TaxTMI 
TaxTMI 
TaxTMI 
2020 (3) TMI 331
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....the Transfer Pricing Officer (TPO) for determining the ALP of a `specified domestic transaction' and, in turn, determination of Arm's Length Price (ALP) by the TPO of the `international transaction' is invalid and violative of the provisions of section 92CA of the Act. 4. Briefly stated, the facts of the case, as are material for this issue, are that the assessee filed its return declaring total income at Rs. 1,99,54,082/-. Certain international transactions were reported in Form No.3CEB. The AO made a reference to the TPO for determining the ALP of the reported `Specified Domestic Transaction' (SDT) amounting to Rs. 7,07,45,549/- after obtaining due approval from the Pr. CIT. The TPO recommended transfer pricing adjustment of Rs. 1,11,28,742/- to the value of the `International transaction'. A draft order was passed accordingly. The Dispute Resolution Panel (DRP) gave certain directions which had the effect of reducing the amount of transfer pricing adjustment from Rs. 1.11 crore and odd to Rs. 79,81,424/- in the final assessment order. Aggrieved thereby, the assessee is in appeal before the Tribunal. 5. The first legal issue raised by the assessee through the above referred ad....
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....f Rs. 7.07 crore. The TPO during the course of proceedings before him observed that the value of Rs. 7.07 crore was in relation to 'international transactions' and not the 'specified domestic transactions'. He accordingly determined the ALP of the international transaction of Rs. 7.07 crore. 7. The case of assessee before the Tribunal is that section 92CA does not permit the TPO to determine the ALP of a transaction not referred to him by the AO. The ld. AR argued that since it was the 'specified domestic transaction' which was referred to him by the AO, he ought not to have proceeded with the determination of the ALP of the `international transaction'. 8. We do not find any substance in the view bolstered on behalf of the assessee in the facts and circumstances of the present case. Sub-section (1) of section 92CA provides that where an assessee has entered into an international transaction or specified domestic transaction and the AO considers it necessary, he may with the previous approval of the Pr. CIT refer the computation of the ALP in relation to the said international transaction or SDT to the TPO. Sub-section (2) provides that where a reference is made under subsection ....
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....P of the `international transaction.' The contention advanced on behalf of the assessee is that such a determination by the TPO is invalid. There is no doubt that the reference by the AO to the TPO was made for the SDT amounting to Rs. 7.07 crore on the basis of the report by the assessee in Form No.3CEB which states the value of SDT as per books of accounts at Rs. 7.07 crore. Since the stated value of the SDT was more than Rs. 5.00 crore, it was obligatory on the part of AO to make a reference to the TPO for determining its ALP. It was on the basis of the report furnished by the assessee itself that the AO first sought approval from the Pr. CIT and then made a reference to the TPO for determining the ALP of the reported SDT with value of Rs. 7.07 crore. The ld. AR fairly confessed that it was, in fact, a mistake on the part of the assessee in reporting wrong values in Column Nos. 8 and 9 of Form No. 3CEB in as much as the correct value of the international transaction was Rs. 7.07 crore and that of SDT was Rs. 2.60 crore. Once the assessee misreported the figures of SDT and international transaction, it cannot be allowed to turn around later and seek benefit of its own mistake b....
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....of Rs. 7.07 crore. In other words, the TPO correctly determined the ALP of the reported transaction of Rs. 7.07 crore for which a reference was made to him, albeit with the nomenclature of `specified domestic transaction' instead of `international transaction'. The substance of the matter is that the TPO determined the ALP of transaction of Rs. 7.07 crore, which was referred to him by the AO after seeking due permission from the Pr. CIT. 13. Reliance of the ld. AR on the ratio decidendi in Times Global Broadcasting Company Ltd. Vs. UOI (2019) 103 taxmann.com 388 (Bom) is misconceived as the facts of that case are alien to the facts of the instant case. That case is an authority for the proposition that the TPO cannot assume jurisdiction to determine ALP of a SDT not referred to him. Au Contraire, the position which subsists before us is that the TPO determined the ALP of the transaction of Rs. 7.07 crore, being the same transaction which was referred to him though as a `SDT' instead of `international transaction', and that too on the wrong reporting made by the assessee only. In the context of jurisdiction of the TPO to determine the ALP, we find that there is no distinction betwe....
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....becomes incumbent upon the AO to make a reference to the TPO after taking approval from the Pr. CIT. There is no choice. There is no question of considering it necessary or expedient. Reference has to be invariably made in such situation. Reverting to the facts and circumstances of the extant case, we find that the AO on finding the figure in column no. 9 reported at Rs. 7.07 crore, being the aggregate value of specified domestic transactions as per books of accounts at more than Rs. 5.00 crore, had no option but to make a reference to the TPO without going into any further details. The position would have been different if the reported value of the international transaction had been less than the Rs. 15 crore and the AO had been contemplating to make a reference to the TPO. In that case, the requirement of considering `necessary or expedient' would have triggered. This contention of the assessee is also ergo jettisoned. 16. At this juncture, it is necessary to note that sections 92 to 92F were introduced by the Finance Act, 2001 w.e.f. 1.4.2002 requiring determination of the ALP only of the international transactions. The Finance Act, 2012, w.e.f. 1.4.2013 extended the applicati....
