TaxTMI 
TaxTMI 
2012 (5) TMI 165
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.... Panel (hereinafter referred to as "DRP") has erred in confirming the same. Ground No. 2: Re-computation of Arm's Length Price which has resulted in an addition of Rs. 98,20,024/-. Under this ground of appeal we have the following specific grounds of appeals: a. The learned AC has erred in making a reference without recording any reasons based on which he reached the conclusion that it was 'expedient and necessary' to refer the matter to the Transfer Pricing Officer ("TPO") for computation of the arm's length price, as is required under section 92CA(1) and Hon'ble DRP has erred in upholding the same. b. The learned TPO has erred on facts and law by rejecting the transfer pricing (TP) documentation maintained by the Appellant as per Rules and Hon'ble DRP has erred in upholding the same. c. The learned TPO has erred on law by undertaking the fresh search for comparability analysis (FY 2005-06) as on December 03, 2008, which is beyond the date of compliance i.e. October 31, 2006 resulting in 'impossibility of performance' and against the premise of maintenance of 'contemporaneous documentation'. The same is also ....
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.... risk free nature of the Appellant and not granting adjustment on account of differential risk borne by the comparables. However, the learned TPO has allowed working capital adjustment of 2% considering the nature of risk free business of the Appellant in the assessment year 2007-08. m. The learned TPO has erred on law by not granting the Appellant the option to chose a price that falls within +/- 5% range of the arithmetic mean of the comparables, as contemplated under the proviso to section 92C(2) as it stood at the time of preparing the TP documentation. Accordingly, this has resulted in hardship for Appellant, having regard to the principle of natural justice and Hon'ble DRP has erred in upholding the same. n. The learned TPO erred on facts by adding the amount of Rs. 1,77,221/- to the operating cost, which was received as reimbursement on cost to cost basis from the associated enterprise towards cost directly incurred on behalf of the associated enterprise. Also the learned TPO has not given an opportunity of being heard to the Appellant on this matter, as the same was correctly treated by not including in the operating cost in the show-cause notice issue....
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....ilable on record. In the present case, it is not in dispute that the assessee claimed deduction under section 10A of the Act, however, the Assessing Officer while framing the assessment under section 143(3) of the Act computed the deduction under section 10A of the Act by reducing lease line charges from export turnover, but not from the total turnover. 8. This issue now has been settled by the Special Bench of ITAT, Chennai in the case of Sak Soft Ltd. (supra) by holding 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 provision 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 ....
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....uous to interpret section 10B in a manner different from those two sections merely because there is no definition of "total turnover" in that section. "Export turnover" as defined in these sections excludes freight, telecom charges or insurance attributable to the delivery of the computer software outside India or expenses, if any, incurred in foreign exchange in providing technical services outside India. Thus statutory parity is maintained between export turnover and total turnover in these sections. There is no reason why such parity cannot be maintained between export turnover and total turnover in section 10B just because "total turnover" has not been defined in that section."' 9. Similar view has been taken by the Hon'ble High Court of Bombay in the case of Gem Plus Jewellery India Ltd. (supra) wherein it has been held as under : "Under sub-section 10A of the Income Tax Act, 1961, a deduction is allowed from the total income of the assessee of such profits and gains as are derived by an undertaking from the export of articles or things or computer software for a period of ten consecutive assessment years commencing from the assessment year relevant to the previo....
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....xport turnover, in the numerator must have the same meaning as the export turnover which is constituent element of the total turnover in the denominator. The legislature has provided a definition of the expression "export turnover" in Expln. 2 to s. 10A which the expression is defined to mean the consideration in respect of export by the undertaking of articles, things or computer software received in or brought into India by the assessee in convertible foreign exchange but so as not to include inter alia freight, telecommunication charges or insurance attributable to the delivery of the articles, things or software outside India. Therefore in computing the export turnover the legislature has made a specific exclusion of freight and insurance charges. The submission which has been urged on behalf of the revenue is that while freight and insurance charges are liable to be excluded in computing export turnover, a similar exclusion has not been provided in regard to total turnover. The submission of the revenue, however, misses the point that the expression "total turnover" has not been defined at all by Parliament for the purposes of s.10A. However, the expression "export turnover" h....
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....ting to Rs. 19,60,808 both from export turnover as well as total turnover. 12. The next issue vide ground No. 2(a) to (k) relates to addition on account of recomputation of arms' length price (ALP). The facts relating to this issue in brief are that the AO during the course of assessment proceedings noticed that the assessee had international transactions during the financial year relevant to assessment year under consideration. He therefore referred the case to the Transfer Pricing Officer (TPO) to determine the ALP after obtaining necessary approval from the ld. CIT, Bangalore-I, Bangalore u/s. 92CA of the Act and the TPO vide order dated 30.10.2009 informed the AO that an adjustment of Rs. 98,83,653 is required to be made to the income of the assessee consequent to the determination of ALP as under: Operating cost (Rs.11,17,26,443 + Rs. 1,77,221) Rs. 11,19,03,664/- Arms length Margin 18.86% of the Operating Cost Arms Length Price (ALP) @ 118.86% of operating cost Rs. 13,30,08,695/- Price shown in the international transactions (Rs. 12,29,47,821 + Rs. 1,77,221) Rs. 12,31,25,042/- Shortfall being adjustment u/s. 92CA Rs. 98,83,653/- 13. The ....
