Income Tax Appellate Tribunal - Chennai
3I Infotech Limited, Navi Mumbai vs Assessee on 18 April, 2013
IN THE INCOME TAX APPELLATE TRIBUNAL
'B' BENCH : CHENNAI
[BEFORE SHRI N.S. SAINI, ACCOUNTANT MEMBER AND
SHRI CHALLA NAGENDRA PRASAD, JUDICIAL MEMBER]
I.T.A.No.21/Mds/2013
Assessment year : 2008-09
M/s 3i Infotech Limited vs The Income Tax Officer
(J&B Software India Pvt. Ltd. Company Ward II(1)
merged with 3i Infotech Limited) Chennai
Tower No.5, 3rd Floor to 6th Floor
International Infotech Park, Vashi
Navi Mumbai 400 703
[PAN AAACJ 9157 G ]
(Appellant) (Respondent)
Appellant by : Shri R.Vijayaraghavan & Shri
S.P.Chidambaram, Advocates
Respondent by : Dr.S.Moharana, CIT/DR
Date of Hearing : 18-04-2013
Date of Pronouncement : 07-05-2013
ORDER
PER N.S. SAINI, ACCOUNTANT MEMBER
This is an appeal filed by the assessee against the order of the Dispute Resolution Panel (DRP), Chennai, dated 9.8.2012, passed u/s 144C(5) of the Income-tax Act, 1961.
:- 2 -: I.T.A.No. 21/13
2. Ground No. 1 & 4 of the appeal are general in nature and hence, requires no separate adjudication by us.
3. Ground No.2 of the appeal reads as under:
"2. Reduction in amount of deduction under section 10A of the Act.
2.1 The AO and learned DRP erred in law and facts and circumstances of the case by restricting the claim of deduction under section 10A of the Income Tax Act, 1961 ("the Act") to Rs.88,88,340/- as against Rs.92,42,254/- claimed by the Appellant.
2.2 The learned DRP erred in facts and circumstances of the case and in law in confirming the order of the AO in reducing the expenditure incurred in foreign currency of Rs. 71,56,489/- and telecommunication expenses of Rs.28, 1 0,371/- from export turnover while computing deduction under section 10A of the Act.
2.3 The AO ought to have appreciated that foreign travel expenditure was incurred on staff travel and not in connection with providing any technical services outside India and as such the same cannot be excluded from the export turnover.
2.4 The AO ought to have appreciated that telecommunication charges were not incurred for the purpose of delivery of software outside India and as such the same cannot be excluded from the export turnover.
2.5 The AO and learned DRP erred in facts and circumstances of the case and in law in not appreciating that foreign travel expenditure and telecommunication charges were not included as part of the export turnover and as such the same cannot be excluded from export turnover, while computing the deduction under section 10A of the Act.:- 3 -: I.T.A.No. 21/13
2.6 Without prejudice to the above, the entire quantum of foreign travel expenditure and telecommunication expenses should not be reduced from the export turnover while computing the deduction under section 10A of the Act.
2.7 Without prejudice to the above, if the quantum of foreign travel expenditure and telecommunication expense is reduced from the export turnover the same should also be reduced from the total turnover of the undertaking while computing the deduction under section 10A of the Act.
4. At the time of hearing, the ld. A.R did not make any submission on ground Nos. 2.1 to 2.6 raised herein above in this appeal, hence, they are dismissed for want of prosecution.
5. The only Ground No.2.7 of the appeal which is to the effect that if quantum of foreign travel expenditure and telecommunication expenses was reduced from the export turnover, the same should also be reduced from the total turnover of the undertaking while computing deduction u/s 10A of the Act. He relied on the decision of the Chennai Special Bench of the Tribunal in the case of ITO vs Sak Soft Ltd., [2009] 30 SOT 55(Chennai)(SB), for the above ground of appeal.
6. The ld.CIT/DR agreed with the submission made by the ld. AR of the assessee.
:- 4 -: I.T.A.No. 21/13
7. We find that the Special Bench of the Tribunal in the case of ITO vs Sak Soft Ltd (supra) has held as under:
"19. We have carefully considered the issue which is short but interesting. The basic issue to be resolved is whether parity should be maintained between the ingredients of export turnover and total turnover for the purpose of applying the formula prescribed by sub-section (4) of section 10B. The expression 'export turnover' has been defined in clause (iii) of Explanation 2 below the section, whereas there is no definition of the expression 'total turnover' for the purposes of the section. This is precisely the difficulty arising in this case and the question is whether the difficulty can be surmounted and if so by what means. The means suggested on behalf of the assessee and the interveners is that the expression 'total turnover' should also be interpreted in the same manner by excluding therefrom the freight, telecom charges or insurance attributable to the delivery of the articles or things or computer software outside India or expenses, if any, incurred in foreign exchange in providing the technical services outside India. We see merit in the contention. We have attempted, to the best of our ability, to understand the rationale behind such exclusion in the definition of 'export turnover'. Section 10B was first inserted by the Finance Act, 1988 with effect from the assessment year 1989-90. In the section as first inserted exemption was given to the entire profits and gains derived by the assessee from a hundred per cent export oriented undertaking. Detailed provisions were made in sub-section (4) as to the manner of computing the total income of the assessee for the purpose of granting the exemption. There was no definition of 'export turnover' or 'total turnover' because the exemption was not linked to any formula in which the export turnover and total turnover were the ingredients. The section was amended by the Finance Act, 1993 with retrospective effect from the assessment year 1991-92. A perusal of this Finance Act shows that the amendment made to the section is not in any way relevant for our purpose. The section was again amended by the Finance Act, 1994. Some amendments took effect from the assessment year 1994-95 and some of them took effect from the assessment year 1995-96. These amendments are also not relevant for our purpose. Thereafter amendments were made to the section by the Income-tax (Second Amendment) Act, 1998. These amendments are also not relevant for our purpose. The section was then substituted by the Finance Act, 2000 with substantial changes with effect from 1-4-2001, i.e., from the assessment year 2001-02. The Finance Act, 2000 is reported in :- 5 -: I.T.A.No. 21/13 (2000) 243 ITR (St) p.65. Section 10B was substantially changed by substitution. It is by this amendment that a definition of the term 'export turnover' was inserted in clause (iii) of Explanation 2 below the section. The Circular No. 794, dated 9-8-2000 issued by the CBDT containing Explanatory Notes on the provisions relating to Finance Act, 2000 is reproduced in (2000) 245 ITR (St.) 21. It is to be noted that the provisions of section 10A which made special provisions in respect of newly established undertakings in free-trade zone, etc., were simultaneously amended and the section was substantially modified by the same Finance Act. The circular, in para 15 thereof explained the new provisions substituted for the existing sections 10A and 10B.
