AI Drafter 
TaxTMI 
TaxTMI 
2013 (12) TMI 1590
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....f Rs. 19,45,136/-. Assessee thereafter agitated the matter before DRP. DRP vide order dated 24.09.2010 issued directions u/s. 144C(1) of the Act. Pursuant to the directions of DRP, assessment u/s 143(3) r.w.s. 144C(5) was framed vide order dated 08.10.2010. Aggrieved by the aforesaid order, Assessee is now in appeal before us and has raised the following grounds:- 1. On the facts and circumstances of the case and in law, the learned Deputy Commissioner of Income-tax, Circle1(2), Baroda ("DCIT") has erred in concluding the assessment under section 143(3) of the Income-tax Act, 1961 ("the Act"), in pursuance to the directions of the Learned Dispute Resolution Panel ("Ld. DRP") under section 144C(5) of the Act. 2. The Learned DCIT erred on facts and in law in confirming the addition of Rs. 17,37,400/- to the income of the Appellant by determining the arm's-length price of the Appellant's international transaction of provision of marketing support services at Rs. 1,48,13,649 instead of Rs. 1,30,76,249/- as determined by the Appellant as follows:- 2.1 in rejecting the contemporaneous documentation maintained by the Appellant as required under the....
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....sks assumed by the Assessee, Transactional Net Margin Method (TNMM) was chosen by the Assessee as the most appropriate method. PBIT (Profit Before Interest and Tax) on Cost was taken as Profit Level Indicator (PLI) and it was accordingly worked at 5.12%. TNMM method chosen by the Assessee was also accepted by the Transfer Pricing Officer (TPO). In addition to the companies chosen as comparables, TPO considered 4 more companies namely KALS Info Systems Ltd, Lucid Software Ltd, Bodhtree Consulting Ltd and Accel Transmatics Ltd as comparables and after considering the 8 companies (4 selected by Assessee and 4 selected by TPO) noted that the average PLI of the companies worked out to 20.76% and the Assessee was therefore show caused and asked as to why the PLI of 20.76% not be adopted and the Arm's Length Price (ALP) of services rendered to AE be recomputed accordingly. Assessee inter alia submitted that the activities of the 4 companies selected by TPO were not comparable with that of the Assessee as they were engaged in the business of software development. It was further submitted that for selection of company by the Assessee, it had applied quantitative filter of turnover/gross....
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.... 4 additional comparables, in respect of support service activities. A notice was issued to tie assessee and after taking into consideration the objections of the assessee, the TPO proposed an addition of Rs. 19,45,136/-. From the order of the TPO, it is noticed that the TPO has not rejected the transfer pricing analysis of the assessee, but added additional 4 comparables and applied arithmetic mean of the operating profit to cost, as PLI to compare that of the Assessee (Indian Party) to arrive at the above referred adjustment of Rs. 19,45,136/-. 5. It is seen that the TPO has not provided the assessee with the search process carried out by him to arrive at the final 8 comparable companies, which consisted of 4 companies selected by the assessee and the other 4 companies selected by the TPO and considered as comparable companies. During the course of DRP proceedings, the TPO was specifically asked to point out the search process through which those 4 companies were selected as it was stated hy him in the TP order that those 4 additional comparables were identified on independent search. The TPO showed his inability to do so. It was verified by the TPO from the Transfer Pri....
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....ny role to play in the selection of comparables. In the FAR analysis done to select comparables, comparison of assets have an important role to play. The underlying logic is that with the application of similar assets, similar or almost similar sales are achieved. The quantitative filter applied for selection of comparables even out the comparables using similar assets. However, in ITES industry, these quantitative filters have no role to play as the rates are charged per hour, in any case, if an adhoc upper filter of 50 crores is applied, the mere difference in receipt of 1 or 2 crore would not make any difference, if the comparable is, otherwise, functionally similar. As the assessee has himself selected this comparable as functionally similar, it cannot be rejected merely because it does not fall in assessee's own ad hoc filter. 9.4 In. view of the above, the final set of comparables which is now directed to be taken for benchmarking the international transaction following TNMM are as under. The PLIs (Operating Profit/Operating expenditure) of these comparables for F.Y. 2005-06 as computed by the assessee, itself have also been mentioned hereunder. Sr. No. Nam....
