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2004 (10) TMI 629
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....noring that: a). The TPO has used arithmetic mean as against weighted average used by the assessee, as the Indian transfer pricing regulations prescribed arithmetic mean. b). The TPO used comparable used by the assessee for benchmarking as the assessee was unable to explain how these companies became non comparable for the year under consideration. c). the sensitivity analysis carried out by the TPO is a valid tool of comparability analysis. d). Ld. CIT(A) has not also not pointed out anywhere in her order as to how these companies are non comparable. 2. The appellant craves leave for reserving the right to amend, modify, alter, add or forego any ground(s) of appeal at any time before or during the hearing of this appeal." In ITA No. 1490/Del/2011 1. The order of the Learned Assessing officer is bad in law and on the facts and circumstances of the case. 2. The Ld. TPO/AO has erred in law and on the facts of the case in making addition of Rs. 77,35,892/- on account of notional interest on interest free loan given to the subsidiary of the appellant in U.S.A. 3. The appellant may be allowed to add/amend/w....
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....under consideration, total revenue from software development is 110.045 millions against it expenditure on salary is 99.22 million which is 90.16% of total revenue. The assessee has not been able to substantiate with any cogent evidence as to how much of these expenses can be attributed to idle employees. The ambiguity in of calculation of idle employee cost is evident from the fact that different adjustment has been claimed in Transfer Pricing report and reply dated 07.12.2005. 6.2 The employee cost at 65.82% of total revenue during financial year 2001-02, if taken as benchmark and applied on total revenue of 110.045 millions for the current year, the assessee company's employee cost under normal operations should be 72.43 millions. Any expense over and above it can be treated as cost on account of idle employees. Since, assessee company has incurred a cost of 99.22 millions and if out of this 72.43 millions is treated as normal expense, the balance Rs. 26.79 millions can be treated as cost for idle employees. Therefore, claim of ATPL on Idle employee cost is restricted to Rs. 26.79 millions. 7. The operating profit (loss) as worked out in Annexure B from the Aud....
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....n why the remaining six comparables i.e., Bodhtree Consul., Fore C Software Fourth Gen., Integ. Hitech, Online Media Sol, Telesys Software be not considered as comparables for benchmarking international transactions. In response to the above letter the assessee submitted replies dated 30.12.2005 and 04.01.2006. Nothing substantial was submitted against use of the above comparables. The objections raised were of general nature that there are slight functional variations or last year was first year of Transfer Pricing etc. But a perusal of details of functions of all these six companies it is seen that there is no change in functional profile and other factors which could render them in comparable with the assessee company. Similarly, there is no change in functional profile of ATPL which could make it in comparable with the same set of companies held to be comparable by the assessee during the Transfer Pricing proceeding for immediately preceding year. 8.2 In the aforesaid circumstances the comparables selected by assessee company for the year under reference are accepted but in addition these above said six comparables are also merged for benchmarking intern....
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....along with six comparables used last year are taken to be appropriate for benchmarking international transaction for current year. A search process for the financial data for the year 2002-03 for these 13 comparables was run on Capitaline Plus, the database used by the assessee company. Out of these 13 comparables financial data for year 2002-03 in respect of Net Axis was not available and, therefore, this comparable was also rejected. In final analysis only 12 comparables are being adopted for the purposes of calculating comparable profit level indicator. A working of OP/Sales for reference the comparables has earned Operating Profit on sales at 9.47%. As per para 7.0 above OP/Sales in the case of assessee company is -11.68%. Even after providing the benefit of +5% range permitted under Indian Transfer Pricing Law, the international transaction does not confirm to arm's length principle and, therefore, an adjustment in the price is imperative. 9. Calculation of arm's length price for international transaction of sale of software Total Sales of ATPL - Rs. 11,00,45,872 (A) Adjusted Operating Profit (loss) of ATPL (as per para 7.0 above) - Rs. 1....
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....for which intimation was filed to the RBI by the assessee and the same was also confirmed by the RBI." Hence the very basis on which international transaction was benchmarked goes and therefore, claim of ATPL that transaction is at Arm's length becomes open to scrutiny." 4. Aggrieved by this the assessee went in appeal before the First Appellate Authority. The CIT(A) considering the submissions of the assessee which are found reproduced in the impugned order at pages 13-18 came to the following conclusion:- Search for Comparables 8.0 By using two prevalent database i.e., PROWESS and CAPITALINE and after applying filters, explained on page 42 to 45 of Transfer Pricing report, ATPL identified seven companies as final comparables. The gist of working of Operating Profit Margins of these seven comparables is mentioned at page 37 of Transfer Pricing report with Average Mean at 5.91%. The assessee has used data for earlier two years without year 2003 and weighted average has been used for calculation of Profit Level Indicator. The issue of use of multiple year data will be dealt in succeeding paragraphs. During the Transfer Pricing proceedings fo....