Para 15.2 says that the provisions have been substituted with a view to rationalize the concessions and to phase them out by the end of the assessment year 2009-10. Paragraph 15.6 explains sub-section (4) of section 10B and the formula prescribed therein. The same is reproduced below :
"15.6 For the computation of profits derived from the export of articles or things or computer software, sub- section (4) provides that the profits derived from such exports shall be the amount which bears to the profits of the business, the same proportion as the export turnover in respect of such articles or things or computer software bears to the total turnover of business. The profits of the business in the given context would mean the profits of the business carried on by the undertaking to which the provisions apply. The working formula for arriving at the export profits will be as under :
Profits of the business × Export turnover Export profits = Total turnover The export turnover and the total turnover for the purposes of sections 10A and 10B shall be of the undertaking located in specified zones or 100 per cent export oriented undertaking as the case may be and this shall not have any material relationship with the other business of the assessee outside these zones or units for the purposes of this provision."
The circular does not throw any light as to how the total turnover should be ascertained and what should be the ingredients :- 6 -: I.T.A.No. 21/13 thereof. It is to be noted that both in sections 10A and 10B, only the expression 'export turnover' is defined and there is no definition of the term 'total turnover'.
20. Section 80HHC is also a section which grants deduction in respect of profits retained for export business. Clause (b) of the Explanation below the section defines 'export turnover' as meaning the sale proceeds received in or brought into India by the assessee in convertible foreign exchange of any goods or merchandise which are exported out of India, but does not include freight or insurance attributable to the transport of the goods beyond the customs station as defined in the Customs Act, 1961. Clause (ba) inserted by the Finance (No. 2) Act, 1991 with retrospective effect from 1-4-1987 defined the term 'total turnover' and stated that it shall not include freight or insurance attributable to the transport of the goods or merchandise beyond the customs station as defined in the Customs Act. The proviso to this clause, which took effect from 1-4-1991 clarified that total turnover would also exclude the incentives referred to in the various clauses of section 28. In Circular No. 621, dated 19-12- 1991 (supra) the CBDT explained the rationale behind the insertion of the definition of 'total turnover' with retrospective effect. This is contained in paras 32.18, 32.19 and 32.20 of the circular. It would be better to reproduce these paragraphs:
32.18 Whereas the definition of the term 'export turnover' excludes freight and insurance attributable to transport, no such exclusion has been specified in respect of the term 'total turnover'. As a result, in CIF transactions, while the export turnover is taken at FOB value, the total turnover includes the sale proceeds of exports at CIF value.
32.19 With a view to removing this anomaly, it has now been clarified that 'total turnover' will also not include such freight or insurance.
32.20 This amendment takes effect retrospectively from 1-4-
1987, the day from which "total turnover" became relevant for the purpose of computation of deduction under section 80HHC. It will, accordingly, apply in relation to assessment year 1987-88 and subsequent years."
It seems to us that the CBDT was of the opinion that whatever has been excluded from the export turnover should also be excluded from the total turnover and otherwise it would be an anomaly. By implication at least, the CBDT seems to be of the view that parity should be maintained between both the expressions. Before the insertion of the definition of 'total turnover' by clause (ba) of the Explanation, there was no definition of 'total turnover' in section 80HHC. The expression :- 7 -: I.T.A.No. 21/13 had to be given a meaning and it was done by the Calcutta Bench of the Tribunal in the case of Chloride (India) Ltd. (supra). There the question was whether the sales-tax and excise duty which are not leviable on export turnover and, therefore, did not form part of the export turnover, should be included in the total turnover as was done by the Assessing Officer in that case. The Calcutta Bench held that there should be parity between the numerator in the formula (export turnover) and the denominator (total turnover) despite the fact that there was no definition of the total turnover in the section as it stood for the assessment year 1986-87 which was the year before the Tribunal. That case was thus decided on first principles, the principle applied being that there should be uniformity in the ingredients of both the numerator and the denominator of the formula since otherwise it would produce anomalous or absurd results. This order was upheld by the Calcutta High Court in Chloride India Ltd.'s case (supra). Subsequently, a Special Bench was constituted in Calcutta in the case of IFB Agro Industries Ltd.(supra), consisting of three Members of the Tribunal since the Assessing Officer took the view in that case that the order of the Tribunal in the case of Chloride India Ltd. (supra) pertained to the assessment year 1986-87 in which year the expression 'total turnover' was not defined in the section whereas from the assessment year 1987-88 clause (ba) has been inserted in the Explanation defining 'total turnover' which excluded only freight or insurance and, therefore, sales-tax or excise duty cannot be excluded from total turnover. The order of the Special Bench in IFB Agro Industries Ltd.'s case (supra). The question before the Special Bench was whether the excise duty and sales- tax should be excluded from the total turnover "for the purpose of bringing parity between the numerator, viz., export, turnover and the denominator 'total turnover' in the said formula, inasmuch as export turnover does not include excise duty and the sales-tax which are not leviable on exportable goods". The contention of the revenue before the Special Bench, which is alluded to in para 8 of the order was that "when particular items alone are excluded, the general meaning excluding only those specified enumerated receipts should be given to the term". The Special Bench proceeded to examine the general meaning of the expression 'total turnover' and apart from several authorities, reference was also made to Circular No. 621 (supra). On an examination of the relevant authorities, including Supreme Court judgments, the Special Bench held that excise duty and sales-tax constitute part of the turnover and trading receipts of the business and, therefore, the term 'total turnover' should be taken as inclusive of these levies. However, the Special Bench was unable to apply the general meaning of the term to the case :- 8 -: I.T.A.No. 21/13 before them and decide the matter in favour of the revenue, because of the judgment of the Bombay High Court in the case of Sudarshan Chemical Industries Ltd. (supra), and the judgment of the Calcutta High Court in Chloride India Ltd.'s case (supra). The Special Bench particularly noticed that the Calcutta High Court, even after referring to the judgment of the Supreme Court in the case of McDowell & Co. Ltd. v. CTO [1985] 154 ITR 148 held that the definition of 'turnover' in one enactment (sales-tax law) may not hold good under all other enactments. Ultimately the Special Bench came to the conclusion that "it could be visualized that it may not always be true that the term 'turnover' included excise duty and it depends upon the provisions of law and the fact that the excise duty did not go into the common till of the assessee and did not become part of circulating capital"
(para 23 of the order). In para 25, the Tribunal concluded as under:
"25. In view of the aforesaid discussion, we are of the opinion that though 'total turnover' may include the receipts of excise duty and sales-tax etc., in its general parlance and under specific statute, because of its wider coverage in the definitions given thereunder, it has to be given a restrictive meaning while computing the 'export profit' for the purposes of section 80HHC namely only that part of the receipt for sale consideration is to be taken as part of the total turnover which has an element of profit therein and, accordingly, the receipts of excise duty and sales-tax which do not include an element of profit should be excluded from 'total turnover'."
