TaxTMI 
TaxTMI 
2016 (11) TMI 1304
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....together and are being disposed of by this consolidated order for the sake of convenience. 3. The learned Authorized Representative for the assessee in the first instance withdrew cross objections filed by the assessee both in assessment years 2004-05 and 2005-06, hence, the same are dismissed as withdrawn. The assessee has also filed an application under Rule 27 for assessment years 2004-05 and 2005-06. 4. First, we shall take up the appeal in ITA No.810/PN/2013 relating to assessment year 2004-05. The grounds of appeal raised by the Revenue are as under:- 1. The order of the Commissioner of Income-tax (Appeals) is contrary to law and to the facts and circumstances of the case. 2. The Commissioner of Income Tax (Appeals) erred on facts and in law in directing the AO to apply the Turnover filter when there is no correlation between turnover and profitability of companies in I.T. Sector. 3. On the facts and in the circumstances of the case and in law, the Commissioner of Income-tax (Appeals) erred in directing the AO to consider the aggregate margin of the assessee from onsite as well as offshore services for computing the ALP despite the fact that the mark up for onsite and ....
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....vel Indicator (PLI), in order to test the arm's length nature of its international transactions. The assessee in the TP study report had reported that it had earned mark-up of 7.50% of cost for the software development activity during the year. The mark-up earned by the comparable companies selected by the assessee were 2.20%. However, the TPO rejected many of the said companies selected as comparable by the assessee on account of abnormal results shown by the said companies and the arithmetic mean of margins of balance companies worked out to 14.18%. The assessee was confronted with the said details and was asked to explain as to why an adjustment should not be made to arm's length price of transactions by taking the revised margins of comparables. The assessee in turn, explained its case which is not accepted by the TPO. The TPO noted that it was not that loss making companies had been removed from the list of comparables. However, only those companies which had reported huge losses in 2004 or which had very good profits in 2003 and had become loss making companies in 2004, had been rejected since they were not demonstrating consistent results. The TPO also pointed out that a....
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....e an addition of Rs. 62,83,059/- on account of adjustment as proposed by the TPO. The Assessing Officer also re-computed the deduction under section 10A of the Act by re -computing the profits for computing deduction under section 10A of the Act. 8. In appeal before the CIT(A), the assessee filed written submissions which are incorporated in the appellate order at pages 3 to 7 of the appellate order. Various issues were raised by the assessee before the CIT(A) in respect of TP adjustment made by the Assessing Officer by not allowing the risk adjustment, rejection of loss making companies, applying the turnover filter and also as to whether the margins from entire software development services were to be considered. The CIT(A) did not allow the claim of assessee to grant risk adjustment. Further, the CIT(A) also confirmed the order of TPO in excluding the loss making companies from list of comparables on the ground that the assessee was a captive service provider and operated in cost protective environment and the business module followed by the assessee did not envisage incurring of losses. With regard to turnover filter, the CIT(A) noted that before the TPO the assessee had reque....
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....rvices of the assessee. 9. The Revenue is in appeal against the order of CIT(A), wherein by way of ground of appeal No.2, the issue raised is against the direction of CIT(A) to apply turnover filter as there was no correlation between turnover and profitability of companies in IT sectors. The Revenue is also in appeal against the directions of CIT(A) in considering the aggregate margins of assessee from on-site as well as off-shore services for computing the arm's length price despite the fact that the mark-up for on-site and off-shore were different from each other. The said issue has been raised by way of ground of appeal No.3. By way of ground of appeal No.4, the Revenue has agitated that the CIT(A) has erred in not appreciating the fact that there were different mark-ups for on-site and off-shore services, which indicate towards functional and risk profile being different for on-site and off-shore segments. 10. The ground of appeal No.1 raised by the Revenue is general in nature and hence, the same is dismissed. The learned Departmental Representative for the Revenue referred to the TP study report filed by the assessee and pointed out that the assessee itself has reporte....