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....of DRP, Assessee is now in appeal before us. 6. Before us, the Ld A.R. submitted that the company is engaged in business process outsourced activities and the services provided by the Assessee to its AE are purely auxiliary and preparatory in nature. He further submitted that ALP was computed by Assessee as per the provisions of section 92 to 92F of the Act, which requires the computation to be based on the information available in the public domain upto the date of filing of return. He further submitted that Assessee for the purpose of computation of average net margins of the comparable companies had considered multiple year data i.e. data pertaining to prior two years for the reason that the data for the relevant year was not available at the time of conducting search process. He further submitted that the TPO considered only the data pertaining to the financial year in which the international transactions were entered by the Assessee i.e. financial year ending 31st March 2006 as being the data that is contemporaneous and appropriate for computing the margin of the comparable companies. He further submitted that if single year data (i.e. for year ended 31st March 2006) was co....
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....possession, of the opinion that- (a) the price charged or paid in an international transaction or specified domestic transaction has not been determined in accordance with sub-sections (1) and (2); or (b) any information and document relating to an international transaction or specified domestic contained in sub-section (1) of section 92D and the rules made in this behalf; or (c) the information or data used in computation of the arm's length price is not reliable or correct; or (d) the assessee has failed to furnish, within the specified time, any information or document which he was required to furnish by a notice issued under sub-section (3) of section 92D, the Assessing Officer may proceed to determine the arm's length price in relation to the said international transaction [or specified domestic transaction] in accordance with sub-sections (1) and (2), on the basis of such material or information or document available with him:" 2.1.2 From perusal of the above provisions, it is clear that if the AO/TPO is in possession of material/information/documents, on the basis of which is of the opinion that one of the four conditions ....
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....quirement of maintenance of documentation is cast on the assessee and the purpose of same is only limited to support the justification of arms length price analysis carried out by the assessee; the same CANNOT fetter the power of TPO to consider other comparables which are outside the documentation kept by the assessee. In this respect it is pertinent to note the following proposition held in the case of Kodiak Networks (India) (P.) Ltd. (15 ITR 610) (51 SOT 191) (Bangalore Tribunal) (2012) and Genisys Integrating Systems (India)(P.) Ltd. v. Dy. CIT (ITA No. 1231) (Bangalore Tribunal)(2019) where this issue is discussed in details by the Hon'ble benches: "12.1 As far as the data to be used by the TPO while determining the ALP is concerned, we find that it is covered by the provisions of Rule 10D sub-rule (4) of the IT Rules, 1962. Sec.92C provides the method for computation of ALP and prescribes five methods for computing the ALP and also any other method as may be prescribed by the Board. Sec.92D provides that every person who has entered into an international transaction shall maintain and keep such information and documents in respect thereof and the Board may also ....
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....sessee had strenuously argued that the provision of sec.92D and Rule-10D is defeated if, the TPO takes the data which is available in the public domain after the specified date and the ALP would be fluid and there would be no certainty for the same. We are unable to agree with the arguments of the learned counsel for the assessee. The ALP has to be determined by the TPO in accordance with law and the Act provides that the TPO shall take into consideration the contemporaneous data. The assessee is only required to maintain the information and documents as may be necessary relating to the international transactions so that it can be made available to the TPO or the AO or any other authority in any proceedings under the Act. By providing a specified date in the Act, the obligation is cast upon the assessee to keep and maintain the documents for that period. But, it does not restrict the TPO from making enquiries thereafter, for determining the correct ALP. Having held so, we come to the next question, as to whether the TPO can make his own research and call for information from various entities without the knowledge of the assessee. Under sub-sec(3) & (7) of sec.92CA, the TPO is entru....