It would be seen that the ultimate decision of the Special Bench rested on the reason that anything which has an element of profit alone can be included in the total turnover. The Special Bench has also recognized that it is possible to restrict the general meaning of turnover considering the particular context of the statute under consideration.
21. A perusal of the judgment of the Bombay High Court in Sudarshan Chemicals Industries Ltd.'s case (supra ) shows that not only did the High Court hold that excise duty and sales tax cannot be included in the total turnover for the purpose of section 80HHC as they do not have any element of profit, but have also held that parity should be maintained between the export turnover and the total turnover which are the numerator and denominator respectively in the formula. This would be clear from the following observations of the court (at page 773 of the report) :
:- 9 -: I.T.A.No. 21/13
"Further, the meaning of export turnover in clause (b) of the Explanation to section 80HHC, therefore, clearly shows that export turnover did not include excise duty and sales tax. The export turnover is the numerator in the above formula whereas the total turnover is the denominator. The above formula has been prescribed to arrive at the profits from exports. In the circumstances, the above two items, namely, sales tax and excise duty, cannot form part of the total turnover. In fact, if the denominator was to include the above two items and if the numerator excluded the above two items, then the formula would become unworkable. In the circumstances, we are of the view that in order to ascertain the export profits, the above two items cannot be introduced to inflate the total turnover artificially in order to reduce the benefit which an assessee is entitled to." [Emphasis supplied]
22. We may now look at the judgment of the Calcutta High Court in Chloride India Ltd.'s case (supra). A perusal of the observations of the court at page 629 of the report shows that the parity principle was accepted in that decision also :
"This formula was introduced in section 80HHC(3) of the Act as it stood at the relevant time. In the above formula the export turnover is the numerator whereas the total turnover is the denominator. There can hardly be any room for scepticism that the said formula had been prescribed to arrive at the profits from exports. It was rightly contended by Dr. Pal that if the denominator was to include octroi, sales tax and excise duty and if the numerator excluded those items the formula would certainly become unworkable." [Emphasis supplied] The Calcutta High Court also agreed with the Bombay High Court judgment (supra) and held that since octroi, excise duty and sales-tax cannot have any element of profit and, therefore, these items cannot be included in the total turnover. Thus both in the Bombay and Calcutta judgments the cases were decided not only on the footing that the sales-tax, octroi and excise duty which were statutory levies did not contain any element of profit and hence were not includible in the total turnover, but they were also decided on the reasoning that parity should be maintained between the ingredients of the export turnover and total turnover which were the numerator and denominator respectively in the statutory formula prescribed by section 80HHC.:- 10 -: I.T.A.No. 21/13
23. The above discussion shows that the Special Bench of the Tribunal in the case of IFB Agro Industries Ltd. (supra), the Bombay High Court in the case of Sudarshan Chemicals Industries Ltd. (supra) and the Calcutta High Court in the case of Chloride India Ltd. (supra) were all of the view that parity should be maintained between the export turnover and the total turnover appearing in section 80HHC of the Act.
24. We now proceed to a consideration of the judgment of the Supreme Court in the case of LMW (supra). This case arose with reference to the assessment year 1993-94. The short point which arose for consideration before the Supreme Court was whether excise duty and sales-tax were includible in the total turnover which was the denominator in the formula contained in section 80HHC(3) as it stood at the relevant time. It must be remembered that clause (b) of the Explanation defined 'export turnover' as the sale proceeds received or brought into India in convertible foreign exchange, of any goods or merchandise exported out of India, but excluding freight or insurance attributable to the transport of the goods beyond the customs station. Clause (ba) defined 'total turnover' as not including freight or insurance attributable to the transport of the goods beyond the customs station. In this case the following propositions were laid down by the Supreme Court :
(i) While interpreting the words 'total turnover' in the formula, a schematic or purposeful interpretation to the words has to be given since the section is entirely based on the formula.
(ii) The formula has to be read in entirety.
(iii) The legislative changes made to the section indicate that the Legislature intended to exclude certain items of receipts (like commission and interest) from the deduction as they did not possess any element of turnover, though they may have emanated from the exports.
(iv) The words 'total turnover' in the formula cannot be interpreted with reference to the definition of the word 'turnover' in other laws like the Central Sales Tax Act or as defined in accounting principles.
(v) Anything which does not involve "turnover" cannot be included in the expression 'total turnover'. That is why receipts :- 11 -: I.T.A.No. 21/13 such as commission, rent, interest etc., are excluded from the profits of the export. These receipts did not emanate from the export turnover, much less any turnover.
(vi) Similarly excise duty and sales-tax do not involve any such turnover and, therefore, they have to be excluded from the total turnover. These receipts are recovered by the assessee on behalf of the Government, being indirect taxes.
The above propositions laid down in the judgment unmistakably show that the principle of parity between export turnover and total turnover was affirmed by the Supreme Court in the case of LMW (supra). The contention of the revenue before us was that the judgment is confined to the facts of the case. Certainly every judgment is rendered on the basis of the facts of the case. But where a ratio is laid down and that is applied to the facts of the case, the ratio is applicable to similar fact- situations. In our understanding the ratio laid down by the Supreme Court in the case of LMW (supra ) is an affirmation of the principle of parity between the export turnover and the total turnover for the purpose of section 80HHC. It was also the ratio laid down in that case that any receipt which does not have an element of turnover cannot find a place either in the export turnover or in the total turnover. LMW's case (supra) was followed by the Supreme Court in Catapharma (India) (P.) Ltd.'s case (supra), where the assessment year involved was 1997-98."
8. Respectfully following the decision of the Special Bench of the Tribunal quoted above, we hold that the expenditure on foreign travel and telecommunication should be reduced both from the export turnover and the total turnover of the assessee. Hence, this ground of appeal of the assessee is allowed.
9. Ground No.3 of the appeal is directed against the order of the DRP confirming the order of the Assessing Officer in determining the Arm's Length Price (ALP) of international transaction of software :- 12 -: I.T.A.No. 21/13 development service by making upward transfer pricing adjustment of ` 5,23,19,210/-.
10. The brief facts of the case, as noted by the DRP, are that the assessee is a wholly owned subsidiary of M/s J&B Software Inc. USA. During the year J&B software Inc., USA and its subsidiaries were acquired by 3i Infotech. The assessee provides software development services to J&B Software Inc., USA and also to unrelated entities. The assessee is remunerated on hourly rate and fixed price basis depending on the project contract, and so the assessee had, as per its claim, had a very limited risk bearing software development service provider with respect to the transactions with AE's. During the year, the assessee had international transactions for ` 26,02,80,790/-. The assessee used TNMM and reported 34.17% as the profit on operating cost (PLI) for its transaction with the AEs. As per the TP study conducted by the assessee, the PLI was found to be 11.06%. Based on that, the assessee declared its transactions with the AE to be at arm's length.