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....ility analysis for software development services:- "(a) Companies not having financial information for the above specified range of period are rejected. (b) Companies having Nil sales or sales less than Rs. 1 crore are rejected. (c) Companies having sales more than Rs. 200 crore are rejected. (d) Companies operating in different industry/products/services are rejected. (e) Companies having insufficient information about products or functions or financials, are rejected. (f) Restructuring, sick and loss making companies are rejected. 16. After application of all the above filters, the assessee selected 32 companies as broadly comparable companies. The weighted average Net Operating Profit on Cost (NCP) margins of those broadly comparable companies ranged from 11.83% to 30.36% with arithmetic mean of 8.54% translating the arms' length range of 3.54% to 13.54%. It was explained that the assessee earned NCP margin of 19.80% (after excluding start-up cost from the total cost)/10.04% (before excluding the start-up cost from the total cost) which exceeds/was within the arms' length range of 3.54% to 13.54%. Therefore the int....
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....llowing manner:- - Companies with turnover greater than Rs. 2000 crores as large firms. - Companies with turnover between Rs. 2000 crores to Rs. 200 crores as medium sized firms. - Companies with turnover less than Rs. 200 crores as smaller firms. The average NCP of 20 comparable companies selected by the TPO when indexed on the basis of the said study clearly depicted that the scale of operations had clear nexus with the operating margin as under:- - Large firms (One) 40.38% - Medium firms (Five) 19.13% - Small firms (Fourteen) 17.06% But the assessee's case was of a categorically small sized company since the turnover of the assessee was Rs. 12.29 crores. Therefore 7 companies having turnover of more than Rs. 200 crores should have been excluded in which case the average NCP would come down from 17.28% to 14.13% before giving effect of working capital adjustment. 20. It was explained that the TPO had given adjustment for working capital to the extent of 1.89% of NCP, however if the 8 companies are rejected, then the working capital adjustment would work out to 2.18% and consequently the final NCP after considering....
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.... that the AO had not recorded any reasons to reach the conclusion that it was expedient and necessary to refer the matter to the TPO for computation of the ALP. It was further contended that the TPO considered the fresh search for comparability analysis as on 03.12.2008 which was beyond the date of compliance i.e., 31.10.2006 resulting in impossibility of performance and against the premise of maintenance of contemporaneous documentation and also exercised his power u/s. 133(6) of the Act to obtain selective information which was not available in the public domain. Furthermore, the TPO used single year data for computation of margin of comparable companies and rejected the multiple year data used by the assessee. 24. It was further contended that the TPO while deciding upon the sales turnover as a quantitative filter had only considered minimum turnover as being valid and had not kept any limit on the turnover for comparability which had led to a situation where the comparable set as identified by the TPO consisted of companies which had a turnover range from Rs. 1.02 crores (Lucid Software Ltd.) to Rs. 9028 crores (Infosys Technologies Ltd.) as against the turnover of the asses....
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....ad been incurring losses, while for the year under consideration the assessee had to incur a lot of traveling expenses on training its staff in USA and also incurred heavy expenditure on training and recruitment, which were peculiar only to a start-up company and not to be found in any established company, if the start-up expenses were excluded, then the NCP of the assessee would have been 19.80%, but the TPO ignored the start-up cost. It was pointed out that the TPO rejected certain comparables selected by the assessee, had the analysis been modified incorporating the comparables selected by the assessee, the result ALP would increasingly skew in favour of the assessee. 25. Reliance was placed on the following case laws: (a) Dy. CIT v. Quark Systems (P.) Ltd. [2010] 38 SOT 307 (Chd.) (SB) (b) DHL Express (India) (P.) Ltd. v. Asstt. CIT [2011] 46 SOT 379/11 taxmann.com 40 (Mum.) (c) Dy. CIT v. Deloitte Consulting India (P.) Ltd. [2011] 12 taxmann.com 500 (Hyd.) (d) Agnity India Technologies (P.) Ltd. [IT Appeal No. 3856 (Delhi) of 2010] (e) CIT v. Rakhra Technologies (P.) Ltd. [2011] 203 Taxman 154/15 taxmann.com 266 (Punj. & Har.) ....
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....f the assessee's PB and proposed to redetermine the ALP on the basis of 20 comparables and subsequently issued another notice on 20.07.09 and proposed to adopt 14 companies as comparables, but in the final order the TPO selected 22 companies as comparables. In other words, 8 additional companies were considered as comparables apart from those which were proposed in the notice dated 20.07.09, copy of which is placed at pages 305 to 355 of the assessee's compilation. It therefore appears that new companies were adopted 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) Pvt. Ltd., Bangalore ....
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....against 52.74% adopted in the draft assessment order. The AO adopted the adjustment at Rs. 98,20,024 as against the earlier adjustment of Rs. 98,83,653. Now the assessee is in appeal. 31. The ld. counsel for the assessee submitted that the assessee should have been given a standard deduction of 5% as provided under proviso to section 92C(2) of the Act before making adjustment for the transfer price. Reliance was placed on the following case laws: 1. Genisys Integrating Systems (India) (P.) Ltd. (supra) 2. Tatra Vectra Motors Ltd. [IT Appeal No. 1284/Bang/2010, dated 31-1-2012]. 32. 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. It was further 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 ....
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....sessee. 14. On a similar issue, the ITAT Delhi Bench in the case of Sony India Pvt. Ltd. v. DCIT (2009) 315 ITR (AT) 150 has held as under: "The proviso to section 92C(2) of the Act consists mainly 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 ....
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....f Rs. 1,76,56,164, however, while doing so, he did not allow the benefit of the adjustment as provided in the proviso to section 92C(2) of the Act and the contention of the ld. CIT(DR) was that since 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 careful....
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....No 2) Act, 2009 with effect from 1.10.2009 which reads as under: "Provided that where more than one price is determined by the most appropriate method, the arm's length price shall be taken 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 Depart....
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....cability of the above amendment has been stated to be with effect from 1.4.2009 so as to apply in respect of assessment year 2009-10 and subsequent years. In this regard, we also find that the Delhi 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; ....