TaxTMI 
TaxTMI 
2018 (2) TMI 1890
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.... income of Rs. 75,92,300/-. The assessee also reported the following International transactions with its Associated Enterprises (AE): Provision of Software Development and related Services - Rs. 8,37,05,618/- Purchase of assets being computers and related equipments Rs. 2,63,45,195/- Purchase of assets being computers and related equipments free of cost Rs. 53,74,108/- The assessee-company sought to justify the consideration received for the above International transactions entered with its associated Enterprises to be at arm's length. The assessee-company submitted Transfer pricing study report adopting TNMM which was considered to be the most appropriate method for the purpose of benchmarking the above International transactions. The assessee-company applied the operating profit to the operating cost as its profit level indicator. The assessee's profit margin was computed at 14.27% and assessee-company claimed that the same was comparable with other companies rendering software development services. For the purpose of TP study, the assessee had chosen 45 comparables and the arithmetic average of profit margin was computed at 9.97%. According to the ....
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.... Flextronics Software Systems Limited The TPO computed average profit of the comparables finally selected at 26.59% after giving working capital adjustment of 2.29% adjusted asymmetrical mean of PL I was determined at 24.3%. On the above basis, the TPO computed TP adjustment as follows: 21.7 Price Received vis-a-vis the Arms Length Price: The price charged by the tax payer to its Associated Enterprises is compared to the Arms Length price as under: Arms Length Price of operating cost Rs. 9,10,49,510/- Price received Rs. 8,37,05,618/- Shortfall being adjustment u/s 92CA Rs. 73,43,892/- 4. The Assessing Officer passed assessment order under section 143(3) dated 17/04/2008 incorporating the above TP adjustments. 5. Being aggrieved by the above assessment order, an appeal was preferred before the learned CIT(A) who, vide impugned order upheld the exclusion of super profit companies and also upheld the turnover filter of Rs. 1 to Rs. 200 crores and excluded the companies having turnover of more than Rs. 200 crores and also applied the 0% RPT filter and therefore excluded certain companies. The ld.CIT(A) excluded the f....
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....t of the Assessing Officer may be restored. 8. The appellant craves leave to add, alter, amend and/or delete any of the grounds mentioned above. 8. Ground Nos. 1, 7 and 8 are general in nature and do not require any adjudication. 9. Ground No.2 challenges the finding of the ld.CIT(A) that 0% RPT filter should be applied. It is trite law that application of RPT filter is an appropriate method as the particular entity having predominantly transactions with its AE in excess of certain threshold or percentage; profitability may result in distorted picture. However, since it is not practically possible to find out the comparable having no RPT transaction, companies having reasonable transactions can be considered for selecting the comparables. In the present case, the assessee-company as well as TPO had applied RPT filter of 25%. However, the ld.CIT(A) applying 0% RPT filter, deleted the following companies: i. Four Soft Ltd. ii. Geometric Software Solutions co. Ltd. iii. RS Software (India) Ltd. iv. Sasken Communications Technologies Ltd. v. Sasken Network Systems Ltd. vi. Tata Elxsi Ltd. We find from the order of TPO that appli....
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.... mentioning here that there are divergent decisions of the Tribunal whether high turnover is a relevant for accepting/rejecting a comparable in the case of a service company. For example, the Mumbai bench of the Tribunal in the case of Capgemini India Pvt Ltd. Vs. ACIT (TS 45 ITAT 2013(Mum)(TP) held that the turnover was relevant only to the manufacturing concerns not to the service oriented companies. On the other hand, the coordinate (Bangalore) bench of the Tribunal in the case of Genesis Integrating Systems (India) Pvt. Ltd. (cited supra) held that turnover is a relevant factor for accepting/rejecting the comparable. However, without going into the turnover factor, we hold that Infosys Ltd., cannot be considered as comparable with that of the assessee-company since Infoysis Ltd. is a giant in the area of software development and it assumed all risks leading to higher profit. On the other hand, the assessee-company is a captive unit of its parent company in US and assumed only limited risk. In the similar circumstances, the Hon'ble Delhi High Court in the case of CIT vs. Agnity India Technologies P.Ltd. held that Infosys cannot be treated as a compa....
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....erlining trade receivable or payable the profit of loss will be treated in the same way in determining the net profit. 10.2 In view of the facts that the assessee has entered into forward contracts for the purpose of hedging of foreign currency exposure on the export and import of diamond, the gain or loss arising of the said, will be treated as part and parcel of the operating profit." 14. Respectfully following the ratio of the above decision, we remand this issue to the file of the AO/TPO to re-compute the margin of the assessee by treating foreign exchange gain as part of operating income and also compute profit margins of the comparable entities by treating foreign exchange gain as operating income. This ground of appeal filed by the revenues is partly allowed for statistical purposes. 15. Ground No.6 challenges the finding of the ld.CIT(A) to allow deduction of 5% from arms length as standard deduction. This issue is covered by the decision of the co-ordinate bench of Tribunal in the case of addition of the code adventure of the table in the case of Tatra Vectra Motors Ltd. vs. Dy.CIT (20 taxmann.com 131) in favour of the assesseecompa....