11. The TPO accepted that the assessee is a low risk service provider, but undertook a fresh search. Reasons for the TPO to undertake a fresh search of comparables were that: :- 13 -: I.T.A.No. 21/13
• One of the comparables selected by the assessee, M/s VJIL Consulting Ltd, had incurred losses for 2 years including the relevant financial year;
• There was no foreign exchange earnings of M/s Shree Tulsi Online.com during the relevant financial year; and • The assessee had used 3 years' data, instead of one year data.
The TPO also rejected the segmental approach adopted by the assessee, and adopted instead the entity approach, and calculated its PLI at 2.79%. Based on this fresh search, the TPO computed the comparables at 20.76%. This computation was done at the entity level, where the PLI of the assessee was 2.79%. This led to TP adjustment in sales at ` 5.23 Crores. The assessee had also claimed deduction u/s 10A of the Act, but made the following adjustments to the export turnover while computing the deduction under section 10A of the Act:
• Reduced the foreign travel expenses incurred in foreign currency amounting to ` 71,56,489/-; also • Reduced telecommunication charges amounting to ` 28,10,371/-.
Based on the above additions and adjustments, the total income of the assessee was determined at `5,42,31,914/- which included TP adjustment of ` 5.23 Crores and 10A deduction of ` 88,88,340/-. The returned total income of the assessee was determined at `7,34,536/-:- 14 -: I.T.A.No. 21/13
with 10A deduction of ` 92,42,254/-.
12. Being aggrieved by the said order of the Assessing Officer, the assessee filed appeal before the DRP, wherein it submitted as under:
"The assessee submitted that it had computed the ALP in accordance with the provisions of the Act read with the Rules. For the purpose of establishing the ALP of its international transactions with AE, the assessee had maintained a transfer pricing documentation post a detailed study of the international transactions. A detailed analysis was undertaken to determine the functions performed, risks assumed and assets utilized by the assessee in respect to its transactions with the AE. Further, the economic analysis for the determination of the ALP was undertaken in accordance with the provisions of the Act, read with the Rules. Based on the transfer pricing study, it was concluded that the price received by the assessee with respect to its international transactions with AEs were consistent with the arm's length principles. Though the comparability analysis undertaken by the assessee was based on well accepted transfer pricing principles, the assessee submitted, it was inappropriate on the part of the TPO to reject the comparability analysis which was undertaken by the Company in accordance with the provisions of the Act, read with the Rules. In this context, the assessee also referred to the Central Board of Direct Taxes ("CBDT") Circular 14 issued in 2001, which read with Section 92C(3), which puts the primary onus on the assessee to determine the ALP in accordance with the rules and substantiate the same with the prescribed documentation. Where such onus is discharged by the assessee and the data used for determining the ALP is reliable and correct then there cannot be any intervention by the Assessing Officer/TPO), the assessee asserted.
On the use of single year data for analysis, the assessee submitted that the Software services industry in India has witnessed robust growth over the last few years and continues to be the fastest growing segments within the Indian IT Industry. Given the nature of the industry and economic conditions, the use of multiple year data (i.e. two/three year average) reduces the variability/distortions to the financial results arising from the use of single year data. Use of single year data of the :- 15 -: I.T.A.No. 21/13 comparable companies may not adequately capture the market and business cycle reflected in the Industry. The use of multiple year data generally captures market cycles and reduces the likelihood that the financial results of an anomalous year will distort the arm's length ranges. In consideration of the assessee's business cycle, industry profile and economic conditions a two-three year data is appropriate rather than the use of a single year data. Use of multiple year data is also in line with OECD TP guidelines. The assessee stated that looking at the above logic it carried out its comparability study on the basis of 3 years' data, instead of one year data.
Based on the above understanding the assessee selected the following comparables and computed the following margins in its TP study:
Sl. Comparable Return Return Return Average
No. companies on cost on cost on cost
200603 200703 200803
1 Akshay 7.07 4.78 9.21 7.02
Software
Technologies
Ltd.
2 Bodhtree 14.66 33.20 20.86 22.91
Consulting Ltd
3 Quintegra 13.73 15.93 19.00 16.22
Solutions Ltd
4 R.S Software NA* NA* 6.30 6.30
(India) Ltd
5 Shree Tulsi 2.72 15.24 15.79 11.25
Online.com Ltd
6 SIP Techno- 21.75 14.46 -33.44 0.92
logies &
Exports Ltd
7 Helios & 30.94 28.14 24.47 27.85
Matheson
It(Bangalore)
Ltd
8 Tutis 4.68 12.74 10.98 9.47
. Technologies
Ltd
9 VJIL 8.54 -42.16 -5.35 -12.09
Consulting Ltd
Arithmetic 13.01 10.29 7.54 9.88
Mean
But the TPO did not agree with the above study and matrix because M/s VJIL Consulting Ltd had incurred losses for 2 years :- 16 -: I.T.A.No. 21/13 including the relevant financial year, and there was no foreign exchange earnings of M/s Shree Tulsi Online.com during the relevant financial year. The other reason was that the assessee had used 3 years' data, instead of one year data, the assessee informed. But the assessee contended that retention of loss making comparable companies alongside profitable companies tends to even out the risk profile of comparable companies, and so a company with losses cannot be rejected outright as a comparable on that ground alone, if it is still a going concern or its losses do not exceed its net worth. Appropriate analysis for reasons for losses has to be undertaken before selection or rejection of a comparable company. The assessee felt that loss filter applied by the TPO was erroneous and should be rejected. Reference was drawn to the decision of the Income Tax Appellate Tribunal (ITAT), Delhi in Sony India Private Limited (reference: ITA No. 1189/Del/2005, 819&820/DeI!2oo7). In the said case, the Tribunal had observed that the facts and circumstances surrounding the company should determine its status as a comparable, not its financial result. The Tribunal had also stated that exclusion of loss-making comparable is not justified as the loss situation is normal for the business. Further, Para 3.65 of the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations issued by the Organization for Economic Co- operation and Development ("the OECD Guidelines") states, "......Loss-making comparable that satisfy the comparability analysis should not however be rejected on the sole basis that they suffer losses." The assessee informed that VJIL Consulting Ltd is not a persistent loss making company. As per the annual report, the company experienced losses due to decrease in turnover, provision for doubtful debts and change in accounting procedures. Further, as per the annual report, the operations of the company were badly affected due to differences in the management.
The assessee further submitted that Sec 92C read with 10B (4) & 10D (4) does not provide any guidance for application of foreign exchange filter while undertaking a bench marking analysis. Appropriate filters are adopted on a conceptual or industry wide basis depending on the functions and risks assumed by the assessee. Further there is limited guidance on standard filters which has to be applied in the OECD or The Act. Thus, Shree Tulsi Online.com(hereinafter referred to as "Shree Tulsi") which is functionally comparable to the business of the assessee, and so should be selected as a comparable company.:- 17 -: I.T.A.No. 21/13
The assessee also submitted that even if the above contentions are accepted ie.