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.... reference was made to the computation of margin analysis of software services comparables at pages 68 and 69 for provision of off-shore services and at page 70 for provision of on-site services. The learned Departmental Representative for the Revenue stressed that the assessee itself had benchmarked the two transactions separately and the CIT(A) in sketchy situation had directed the merging of two. However, the order of CIT(A) was totally silent on that. The learned Departmental Representative for the Revenue further stressed that as far as FAR of two services are concerned, the same were separate. Reliance in this regard was placed on the ratio laid down by Pune Bench of Tribunal in TIBCO Software India (P.) Ltd. Vs. DCIT (20 15) 56 taxmann.com 91 (Pune-Trib.), relating to assessment year 2008-09 and TIBCO Software (India) (P.) Ltd. Vs. DCIT (2015) 58 taxmann.com 215 (Pune -Trib.), relating to assessment year 2009-10. Just because the comparables picked up by the assessee were same and results of two i.e. provision of off-shore and onsite services should be clubbed, as per the learned Departmental Representative for the Revenue was wrong and submissions of the assessee before the....
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....efs to the assessee on certain issues while benchmarking the international transactions entered into by the assessee with its associate enterprises. The assessee was engaged in providing software development support and software consultancy services to SAS group entities. Various transactions were entered into by the assessee with its associate enterprises during the year under consideration. However, the issue which arises for adjudication is in respect of provision of software development support services to SAS Inc by the assessee to the extent of Rs. 10.08 crores. The international transaction which is the subject matter of appeal is the provision of on-site services to SAS group companies at Rs. 1.70 crores. The assessee had applied TNMM method using OP/OC as PLI in its TP study report while benchmarking the international transaction. Admittedly, the assessee had benchmarked the two services i.e. provision of software development services to the SAS and provision of on-site services to overseas SAS group companies separately by using OP/OC as PLI, in its TP study report. In respect of provision of software development services, the assessee was being reimbursed at cost plus 7.....
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....ench of Tribunal in Genisys Integrating System (India) Pvt. Ltd. Vs. DCIT (supra), we uphold the order of CIT(A) in applying the turnover filter of Rs. 1 to 200 crores. The Hon'ble Bombay High Court in CIT Vs. M/s.Pentair Water India Pvt. Ltd. in Tax Appeal No.18 of 2015 vide judgment dated 16.09.2015 have held that turnover is relevant factor to consider the comparability. In the facts of the case before the Hon'ble High Court, the question was with regard to exclusion of three companies i.e. (i) HCL Comnet Systems & Services Ltd., (ii) Infosys BPO Ltd. and (iii) Wipro Ltd. on the ground that the turnover of the said companies was high as compared to the turnover of assessee in that case at Rs. 11 crores. The turnover of HCL Comnet Systems & Services Ltd. was Rs. 260.18 crores, of Infosys BPO Ltd., was Rs. 649.56 crores and of Wipro Ltd. was Rs. 939.78 crores. The said companies were excluded by the Tribunal on the basis of turnover filter, which was approved by the Hon'ble High Court. The Hon'ble High Court held that the said companies are no doubt large and distinct companies where the area of development of subject services are different and as such the profit earned therefrom ....
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....e as to whether an activity being provided by a concern on account of off-site services and on-site services have been compared and it has been held that the company engaged in providing on-site services is un-comparable to the company engaged in providing off-shore services. The said ratio has been laid down by the Pune Bench of Tribunal in TIBCO Software India (P.) Ltd. Vs. DCIT relating to assessment year 2008-09 (supra) and TIBCO Software (India) (P.) Ltd. Vs. DCIT relating to assessment year 2009-10 (supra). 16. In view of the said proposition, wherein it has been held that the company providing off-shore services to its associate enterprises stand on a different footing from the company rendering on-site services to its clients, then even in a case where one company itself providing both the said services, the same have to be considered separately while benchmarking the international transactions. The basis on which the assessee before us is being reimbursed on account of its off-site services is cost plus 7.5% and for on-site services, it is being reimbursed at cost plus 15.04%, which itself establish that the two services provided by the assessee are different and the same....
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....Transfer Pricing Officer (hereinafter referred to as 'TPO') have: Validity of reassessment proceedings: 1. Erred in upholding the validity of reassessment proceedings conducted by AO under section 147 of the Act. Non reference to the TPO during reassessment proceedings 2. Assuming but without admitting that the reassessment proceedings are valid and without prejudice to the above ground, erred in upholding that there was no need to make fresh reference to the TPO for determination of arm's length price of international transactions, after initiating proceedings under section 147 of the Act. Deprivation of opportunity of appeal before the DRP 3. Without prejudice to the above grounds regarding validity of reassessment proceedings under section 147 of the Act, erred in upholding the issuance of the order under section 143(3) read with section 147 of the Act along with the notice of demand instead of issuing order under section 144C of the Act, objection against which would have been filed before DRP. 20. The assessee has challenged the re-assessment proceedings conducted by the Assessing Officer under section 147 of the Act and has further challenged the re-....
