TaxTMI 
TaxTMI 
2013 (6) TMI 113
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....h information was not available at the time when the appellant complied with the Indian TP regulations, as per the Act; 3) erred in considering the operating margins earned by comparable companies based on the financial data pertaining to the year ended March 31, 2006 only and rejecting the financial data of comparable companies for prior two years or use of multiple year data; 4) erred by cherry picking new comparables with high profit margins. The ld AO also erred in including new comparables, without providing a sound/logical search strategy; 5) erred in adding new comparables which differ in functions undertaken, assets employed and risk assumed as compared to appellant, also whose data was not available to the appellant at the time of preparing the TP documentation; 6) erred in rejecting comparables selected in TP study report, for FY 05-06 without sound and logical reasons; 7) erred in rejecting comparable selected in TP study report, on account of losses incurred by concerned comparables in a single year i.e. for FY 05-06; 8) erred in applying the Related Party (RPT") criteria considering the value of RPT as a percentage of total sales and expenses and not considering ....
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....n in terms of Chapter X of the Act. The learned Counsel for the assessee has made detailed submissions and in the course of the hearing has also referred to the relevant material placed in the Paper Books filed before us. The Departmental side has also supported the adjustment made by the AO by referring to the relevant discussion in the orders of the authorities below. The rival submissions have been heard and the relevant record perused. 4. In order to appreciate the controversy and the rival stands, it would be appropriate to briefly note the background and the relevant facts. The appellant before us is a Company incorporated under the provisions of the Companies Act, 1956 and is inter-alia, engaged in the business of export of network security and administrative software solutions, broadly speaking software development activities. The appellant has its software development facility at Pune, which is a 100% Export Oriented Unit (EOU) approved under the Software Technology Park scheme (STPI) of the Government of India. The assessee is undertaking software development activities exclusively for its parent company, Bindview Development Corporation, US (hereinafter referred to as "....
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.... appellant that broadly six objections were raised before the lower authorities challenging the impugned adjustment and the same have been rejected for insufficient/irrelevant reasons. Firstly, it has been pointed out that the appellant-company had carried out the benchmarking of its international transaction on the basis of Transactional Net Margin Method (hereinafter referred to as "TNMM method') with the identified comparables on the basis of FAR analysis, i.e. Functions performed, risk assumed and assets utilized. The assessee had relied upon prowess and capitaline plus data base to identify comparable companies in the transfer pricing study (hereinafter referred to as "T P study") and by applying appropriate filters, eleven companies were identified as comparables for benchmarking the international transaction, details of which has been noted by the TPO in para 4 of his order. In this connection, it is pointed out that the arithmetical mean of the fully loaded cost price (FLCP) of the comparables was 4.96% whereas the FLCP mark up of the assessee was 13.33% and therefore, the declared consideration of Rs 24,48,47,439/- for the international transaction with AE was consistent w....
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....llowed any systematic search strategy to pick up additional comparables but has merely picked up high profit making comparables which can be termed as an exercise of 'cherry picking.' It has been explained that adopting comparables on a random basis without any search strategy/process, is untenable and is to be seen as a faulty selection of comparables. In this connection, reliance was placed on the observations of the Tribunal on the following decisions: i) Mentor Graphics (Noida) P Ltd. V DCIT 112 TTJ 408 (Del); ii) Skoda Auto India (P) Ltd. V. ACIT 122 TTJ 699 (Pune); and, iii) Philips Software Centre P Ltd. V. ACIT 119 TTJ 721 (Bang) Apart from the aforesaid, the learned Counsel also referred to detailed written submissions on each of the comparables to establish as to how the same are not liable to be included for the purposes of benchmarking the international transaction in question. Thirdly, the plea of the assessee is that the TPO unjustly rejected 9 comparables out of the 11 comparables selected by the assessee. In this connection, it was pointed out that the assessee had selected the comparable companies based on a methodological search strategy and reference was invi....
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....); ii) Philips Software Centre P Ltd. V. ACIT 119 TTJ 721 (Bang); and, iii) Egain Communications P. Ltd. V. ITO 118 TTJ 354 (Pune). 8. The next plea raised is that the TPO erred in not applying the proviso to section 92C(2) of the Act and has failed to grant the relief for the downward adjustment of 5 percent from the arithmetic mean, which is permitted to and which has also been opted for by the appellant. It was submitted that the TPO has applied the amended proviso to section 92C(2) in the instant case. However, according to the assessee, the amendment in proviso to section 92C(2) is substantive amendment and not a procedural amendment and, therefore, the same should apply prospectively. Reliance has been placed on the judgment of the Hon'ble Supreme court in the case of Kehavan Madhava Menon v State of Bombay (AIR 1951 SC 128). According to the appellant, if the amendment is considered prospective in nature, the old law would apply and in such a case, the assessee should be able to claim benefit of +/-5%. Reliance was placed on the decision of the Delhi Bench of the Tribunal in the case of Sony India (P) Ltd 114 ITD 448. Further reliance has been placed on the following deci....