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.... him but not available to the assessee, at the time of TP documentation is misplaced and erroneous. 2.1.6 Thus, on the basis of discussion made above till this point, it becomes clear that by not considering some of the comparables subsequently identified by the TPO, the analysis carried out by the assessee was incorrect and thus the TPO was right in considering the new comparable entities. It is also seen that there is no bar on the power of the TPO to select any entity as comparable, even when the same may or may not have been available to the assessee while carrying out its TP documentation. 2.1.7 As far as the issue regarding the selection of comparables found by the TPO is concerned, it can be seen that OECD guidelines 2010 prescribe two different kind of approaches for selecting potential comparables. One of such approach is called "additive approach"in which the person carrying out search process make list of third parties which are believed to carry out potential comparable transactions. The information is then collected on such transactions to determine their comparability. In the guidelines, it is also acknowledged that such an approach gives well focuse....
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....p; ** (4) The 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: Provided that data relating to a period not being more than two years prior to such financial year may also be considered if such data reveals facts which could have an influence on the determination of transfer prices in relation to the transactions being compared. 2.2.1 The use of the word "shall", in the main provision of the Rule, makes it clear, in no uncertain terms that the use of current financial year data (i.e. the financial year in which international transaction was actually entered into) is a mandatory requirement of law in the comparability analysis under the Indian Transfer Pricing regulations. The proviso to the said Rule makes it an exception in allowing the use of data for the preceding two years, if and only if, it is proved that such data reveals facts, which could have an influence on the determination of transfer price. Therefore, the exception comes into play only when p....
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....ides such impetus to the Transfer Pricing analysis which the usage of single year data would not argument. 2.2.4 A re-look at the provisions of section 92D (1) clearly states that, every person entering into an international transaction is required to keep and maintain such information and document, in respect thereof, as being prescribed under the Rules. Corresponding Rule 10D(1) of the Rules, requires maintenance of a record of the analysis performed to evaluate comparability as well as a record of the actual working carried out for determining the ALP. Rule 10D (4) of the Rules, requires that the information and documentations to be maintained under rule 10D (1), should be contemporaneous as far as possible and should exist latest by the due date of filing of the Income-tax Return. Hence, even in terms of the relevant section of the Income Tax Act and Rules the importance and pedestal assigned to the initial documentation in contemporary parlance prepared at the time of settling the price of the international transaction is clearly brought out. It needs to be appreciated that the requirement of the existence of information and documentation by the due date of filling of....
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.... Having regard to the statutory provisions, it is clear that burden to establish that international transaction -was carried at ALP is on the taxpayer. He, has also to furnish comparable transactions, apply appropriate method for determination of ALP and justify the same by producing relevant material and documents before the revenue authorities. In case revenue authorities are not satisfied with the ALP and the supporting documents / information furnished by the taxpayer, the authorities have ample power to determine the same and make suitable adjustments. The responsibility of determination of ALP is shifted to the revenue authorities who are to determine the same in accordance with statutory regulations. [Para 127] There is criticism that the Legislature is not justified in placing onerous burden on the taxpayer to maintain detailed documents and to justify that transaction was carried at ALP. It is contended that this is like insisting upon production of self-incriminating evidence and is uncalled for. This criticism, is without any valid basis. It is to be remembered that international transactions carried by taxpayer are cross-border transactions. The departme....
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.... It can be seen that in the transfer pricing analysis, the assessee has not used the current year data at all. By not using the current year data at all, the transfer pricing document is against the provisions of rule 10B (4) of the Income tax rules. 2.2.9 The issue relating to use of current year data is well settled now in view of the decision of the Special Bench of Bangalore Tribunal in the case of Aztee Software & Technology Services Ltd. [2007] 294 ITR (AT) 32 and reaffirmed by the Delhi Bench of Income Tax Appellate Tribunal in the case of Mentor Graphics (P.) Ltd. [2007] 109 ITD (101) which stipulated that the comparability analysis is to be conducted on the basis of current year data. Other cases where it was held so are: i. Honeywell limited 2009-TIOL-104-ITAT-Pune ii. Customer Services India Pvt limited 2009-TIOL-424-ITAT-Delhi iii. Schefenacker motherson limited 2009-TIOL-376-ITAT-Delhi iv. Panasonic India Pvt limited 2010-TII-47-ITAT-Del-TP v. Geodis Overseas P Limited 201l-TII-34-ITAT-Del-TP vi. Haworth India Pvt limited ITA No. 5341/Del/2010 vii. TNT India Pvt limited 2011TII-39-ITAT-BANG-TP ....
