TaxTMI 
TaxTMI 
2013 (6) TMI 209
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....2009) 319 ITR 306 (SC)] has held that the amendment to first proviso and omission of the second proviso to section 43B by the Finance Act, 2003 is retrospective. The Hon'ble Delhi High Court in the case of CIT vs. Aimil Limited [(2010) 321 ITR 508 (Delhi)] has allowed deduction in respect of employees' share when the amount was paid before the due date under the Act. When we consider these two judgements, it becomes clear that both the employer's and employees' contribution are allowable as deduction if the amount of provident fund etc., though belatedly, but is paid before the due date of filing of return u/s 139(1) of the Act. As the amount in question was deposited by the assessee before the due date of filing the return of income, we hold that no disallowance is called for. This ground is allowed. 3. The second ground is against the treatment of interest income of Rs. 11,11,771 as 'Income from other sources' against the Business income claimed by the assessee. At the very outset, the learned Counsel for the assessee was fair enough to concede that the Tribunal in the assessee's own case for the immediately preceding assessment year has decided this issue in favour of the Reven....
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....p; 5. Recruitment Charges (Received) 1.19 CUP 1.03 6. Sale of Customized Software Tools (Received) 2.07 CUP 0 TOTAL 3.26 1.03 III Others (Reimbursements) 7. Management Fees (Received) 0.29 Actual 0.29 8. Reimbursement of expenses (Received) 0.43 Actual 0.47 9. Reimbursement of expenses (Paid) 0.26 Actual 0 TOTAL 0.93 0.76 GRAND TOTAL 26.37 19.33 6. Before proceeding further, we want to make it clear that there is no dispute on the international transactions under the II and III segments, viz., Distribution and Others (Reimbursements) inasmuch as the Transfer Pricing Officer (TPO) accepted these transactions at Arm's Length Price (ALP). The entire controversy revolves around the determination of ALP in respect of international transactions under the first segment, being, IT Enabled Services. The TPO noted on page 2 of his order that the Operating income of the assessee was Rs. 66.25 crore with the operating profit of Rs. 0.24 crore. He further observed that the assessee earned revenue of Rs. 31.58 crore with operating income of Rs. 3.89 crore giving percentage of Oper....
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....es have back to back arrangement of Software Services Offshore (which in the assessee's case constitute more than 70% of the transaction with its AE), wherein the entire revenue from sales of the AE are received by the Indian Companies. The AE's for the marketing services rendered are given cost + 5% margin. In absence of the said data and facts the comparables cannot be applied to the assessee's case. Thus only companies with like nature of transactions can be compared. (ii) Most of the companies referred by you like Aztec Software Ltd, Infosys Ltd. Tata Elxsi Ltd., Accel Transmatics Ltd., Mindtree Consulting Ltd., Flextronics Software Systems Ltd., Sasken Communications Ltd. etc. are large companies having high turnover and volume of business whereby having economics of scale cannot be compared. Thus the financials of the said companies cannot be bench marked or compared with that of the assessee. (iii) Most of the companies referred by you have presence worldwide whereas the assessee has presence only in USA and very nominal transaction in Germany. Thus the transactions are not comparable. (iv) Most of the companies referred by you have high intangibles whereas the assessee h....
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....foreign AE with outside comparables to prove that the price charged by it from the transactions with the AEs is at ALP. As can be noticed from internal page no. 34 of the TP Study that the assessee is harping on the selection of its AE as tested party on the basis of the US and UK Regulations. We have to decide as to whether the selection of the foreign AE as tested party is correct in the Indian context. For that purpose, we need to visit the provisions of the Chapter X of the Act with the caption "Special Provisions Relating to Avoidance of Tax" dealing with the computation of income from international transactions having regard to ALP. Section 92(1) of the Act provides that : 'Any income arising from an international transaction shall be computed having regard to the arm's length price.' The term "international transaction" has been defined in section 92B to mean 'a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or ..............'. The methodology for the computation of arm's length price has been set out in section 92C(1) to b....
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....ause (iii) ; (v) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction.' 11.2.2. A conjoint reading of the above provisions indicates that firstly, a transaction between two or more associated enterprises is called an international transaction; secondly, any income from such international transaction is required to be determined at ALP; thirdly, the ALP in respect of such international transaction should be determined by one of the prescribed methods, which also include the TNMM. Under this method, the net profit margin realized by the enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base, which is then compared with the net profit margin realized by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction. The modus operandi of determining ALP of an international transaction under this method is that firstly, the profit rate earned by the assessee from a transaction wi....