• Only FY 2007-08 margins are considered and
• VJIL Consulting Ltd and Shri Tulsi Online.com are eliminated
from the list of comparable companies
the results of the margin analysis of the comparable companies at 8.20% would be as at arm's length, as shown below, the assessee submitted:
Sl. Name of Comparable Return on cost
No. companies 200803
1 Akshay Software 9.21
Technologies Ltd.
2 Bodhtree Consulting Ltd 20.86
3 Quintegra Solutions Ltd 19.00
4 R.S Software (India) Ltd 6.30
5 Shree Tulsi Online.com Ltd 15.79
6 SIP Technologies & Exports -33.44
Ltd
7 Helios & Matheson 24.47
It(Bangalore) Ltd
8 Tutis Technologies Ltd 10.98
.
Arithmetic Mean 8.20
Thus, undertaking a new search and using the FY 2007-08 information of the comparable companies is not appropriate as the Rule 10D(4) requires that information and documentation are to be maintained by the assessee. The assessee also stated that it is not appropriate to undertake new search/update the margins based on the data available at the time of assessment. This would lead to anomaly since if this approach is adopted then the arm's length margins earned by the comparable companies will not be as per the provisions of the Act but 'will depend upon the date of performing the search/updating of margin, which is not the intention of the legislature.
On segmental approach, the assessee informed that during the previous financial year, the assessee was in the process of setting up its operations to cater to the needs of the domestic customers. Though during the current year, assessee earned ` 3.86 Crores from domestic operations, as it was only the second year of operations with respect to domestic segment, the assessee company could not reach the breakeven point; it incurred a loss of ` 5.8 Crores with respect to :- 18 -: I.T.A.No. 21/13 domestic operations. In continuation of the same the assessee had determined the profits earned from rendering services to its associated enterprises vis-a-vis services rendered to unrelated parties. The assessee incurred software development expenses for sale in the domestic market. These include Cheque truncation software (CTS), Cheque Clearing Software (CC), Post-dated cheque Software (PDC), I- page forms processing software. In this regard, the assessee submitted that a scientific approach had been adopted using appropriate allocation keys to allocate the various income and expenses between the segments. For this purpose, the most appropriate allocation key i.e number of employees in each segment and the turnover was considered. The financial statements depict the financial state of affairs of the company and were prepared as per the generally accepted accounting principles are certified by the auditors of the company about them giving a true and fair view of the state of affairs of the company. The disclosures required to be made as per the provisions of the Companies Act, 1956 and the accounting standards have already been made. These certified financial statements do not express any opinion or view on the types of operations carried on or the business plans of the company. Accordingly, there is no need to disclose the results of the segmental operations carried on by the company in its financial statements, the assessee submitted.
In relation to the applicability of multiple year data, the assessee stated that Provision to section 92C(2) states, "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." The above view is also supported by paragraph no. 50.4.1 of Circular no. 8 dated August 27, 2002 issued by Central Board of Direct Taxes, which reads as under: "With a view to allow a degree of flexibility in adopting an arm's length price, the Finance Act, 2002 has amended the proviso to subsection (2) of section 92C to provide that where the most appropriate method results in more than one price, a price which differs from the arithmetical mean by an amount not exceeding five per cent of such mean may be taken to be the arm's length price, at the option of the assessee." The proviso of Section 92C(2) was amended by the Finance (No. 2) Act, 2009 and was replaced by two provisos wherein the first proviso provides that on availability of more than one ALP, the ALP may be determined by taking arithmetical mean of such prices. The second proviso provides that if the price at which the international transaction has been undertaken does not exceed 5% of the ALP determined as per first proviso the same is deemed to be at arm's length price. In respect of the same, the CBDT issued a Circular No. 5/2010 dated 3 June 2010 giving explanatory notes to the provisions of the Finance (No.2) Act, 2009.:- 19 -: I.T.A.No. 21/13
Para 37 to 37.5 in the aforesaid circular talks about the amendment made in the proviso to Section 92C(2). Para 37.5 contains the applicability of the said amendment and it dearly states that the amendment has been made with effect from 1st April 2009 and the same will apply in respect of assessment year 2009-10 and subsequent assessment years, i.e., prospectively.
The assessee also submitted that the following companies in the final set of comparables have very high margin:
S.No Name of th Company Margins
earned
during FYE
2008
1. Magnasoft Consulting India Pvt. 32.08
Ltd
2. 3K Technologies Ltd. 25.40
The assessee also stated that extreme profit margin companies should not be considered as they do not demonstrate normal industry trend. The extraordinary variations in profitability are indicators of several abnormal business factors; which are not apparent from the annual report. Therefore, the said companies ought to be rejected. This principle has been well accepted by various Income-tax Appellate Tribunals. In this regard, assessee relied on the following case laws:
• E-Gam Communication (ITA No.1685/PN/2007) • Phi lips Software Centre Pvt Ltd (2008 ID2 GJX-0259- TBAN) • Mentor Graphics (ITA NO.1969/DEL/2006) • Sapient Corporation Pvt Ltd (2011-TII-50-ITAT-DEL-TP) • SAP Labs India Private Ltd (2010-TII-44-ITAT-BANG-TP) • If 15 percent is considered as the threshold limit for related party filter for IT segment, the following comparables proposed by the TPO will be rejected:
Sl.No. Company selected by TPO RPT %
1. Trigyn Technologies Ltd. 100%
The assessee further stated that even if the limit on related party filter was to be increased, the same would have to be done with extreme caution, and the limit ought to be capped at a maximum of 10 percent to 15 percent [as decided in the case of the decision in Sony Limited by :- 20 -: I.T.A.No. 21/13 the Honourable Bench of the Delhi ITAT] and not at an ad hoc, and arbitrary yardstick of 25 percent. Following the same principle the assessee had considered 15 percent, the assessee submitted.
19. The assessee also submitted that 3K Technologies Limited ('3K Technologies) is functionally not comparable to the functions performed by the assessee company. 3K Technologies Ltd is engaged in designing, developing, manufacturing and assembly of computers, components parts and accessories. The company obtains technical know-how for the development of computer systems by entering into foreign collaborations. It mainly provides the following services • Strategy studies • Package implementation • Custom development • Testing services • BPO / IT Enabled services For KALS Information Systems Limited and Magnasoft Consulting, the assessee submitted that they are predominantly a product company, and hence should be rejected.