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....venue are given below: a. Use of current year data 1. Asstt. CIT v. Birla Soft Ltd. [2011] 47 SOT 437 (Delhi) 2. Bindview India (P.) Ltd. ITA no 1386/PN/10 Pune Tribunal 3. M/s Genisys Integrating Systems (India) (P.) Ltd. I.T.A. No.l231(Bang.)/2010 4. Actis Advisers (P.) Ltd., ITA No. 5277/Del/2011 5. Sandstone Capital Advisors (P.) Ltd. ITA No.6315/Mum/2012 Ground no 2.3 Issue regarding allowance of+/- 5% variation as standard deduction 1. The proviso to section 92C(2) of the I.T. Act provides 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, or, at the option of the assessee, a price which may vary from the arithmetical mean by an amount not exceeding 5% of such arithmetical mean. 2. The Transfer Pricing provisions were brought on the statute by the Finance Act, 2001 w.e.f. 1.4.2002. It is with a view to avoid hardship to the tax payers in the initial years of implementation of these provisions, the government of India, through a press note issued by the Ministry of Finance (Dept....
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..... ADP Private Limited (2011-TII-44-ITAT-Hyd-TP) iv. Perot Systems TSI (India) Ltd [2010]-TIOL-15-Del v. Essar Steel Ltd. (2011-TII-17-ITAT-Vizag-TP 5.This issue is also decided in favour of the revenue in a recent decision in the case of M/s. Deloittee Consulting India Pvt. Ltd. as under: "31. Next we deal with the issue with regard to the allowance of 5% deduction before computing the ALP. It is contention of the learned counsel for the assessee that the arithmetical mean of the comparable price should be reduced by 5% for determining the ALP. We have gone through the submissions and also the case law relied upon by him. He pointed out that the amendment made under section 92C of the Act would be applicable prospectively and not retrospectively. Whereas the learned Departmental Representative objected to the above proposition and submitted that under the proviso, no standard deduction has been provided to the assessee company. In our considered view, the tolerance band provided in the aforesaid provision is not to be taken as a standard deduction. If the arithmetic mean falls within the tolerance band, then there should not be any ALP adjustment....
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.... 7 In another recent judgment in the case of Johnson Mattney India (P.) Ltd. 20 taxmann.com 39(Del) good discussion is made on this issue which is reproduced below "14. We have heard both the sides on the issue. Various Benches of ITAT had decided the issue. In the case of Dy. CIT v. Deloitte Consulting India Pvt. Ltd., the ITAT, Hyderabad Bench 'A' in lTA No.1082/Hyd./2010 has decided this issue as under :- 31. Next we deal with the issue with regard to the allowance of 5% deduction before computing the ALP. It is contention of the learned counsel for the assessee that the arithmetical mean of the comparable price should be reduced by 5% for determining the ALP. We have gone through the submissions and also the case law relied upon by him. He pointed out that the amendment made under section 92C of the Act would be applicable prospectively and not retrospectively. Whereas the learned Departmental Representative objected to the above proposition and submitted that under the proviso, no standard deduction has been provided to the assessee company. In our considered view, the tolerance band provided in the aforesaid provision is not to be taken as a standar....
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....5% less in case of receipt and up to 5% more in case of outgoing. The relaxation extended by this Circular was in substance brought on to the statute by the Finance Act 2002 by amending the proviso to sec. 92C(2) with retrospective effect from 1.4.2002. It provides a tolerance band. It also suggests that there will be no TP adjustment in cases of marginal variation up to +/- 5% but substantial variation would result in appropriate TP adjustment. Learned CIT(Appeals) has explained the meaning of tolerance band which read as under : "Whether there is an international transaction involving sale of a product or export of services, there would be a credit entry in the profit & loss account. By allowing a margin of (-) 5% for such a transaction, a taxpayer is permitted to have a credit entry which is not below 95% of the ALP so that profit from the transaction is not understated beyond the tolerance level of (-) 5%. Whenever there is an international transaction involving purchase of a product or import of services, there would be a debit entry in the profit and loss account. By allowing a margin of (+) 5% under such a transaction, a taxpayer is permitted to have a debit entry w....
