Income Tax Appellate Tribunal - Pune
Starent Networks India Private ... vs Assessee
Author: G.S. Pannu
Bench: G.S. Pannu
IN THE INCOME TAX APPELLATE TRIBUNAL
PUNE BENCH " A", PUNE
BEFORE SHRI SHAILENDRA KUMAR YADAV, JUDICIAL MEMBER
AND SHRI G.S. PANNU, ACCOUNTANT MEMBER
I.T.A. No. 1350/PN/2010
(Asstt. Year : 2006-07)
Starent Networks (India) P.Ltd. .. Appellant
P-17, Rajiv Gandhi Infotech Park,
Hinjewadi, Pune
PAN AAACN5937G
Vs.
Dy. Commissioner of Income-tax, .. Respondent
Pune
Appellant by: S/Shri R R Vora &
Mahesh G Mandlecha
Respondent by: Shri Hareshwar Sharma
ORDER
PER G.S. PANNU, AM
This appeal by the assessee is directed against the order passed by the Dy. Commissioner of Income-tax, Cir.6, Pune dated 28.9.2010 under section 143(3) r.w.s 144C of the Income-tax Act, 1961 (in short "the Act"), pertaining to the assessment year 2006-
07.
2. In this appeal pertaining to the assessment year 2006-07, substantive dispute raised by the assessee is against the action of the lower authorities in determining the Arm's Length Price (in short 'ALP') of the appellant's international transaction at Rs 18,78,32,677/- as against Rs 17,47,15,470/- 2 declared by the assessee. Although the appellant company has raised multiple Grounds on this issue, the pertinent grievance is against the determination of the ALP at a higher figure by the Revenue authorities than the value declared by the assessee.
3. In brief the relevant factual backdrop leading up to the present dispute can be summarized as follows. The appellant is a company incorporated under the provisions of the Companies Act, 1956 and is a 100% owned subsidiary of M/s Starent Networks Corporation, USA (hereinafter referred to as 'SNC'). The appellant is engaged in carrying out research, development and testing activities in the field of software development and export thereof exclusively to its parent holding company, i.e. SNC. The appellant company has three undertakings in India located at Pune and Bangalore, which are stated to be approved under the Software Technology Park scheme of the Government of India entitled to the benefits provided under section 10A of the Act.
4. During the year under consideration, assessee entered into an international transaction with its Associated Enterprise(AE), i.e. SNC on account of software development services for a stated consideration of Rs 17,47,15,470/-. In the course of assessment proceedings, the Assessing officer made a reference to the Transfer Pricing Officer (TPO) to determine the ALP with reference to the above transaction in terms of section 92CA(1) of the Act. In the proceedings before the TPO, it was explained that in the Transfer Pricing Study Report, the appellant considered the Cost Plus Method (i.e. CPM) as the most appropriate method for benchmarking the international transaction in question since the pricing was determined on Cost plus basis. The assessee explained that the parent company provided a 10% margin to the appellant on the total costs incurred by it. Thus, the price charged by the assessee from its AE was arrived at by applying a 10% margin on the total costs incurred.
5. During the course of transfer pricing assessment proceedings, the TPO opined that the method adopted by the appellant for benchmarking its 3 international transaction was not acceptable. It was observed that the final comparison was done on the basis of net margin (PBIT/Operating cost) of the comparable companies with the gross margin of the assessee company. The TPO was, therefore, of the opinion that in such situation, the Transactional Net Margin Method is the most appropriate method for benchmarking the international transaction carried out by the assessee. In so far as this aspect of the matter is concerned, the learned Counsel for the appellant submitted in response to a query from the Bench, that the application of the Transactional Net Margin Method (hereinafter referred to as 'TNM Method') is not being disputed. In fact, the in the course of transfer pricing assessment proceedings, the appellant also tested its international transactions by applying the TNM Method, inasmuch as, the assessee compared its net operating profits with the net operating profits of the comparable companies. For this purpose, the appellant conducted search for identifying the comparable companies on the basis of the 'Prowess' information data base. After using the following filters for identifying the comparable companies, a total of 62 companies were considered as comparable by the appellant:
i) Companies where sales were less than one crore and more than one hundred crores;
(ii) Companies for which data not available;
(iii) Abnormal PLI (ie Negative PLI or PLI greater than 50%);
(iv) Product based activity;
(v) Line of business activities/services not comparable to the Appellant;
and,
(vi) Related party transactions more than 25%.