The assessee also stated that in many instances the margins computed are not correct. The assessee submitted that the margins of the said comparable companies need to be rectified as per the computation performed by the assessee from the annual reports of the respective comparable companies. The detailed computation of the margins from the annual reports of the respective comparable companies provided by the assessee is given below:
Name of the company Margin Correct
computed Margin
by the
TPO
Nettlinx Ltd 30.29 25.48
Magnasoft Consulting India 32.08 26.23
Pvt. Ltd
7seas Entertainment Ltd 37.66 29.69
Trigyn Technologies Ltd 24.42 20.29
Cybertech Systems and 31.55 1.29
Software Ltd
:- 21 -: I.T.A.No. 21/13
13. The DRP, after considering the submission of the assessee, held as under:
"23. The Panel considered the objections of the assessee in detail. The objection of the assessee was that the TPO rejected the segmental approach adopted by the assessee, and applied entity approach, instead. The assessee for its contention relied on various judicial decisions, wherein it was held that the segmental results needed to be considered for transfer pricing analysis. In most of these decisions referred to by the assessee, the TPO did not accept the entity level approach followed by the assessee and applied most appropriate method at segment level. The reason for the TPO to go for entity approach is very clear and that was because the assessee did not have an audited segmental account. Once the assessee did not have a segmental account, it is always very difficult to accept a segmental account. One needs to be consistent. Thus, the action of the TPO to adopt entity approach, in the absence of segment account, cannot be faulted. Once the TPO did a fresh search, there would be a fresh comparables too. It would thus be appropriate to look into the comparables and see how valid they are.
24. The assessee argued that Magnasoft Consulting India Pvt. Ltd and 3K Technologies Ltd had high profits, 32,08% and 35.40% respectively. The assessee also stated that extreme profit margin companies should not be considered as they do not demonstrate normal industry trend. The extraordinary variations in profitability are indicators of several abnormal business factors; which are not apparent from the annual report. Therefore, these companies ought to be rejected, the assessee submitted. But that argument is without any basis. The market has profit making companies and also not so profitable companies. How can comparables be rejected on the basis that they are profitable'? These profits are often because the companies are more efficient, and arm's length price is intended to capture that so that the related parties are not able to hide their related party transactions in inefficiency, and that has been the basis of comparability method, adopted largely world-wide for TP analysis. Thus, this ground needs to be rejected.
25. On related party transactions, the assessee submitted that fixing RPT at 25% is not correct. Sure, the purist view should be that we have comparables only which do not have any RPT at all, and that would be the best scenario. But as it has been :- 22 -: I.T.A.No. 21/13 stated by some court, we may not find any comparable in the market. That would defeat the comparability method. So, as a compromise 25% of RPT has been taken to be a benchmark for undertaking TP analysis. It can be kept at 10-15% as has been stated in some courts, but that is also as arbitrary as 25%. No scientific study has been done to establish RPT level. Till something happens, I guess we would have to live with an arbitrary level, and most of the TP analysis, this panel has seen benchmarked at 25%. So, we would stick to that. But if Trigyn Technologies Ltd had 100% RPT, it is a mistake and needs to be rectified. The TPO would undertake to find before order is finalised whether Trigyn Technologies Ltd had 100% RPT as claimed by the assessee.
26. For the functional difference in the cases of 3K Technologies Limited, KALS Information Systems Limited and Magnasoft Consulting, the Panel did not find any strong reason to convincingly reject these comparables, thus no interference. On the calculation error, it was decided that the TPO would work out the PLI and use that to calculate average PLI, and the arm's length price.
27. On the deduction of 5%, the provisions of the Act are quite clear. This is not to be given as standard deduction, but used as limit which would encourage the taxpayers to have more market prices in its dealing with AEs, and in case it fails to do so, the entire difference between the PLl of the taxpayer and that of the comparables is to be the adjustment. It may also be recalled that the Transfer Pricing provisions were brought on the statute by the Finance Act 2001 w.e.f. 1.4.2002. It is with a view to avoid hardship to the tax payers in the initial years of implementation of these provisions, the Government of India, through a Press Note issued by the Ministry of Finance (Dept. of Revenue) on 22.08.2001, expressed its intention of not making any adjustment if the price adopted by the assessee was up to 5% less or up to 5% more than the arm's length price determined by the A.O. Immediately thereafter, the Central Board of Direct Taxes (CBDT) issued the Circular No.12 dtd.23.08.2001 specifying that the A.O. shall not make any adjustment to the price shown by the assessee if such price was up to 5% less or up to 5% more than the arm's length price determined by the Assessing Officer and in such cases, the price declared by the assessee may be accepted. In the present ease it is seen that the ALP of the international transactions undertaken by the assessee falls beyond the 5% margin of the price of international transaction computed by the assessee. Even in the case of M/s Globe Vantedge Pvt Ltd [201O-TIOL-24-ITAT-Del] it was held that benefit of ±5% is not available as a standard deduction. The :- 23 -: I.T.A.No. 21/13 Hon'ble Delhi tribunal in the case of Marubeni India Pvt. Ltd (2011-TII-36-ITAT-Del-TP) held that, "The benefit of +/- 5 % as per proviso to Section 92C of the Act cannot be considered to be a standard universal deduction allowed in each and every case which the assessee exceeds the permissible limit and falls outside the arm's length. The proviso provides a relief to the taxpayer at the time of determining the ALP. Therefore, the option is available to the assessee only when assessee is computing the ALP and not when the AO/TPO is computing the ALP". Thus, this objection of the assessee is not valid.
28. Rule 10B(4) of Income-tax Rules, 1962 is very clear that single year data is required and there cannot be any argument on that. The only place three years data could be employed where the market situations so demand and these are exceptional cases as per the proviso to Rule 10B(4) of the IT Rules. Here no such extra-ordinary situation was there which required for invoking of the proviso. The proviso allows the use of earlier year data, if (and only if) such data reveals facts which could have all influence on the determination of transfer prices in relation to the transactions being compared. In all other circumstances only the data relating the Financial Year of the international transaction should be used for comparability analysis. In any case, onus is on the assessee to demonstrate and establish existence of factors necessitating the use of such data. The assessee has not even mentioned any such specific factors, leave alone discharging the onus of establishing them. Emphasis of the assessee's submission was on the policy issue rather than on the specific reason relevant for the business nee. So, the action of the TPO on adopting single year data cannot be faulted, and so needs no interference."
14. The ld. AR of the assessee submitted that the DRP erred in confirming the TPO's order rejecting the transfer pricing document maintained by the assessee. It was submitted that the TPO erred in rejecting the following five comparable companies adopted by the assessee without providing any reason:
:- 24 -: I.T.A.No. 21/13
1. M/s Akshay Software Technologies Ltd.
2. M/s Bodhtree consulting Ltd
3. M/s Quintegra Solutions Ltd
4. M/s R.S. Software (India) Ltd
5. M/s SIP Technologies & Exports Ltd.
15. Further, the TPO ignored the three comparable companies viz M/s 3K Techologies Ltd., M/s Kals Information Systems Ltd. and M/s Magnasoft Consulting India Pvt. Ltd., originally included in the show cause notice without assigning any reason. Further, in respect of the comparable companies adopted by the TPO, the assessee raised the following objections:
(i) The learned Transfer Pricing Officer (TPO) erred in not accepting the argument of the assessee that there has been no default of the conditions mentioned in section 92C(3) of the Act.