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.... made to the international transactions entered into by the assessee with its associate enterprises and the adjustments sought to be made by the TPO at Rs. 2.60 crores and in view thereof, the Assessing Officer was of the view that the income of assessee to the tune of Rs. 2.60 crores had escaped assessment on account of arm's length price of international transactions and notice under section 148 of the Act was issued. Consequent thereto, the assessee filed latter stating that the original return of income filed by it should be treated as filed under section 148 of the Act. The letter is dated 02.02.2011, which is placed at pages 266 to 269 of the Paper Book. The assessee thereafter, sought the reasons for reopening the assessment and also challenged the validity of assessment proceedings initiated under section 147 of the Act vide letter dated 02.02.2011 placed at page 267 of the Paper Book. The Assessing Officer in return, furnished reasons on 07.02.2011, copy of which is placed at pages 270 and 271 of the Paper Book. The assessee challenged the validity of proceedings initiated under section 147 of the Act and also objected to the reasons furnished by the Assessing Officer ....
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.... issue arising in the present appeal filed by the assessee is squarely covered by the order of Co-ordinate Bench of Pune Tribunal in the case of Maximize Learning (P.) Ltd. Vs. ACIT in ITA No.2234/PN/2012, relating to assessment year 2007-08, order dated 02.02.2015 and the facts and issue were pointed out to be identical. The assessee in this regard has filed a comparative chart between the facts and issue arising in the case of Maximize Learning Pvt. Ltd. (supra) and in the present case and has stressed that since the re-assessment proceedings have been quashed in the case of Maximize Learning Pvt. Ltd. (supra), the same needs to be quashed in the facts of the assessee also. He pointed out that the assessee has challenged the reopening perse where the original assessment proceedings were dropped even though the report was received from the TPO under section 92CA(3) of the Act since no notice under section 143(2) of the Act was served upon the assessee in time. As no assessment order was passed after reference to the TPO, then the same order of TPO could not be the basis for reopening the assessment under section 147/148 of the Act and the assessment order passed by the Assessing O....
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....e Act were dropped by the Assessing Officer in the case of assessee on 28.09.2010 and similarly in the case of Maximize Learning Pvt. Ltd. (supra). Thereafter, in both the cases notice under section 148 of the Act was issued by the Assessing Officer and the issue which arises before us is against the validity of such re-assessment proceedings. In both the cases, the reasons for reopening the assessment was the TPO's order passed under section 92CA(3) of the Act during the pendency of original assessment proceedings, which were held to be invalid. The question which arises is the validity of re24 assessment proceedings on the surmise that an adjustment has to be made on account of arm's length price of international transactions in the hands of assessee on the basis of such reference, during the course of assessment proceedings, which were held to be invalid. After going through the factual and legal aspects of the case, the Tribunal vide order dated 02.02.2015 (supra) had firstly held that the Assessing Officer was precluded for making a reference to the TPO under section 92CA(1) of the Act for the purpose of computing arm's length price in relation to the international tra....
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....any income arising from an international transaction between associated enterprises shall be computed having regard to the arm's length price. Sections 92A and 92B of the Act contain provisions relating to the meaning of the expressions "associated enterprise" and "international transaction" respectively. Section 92C of the Act contains the powers of the Assessing Officer and the manner of determination of arm's length price in relation to an international transaction. Section 92CA of the Act provides that where the Assessing Officer considers it necessary or expedient to do so, he may refer to the Transfer Pricing Officer the determination of the arm's length price. Section 92CB of the Act relates to the power of the Board to make safe harbour rules. Section 92D of the Act relates to Maintenance and keeping of information and document by persons entering into an international transaction. Section 92E of the Act prescribes that the person entering into international transaction shall furnish a report from a chartered accountant in Form No.3CEB. Section 92F of the Act contains definitions of certain terms which are relevant to compute arm's length price, etc. in terms of sec....