Upon consideration of the above filters, the net operating profit/operating cost was used as the relevant PLI and average PLI was ascertained at 8.72%. For the year under consideration, the appellant had earned a margin of 11.62% and since the margin earned by the appellant was higher than the average of margin 4 earned by the comparable companies, the instant international transaction with the AE for the provision of software development services was canvassed by the assessee as having been concluded at an arm's length.
6. The aforesaid determination of ALP by the appellant was not found acceptable by the TPO. Firstly, the TPO rejected one of the filters applied by the appellant, i.e. the filter on account of abnormal PLI (i.e. negative PLI or PLI greater than 50%) for the reason that the functional comparability, assets employed and risks undertaken should ultimately alone matter in identifying the comparable companies. Further, the TPO cited two more filters for rejection of comparable companies, namely, Companies with negative net worth; and, Companies having ratio of personnel expenses to total expenses less than 30% In this way, out of the 62 companies selected by the appellant as comparables, the TPO rejected 56 companies for varied reasons, such as distinction in business activities from that of the appellant, product based activity (trading), substantial related party transactions, ratio of personnel expenses to total expenses less than 30%, etc. Additionally, after considering the accept reject matrix provided by the appellant, the TPO adopted an additional comparable company which was otherwise rejected by the appellant in its analysis, namely, M/s Compucom Software Ltd. In the final analysis, the TPO has adopted the following as the comparable companies:-
S.No Name of the company Margin
(OP/TC)
(%)
1 Goldstone Technologies Ltd. 0.98%
2 NUC Soft Ltd 3.69%
3 Ominitech Infosolutions Ltd(Seg) 84.94%
4 R Systems International Ltd 21.86%
5 SIP Technologies & exports Ltd 20.92%
6 Compucom Software Ltd (seg) 33.52%
Arithmetic mean 27.65%
As a result of the above exercise, the appellant's margin of 11.62% was found lower than the average margin of the comparable companies adopted by the TPO. As a result, the TPO proposed an upward adjustment of Rs 2,50,91,747/- 5 to the appellant's income in terms of his order passed under section 92CA(3) of the Act dated 30.10.2010. Accordingly, the Assessing Officer proposed similar addition in the draft order, which was objected to by the appellant before the Dispute Resolution Panel (DRP). In its objection before the DRP, the appellant inter alia, objected to the adjustment proposed by the TPO to the international transaction of providing of software development services. After considering the varied submissions putforth by the appellant and taking into consideration the material on record, the DRP gave certain directions vide order dated 30.8.2010. Briefly put, the directions of the DRP were to the following effect--
- that the TNM Method is the most appropriate method for benchmarking the appellant's international transaction;
- that out of the set of comparables finally adopted by the TPO, two companies, one having the highest profit margin at 84.94% (i.e. Omnitech Infosolutions Ltd) and the other having the lowest margin at 0.98% (i.e. Goldstone Technologies Ltd) should be excluded to arrive at the PLI for benchmarking the said international transaction of the appellant;
- that since the PLI of the remaining four companies on aggregation basis came to 20%, the Assessing Officer was directed to compute the value of the international transaction adopting TNM Method and PLI of 20% on the cost; and,
- that as regards the contention of the appellant regarding the allowability of benefit of +/-5% as per proviso to section 92C of the Act, the DRP was of the view that the safe harbour of +/-5% is not available to the appellant;
As a result of the above directions, the final set of comparable companies adopted are as under:
S.No Name of the company Margin
(OP/TC)(%)
1 NUC Soft Ltd 3.69%
2 R Systems International Ltd 21.86%
3 SIP Technologies and Exports 20.92%
Ltd
4 Compucom Software Ltd (Seg) 33.52%
Arithmetic mean 20.00%
In terms of the aforesaid directions, the Assessing Officer finalized the assessment under section 143(3) r.w.s. 144C of the Act, vide order dated 28.9.2010 after making an addition of Rs 1,31,17,207/- on account of transfer 6 pricing adjustment. Aggrieved by such an addition, the appellant is in appeal before the Tribunal.