(ii) The learned TPO erred in rejecting the TP documentation maintained by the assessee on the grounds that the assessee should have determined the arm's length price of its AE transaction based on current year data only without appreciating the fact that the data of comparable companies were not available in public domain at the time of preparation of the TP documentation.
(iii) Without prejudice to the above, the TPO erred in not considering the fact that the current year data of the comparable was separately submitted during the course of assessment proceedings.
(iv) The learned TPO vide Para 6.1 erred in rejecting the search process undertaken by the assessee and conducting a fresh search without providing appropriate justification, which is bad in law.
(v) The TPO has grossly erred in law and facts in rejecting Shree Tulsi.com.:- 25 -: I.T.A.No. 21/13
(vi) The learned has grossly erred in law and facts in rejecting VJIL Consulting Ltd.
(vii) The learned Transfer Pricing Officer ("TPO") erred in not considering the segmental results provided by the assessee, without appreciating the fact that the expenditure has been identified and apportioned towards rendering services to Associated Enterprises (AE) and unrelated parties by adopting appropriate allocation key.
(viii) The learned TPO erred in rejecting the segmental results on the ground that the segmental results were unaudited.
(ix) The benefit of using +/- 5% range to determine the ALP should be provided to the assessee even if the arithmetic mean is determined by the TPO.
(x) The learned Transfer Pricing Officer ('TPO") erred in selecting comparable companies which are functionally dissimilar when compared to the assessee.
(xi) The learned Transfer Pricing Officer ("TPO'') should have rejected companies with abnormal profit margins, which squarely fall within the ambit of the term "outliers" vis-a-vis the average industry.
(xii) The learned Transfer Pricing Officer (hereinafter referred to as 'TPO") erred in considering 25 percent as the threshold limit for the Related Party Transactions filter as this number is an arbitrary number that has been adopted without any judicial precedence or reasonable basis.
(xiii) The learned TPO in the event not in acceptance of the zero percent threshold limit for Related Party Transactions filter, should have considered the threshold limit for Related Party Transactions filter as prescribed in the recent Income Tax Appellate Tribunal ("ITAT") decision in the case of Sony India Private Limited wherein the Honourable Delhi Tribunal observed that a limit of 10 percent to 15 percent on total revenue may be considered.
(xiv) The learned Transfer Pricing Officer ('TPO") erred in the computation of the margins of some of the comparables companies proposed by the TPO.
(xv) The learned Transfer Pricing Officer ("TPO") ought to have accepted the use of multiple year data for computing the final margin of the comparables.:- 26 -: I.T.A.No. 21/13
(xvi) With regard to the use of contemporaneous data, the TPO ought to have accepted the submission of the assessee that the data to be employed for the determination of the transfer price in the transfer pricing documentation ought to be the latest available data.
(xvii) The word "shall" though ordinarily mandatory, is sometimes not so interpreted if the context or the intention otherwise demands.
(xviii) The learned TPO ought to have accepted the fact that current year data u.ere not available in the public domain to calculate the margins of comparable companies.
(xix) The learned TPO ought to have appreciated the fact that transfer pricing is an anti avoidance mechanism. In the instant case the assessee is registered as an Software Technology Parks of India (hereinafter referred to as the "STPI").The assessee has claimed tax benefits under section 10A of the Income -Tax Act, 1961 and has no reason to suppress its profit from its operations to manipulate the transfer prices. Therefore the adjustment proposed is not called for and is hence misplaced.
(xx) 3K Technologies Limited ('3K Technologies' or the 'Company") is functionally not comparable to the functions performed by the assessee company.
(xxi) KALS Information Systems Limited ("KALS Information Systems" or "the Company") is predominantly a product company and hence has to be rejected.
(xxii) Magnasoft Consulting India Private Limited ['Maqnasoft" or "the Company'] is not functionally comparable to the tested party as it is primarily engaged in IT products related services. (xxiii) Trigyn Technologies Ltd ["Trigyn" or "the Company''] is not functionally comparable to the tested party.
(xxiv) Trigyn has significant Related Parts) Transactions [100% on operating sales], hence has to be rejected."
16. It was submitted that it agreed with the TPO's stand in disregarding the use of multiple year data in determining the price of the international transaction with AEs, but the TPO did not appreciate :- 27 -: I.T.A.No. 21/13 that the software service industry in India had witnessed robust growth over the last few years and continued to be the fastest growing segment within Indian IT industry. Given the nature of industrial and economic conditions, the use of multiple year data i.e to which three year average reduced the variability/distortions to the financial results arising from the use of single user data. It was further submitted that the DRP erred in confirming the TPO's stand in rejecting VJIL Consulting Ltd without appreciating that losses are part of business and hence company cannot be removed just because it incurs losses.
17. It was submitted that the DRP erred in confirming the TPO's stand in rejecting Shree Tulsi Online.com Ltd as a comparable company without appreciating that the company is functionally comparable to the business of the assessee. It was also submitted that even as per TPO's criteria only two companies selected by the assessee will get eliminated and the recomputed average margin of comparable companies would be 8.2% as against 34.17% segmental margin earned by the assessee.
18. It was argued that the DRP erred in confirming the action of the TPO in not considering the segmental results provided by the assessee and rejecting the segmental results on the ground that they :- 28 -: I.T.A.No. 21/13 were unaudited, without appreciating the fact that the expenditure has been identified and apportioned towards rendering services to AEs and unrelated parties by adopting appropriate allocation key.
19. It was argued that the PLI calculated by the TPO of the companies selected as comparables with the assessee-company was 20.76% whereas the segmental margin earned by the assessee on transactions with AEs was 34.17% and hence, the price determined by the assessee was at ALP. He submitted that the TPO was not justified in comparing the PLI of all the transactions of the assesseei.e domestic as well as international which was 2.79% with the comparable companies selected by him and thereby making an adjustment of ` 5.23 crores to the ALP of the assessee .
20. The ld. AR of the assessee further submitted that it was in the month of September that the TPO asked the assessee to provide the comparables of its ALP and as the companies by that time had not uploaded their data, therefore, the financial data was not available with the assessee for making the comparison with the assessee's price charged to AEs for international transactions. Therefore, the assessee took multiple year data of the companies for making the comparable with the ALP charged by the assessee.
