TaxTMI 
TaxTMI 
2011 (10) TMI 633
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....rities than the value declared by the assessee. 3. In brief the relevant factual backdrop leading up to the present dispute can be summarized as follows. The appellant is a company incorporated under the provisions of the Companies Act, 1956 and is a 100% owned subsidiary of M/s Starent Networks Corporation, USA (hereinafter referred to as 'SNC'). The appellant is engaged in carrying out research, development and testing activities in the field of software development and export thereof exclusively to its parent holding company, i.e. SNC. The appellant company has three undertakings in India located at Pune and Bangalore, which are stated to be approved under the Software Technology Park scheme of the Government of India entitled to the benefits provided under section 10A of the Act. 4. During the year under consideration, assessee entered into an international transaction with its Associated Enterprise(AE), i.e. SNC on account of software development services for a stated consideration of Rs. 17,47,15,470/-. In the course of assessment proceedings, the Assessing officer made a reference to the Transfer Pricing Officer (TPO) to determine the ALP with reference to the above transa....
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....ing profit/operating cost was used as the relevant PLI and average PLI was ascertained at 8.72%. For the year under consideration, the appellant had earned a margin of 11.62% and since the margin earned by the appellant was higher than the average of margin earned by the comparable companies, the instant international transaction with the AE for the provision of software development services was canvassed by the assessee as having been concluded at an arm's length. 6. The aforesaid determination of ALP by the appellant was not found acceptable by the TPO. Firstly, the TPO rejected one of the filters applied by the appellant, i.e. the filter on account of abnormal PLI (i.e. negative PLI or PLI greater than 50%) for the reason that the functional comparability, assets employed and risks undertaken should ultimately alone matter in identifying the comparable companies. Further, the TPO cited two more filters for rejection of comparable companies, namely, Companies with negative net worth; and, Companies having ratio of personnel expenses to total expenses less than 30% In this way, out of the 62 companies selected by the appellant as comparables, the TPO rejected 56 companies for var....
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....mpute the value of the international transaction adopting TNM Method and PLI of 20% on the cost; and, - that as regards the contention of the appellant regarding the allowability of benefit of +/-5% as per proviso to section 92C of the Act, the DRP was of the view that the safe harbour of +/-5% is not available to the appellant; As a result of the above directions, the final set of comparable companies adopted are as under: S.No Name of the company Margin (OP/TC)(%) 1 NUC Soft Ltd 3.69% 2 R Systems International Ltd 21.86% 3 SIP Technologies and Exports Ltd 20.92% 4 Compucom Software Ltd (Seg) 33.52% Arithmetic mean 20.00% In terms of the aforesaid directions, the Assessing Officer finalized the assessment under section 143(3) r.w.s. 144C of the Act, vide order dated 28.9.2010 after making an addition of Rs. 1,31,17,207/- on account of transfer pricing adjustment. Aggrieved by such an addition, the appellant is in appeal before the Tribunal. 7. In the above background, the rival parties have made detailed submissions. The appellant company has also furnished an exhaustive Paper Book containing, inter alia, the written submissions made before the respec....
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.... adopting the said company as a comparable, the TPO did not consider that it has related party transactions which comprised more than 25% of the total revenue for the financial year 2005-06. It has been submitted that the appellant applied a filter of rejecting companies having related party transactions in excess of 25% and our attention was drawn to pages 244-245 of the Paper Book, wherein is placed the relevant workings in this regard. On this basis, it was contended that the said company be excluded from the final set of comparable companies to arrive at the ALP of the international transaction in question. 10. It is further contended that the authorities below have erred in not considering any adjustment on account of difference in working capital and risks undertaken by the appellant vis-à-vis the comparable companies. It is submitted that adjustment on account of working capital is warranted for the difference in the levels of credit extended in the form of accounts receivables and credit obtained in the form of accounts payables in the books of tested party vis-a-vis those of the comparable companies. Even on account of differential risks undertaken, an adjustment i....