7. In the above background, the rival parties have made detailed submissions. The appellant company has also furnished an exhaustive Paper Book containing, inter alia, the written submissions made before the respective authorities, as also copy of the transfer pricing study report conducted by the appellant etc. The learned CIT-Departmental Representative, appearing for the Revenue, has exhaustively referred to the orders of the authorities below in support of the case of the Revenue. The respective submissions have been heard and the relevant records perused.
8. Broadly speaking the learned Counsel for the appellant has assailed the addition on the following points. Firstly, it is contended that the DRP erred in excluding M/s Goldstone Technologies Ltd. from the list of comparables on the ground that the margin of the said comparable company was abnormally low. The aforesaid action is stated to be inappropriate for no opportunity of being heard was given to the assessee before excluding such company from the final set of comparables. Further it is pointed out that the profit margin of 0.98% of Goldstone Technologies Ltd. cannot be considered as abnormally low in the light of its own margin of the preceding year and in this connection, a reference has been invited to the tabulation placed at page 163 of the paper Book. In terms thereof, it is pointed out that the margin (i.e. net operating profit/operating cost of the said company for the earlier year of March 2005 is 4.51% vis-à-vis 0.98% for the year under consideration, and in any case, the said company has been accepted as functionally comparable by the TPO in the subsequent assessment year. It is contended that the appellant had already applied a filter to remove abnormal PLI (i.e. negative PLI or PLI greater than 50%) while identifying the comparable companies and after the application of such filter, the Goldstone Technologies Ltd. cannot be considered as a company having abnormal PLI or a negative PLI and therefore the same cannot be excluded on account of the 7 reason advanced by the DRP especially when the said company has been accepted as functionally comparable by the TPO in the subsequent year. It was accordingly contended that Goldstone Technologies Ltd be considered as a comparable for the purposes of testing the international transaction in question.
9. Secondly, it is submitted that Compucom Software Ltd. has been wrongly considered by the TPO as a comparable company and deserves to be excluded because of significant related party transactions. In this regard, it has been pointed out that while adopting the said company as a comparable, the TPO did not consider that it has related party transactions which comprised more than 25% of the total revenue for the financial year 2005-06. It has been submitted that the appellant applied a filter of rejecting companies having related party transactions in excess of 25% and our attention was drawn to pages 244-245 of the Paper Book, wherein is placed the relevant workings in this regard. On this basis, it was contended that the said company be excluded from the final set of comparable companies to arrive at the ALP of the international transaction in question.
10. It is further contended that the authorities below have erred in not considering any adjustment on account of difference in working capital and risks undertaken by the appellant vis-à-vis the comparable companies. It is submitted that adjustment on account of working capital is warranted for the difference in the levels of credit extended in the form of accounts receivables and credit obtained in the form of accounts payables in the books of tested party vis-a-vis those of the comparable companies. Even on account of differential risks undertaken, an adjustment is warranted as there is a direct relationship between risk and return. In this regard, it is vehemently emphasized that the assessee is a captive service provider to its parent company, (i.e. the AE) and that major risks are undertaken by the parent company inasmuch as the majority of functions of overall software development are done by the AE and all of the significant risks are assumed by the AE. It is submitted that these aspects have not been 8 appreciated by the lower authorities and no adjustment has been allowed on account of difference in working capital and risks undertaken by the appellant vis- à-vis comparable companies. In support of the aforesaid propositions, reliance has been placed on the following decisions:
a. Mentor graphics (Noida) P Ltd v DCIT 112 TTJ 408 (Del);
b. Egain Communications P Ltd v ITO 118 TTJ 354 (Pune); c. Philips Software Centre P Ltd v ACIT 119 TTJ 721 (Bang.); and d. Sony India (P) Ltd v DCIT 118 TTJ 865 (Del).