:- 29 -: I.T.A.No. 21/13
21. While concluding his arguments, the ld. AR of the assessee submitted that both, the TPO and the DRP has not considered the issue in its true perspective. Firstly, they erred in comparing data of the entire entity with the data of the assessee-company. He submitted that only the international transactions should be considered for comparison and not the result of the entire entity which would give a distorting result. Further, the comparable selected by the TPO were not functionally comparable with the line of business of the assessee company. It was submitted that the assessee was in the business of software development services to J&B Software Inc. USA and also to unrelated entities and was remunerated on hourly rate and fixed price basis depending on the project contract and that the assessee had a very limited risk bearing software development service provider with respect to the transaction with AEs. The comparables adopted by the TPO were of companies either designing, developing and manufacturing and assembly of computers or software product sale/licensing and training activities apart from software service or were providing sales and services of their own software product. It was submitted that the segmental PLI worked out by the assessee for its international transaction with the AEs was supported by the certificate of the CA in Form 3CEB and therefore, the TPO as well as :- 30 -: I.T.A.No. 21/13 the DRP were not justified in rejecting the PLI of 34.17% worked out by the assessee for its ALP with AEs.
22. On the other hand, the ld.CIT/DR supported the orders of the lower authorities.
23. We have heard the rival submissions and perused the orders of the lower authorities and materials available on record. The assessee is engaged in software development services. During the year it also provided software development services to M/s J&B software Inc. USA to the tune of ` 26,02,80,790/-. Thus, the assessee entered into transactions with its AE of ` 26,02,80,790/-. In the audit report submitted u/s 92AE, the assessee's auditor has certified that ` 26,02,80,790/- is transaction at ALP on the basis of TNM method.
24. During the course of hearing, the assessee prepared segmentwise Profit and Loss Account in respect of its transactions with AE and transactions with others and claimed that it has earned profit of 34.17% of the cost in respect of AE transactions and incurred loss of 60.30% of cost in respect of transactions with non-AEs. The TPO rejected the above working of the assessee on the ground that the segment-wise Profit & Loss Account prepared by the assessee was unaudited. The TPO, on the basis of the comparable cases observed :- 31 -: I.T.A.No. 21/13 that ALP should be determined by taking profit @ 20.76% of the cost in respect of transactions with AE. According to the TPO, the assessee has shown 2.79% of the cost as its profit of the entire entity. He, therefore, added ` 5.23 crores to the ALP of the assessee.
25. The assessee, before the DRP submitted that its profit in respect of AE was 34.17% of the cost which is more than the rate of profit adopted by the TPO and therefore, TPO was not justified in enhancing its ALP of AE transactions and consequently, the total income.
26. The DRP confirmed the action of the TPO on the same ground that the segment wise working prepared by the assessee is not audited and therefore, the TPO was justified in adopting the profit rate of all the transactions of the assessee as the rate of profit derived in respect of AE transactions also.
27. Before us, the ld. AR of the assessee submitted that when profit derived from AE transactions are taken separately, the profit derived from transactions with AE comes to 34.17% and as the same compares favourably with the rate of profit derived by the TPO in respect of other comparable cases, so, the lower authorities were not justified in making adjustment with the ALP declared by the assessee. :- 32 -: I.T.A.No. 21/13
28. The lower authorities, for making adjustment, have assumed the profit declared by the assessee in its all transactions i.e domestic transaction as well as AE transaction, taken together as the rate of profit derived from AE transactions which is neither factually correct nor legally permissible. For the submission the assessee placed reliance on the decision of the Delhi Bench of the Tribunal in the case of DCIT vs Stratex Net Works (India) Pvt. Ltd, [2010] 133 TTJ 365 wherein it was held as under:
"7. The TPO on p. 12 in the order extracted by the AO in the assessment order himself accepted that adjustment is required to be made to the value of international transaction related to commission on sales and warranty service. He has made the adjustment on these two items only. The grievance of the assessee is that if the TPO wants to determine the ALP of international transaction with associated concern then he should work out the profit disclosed the assessee on those receipts and compare that result with the comparables of independent cases, who have carried out similar international transactions with independent parties. In that exercise the domestic receipts which have nothing to do with the AEs are required to be excluded for working out the profit level indicator shown by the assessee in respect of international transaction. We find force in this contention of the learned counsel for the assessee. The TPO ought to have considered the international receipts with the AEs only while determining the profit shown by the assessee in such transaction if the PLI is lower than the one comes out from comparable cases only then he could make necessary adjustment. In the present case while working out the PLI shown by the assessee he included the domestic receipt which gives lesser figure and then compared this result with the comparable cases, after the comparison he applied the difference only to the international receipts. To our mind that is not the appropriate step permissible in law and the learned CIT(A) has rightly appreciated this aspect.":- 33 -: I.T.A.No. 21/13
29. We, thus, find that the lower authorities were not justified in not excluding profit or loss in respect of domestic transactions for determining the profit declared by the assessee in respect of AE transactions. They were not justified in adopting the profit level achieved by the assessee in respect of all its transactions including domestic transactions as the profit level declared in respect of AE transactions. Further, we find that the assessee had furnished separately its working of the profit declared by it in respect of its AE transactions before the TPO as well as before the DRP. The lower authorities could not point out any specific defect in the said working of the assessee. As per the said working of the assessee, the assessee claimed to have earned a profit level of 34.17% of the cost in respect of AE transactions. Before us also, the ld. CIT/DR could not point out any specific defect in this working of the assessee. The only argument of the Department is that the segmentwise working made by the assessee is not audited. In our considered view, there is no legal requirement that the segmentwise working submitted before the TPO should be audited by the assessee's CA. Moreover, it is not open to the Revenue to reject the working prepared by the assessee without pointing out any error therein. In absence of any error being pointed out in the working shown by the assessee wherein it has :- 34 -: I.T.A.No. 21/13 claimed that it has achieved a profit level of 34.17% of the cost in respect of transactions with AE, we have no option but to accept the same. On the above facts, in view of the decision of the Delhi Bench of the Tribunal quoted above, we find that the rate of profit achieved in other comparable cases are to be compared with profit level declared by the assessee in respect of its AE transactions after excluding domestic transactions. Therefore, on comparing the same, we find that the profit level declared by the assessee in respect of its AE transactions is more than the profit level in respect of comparable cases found by the TPO. In the above circumstances, in our considered view, the lower authorities were not justified in making addition to the income of the assessee. We, therefore, delete the addition of `5,23,19,210/- and allow the ground of appeal of the assessee.
30. In the result, the appeal of the assessee is partly allowed.
Order pronounced on Tuesday, the 07th of May, 2013, at Chennai.
Sd/- Sd/-
(CHALLA NAGENDRA PRASAD) (N.S.SAINI)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated: 07th May, 2013
RD
Copy to: Appellant/Respondent/CIT(A)/CIT/DR