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....d to calculate the arm's length price in accordance with section 92C(1) and 92C(2) of the Act. The Explanatory memorandum to Finance Bill 2002 and Notes on Clauses - income Tax (Finance Bill, 2002) also clarifies that in case the application of the most appropriate method results in two or more prices, the Appellant is require to compute the arm's length price by determining an arithmetic mean of such prices or a 5% variation of the arithmetic mean thereof. There is no ambiguity in law in respect of the same. Thus, any adjustment to the income of the assessee should be computed after considering a +/-5% variation from the arithmetic mean. 4.4 In view of the above, the appellant requests your Honour to adopt the computation mechanism followed in the above cases and allow the benefit of the 5 percent range as provided under the erstwhile proviso to section 92C(2) of the Act. 4.5 Further, prior to the amendment made by the Finance (No 2) Act, 2009, the proviso to section 92C(2) of the Act provided that the ALP would be taken to be the arithmetic mean (hereinafter referred to as 'AM') of the prices or at the option of the appellant, a price which may vary from the AM by an amount not....
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....ellant, the rejection of certain comparables by the TPO was not appropriate in the case of the following companies, namely, i) VMF Softech Ltd.; ii) RS Software (I) Ltd.; iii) Quintegra Solutions Ltd.; iv) VJIL Consulting Ltd.; and v) LGS Global Ltd. 14. Further, the learned Counsel pointed out that the appellant had explained before the lower authorities that the AE of the assessee was having significantly low margins, and the appellant was being compensated adequately irrespective of the fact whether the AE was making reasonable profits or not. It has been pointed out that assessee was being compensated with a constant mark-up of 10% over the costs, despite the low profitability of the AE and in any case significant functions and risks were being undertaken by the AE as compared to the appellant company. In this connection, reference was invited to the detailed functional, assets and risk analysis of the appellant vis-à-vis parent company and summary financial position of the parent company contained in the written submissions dated 22.6.2009 addressed to the TPO, a copy of which has been placed in the Paper Book at pages 180 to 212. Based on such workings, it is contende....
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....en transferred by the parent company to the appellant at fair value of the transaction which showed that there was no intention on the part of the parent company to assume the risks associated with the operations of the appellant company. It is also pointed out that it was wrong to suggest on the part of the assessee that majority of the risks are undertaken by the parent company because ultimately the market forces determine the levels of business carried out, and the same would not only affect the parent company but it would also impact the business of the Indian subsidiary as well. 16. Further, it is contended that low margins earned by the parent company is not a relevant factor for the purpose of Transfer pricing adjustments, since as per the transfer pricing regulations, Associated Enterprise is expected to pay arm's length price to its Indian subsidiary company, irrespective of its own profitability levels. 17. With regard to exclusion of M/s Goldstone Technologies Ltd., it is contended that the DRP has given the following reasoning for its exclusion, which is quite justified:- "The next question that arises before us is pertaining to comparables chosen by the ld TPO in ....
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....ssessee falls beyond the 5% margin of the price of international transaction computed by the assessee. Therefore in view of the provisions of the law, details and intentions as are evident from the press note of Govt. of India as well as circular of the CBDT, as aforementioned the benefit of the safe harbor of +5% -5% is not available to the assessee." 19. On the basis of the aforesaid, it has been contended 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. In this regard, a reference has been made to the CBDT Circular No. 5/2010 dated 03.06.2010 read with Corrigendum dated 30.9.2010 to submit that the amended Proviso to section 92C(2) of the Act is 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 Officer on or after such date. Therefore, as per the learned CIT-Departmental Representative, the benefit of +/-5% intended by the erstwhile proviso to section 92C(2) of the Act is not available to the assessee. In the aforesaid manner, the learned Departmental Representative has strongly defen....
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....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 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, w....
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....he 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. 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 ef....
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.... made any determination. Therefore, the Corrigendum dated 30.9.2010, in our considered opinion, has no bearing so as to dis-entitle 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 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 term....