11. Further it is contended that the DRP erred on facts and in law in making the transfer pricing adjustment from the ALP without giving the benefit of the option available to the appellant under the erstwhile proviso to section 92C(2) of the Act. As per the DRP, the ALP of the international transaction undertaken by the assessee falls beyond 5% margin of the price of international transaction computed by the assessee, thus the benefit of +/-5% as per the proviso to section 92C(2) is not available to the assessee. It is pointed out by the learned counsel that the above conclusion of the DRP is in contrast to the following decisions:
a. Skoda Auto India (P) Ltd v ACIT 122 TTJ 699 (Pune); and b. Electrobug Technologies Ltd v ACIT 37 SOT 270 (Delhi)
12. In this regard, the appellant has submitted a detailed written submission which is on the following lines:
"4.3 As per the erstwhile proviso to section 92C(2) of the Act, an assessee has the option of charging a price to its AE, which may vary from the ALP by +/-5%. The appellant further states that section 92CA(3) of the Act provides that the GTPO has to determine the arm's length price in accordance with sub-section (3) of section 92C.
Section 92C(3) further states that the arm's length price shall be determined by the AO in accordance with sub-section (1) and (2) of section 92C. Therefore, it should be appreciated that it is mandatorily required to calculate the arm's length price in accordance with section 92C(1) and 92C(2) of the Act. The Explanatory memorandum to Finance Bill 2002 and Notes on Clauses - income Tax (Finance Bill, 2002) also clarifies that in case the application of the most appropriate method results in two or more prices, the Appellant is require to compute the arm's length price by determining an arithmetic mean of such prices or a 5% variation of the arithmetic mean thereof. There is no ambiguity in law in respect of the same. Thus, any adjustment to the income of the assessee should be computed after considering a +/-5% variation from the arithmetic mean.
4.4 In view of the above, the appellant requests your Honour to adopt the computation mechanism followed in the above cases and allow the benefit of the 5 percent range as provided under the erstwhile proviso to section 92C(2) of the Act. 4.5 Further, prior to the amendment made by the Finance (No 2) Act, 2009, the proviso to section 92C(2) of the Act provided that the ALP would be taken to be the arithmetic mean (hereinafter referred to as 'AM') of the prices or at the option of the appellant, a price which may vary from the AM by an amount not exceeding 5% of such AM. Thus, the ALP was +/-5% from the AM. However, the amendment introduced by the 9 Finance (No 2) Act, 2009 provides that the ALP shall be determined to be the AM of prices where more than one price is determined by the most appropriate method. Further, where such ALP is within 5% of the transfer price, hen the transfer price should be regarded as the Alp. The said amendment to section 92C(2) of the Act has come into effect from 1 October 2009.
4.6 With respect to the applicability of such amendment from 1 October 2009, the appellant submits that as the ALP is to be computed and determined for each international transaction by the assessee at the time of complying with the transfer pricing regulations, the amendment should apply only for computing ALP for international transactions entered into on or after 1 October 2009. Following the ruling of the Supreme Court in the case of Karimtharuvi Tea Estate Limited v State of Kerala (60 ITR 262), the amendment should not ordinarily apply to assessment year 2007-08. 4.7 It may be noted that while submitting the return of income, income was required to be computed based on ALP. A tax-payer would have committed no wrong if, in the past returns, income was determined based on the law that then existed and allowed a variation of +/-5%. Any change in law which has the effect of contributing to returned and assessed income and having consequences of concealment penalty or scope for prosecution can never be applied retrospectively so as to lead to a presumption of willfully wrong return furnished by the taxpayer."
In terms of the above, the assessee submitted that the amendment to the proviso made with effect from 1.10.2009 was not retrospective and came into effect from the assessment year 2009-10 and subsequent years. In this regard, reference was made to a decision of the Delhi Bench of the Tribunal in the case of ACIT v UE Trade Corporation India (ITA no 4405/Del/09 dated 24.10.2010), a copy of which has been placed before us. For the above reasons, it is contended that the computation mechanism as per the erstwhile proviso be applied and assessee be allowed the benefit of 5% range as provided by the erstwhile proviso to section 92C(2) of the Act.
13. Apart from the aforesaid arguments, the learned Counsel has made detailed submissions that out of the comparable companies identified by the appellant, the rejection of certain comparables by the TPO was not appropriate in the case of the following companies, namely, i) VMF Softech Ltd.; ii) RS Software (I) Ltd.; iii) Quintegra Solutions Ltd.; iv) VJIL Consulting Ltd.; and v) LGS Global Ltd.
