AI Drafter 
TaxTMI 
TaxTMI 
2020 (12) TMI 460
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....tal income of Rs. 2,51,85,090. The assessee reported three international transactions in Form No. 3CEB. The Assessing Officer (AO) made a reference to the Transfer Pricing Officer (TPO) for determining the Arm's Length Price (hereinafter referred to as ALP') of international transactions. The dispute in the extant appeal is only qua the international transaction of " Rendering of software development and support services" with transacted value of Rs. 15,29,56,672. The assessee followed the Transactional Net Marginal Method (TNMM) as most appropriate method with its Profit Level Indicator (PLI) of Operating Profit/Total Cost (OP/TC) computed at 16.57%. The assessee selected certain comparables to demonstrate that the international transaction was at ALP. The TPO made certain alterations to the comparables selected by the assessee and also to the profit margin of some of the comparables. He shortlisted nine comparables with their mean profit margin at 28.18%, which was taken as benchmark. In this way, the TPO proposed transfer pricing adjustment of Rs. 1,53,44,587. The AO notified the draft order on 23-03-2016 proposing transfer pricing addition of this magnitude. The assesse....
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....eeded to determine the ALP by considering the nature of services rendered by the assessee as those of software development and support services. To clarify the things further, we have also examined Annual accounts of the assessee, whose copy has been placed in the paper book. It can be seen from the assessee's Balance sheet that no Intangible assets appear in it, which exhibits that the assessee did not have its own developed software products available for commercial exploitation. Note No. 19 on Financial statements indicates that the assessee company obtained certain fixed assets on loan or free of cost from Netscout Systems Inc, USA in the nature of computer hardware and other equipments which were not included in the fixed assets since their ownership vested with Netscout Systems Inc, USA. It can be further seen from the assessee's balance sheet that the figure of Capital work-in-progress in the current/preceding year is Nil, which shows that the assessee was working exclusively for its associated enterprise and invoicing the work completed on regular basis without any need to hold its own capital work-in-progress. It is further apparent from the Current assets of the a....
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....rresponding operating costs, which part of its activity is analogous to the operations carried out by the assessee-company. In the absence of such a vital information, Cybermate Infotek Limited cannot be considered, on an entity level, as comparable to the assessee company. We, therefore, direct to exclude Cybermate Infotek Limited from the list of comparables. (ii) Acropetal Technologies Limited (Segmental) 8. Insofar as this company is concerned, there is no dispute on its inclusion in the final tally of comparables. The only point of difference is the computation of its PLI for the purposes of working out the mean PLI of all the comparables. The assessee worked out PLI of this company on segment basis at 4.66%. The TPO determined its PLI at 29.62%. In the objections before the DRP, the assessee contended that the TPO made a wrong computation. The DRP in para 8.2 of its directions accepted the contention of the assessee. It directed the adoption of segmental operating profit of Acropetal Technologies Limited at Rs. 11.83 crore and then re-compute the PLI of this company accordingly. For giving effect to the directions given by the DRP, the AO requested the TPO to quantify t....
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...., upon receipt of the directions from the DRP, shall complete the assessment " in conformity with the directions". There is no choice with the AO to follow or not to follow the direction rendered by the DRP u/s 144C(5). Such a direction is binding in nature upon the AO, who is supposed to follow the same in letter and spirit. Since in the instant case, the DRP categorically directed to include the amount of operating profit of Acropetal Technologies Limited at Rs. 11.83 crore, in our considered opinion, the AO/TPO went on a wrong premise in tinkering with such a figure and substituting it with a different figure. In view of the fact that the AO was bound by the directions of the DRP, we vacate the impugned order to this extent in substituting the amount of operating profit of Acropetal Technologies Limited at Rs. 22.26 crores, which is hereby ordered to be adopted as Rs. 11.83 crore as was directed by the DRP. (ii) Comp-u-Learn Tech India Limited (CTIL) 11. The assessee selected this company as comparable. The TPO excluded it by recording on page 14 of his order that the company is in BPO sector and segmental analysis is not available and then on page 26 by finding it to be f....
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....ilarity. Since the company was held to be functionally dissimilar, there was no occasion for the TPO to apply other filters for the purposes of inclusion in the list of comparables. It goes without saying that only when the functional similarity is established that the turn of applying other filters come. If a company is held to be functional different at the threshold, there can be no question of testing the comparability on the basis of other filters. Once the DRP held the company to be functionally similar, the leftover exercise of the TPO of applying the filters, was to be carried out by the TPO. The natural corollary is that only those filters, which were applied by the TPO at the time of passing the order u/s 92CA(3) of the Act, could have been considered anent to this company at the time of giving effect to the directions given by the DRP. 14. We have examined the filters applied by the TPO that have been recorded in the show cause notice dated 04-12-2015 issued by the TPO, a copy of which is available on page 182 onwards of paper book. Para 4.2 discusses the determination of ALP by the assessee in its TP study report. Para 5 dealing with the selection of comparables also....
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....as been specifically enumerated in section 144C(13) requiring completion of the assessment 'without providing any further opportunity of being heard to the assessee'. There is a rationale behind such a mandate of sub-section (13), which on a harmonious construction compliments the mandate of sub-section (8) of section 144C of the Act defining the scope of directions to be given by the DRP. Subsection (8) explicitly provides that the DRP " may confirm, reduce or enhance the variations proposed in draft order so, however, that it shall not set aside any proposed variation or issue any direction under sub-section (5) for further enquiry and passing of the assessment order.' There is no ambiguity in the language of the provision in unmistakably stating that the DRP can suo motu confirm, reduce or enhance the variations proposed in draft order but not direct the AO/TPO to make any further enquiry before passing the assessment order giving effect to its directions. In other words, a fresh exercise of the assessment by the AO, at the instance of the DRP remanding the matter, is prohibited. The raison d'etre for curbing such a power of the DRP is to curtail initiating the e....