motors Ltd. v. Dy. CIT [2012] 20 taxmann.com 131 (Bang.) 23. The ld. counsel for the assessee contended that the contention of the assessee was rejected by the DRP on the ground that amendment to proviso to section 92C was clarificatory in nature and therefore retrospective in effect. It was contended that the amendment to proviso to section 92C was not retrospective as clarified by the CBDT by way of letter No.F.142/13/2010-SO(TPL) dated 30.09.2010 and it was contended that a deeming provision has been created to adopt an arms' length price if the price actually undertaken by the assessee does not exceed 5% of the amount at which international transaction has actually been undertaken instead of reckoning the price which is determined by the TPO which was the position under unamended proviso to section 92C(2) of the Act. It wa....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ainly of two parts: (a) where more than one price is determined by the most appropriate method, then the arm's length price shall be taken to be the arithmetical mean of such price; or (b) at the option of the assessee, a price which may vary from the arithmetical mean by an amount not exceeding 5 per cent of such arithmetical mean. The first limb of the proviso has general application. There is no option with nor any sort of concession allowed to the assessee. The arm's length price so determined may be accepted or contested by the assessee or by any aggrieved person in accordance with the statutory provisions. It is a statutory levy without any option. The second limb of the proviso gives "an option" to the assessee to take the arm's length price which may vary from the arithmetic mean by an amount not exceeding 5 per cent of such arithmetic mean. The word "option" is synonymous with "choice" or "preference". Therefore, it is the choice of the assessee to take the arm's length price with a marginal benefit and not the arithmetical mean determined as the most appropriate method. There is nothing in the language to restrict the application of the provision ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e the impugned assessment was made after 1.10.2009, the amended proviso to section 92C(2) of the Act shall apply in this case, which are applicable from w.e.f. 1.10.2009. and shall accordingly apply to the cases in which the proceedings were pending before the TPO on or after such date. Therefore, the benefit of +/- 5% intended by the erstwhile proviso to section 92C(2) of the Act was not available to the assessee. Accordingly the ld. CIT(DR) had strongly defended the assessment framed by the AO and his method of determining the ALP. 16. As regards to the applicability of the amended provisions in proviso to section 92C(2) of the Act which is applicable w.e.f. 1.10.2009 is concerned, it is noticed that this issue has been adjudicated by the ITAT Pune Bench "A", Pune in ITA No.1350/PN/2010 in the case of Starnet Networks (India) P. Ltd. v. DCIT (supra), wherein the relevant findings has been given in paras 20 to 23 of the order dated 03.10.2011 and read as under: "20. We have carefully considered the rival submissions. In this case, a pertinent issue which has been vehemently agitated by the appellant is with regard to its claim of seeking benefit of the option available under....
X X X X Extracts X X X X
X X X X Extracts X X X X
....to be the arithmetical mean of such prices: Provided further that if the variation between the arm's length price so determined and price at which the international transaction has actually been undertaken does not exceed five per cent of the latter, the price at which the international transaction has actually been undertaken shall be deemed to be the arm's length price." The case set up by the Revenue is that the amended Proviso shall govern the determination of ALP in the present case, inasmuch as the amended provisions were on statute when the proceedings were carried on by the Transfer Pricing Officer (TPO). As per the Revenue, the amended Proviso would have a retrospective operation and in any case, would be applicable to the proceedings which are pending before the TPO on insertion of the amended Proviso, which has been inserted by the Finance (No. 2) Act, 2009 with effect from 1.10.2009 and, in this case, the TPO has passed his order on 30.10.2009. The learned Departmental Representative has also referred to the CBDT Circular No 5/2010 (supra) read with Corrigendum dated 30.9.2010 issued by the CBDT in this regard. Per contra, the stand of the assessee is that....