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.... this tolerance band provided in the proviso is not to be construed as a standard deduction. In the present appeals, learned TPO has adopted the arithmetic mean of several comparables for taking out a PLI which would be tested with the PLI of the assessee. If that arithmetic mean falls within the range of alleged tolerance band then there may not be any adjustment but if it exceeds the ultimate adjustment is not required to be computed after Reducing the arithmetic mean by 5%. The actual working is to be taken. Learned First Appellate Authority has considered this aspect elaborately in assessment year 2003-04 and after going through his order, we do not see any merit in the ground of appeal raised by the assessee in all these three assessment years. Considering all these decisions of ITAT Benches and pleadings on both the sides, we are of the view that this tolerance band provided in the proviso is not to be construed as a standard deduction. In this case, the TPO has adopted the arithmetic mean of several comparables for taking out a PLI which would be tested with the PLI of the assessee. If that arithmetic mean falls within the range of tolerance band then there may not be any ad....
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....viding computer software services comparable to itself. In such a case, the contention raised by the assessee regarding the incomparability of the comparables selected by the TPO on the basis that they were engaged in providing "computer software" is hypocritical and misleading. Once a FAR is considered as comparable by the assessee while selecting its own comparables, it cannot take a u-turn and find faults in the comparables selected by the TPO were engaged in providing computer software services, and consequently incomparable to the assessee, is in contravention to the comparables selected by the assessee itself. If the comparables considered by the assessee by the TPO are also required to be considered and they cannot be rejected solely on the basis that they were engaged in providing computer software services. 3.1.2. No comments can be made on the specific comparables, unless the objections on the same can be learnt from the assessee's side. 4. Before parting it is also important to note the observations made by the Hon. Special Bench in the case of Aztec Software & Technology Services Ltd 107 ITD 141(Bangalore) (SB). The relevant portion of the same is ....
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....sis of one comparable.' 8. Apart from the written submissions as above, Ld D.R. further submitted that the facts in the case of Quark Systems (P.) Ltd. (supra) which has been relied upon by the Ld A.R. are distinguishable and therefore cannot be applied to the facts of the present case. He thus supported the order of AO and DRP. 9. We have heard the rival submissions and perused the material in record. It is an undisputed fact that for the purpose of TP study, Assessee has considered Vakrangee Computer Software as a comparable but however later on it was submitted that the same should be excluded as it was functionally not comparable with the Assessee moreso when the nature of its activities was not functionally comparable with that of the Assessee. Before us the Revenue has submitted that once a FAR is considered as comparable by the Assessee while selecting its own comparables, it cannot take a U turn and find faults in the comparables selected by the TPO on the basis of same FAR. We find that before the Sp. Bench of Tribunal in the case of Quark Systems (P.) Ltd. (supra), the Assessee had raised an issue that one of the independent comparable which was included by the ....
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.... to admit this ground of appeal, the matter can at best be remitted to the file of the Assessing Officer for the limited purpose of examining the relevant fact regarding Datamatics Technologies Ltd. Learned counsel further submits that in case we are inclined to remit the matter to the file of the Assessing Officer, he has no objection to the matter being restored to the file of the Assessing Officer as such but an exercise should be for the limited purposes of examining specific points as the bench may deem fit but it should not be for the purposes of revisiting the entire transfer pricing analysis it is also submitted that the question as to what-further adjustments need to be made in the profits so as to eliminate the impact of variations between the assessee and the comparables cannot be addressed at this stage as it would amount to revisiting entire transfer pricing study, and that the remand should be confined to the question as to whether or not a particular comparable can be taken into account or not. 30. Learned Special counsel for the revenue Shri Kapila has vehemently argued that "Datamatics" was taken as one of the comparables by the taxpayer and no objection t....
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....from the position which it had wrongly taken while filing the return. Quit apart from if, it is incumbent on the income tax department to find out whether a particular income was assessable in the particular year or not. Merely because the assessee wrongly included the income in its return for a particular year, it cannot confer jurisdiction on the department to tax that income in that year even though legally such income did not pertain to that year." 32 In the case of R.B. Jessa Ram Fateh Chand v. CIT 81 ITR 409, it has been found and observed as under: "Mr Brijial Gupta appearing for the department pointed out that the assessee itself filed separate returns for the two parts of a single accounting period. The assessee applied for registration for the first period only. The assessment for the second period proceeded as against an unregistered firm. It was, therefore, urged by Mr. Gupta that it is not open to the assessee to urge now that a single assessment under section 26(1) ought to have been made. Now, there cannot be an estoppel against statute. If in fact the procedure adopted by the Income-tax Officer was incorrect, the defect is not cured by the attitude taken up....
