AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2018 (1) TMI 885
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....rted value of such transaction at Rs. 10,24,95,795/-, were reported. The assessee applied the Transactional Net Margin Method (TNMM) for showing that Software development services segment, designated in Transfer Pricing documentation as IT services, was at arm's length price (ALP). Similar method was adopted for benchmarking the international transaction of Claim processing service transaction (ITES). The Assessing Officer (AO) made reference to the Transfer Pricing Officer (TPO) for determining the ALP of the international transactions reported by the assessee. The TPO vide his order dated 11.10.2010, proposed transfer pricing adjustments in the Software development service and ITES segment amounting to Rs. 2.68 crore in total. Pursuant to the directions given by the Dispute Resolution Panel (DRP) and certain rectification orders passed, the TPO, vide his order dated 25.10.2011, recalculated the transfer pricing adjustment in Software development segment at Rs. 53,27,302/-. No transfer pricing adjustment was proposed in ITES segment in such rectification order. As such, we are concerned in the instant appeal only with the transfer pricing addition of Rs. 53,27,302/- made in the So....
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.... foreign A.E. has broadly four functions, namely, Health care services, Optum Health, Ingenix and Prescription solutions. In so far as first two functions are concerned, these are qua the provision of health care solutions by means of health insurance policies etc. catering to different age-groups. The third function, namely, Ingenix is an altogether different work totally unrelated to the health services. The TP Study report indicates that Ingenix offers database and data management services, software products, publications, consulting and actuarial services, business process outsourcing services and pharmaceutical data consulting and research services. The fourth function, namely, Prescription solutions includes retail network, pharmacy management, mail order pharmacy services, specialty pharmacy services, benefit design consultation, drug utilization review and disease therapy management etc. From the above four broader functions carried out by the assessee's A.E, in which the assessee is providing software development services, it can be seen that the nature of software development by the assessee is of a wider range. We want to make it manifest from the Services agreement that....
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....from claiming so, provided the company so originally reported as comparable is, in fact, not comparable. Simply because a company was wrongly chosen by the assessee as comparable, cannot tie its hands to contend before the Tribunal that such a company was wrongly considered as comparable which is, in fact, not. There is no difference in the situation where the assessee claims that a wrong company inadvertently included for the purpose of comparison should be excluded and the situation in which the Revenue does not accept a particular company chosen by the assessee as comparable. The underlying object of the entire exercise is to determine the arm's length price of an international transaction. Simply because a company was wrongly considered by the assessee as comparable, cannot, act as a deterrent from challenging the fact that this company is, in fact, not comparable. The Special Bench of the Tribunal in DCIT vs. Quark Systems Pvt. Ltd. (2010) 132 TTJ (Chd) (SB) 1 has held that a company which was included by the assessee and also by the TPO in the list of comparables at the time of computing ALP, can be excluded by the Tribunal, if the assessee proves that the same was wrongly in....
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.... determining the ALP of the assessee, have been influenced by the mergers and acquisitions taking place during the year, thereby making such financial results incomparable. 16. The Mumbai Bench of the Tribunal in Petro Araldite (P) Ltd. Vs. DCIT (2013) 154 TTJ (Mum) 176, has held that a company cannot be considered as comparable because of exceptional financial results due to mergers/demergers. Similar view has been bolstered by the Delhi Bench of the Tribunal in several cases including Ciena India Pvt. Ltd. Vs. DCIT (ITA No.3324/Del/2013) vide its order dated 23.4.2015. In view of the fact that there were mergers during the year, we hold that this company cannot be considered as comparable due to such extra-ordinary financial events. Accordingly, this company is directed to be excluded from the final list of comparables. (iii) Tata Elxsi Ltd. 17. The assessee included this company in the list of comparables which was not objected to by the TPO. However, the assessee raised objection before the DRP that this company was inadvertently included. The ld. DRP did not interfere with the order passed by the TPO on this score. 18. The ld. AR contended that the nature of activity done ....
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....is for the imposition of penalty u/s 271(1)(c) is the transfer pricing adjustment made by the TPO. Explanation 7 to section 271, which is relevant for our purpose, reads as under:- "Explanation 7.-Where in the case of an assessee who has entered into an international transaction or specified domestic transaction defined in section 92B, any amount is added or disallowed in computing the total income under sub-section (4) of section 92C, then, the amount so added or disallowed shall, for the purposes of clause (c) of this sub-section, be deemed to represent the income in respect of which particulars have been concealed or inaccurate particulars have been furnished, unless the assessee proves to the satisfaction of the Assessing Officer or the Commissioner (Appeals) or the Principal Commissioner or Commissioner that the price charged or paid in such transaction was computed in accordance with the provisions contained in section 92C and in the manner prescribed under that section, in good faith and with due diligence." 24. A perusal of this Explanation transpires that any addition on account of transfer pricing adjustment shall be deemed to represent income in respect of which parti....
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.... of the 'Software development' segment under consideration is 'in accordance with the provisions contained in section 92C'. Further, such determination is 'in the manner prescribed under that section' because the TPO has nowhere held that the assessee calculated ALP of these transactions in a manner different from the one prescribed under rule 10B(1)(e), which contains mechanism for calculating the ALP under the TNMM. 26. The next ingredient which is crucial for evading penalty u/s 271(1)(c) is that the application by the assessee of most appropriate method for determining ALP should be 'in good faith and with due diligence.' Now, the moot question is whether the assessee's application of the TNMM in the given circumstances, can be considered as done in good faith and with due diligence 27. There is absolutely no doubt that the assessee applied the TNMM on the international transactions of 'Software development' in the manner prescribed and computed the ALP in good faith and with due diligence. Simply because certain comparables chosen by the assessee were found to be not comparable by the TPO, the good faith and due diligence cannot be said to be lacking. It is simply a differen....