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....ackaged application, testing and communication thereof. The assessee has been providing software development and support services in the areas of embedded multimedia and multimedia applications and communication systems. The assessee reported two international transactions of "Provision of software development and support services" with transacted value of Rs. 69,37,222/- and Rs. 6,38,08,327/- with its two Associated Enterprises (AEs) respectively. The assessee applied Transactional Net Marginal Method (TNMM) as the most appropriate method for demonstrating these transactions to be at ALP. For this purpose, it made geographical segments with different profit margins. The TPO aggregated the same and computed the assessee's PLI at 4.20%. As against certain comparables noted by the assessee, the TPO shortlisted ten companies as comparable with their mean margin of OP/OC at 19.00%. On the basis of such margin, the TPO computed transfer pricing adjustment of Rs. 1,11,28,742/-. The DRP ordered the exclusion of two companies, namely, e-Zest Solutions Ltd. and Priya Softweb Solutions Pvt. Ltd. from the list of comparables, which had the effect of reducing the amount of transfer pricing add....
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....expenses/income of revenue nature. 22. In the context of transfer pricing, the Bangalore Bench of the Tribunal in SAP Labs India Pvt. Ltd. Vs ACIT (2011) 44 SOT 156 (Bangalore) has held that foreign exchange fluctuation gain is part of operating profit of the company and should be included in the operating revenue. Similar view has been taken in several decisions including Trilogy E Business Software India (P) Ltd. Vs DCIT (2011) 47 SOT 45 (URO) (Bangalore). 23. The reliance of the ld. DR on Safe Harbour rules to contend that foreign exchange gain or loss be taken as non-operating, is not sustainable. There is no doubt that in such rules, forex gain/loss has been treated as non-operating. However it is relevant to note that such rules are not applicable to the assessment year under consideration. The Hon'ble Delhi High Court in Pr. CIT VS. Cashedge India Pvt. Ltd., vide its judgment dated 4.5.2016 in ITA 279/2016, has held that : `So far as the question of fluctuation of foreign exchange was concerned, the ITAT ruled that the relevant provision, i.e. `Safe Harbour Rules' had not been notified for the concerned assessment year and were, therefore, inapplicable'. Thus the Hon'ble H....
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....lopment services to the CLIENT (i.e. the A.E.) as described in Work Orders issued by CLIENT from time to time during the period of the Agreement. The term "Work Products" has been defined to consist of work including but not limited to reports, specifications, data, databases, software and documentation that has been developed and delivered by the assessee pursuant to the Work Orders. To sum up, the nature of services provided by the assessee to its AEs is that of software development in the field of multimedia. With the above understanding of the functional profile of the assessee, we now proceed to examine as to whether the companies under challenge are comparable or not. 1. Thirdware Solutions : 26. The TPO included this company in the list of comparables by rejecting the assessee's contention of the same being functionally different and its turnover being five times more. No relief was allowed by the DRP, which has brought the assessee before the Tribunal. 27. We have heard both the sides and gone through the relevant material on record. A copy of the Annual report of the company has been placed at 212 onwards of the paper book. Page 304 of the paper book is a copy of this c....
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....contended that it was clear from the Note No.17 that this company had only sale of software and not that of sale of software development services. We do not approve such a contention for the reason that the company used a generalized term of "Sale of software" to represent the amount realized from sale rendering of software development services. This fact is divulged from the Auditor's report on page 344 of the paper book. Under the head: `In respect of its Inventories', the Auditor has reported that "The company is Service Company, primarily engaged in Software Development. Accordingly, it does not hold any physical inventory.' Note No.26 forming part of financial statements categorically records that the figure of Revenue of Rs. 21.65 crore is from "Services rendered". The DRP has correctly recorded that this company apart from involved in software development services is also engaged in providing software product development services and no distinction can be drawn between the activities of software development and software product development services. In our considered opinion, there is a difference in rendering software development services as a Contractor and rendering softw....
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....red in the case of the assessee is Rs. 21.30 crore. This shows that the Mumbai Tribunal, while holding such company to be not comparable, was dealing with it for the A.Y. 2014-15 and not the A.Y. 2013-14 under consideration. Nature of work and business model of a company can undergo change from one year to another. It goes without saying that one needs to examine the comparability position on year to year basis independently. For one year, a company may be comparable and for the next year, it may cease to be so for a variety of reasons. We, therefore, hold that the authorities below were justified in including this company in the list of comparables. 3. R.S. Software (India) Ltd. : 31. The TPO included this company in the list of comparables without making much discussion in his order. The assessee approached the DRP which discussed, at para 8 of its direction, the deployment by the TPO of turnover filter of more than Rs. 1.00 crore and less than Rs. 5.00 crore. After discussing certain decisions, the DRP held that upper turnover filter should be fixed at ten times and lower turnover filter at 1/10th of the turnover of the tested party (the assessee). It, therefore, fixed the upp....
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....tion as per the draft order strictly in accordance with the direction of the DRP. This manifests that once the matter travels to the DRP, the AO/TPO become bound to give effect to the directions of the DRP vis-à-vis the income computation under the draft order. Such directions are mandatory and not directory on the AO. The AO has no option to accept or reject the same in as much he is bound to follow the same, whether or not he agrees with the same. As R. S. Software (supra) does not pass the turnover filter approved by the DRP, we order to exclude this company from the list of comparables. 34. Having discussed the inclusion or otherwise of the above referred three companies in the list of comparables, now we proceed to determine the correctness of the profit margin of two comparables, namely, CG-VAK Software and Exports Ltd. and Exilant Technologies Ltd. 35. The assessee has not disputed the per se inclusion of these two companies in the list of comparables. The only quarrel is on the computation of their OP/OC. To be precise, the question is about the treatment given by the authorities below to the Provision for bad and doubtful debts as non-operating. The TPO while calc....