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....e company for the year under reference are accepted but in addition these above said six comparables are also merged for benchmarking international transaction for the purposes of Transactional Net Margin Method (TNMM). 8.3 The Profit level Indicator adopted by the assessee is operating margin and at page 37 of Transfer Pricing report this PLI has been adopted by the assessee with the following remarks: "Operating Profit Margin ratio takes care of the difference in functions. The Operating Profit Margin is an indicator of performance for the assessee as it calculates the operating income and costs, which truly reflects the profits earned by the assessee from its operations. Hence, the operating profit ratio has been considered as the appropriate PLI." The PLI adopted using operating margin over sales in not disturbed. 8.4 Use of Previous Year Data: It is worthwhile to mention that Rule 10B(4) of Income Tax Rules provides that the data to be used in analyzing the comparability of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction shall be the data re....
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....tal Sales of ATPL - Rs. 11,00,45,872 (A) Adjusted Operating Profit (loss) of ATPL(as per para 7.0 above) - Rs. 1,28,56,595 (B) Operating profit/sales of comparables - 9.47% (C) Arm's length operating profit (AXC) - Rs. 1,04,21,344 (D) Difference (D-B) - Rs. 2,32,77,939 It can therefore, be concluded that on international transaction of sale of software ATPL must earn a profit of Rs. 1,04,21,344 whereas a (adjusted) loss of Rs. 1,28,56,595 is being posted. The difference between loss reported by the assessee and arm's length profit calculated on the basis of comparables as above would be Rs. 2,32,77,939/-. The value of international transaction on account of sale of customized software is therefore, determined at Rs. 8,73,73,438/- (6,40,95,499 + 2,32,77,939). The Assessing Officer shall increase the income of ATPL by Rs. 2,32,77,939/-." 5. Aggrieved by this both assessee and the Revenue is in appeal before the Tribunal. 6. The Ld. CIT DR Mr. Peeyush Jain & Mr. Yogesh Verma referring to the grievance posed by the Revenue in their appeal invited attention to the finding arrived at in the impugned order on the basis of whic....
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....ssions and perused the material available on record. In the face of the clear statutory mandate we hold that the CIT(A erred in accepting the assessee's claim based on "weighted mean" as it was contrary to the mandate of law as law permits only the "arithmetic mean". Accordingly the finding arrived at is vitiated on this count. It is also seen that qua the comparables the impugned order is vitiated as the reasoning for concurring with the assessee's claim is found missing. It is well settled that the correctness of the conclusion when questioned in higher forum can only be considered taking into consideration the discussion on the reasons prevailing in the mind of the adjudicating authority. In the absence of any discussion addressing the reason the finding is open to challenge on the grounds of being arbitrary. In view of the above in the absence of any reasoning the order is held to be non-speaking and considering the request of the parties the issue is restored back to the file to the CIT(A) with the direction to decide the same by way of a speaking order in accordance with law after giving the assessee a reasonable opportunity of being heard. 9. The sole issue agitated by th....
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....t on loan by ATPL to AIUS was considered and arm''s length interest @ 10% on outstanding amount is required to be charged. An interest calculated @ 10% on an average outstanding amount of which Rs. 7,73,58,925/- being the average of opening loan outstanding on 01.04.2002 (Rs. 7,39,16,850) and closing balance as on 31.03.2003 comes to a sum of Rs. 77,35,892/- and is to be added to total income of ATPL being arm's length value of interest against Nil charged by the assessee." 9.3. As a result of this addition of Rs. 77,35,892/- was made by the AO. This was challenged in appeal before the CIT(A) and considering the submissions advanced by the assessee the CIT(A) decided the issue in the following manner:- "I find no force in the appellants submission the addition made by TPO and his submissions are upheld. The assessee appeal on this ground is dismissed." 10. The Ld. AR inviting attention to the order dated 09.12.2011 in the case of the assessee for 2002-03 assessment year submitted that the Tribunal has restored the issue in the immediately preceding assessment years to the TPO accordingly on account of identical reasoning said issue may also be restored. The ....