14. Further, the learned Counsel pointed out that the appellant had explained before the lower authorities that the AE of the assessee was having significantly low margins, and the appellant was being compensated adequately irrespective of the fact whether the AE was making reasonable profits or not. It has been pointed out that assessee was being compensated with a constant mark-up of 10% over the costs, despite the low profitability of the AE and in any case 10 significant functions and risks were being undertaken by the AE as compared to the appellant company. In this connection, reference was invited to the detailed functional, assets and risk analysis of the appellant vis-à-vis parent company and summary financial position of the parent company contained in the written submissions dated 22.6.2009 addressed to the TPO, a copy of which has been placed in the Paper Book at pages 180 to 212. Based on such workings, it is contended that inspite of assuming majority of the functions, assets and risks in comparison to the appellant, the margins of the AE earned on an overall basis is significantly lower. It is contended that no credence to the above argument has been given by the TPO. The learned Counsel emphasized that the transfer pricing provisions in the Act are liable to be invoked in a situation where the profits belonging to India's tax jurisdictions are intended to be passed on to any other tax jurisdiction by way of an international transaction between two or more Associated Enterprises and in this regard, reference was made to the following decisions:
a. Philips Software Centre P Ltd v ACIT 119 TTJ 721 (Bang);
b. Zydus Atlanta Healthcare P Ltd v ITO - ITA No 3311 k& 3312/Mum/2008 (Mum);
c. Panasonic India P Ltd v ITO 135 TTJ 43 (Del); and, d. DCIT v Indo American Jewellery - ITA No 6194/Mum/2008 (Mum). Dwelling further, it was submitted that before venturing to prove that any profit of the appellant company has been shifted outside India, it would need substantiation that profits exist at all with the parent company outside lndia. In the instant case, the assessee enjoys the benefit of exemption under section 10A of the Act, the parent company has earned a net operating margin of 2.43% for the year ended 31.12.2005, which is lower than the margin of assessee company, which was 11.62% during the Financial year 2005-06. Thus as per the learned Counsel factually speaking, since the the parent company has lower profits in comparison with the appellant company, it is inappropriate to conclude that any 11 profit has been shifted outside India so as to attract the transfer pricing regulations of the Act.
15. On the other hand, the learned Departmental Representative, appearing for the Revenue, has primarily relied upon the orders of the authorities below in support of the case of the Revenue. The learned Departmental Representative pointed out that the final set of comparables considered on the basis of the directions of the DRP was fair and proper. It is pointed out that the risks assumed by the assessee company are quite high which would suggest high returns/margins. It was submitted that the assessee was fully dependent on a single customer, i.e. its parent company and this factor by itself suggests a high risk situation. It was also pointed out that certain assets have been transferred by the parent company to the appellant at fair value of the transaction which showed that there was no intention on the part of the parent company to assume the risks associated with the operations of the appellant company. It is also pointed out that it was wrong to suggest on the part of the assessee that majority of the risks are undertaken by the parent company because ultimately the market forces determine the levels of business carried out, and the same would not only affect the parent company but it would also impact the business of the Indian subsidiary as well.
16. Further, it is contended that low margins earned by the parent company is not a relevant factor for the purpose of Transfer pricing adjustments, since as per the transfer pricing regulations, Associated Enterprise is expected to pay arm's length price to its Indian subsidiary company, irrespective of its own profitability levels.
17. With regard to exclusion of M/s Goldstone Technologies Ltd., it is contended that the DRP has given the following reasoning for its exclusion, which is quite justified:-
"The next question that arises before us is pertaining to comparables chosen by the ld TPO in paragraph 87 of the TP order on the basis of which PLI of 27.65% has been arrived at by him to benchmark the assessee's international transactions. After careful consideration of the material on record including the submission of the assessee, we are 12 of the considered view that the two companies, one having the highest profit margin at 84.94%, namely, Omnitech Infosolutions Ltd. and the other having margin of 0.98% in the case of Goldstone Technologies Ld. Which is the lowest, should be excluded to arrive at the just and fair PLI for the purpose of benchmarking the international transaction of the assessee because the margin in the two cases are found to be abnormal in the light of their own margins in the preceding years."
