TaxTMI 
TaxTMI 
2012 (11) TMI 988
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...., as against this, the sales to A.E. amounted to Rs. 49,81,00,499. The assessee had disclosed its net profit to the cost ratio of 4.86%. The profit level indicator (for short "PLI") was worked out by taking net profit before tax and excluding non-operating expenditure like debtors written-off, final cost and non-operating income. The final profile of the assessee vis-a-vis the A.E. transactions and non-A.E. transaction and the net profit during the year were as under:- Particulars A.Es (Rs.) Non A.Es (Rs.) Total (Rs.) Sales (A) 49,81,00,499 4,15,09,63,188 4,6,490,63,687 Operating Expenses * (B) excluding non-operating expenses (debtors written-off) financial costs (interest and finance charges) 47,50,24,604 3,95,86,58,237 4,43,36,82,841 Net Profit (C) (A-B) 2,30,75,895 19,23,04,951 21,53,80,846 Net profit as a % of expenses (C/B) 4.86% 4.86% 4.86% 4. Since the assessee had international transactions with the A.E. for more than Rs. 15 crores, the matter was referred to the Transfer Pricing Officer (for short "TPO") under section 92CA(1) for determining the ALP of the international transactions. In the T.P study rep....
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....rice 39 73,519 3,31,13,658 3,70,87,177 Range of Arms Length Sales considering 5% variation from ALP +5% 527,177,718.58 -5% 476,970,316.81 7. Further, the learned Counsel, in support of his contentions that adjustment of ALP has to be made on international transaction with A.Es only and not on entire turnover, referred and relied upon the following case laws:- * Petro Araldite P. Ltd., ITA no.3531/Mum./2009; * T. Two International P. Ltd., ITA no.5644/Mum./2008, Tera Jewels Exports P. Ltd. ITA no.5646/Mum./2008 and Tara Ultimo P. Ltd.; * Huntsman Advanced Materials (I) P. Ltd., ITA no.8237/M./2010; * SMCC Construction India Ltd., ITA no.4333/Del./2009. 8. Besides this, he also made detail submissions on the merits of various comparable companies adopted by the TPOs and the adjustment made in ALP. 9. On the other hand, the learned Departmental Representative, relying upon the order of the TPO as well as the directions of the DRP submitted that the international transaction of the assessee were on income side as well as ....
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....ned by following any of the methods, being the most appropriate method having regard to the nature of transaction and the most appropriate method should be applied for determining of ALP. The proviso to section 92C(2) provides that where more than one price is determined by the most appropriate method, the ALP shall be taken to be the arithmetical mean of such price or at the option of the assessee a price which may vary from arithmetic mean by an amount not exceeding 5% of such arithmetical mean. The basic philosophy and concept behind the proviso is that in transfer pricing, there cannot be exact determination of ALP as there are lot of factors and variables in coming to a proper judgment. The use of range of 5% in the results reduces the effect of difference in the controlled and un-controlled transactions. The CBDT, vide Circular no.12/2001 dated 23rd August 2001, laying down the guidelines for applying the newly introduced transfer pricing regime stated as under:- "However, this is a new legislation. In the initial years of its implementation, there may be room for different interpretations leading to uncertainties with regard to determination of arm's length price of an in....
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....urnover instead of restricting the same to the international transaction with the A.E. This again is against the spirit of law as envisaged in section 92 which provides that "any income arising from an international transaction shall be computed having regard to the ALP". Thus, the ALP has to be on international transaction and not in relation to assessee's entire sales/turnover. The second proviso to section 92C, though brought in statute by the Finance Act, 2009, w.e.f. 1st October 2009, provides that "if the variation between ALP so determined and the price at which international transaction has actually been undertaken shall be deemed to be the ALP", however, the same is indicative of the preposition that the ALP is to be determined only on international transaction. This, inter-alia, means that the statute itself provides that the adjustment arising out of ALP should be with regard to international transaction and not on the entire turnover of the assessee. The transfer pricing mechanism revolves around international transaction where it has to be seen whether such transactions are at arm's length price or not. The presumption is that transactions with the independent parties ....
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.... considered. We find that the assessee's argument of AMC for maintenance of software is reasonable. We accordingly, direct the AO to verify the bills/payment vouchers in respect of the disallowance under this head. If it is found that the payment is rot for development or up gradation of the software but in the nature of AMC/maintenance then such expenditure would be considered allowable as revenue expenditure. Remaining expenditure, if any, would be capitalized and depreciation allowed as per Income Tax Rules." 17. Before us, the learned Counsel for the assessee submitted that the assessee had debited a sum of Rs. 3,72,361 to legal and professional fees towards software consultancy charges paid as under:- Systems & Software Enterprises Rs. 140,000 Nirav Kaku Rs. 150,040 Gunvantrai Kaku Rs. 37,821 Subodh Chogle Rs. 37,500 Keshavkant Dwivedi Rs. 7,500 18. He clarified that the assessee uses various software for its operations and was also in the process of getting new software. The payments made to Systems and Software ("S&S") were towards maintenance of existing software. S&S was also developing other software and the payments made for that purpo....