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....ational transaction is determined either by the Assessing Officer as provided in sub-section (3) of section 92C or by the TPO u/s 92CA(3) of the Act where a reference is made to him by the Assessing Officer. In both situations, the Assessing Officer is required to compute the total income of the assessee having regard to the arm's length price of the international transaction so determined, either in terms of sub-section (4) of section 92C or sub-section (4) of section 92CA. Notably, sub-section (4) of section 92C comes into play where an arm's length price in relation to the international transaction is determined by the Assessing Officer and sub-section (4) of section 92CA comes into play where the arm's length price in relation to an international transaction is determined by the TPO, on a reference by the Assessing Officer. In the case before us, the total income of the assessee has been computed having regard to the arm's length price determined by the TPO under section 92CA(3) of the Act and therefore the Assessing Officer has taken recourse to section 92CA(4) of the Act. 15. It is quite clear that the process of determination of arm's length price is to....
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....relation to the international transaction. Hence all transactions have to be explicitly mentioned in the letter of reference. Since the case will be selected for scrutiny before making reference to the TPO, the Assessing Officer may proceed to examine other aspects of the case during pendency of assessment proceedings but await the report of the TPO on the value of international transaction before making final assessment." [underlined for emphasis by us] 17. It is emphasized on the basis of the CBDT Instruction (supra) that even as per the understanding of the CBDT, a case is to be selected for scrutiny assessment before the Assessing Officer may refer the computation of arm's length price in relation to an international transaction to the TPO u/s 92CA of the Act. Therefore, we are inclined to uphold the position sought to be canvassed by the assessee that an Assessing Officer can make reference to the TPO u/s 92CA of the Act only after selecting the case for scrutiny assessment. In-fact, the aforesaid underlined observations of the CBDT Instruction (supra) is a pointer to the legislative import that the reference to the TPO for determining the arm's length price in rel....
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.... in our view, it is not supported by a schematic reading of the relevant Provisions relating to the transfer pricing assessment contained in sections 92 to 92F. The entire purpose of computation of arm's length price in relation to an international transaction is found in sub-section (1) of section 92 of the Act. Section 92(1) mandates that any income arising from an international transaction shall be computed having regard to the arm's length price. Therefore, the sole aim of computing the arm's length price in relation to any international transaction is to compute the income arising therefrom. Thus, the computation of income and the determination of arm's length price in relation to the international transaction have to go hand-in-hand and without there being an occasion to compute income arising from an international transaction, it is difficult to comprehend the process for computation of arm's length price in relation to the relevant international transaction. Therefore, it would not be open for the Department to say that the process of computing arm's length price of an international transaction or a reference to the TPO to determine arm's length ....
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....to 92F of the relate to computation of income from the international transaction having regard to the arm's length price, meaning of associated enterprises, meaning of international transaction, determination of arm's length price, keeping and maintaining of information and documents by persons entering into international transactions, furnishing of a report from an accountant by persons entering into such transaction and the definition of certain expressions occurring in such sections. The aforesaid provisions do not operate in individual spheres but the same operate with a singular purpose of computing income arising from an international transaction. The process of computation of income is necessarily a part and parcel of the assessment proceedings envisaged under the Act. Section 92CA of the Act is not an independent provision, but it is triggered only when the occasion arises for application of section 92(1) of the Act, whereby income from an international transaction is to be computed having regard to its arm's length price; and, the occasion to compute the income would arise only when there is an on-going assessment proceeding. Therefore, reference made by the Ld....
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....eriod. A consequence of the aforesaid situation is that the return of income filed by the assessee on 05.11.2007 became final as no scrutiny proceedings were started within the period stipulated in law. The aforesaid position is also reinforced by the CBDT Circular No.549 dated 31.10.1989. As per the CBDT, if, after furnishing return of income, an assessee does not receive a notice u/s 143(2) of the Act from the Department within period stipulated in the proviso to section 143(2) of the Act, it follows that the return filed by the assessee has become final and no scrutiny proceedings should be started in respect of that return. In other words, in the present case, assessment proceedings u/s 143 of the Act came to end and the matter became final on 30.09.2008 i.e. the date within which a notice u/s 143(2) of the Act was required to be issued, which was not done. The judgement of the Hon'ble Punjab & Haryana High Court in the case of Vipan Khanna vs. CIT and Others, 255 ITR 220 (P&H) is also to the same effect. In-fact, as per the Hon'ble Punjab & Haryana High Court, in case where a return is filed and is processed and no notice under sub-section (2) of section 143 thereafter is serv....