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....the income arising from the impugned international transactions be accepted at the stated consideration which has been computed having regard to the arm's length price. 10. On the other hand, the learned Departmental Representative, appearing for the Revenue, has defended the addition made by the Assessing Officer. With regard to the assessee's contention that only the data available at the time of analysis when the international transaction had been entered into should be used, the learned Departmental Representative submitted that such argument is not acceptable in view of the prescription of rule 10B(4) of the Income-tax Rules. It was submitted that Rule 10B(4) provides use of the data relating to the financial year in which the international transaction has been entered into and does not say specifically that contemporaneous data or only such data which is available at the time of transaction or at the time of conducting of analysis by the assessee, is alone to be used. Even with regard to the assessee's plea with reference to the OECD guidelines in this regard, it has been pointed out that the approach of the TPO in using the information which is currently in public domain at ....
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....hout any working or definite outlining of the differences in the risk profile of the comparable companies and the tested party, therefore, according to the learned Departmental Representative the adjustment allowed by the TPO on account of difference in working capital requirements was adequate and reasonable on the facts of the instant case. In this manner, the learned Departmental Representative has justified the order of the TPO. 11. We have carefully considered the rival submissions. As noted earlier, the pith and substance of the dispute raised by the assessee is against the action of the Revenue in determining ALP of the appellant's international transaction of provision of software development services to its AE at R 26,93,99,396/- as against Rs 24,48,47,439/- declared by the assessee. In this connection, the first area of dispute is with regard to the claim of the assessee seeking benefit of the option available under the erstwhile proviso to section 92C(2) of the Act for adjustment of +/-5% variation for the purposes of computing the ALP. The Revenue, on the other hand, has contended that since the impugned assessment was made after 1.10.2009, the provisions of Proviso to....
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.... to all assessees, irrespective of the fact that price of the international transaction disclosed by them exceeds the margin prescribed in the Proviso. 21. So, however, the other argument set up by the Revenue and which has been more potently argued is to the effect that the benefit of such Proviso is not available to the assessee in the instant case, because the said Proviso has been amended by the Finance (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 Transfe....
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....isions as they stand on the first day of April of the assessment year must apply to the assessment of the year and the modification of the provisions during the pendency of assessment would not generally prejudice the rights of the assessee. Furthermore, we are fortified by the intention of the Legislature as found from circular No 5 of 2010 (supra) whereby in para 37.5, the applicability 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.....
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.... such withdrawal shall be effective only after 30.9.2010, even if such Corrigendum is accepted as valid. We may note here that the appellant has assailed the validity of the Corrigendum itself on which we have not made any determination. Therefore, the Corrigendum dated 30.9.2010, in our considered opinion, has no bearing so as to disentitle the assessee from its claim of the benefit of +/-5% in terms of the erstwhile proviso to section 92C(2) of the Act. In coming to the aforesaid, we have been guided by the parity of reasoning laid down in the 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 5....
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....have carefully examined the rival stands on this aspect. Section 92C of the Act prescribes the determination of the ALP in relation to an international transaction on the basis of most appropriate method prescribed therein. Rule 10B lays down the manner in which the ALP in relation to an international transaction is to be determined for the purposes of section 92C(2) of the Act. Sub-rule (4) of Rule 10B prescribes that data to be used in analysing the comparability of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction has been entered into. On the strength of the aforesaid provision, Revenue has sought to justify the action of the TPO of having used the data of the financial year 2005-06 of the comparable companies in order to benchmark the international transaction of the assessee, which has been carried out during the instant year. The assessee, on the other hand, seeks support from the following Proviso to Rule 10B(4) which reads as under: "10B(4) The data to be used in analysing the comparability of an uncontrolled transaction with an international transaction shall be the data r....
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....tion to the impugned international transaction. Therefore, having regard to the facts and circumstances of the present case, we are unable to accept such objection of the assessee against the action of TPO having used the data of the financial year 2005-06 of the comparable companies in order to benchmark the impugned international transaction. Thus, on this aspect, the assessee has to fail. 14. Apart from the aforesaid, the appellant has assailed the addition on other aspects also. One of the aspect relates to the selection of comparables by the TPO. On this, the first issue raised is regarding the inclusion of Compucon Software Ltd. as a comparable by the TPO. The assessee objected to the inclusion of this company on the plea that it has a high percentage of Related Party Transactions (RPT) and, therefore, the same was liable to be excluded. In support, the assessee has also referred to a summary of search strategy at pages 79 to 80 of the Paper Book to point out that it had set up a filter in terms of which companies having RPT in excess of 10% were excluded. The TPO, however, has considered exclusion of a company on the basis of RPT beyond a threshold of 25% as against 10% con....