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.... the Indian transfer pricing law. Borrowing a contrary mandate of the TP provisions of other countries and reading it into our provisions is not permissible. The requirement under our law is to compute the income from an international transaction between two AEs having regard to its ALP and the same is required to be strictly adhered to as prescribed. This contention, is therefore, repelled. 11.3. Now we espouse the second contention of the ld. AR that the authorities cannot go beyond the overall profit of the group of AEs in determining the ALP of the international transaction. It has been noticed supra that the object of Chapter-X of the Act is to prevent the avoidance of tax from transactions between two or more AEs. Because of such internal relation, the affairs between the AEs are capable of being arranged in such a way so as to reduce the incidence of tax in India. It is with this avowed object that the legislature has come out with the Chapter-X by declaring that any income arising from an international transaction shall be computed having regard to the arm's length price. The matter does not end here. The legislature in its wisdom has inserted section 92C which contains a....
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....chose six foreign comparable cases to demonstrate that the price charged by it from its AEs was at ALP under the TNMM. Such point of view was sought to be canvassed before the TPO vide its letter dated November, 2009, a copy of which is available at page 367 (relevant page 374) of the paper book. In that letter it was stated by the assessee that its subsidiaries in USA and Germany were responsible for carrying out primarily sales and marketing activity along with sales and site support to clients in the respective countries. It remunerated the subsidiaries at cost plus 5% mark up. The assessee selected six comparables which were stated to be engaged in marketing functions in USA. The arithmetic mean of the cost plus mark up earned by those comparables was demonstrated at 4.07%. That is how the transactions between the assessee and its foreign AE were claimed at ALP. 12.2. There is no doubt on the fact that the assessee was following the TNMM for determining the ALP in respect of international transactions under the IT Enabled Services segment. It has been noticed above that as per rule 10B(1)(e), the ALP is determined under the TNMM with the starting point of the profit margin ....
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....140 ITD 31 (Del- Trib)(SB). As such, we are not inclined to approve the way in which the assessee has determined the ALP by mixing up the TNMM and the Cost plus method. 12.3. There is another vital reason for rejecting the assessee's method of determining the ALP. It has been greatly emphasized that the foreign AE incurred expenses on marketing and for carrying out the sales and marketing activity along with sales and site support to clients in the respective countries, for which it remunerated at cost plus 5% mark up. Since cost plus 5% mark up was higher than 4.07% of the comparables, the assessee claimed its international transactions of rendering offshore software and technical support services at arm's length. It is significant to note that the international transaction under consideration is that of receipt of amount from its AEs towards software and technical services rendered and not that of paying 5% mark up on the costs incurred by the AEs. By comparing the mark up on costs incurred by the AE, the assessee has altogether changed the complexion of the international transaction by substituting the actual transaction of 'rendering the software and technical support services....
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.... its two AEs worth Rs. 22.13 crore. This has been mentioned in para 8 and elsewhere also in his order. It is in contrast to the correct factual position recorded on page 2 of the TPO's order by which it is obvious that the amount of Rs. 1.88 crore represents the amount 'Paid' by the assessee towards Marketing fees and the other three figures totaling Rs. 20.25 crore are the amounts 'Received' by the assessee towards rendering of software services and technical support services. 14.3. Another glaring infirmity in the TPO's order which has bearing on the TP adjustment is that he determined 14.05% as Operating income / Total cost, which was later applied on the international transactions under the IT Enabled Services segment for working out the TP adjustment of Rs. 1.46 crore. In determining the Operating income / total cost of the assessee at 14.05%, the TPO took the figures on entity level inclusive of those from Distribution segment and Others (Reimbursements), which international transactions were accepted by him at ALP. In such a situation, only the figures of IT Enabled Services segment were required to be considered as he was examining the ALP in respect of this segment alone.....
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....nner, which came to be rejected without any cogent reasons. Rather there is no discussion worth the name in the TPO's order as to how the objections taken by the assessee as to the comparability of these companies, were not correct. Without going into the factual position qua each of these twenty cases as to whether they are comparable or not, in our considered opinion, the ends of justice would meet adequately if the impugned order on this issue is set aside and the matter is restored to the file of AO / TPO so that the comparability or otherwise of such cases may be discussed and decided in the light of the objections of the assessee on this issue. We sum up our conclusion that the AO / TPO would determine the ALP of ITES segment afresh by primarily considering the correct figures of operating profit to total cost in respect of IT Enabled Service segment alone and thereafter considering the mean of the OP/TC of such cases out of twenty cases noted by the TPO, which are really comparable. It is also made clear that the other international transaction of payment of a sum of Rs. 1.88 crore included by the assessee under this segment should also be benchmarked as per law. Needless t....