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....al (supra) are in paras 28 to 35, which are as under :- "28. The next aspect is as to whether, in the above circumstances, the order of the TPO dated 29.10.2010 (supra) can be a valid material for the Assessing Officer to entertain a belief that certain income chargeable to tax has escaped assessment within the meaning of section 147 of the Act. 29. In this context, the Ld. CID-DR has vehemently pointed out that the return of income filed by the assessee included international transactions entered with the associated enterprise and such return of income was required to be taken-up for compulsory scrutiny, as per the norms of the CBDT relating to assessment year 2007-08. Therefore, when such a return of income was not picked up for a scrutiny assessment within the stipulated period, the only course for the Revenue was to issue notice u/s 148 of the Act on the ground that certain income chargeable to tax has escaped assessment. Secondly, it is pointed out that the return of income was filed by the assessee on 05.11.2007 with Circle 11(2), Pune whereas Form No.3CEB for the same assessment year was filed in Circle 1(1), Pune on 31.10.2007. It is only on 28.07.2009, Form No.3CE B was....
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....part of this order. It's a trite law that the reasons recorded by the Assessing Officer are alone to be examined so as to test their validity. In this context, a reference can be made to the judgement of the Hon'ble Delhi High Court in the case of Northern Exim (P) Ltd. vs. DCIT, (2012) 20 taxmann.com 466 (Delhi) wherein it has been held that a Court is to be guided only by the reasons recorded for re-assessment and not by the reasons or explanation given by the Revenue at a later stage in respect of the notice of re-assessment. The Hon'ble Delhi High Court after making a reference to the following judgements :- (i) Jamna Lal Kobra vs. ITO (1968) 69 ITR 461 (All.); (ii) CIT vs. Agarwalla Bros. (1991) 189 ITR 786 (Pat.); (iii) G.M. Rajgharia vs. ITO, (1975) 98 ITR 486 (Pat.); (iv) Asa John Devinathan vs. Addl. CIT, (1980) 126 ITR 270 (Mad.); (v) East Coast Commercial Co. Ltd. vs. ITO, (1981) 128 ITR 326 (Cal.); (vi) Equitable Investment Co. (P.) Ltd. vs. ITO, (1988) 174 ITR 714 (Cal.); and, (vii) S. Sreeramachandra Murthy vs. DCIT, (2000) 243 ITR 427 (AP). held as under :- "The ratio laid down in all these cases is that, having regard to the entire scheme and....
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....nest and void ab initio order passed by the TPO on 29.10.2010 determining the arm's length price u/s 92CA(3) of the Act cannot form a basis to formulate a belief that certain income chargeable to tax has escaped assessment within the meaning of section 147 of the Act. The controversy in the present case has to be adjudicated in the light of the parameters of section 147/148 of the Act. In a somewhat similar situation, the Hon'ble Rajasthan High Court in the case of Brig B. Lal vs. WTO, 127 ITR 308 (Raj.) was dealing with a situation where the reopening of assessment was based on a report submitted by the Valuation Officer in an invalid reference. As per the Hon'ble High Court, a report submitted by the Valuation Officer in an invalid reference must be treated as a nullity in the eyes of law, nonest and void ab initio. According to the Hon'ble High Court, where the reopening of assessment was based on such illegal, null and void report, the entire fabric for reopening of the assessment proceedings falls flat. In our considered opinion, the ratio of the judgement of the Hon'ble Rajasthan High Court in the case of Brig B. Lal (supra) is squarely applicable in the present case. The....
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....sessment even in relation to an assessment year prior to the insertion of 92CA of the Act with effect from 01.04.2002. As per the Hon'ble High Court, the order of the TPO could certainly have nexus for reaching a conclusion that income has been incorrectly assessed or has escaped assessment within the meaning of section 147 of the Act. The proposition laid down by the Hon'ble High Court is to the effect that the order of the TPO passed u/s 92CA of the Act after 01.04.2002 i.e. under the amended Provisions, can be one of the reasons for re-assessment for a period prior to the introduction of the amended Chapter X with effect from 01.04.2002. Clearly, the dispute in the case of M/s Coca Cola India Inc (supra) stood on a different footing than the dispute before us. In the case of M/s Coca Cola India Inc (supra), it was nobody's case that there was any illegality in the reference made to the TPO or that the order of the TPO was void ab initio with respect to the assessment year for which the TPO passed the order u/s 92CA(3) of the Act. The only point was whether order of the TPO passed u/s 92CA(3) of the Act for a subsequent assessment year could form a basis for the Assessing Officer....