X X X X Extracts X X X X
X X X X Extracts X X X X
....i Bench of the Tribunal in the case of ACIT v. UE Trade Corporation India (P) Ltd. vide ITA No 4405(Del)/2009 dt 24.12.2010 has observed that the proviso inserted by the Finance (No 2) Act, 2009 would not apply to an assessment year prior to its insertion. In this view of the matter, we therefore find no justification to deny the benefit of +/-5% to the assessee in terms of the erstwhile Proviso for the purposes of computing the ALP. 23. However, before parting we may also refer to a Corrigendum dated 30.9.2010 by the CBDT by way of which para 37.5 of the circular No 5/2010 (supra) has been sought to be modified. The Corrigendum reads as under: "CORRIGENDUM In partial modification of Circular No. 5/2010 dated 03.6.2010, (i) In para 37.5 of the said Circular, for the lines "the above amendment has been made applicable with effect from 1st April, 2009 and will accordingly apply in respect of assessment year 2009-10 and subsequent years." the following lines shall be read; "the above amendment has been made applicable with effect from 1st October, 2009 and shall accordingly apply in relation to all cases in which proceedings are pending before the Transfer Pricing....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... judgments of the Hon'ble Bombay High Court in the cases of BASF (India) Ltd. v. CIT 280 ITR 136 (Bom); Shakti Raj Films Distributors v. CIT 213 ITR 20 (Bom); and, Unit Trust of India & Anrs. v. ITO 249 ITR 612 (Bom). The Hon'ble High Court has opined in the case of BASF (India) Ltd. (supra) that the circulars which are in force during the relevant period are to be applied and the subsequent circulars either withdrawing or modifying the earlier circulars have no application. Moreover, the circulars in the nature of concession can be withdrawn prospectively only as held by the Hon'ble Supreme Court in the case of State Bank of Travancore v. CIT 50 CTR 102 (SC). Considering all these aspects, we therefore find no justification in the action of the lower authorities in disentitling the assessee from its claim for the benefit of +/-5% to compute ALP in terms of the erstwhile proviso to section 92C(2) of the Act. We order accordingly." 17. We therefore considering the totality of the facts and respectfully following the aforesaid referred to orders of the co-ordinate benches of the ITAT at Delhi & Pune, direct the Assessing Officer to allow the benefit of +/-5% to the ass....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nai in the case of ITO v. Sak Soft Ltd. [2009] 30 SOT 55 wherein it has been held as under: "To say that in the absence of any definition of "total turnover" for the purpose of section 10B, there is no authority to exclude anything from the expression as understood in general parlance would be wrong, as there has to be an element of turnover in the receipt if it has to be included in the total turnover. That element is missing in the case of freight, telecom charges or insurance attributable to the delivery of the goods outside India and expenses incurred in foreign exchange in connection with the providing of technical services outside India. These receipts can only be received by the assessee as reimbursement of such expenses incurred by him. Mere reimbursement of expenses cannot have an element of turnover. It is only in recognition of this position that in the definition of "export turnover" in section 10B, the aforesaid two items have been directed to be excluded. Secondly, the definition of export turnover contemplates that the amount received by the assessee in convertible foreign exchange should represent "consideration" in respect of the export. Any reimbursement of the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....oss viz., both current year loss and brought forward losses and depreciation. He accordingly held that deduction u/s. 10A will have to be allowed only after set off of such loss as per provisions of section 72 of the Act. Reliance was placed on the judgment of the Hon'ble Karnataka High Court in the case of CIT v. Himatasingike Seide Ltd. [2006] 286 ITR 55/156 Taxman 151. Now the assessee is in appeal. 34. The ld. counsel for the assessee at the very outset stated that this issue is now covered in favour of the assessee and against the department by the judgment of Hon'ble jurisdictional High Court order dated 9.08.2011 in the case of Yokogawa India Ltd. [IT Appeal No. 78 of 2011, dated 9-8-2011] copy of the said judgment was furnished. 35. The ld. DR although supported the order of the AO, but could not controvert the aforesaid contention of the ld. counsel for the assessee. 36. After considering the submissions of both the parties and the material on record, it is noticed that this issue has not been settled by the Hon'ble jurisdictional High Court in the case of Yokogawa India Ltd., (supra). Their Lordships in para 31 of the said order observed as under: ....