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....e statutory provisions. It is a statutory levy without any option. The second limb of the proviso gives "an option" to the assessee to take the arm's length price which may vary from the arithmetic mean by an amount not exceeding 5 per cent of such arithmetic mean. The word "option" is synonymous with "choice" or "preference". Therefore, it is the choice of the assessee to take the arm's length price with a marginal benefit and not the arithmetical mean determined as the most appropriate method. There is nothing in the language to restrict the application of the provision only to marginal cases where the price disclosed by the assessee does not exceed 5 per cent of the arithmetic mean. The arm's length price determined on application of the most appropriate method is only an approximation and is not a scientific evaluation. Therefore, the Legislature thought it proper to allow marginal benefit to assessees who opt for such benefit. In the case of an assessee who exercises the option and accepts the arm's length price even exceeding 5 per cent of the arithmetic mean determined by the tax authority as correct and is ready to pay tax on the difference between the price....
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....rovisions in proviso to section 92C(2) of the Act which is applicable w.e.f. 1.10.2009 is concerned, it is noticed that this issue has been adjudicated by the ITAT Pune Bench "A", Pune in ITA No.1350/PN/2010 in the case of Starnet Networks (India) (P.) Ltd. (supra), wherein the relevant findings has been given in paras 20 to 23 of the order dated 03.10.2011 and read as under: "20. We have carefully considered the rival submissions. In this case, a pertinent issue which has been vehemently agitated by the appellant is with regard to its claim of seeking benefit of the option available under the erstwhile proviso to section 92C(2) of the Act. The erstwhile proviso which was inserted by Finance Act, 2002 with effect from 1.4.2002 read 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, or, at the option of the assessee, a price which may vary from the arithmetical mean by an amount not exceeding five percent of such arithmetical mean." As per the said Proviso, an option is available to the assessee for adjustment of +/-5% variati....
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....hen 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, which has been inserted by the Finance (No. 2) Act, 2009 with effect from 1.10.2009 and, in this case, the TPO has passed his order on 30.10.2009. The learned Departmental Representative has also referred to the CBDT Circular No 5/2010 (supra) read with Corrigendum dated 30.9.2010 issued by the CBDT in this regard. Per contra, the stand of the assessee is that the amended Proviso would be applicable prospectively and would not apply in respect of the stated assessment year, which is prior to the insertion of the amended Proviso with effect from 1.10.2009. 22. We have carefully examined the rival stands on this aspect. The amended Proviso has been brought on the statute by the Finance (No. 2) Act, 2009 with effect from 1.10.2009. The Explanatory Notes to the provisions of Finance (No 2) Act, 2009 contained in circular No 5 of 2010 (supra) provides the objective behind the amendment of the Proviso. The....
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....hich 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 effect from 1st April, 2009 and will accordingly apply in respect of assessment year 2009-10 and subsequent years." the following lines shall be read; "the above amendment has been made 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 (TPO)on or after such date." (ii) In para 38.3, for the date "1st October, 2009, the following date shall be read: "1st April, 2009". In terms thereof, it is canvassed that the amended proviso has been made applicable with effect from 1.10.2009 and shall apply even to cases where proceedings were pending before the TPO on or after such date, irrespective of the assessment year involved and, therefore, in the instant case the benefit of the erstwhile proviso cannot be extended....
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....reover, 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 terms of the erstwhile proviso to section 92C(2) of the Act. We order accordingly." In the light of the above decision, we hold that there is no fallacy in the finding of the ld.CIT(A). The ground of appeal filed by the revenue is dismissed. 16. In the result, the appeal filed by the revenue is partly allowed Cross Objection: 17. The assessee-company raised the following grounds of cross objections and also additional grounds of cross objections vide its cross objections: On the facts and circumstances of the case and in law 1. The learned CIT(A) has erred, in law and in facts, by not accepting the Respondent's plea in entirety and confirming with the Learned Assessing Officer ("AO)/ Transfer Pricing Officer ("TPO") on not accepting the economic analysis underta....
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....) of the Act to obtain information which was not available in public domain and relying on the same for comparability purposes. 5. The learned CIT(A) hæs erred, in law and in facts, by accepting cenain comparable companies using unreasonable comparability criteria. 6. The learned CIT(A) has erred. in law and in facts, by rejecting the companies having margin less than the margin of the Respondent company. 7. The learned CIT(A) has erred. in law and facts, by not making suitable adjustments to account for differences in the risk profile of the Respondent vis-å-vis the comparables. 8. The learned CIT(A) erred in confirming the imposition of interest under section 234B and 234C of the Act; The Respondent submits that each of the above grounds is independent and without prejudice to one another. The Respondent craves leave to add, alter. vary, omit, amend or delete one or more of the above grounds of Cross-objections at any time before, or at the time of. hearing of the appeal, so as to enable the Appellate Tribunal to decide this response according to law....