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....e course of the examination of a transfer pricing case. More particularly, as a matter of good practice the burden of proof should not be misused by tax administrations or taxpayers as a justification for making groundless or unverifiable assertions about transfer pricing. A tax administration should be prepared to make good faith showing that its determination of transfer pricing is consistent with the arm's length principle even where the burden of proof is on the taxpayer, and the taxpayers similarly should be prepared to make good faith showing that their transfer pricing is consistent with the arm's length principal regardless of where the burden of proof lies." 36. The aforesaid decisions and guidelines may not be exactly on identical facts before us but they emphatically show that taxpayer is not estopped from pointing out a mistake in the assessment though such mistake is the result of evidence adduced by the taxpayer. 37. When substantial justice and technical considerations are pitted against each other, the cause of substantial justice deserves to be preferred. For the other side cannot claim to have a vested right in injustice being done due to....
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....r school building and toilet at the village which was near the vicinity of the Assessee's factory and was for the benefit of the villagers. AO did not agree with the contention of the Assessee. He was of the view that the expenses had nothing to do with the business of the Assessee and further there was no contractual obligation of the Assessee to incur the expenses. He accordingly disallowed the expenses. Aggrieved by the draft order of AO, Assessee carried the matter before DRP. DRP upheld the draft order of AO by holding as under: '11.10 The assessee's submissions have been considered carefully, but the sane are found not acceptable. From the facts of the case it can be seen that the AO had disallowed the claim of the assessee on the ground that the said expenditure was not for the business purposes of the assessee company and there was no liability for the assessee's company to incur such expenditure. The payment under considerations can at best be treated as application of income. Further, any voluntary payment where there is no legal liability to make such, payments cannot be considered to be expenditure for the purposes of business. Reliance in this ....
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....e-company to the erstwhile occupant of the land acquired from the Bombay Municipal Corporation in exchange of the assessee's land was not allowable as revenue expenditure ? (iii) Whether, on the facts and in the circumstances of the case, the Tribunal had rightly held that the assessee is not entitled to weighted deduction under s. 35B of the IT Act, 1961, in respect of export freight and expenses amounting to Rs. 33,10,138 and (ii) Bank guarantee commission amounting to Rs. 3,000 for the asst, yr. 1977-78?" 11.12 In view of above mentioned factual and legal position. We do not find any infirmity in the proposed addition of Rs. 5,06,950/- on account of community welfare expense and hence the same is confirmed.' 12. Aggrieved by the order of DRP, Assessee is now in appeal before us. 13. Before us, the Ld. A.R. reiterated the submissions made before DRP and further submitted the expenses was incurred for the purpose of better relationship with the workers and employees of the Assessee as many of the employee are habitant of nearby area and their children are studying in that school. He further submitted that existence of contractual obligation is not a prere....
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.... present case the expenditure incurred by the assessee as community welfare expenses is allowable. Thus this ground of the Assessee is allowed. Ground nos. 5 & 6 are interconnected and is with respect to computation of deduction u/s 10B: 17. During the course of assessment proceedings AO noticed that Assessee has received brokerage on sea freight of Rs. 1,00,318/- and insurance claim of Rs. 64,125/- and had considered both of them as part of profit of the business for computing deduction u/s 10B. AO was of the view that the aforesaid amounts did not have the attributes of profits derived from the business of the undertaking of export of articles or things and therefore cannot be considered to be part of profit for deduction u/s 10B. He accordingly reworked the profit of the business by excluding the same. Aggrieved by the order of AO, Assessee carried the matter before DRP. DRP upheld the order of AO and therefore the Assessee is now before us. 18. Before us, the Ld. A.R. submitted that brokerage on sea freight charges were nothing but merely discount availed by the Assessee and refund of insurance charges were in the nature of refund of excess amount paid to insurance com....