18. As regards the contention of the appellant that it may be allowed the benefit of +/-5% as per the proviso to section 92C, a reference was made to the following discussion in the order of the DRP in para 6.3:
"6.3 As regards the contention of the assessee that it may be allowed the benefit of +/- 5% as per section 92C, it may be mentioned that the proviso to section 92C(2) of the IT Act provides 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 price, or, at the option of the assessee, a price which may vary from the arithmetical mean by an amount not exceeding 5% of such arithmetical mean. 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, government of India, through a press note issue by the Ministry of Finance (department of Revenue) on 22.8.2001, expressed its intention of not making any adjustment if the price adopted by the assessee was upto 5% less or upto 5% more than the arm's length price determined by the AO. Immediatey thereafter, the Central Board of Direct Taxes (CBDT) issued the Circular No 12 dtd. 23.8.2001) specifying that the AO shall not make any adjustment to the price shown by the assessee if such price was up to 5% less or upto 5% more than the arm's length price determined by the AO and in such cases, the price declared by the assessee may be accepted. In the present case, it is seen that the ALP of the international transaction undertaken by the assessee falls beyond the 5% margin of the price of international transaction computed by the assessee. Therefore in view of the provisions of the law, details and intentions as are evident from the press note of Govt. of India as well as circular of the CBDT, as aforementioned the benefit of the safe harbor of +5% -5% is not available to the assessee."
19. On the basis of the aforesaid, it has been contended that since the impugned assessment was made after 1.10.2009, the amended Proviso to section 92C(2) of the Act shall apply in this case. In this regard, a reference has been made to the CBDT Circular No. 5/2010 dated 03.06.2010 read with Corrigendum dated 30.9.2010 to submit that the amended Proviso to section 92C(2) of the Act is applicable with effect from 1st October, 2009 and shall accordingly apply in relation to all cases in which proceedings are pending before the Transfer Pricing Officer on or after such date. Therefore, as per the learned CIT-Departmental Representative, the benefit of +/-5% intended by the erstwhile proviso to section 92C(2) of the Act is not available to the assessee. In the aforesaid manner, the learned Departmental Representative has strongly defended the assessment framed by the Assessing officer determining the ALP of the international transaction at Rs 18,78,32,677/- as against the stated value of Rs 17,47,15,470/-.
13
20. We have carefully considered the rival submissions. In this case, a pertinent issue which has been vehemently agitated by the appellant is with regard to its claim of seeking benefit of the option available under the erstwhile proviso to section 92C(2) of the Act. The erstwhile proviso which was inserted by Finance Act, 2002 with effect from 1.4.2002 read as under:
"Provided that where more than one price is determined by the most appropriate method, the arm's length price shall be taken to be the arithmetical mean of such prices, or, at the option of the assessee, a price which may vary from the arithmetical mean by an amount not exceeding five percent of such arithmetical mean."
As per the said Proviso, an option is available to the assessee for adjustment of +/-5% variation for the purposes of computing ALP. As per the Proviso, 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 5% of such arithmetical mean. The point made out by the assessee is based on the latter part of the Proviso whereby an option is given to the assessee to take an ALP which may vary from the arithmetical mean by an amount not exceeding 5% of such arithmetical mean. Firstly, the claim of the Revenue is that such benefit is not available to the present assessee, because the price of international transaction disclosed by the assessee exceeds the margin provided in the Proviso. This aspect of the controversy, in our view, is no longer germane in view of the plethora of decisions of our co-ordinate Benches, namely, Sony India (P) Ltd. (supra); Electrobug Technologies Ltd. (supra), and Development Consultant P Ltd v DCIT 115 TTJ 577 (Kol.) wherein it has been observed that the benefit of the option contained in the latter part of the Proviso to section 92C(2) is available to all assessees, irrespective of the fact that price of the international transaction disclosed by them exceeds the margin prescribed in the Proviso.
21. So, however, the other argument set up by the Revenue and which has been more potently argued is to the effect that the benefit of such Proviso is not available to the assessee in the instant case, because the said Proviso has been 14 amended by the Finance (No 2) Act, 2009 with effect from 1.10.2009 which reads as under:
"Provided that where more than one price is determined by the most appropriate method, the arm's length price shall be taken to be the arithmetical mean of such prices:
Provided further that if the variation between the arm's length price so determined and price at which the international transaction has actually been undertaken does not exceed five per cent of the latter, the price at which the international transaction has actually been undertaken shall be deemed to be the arm's length price."
The case set up by the Revenue is that the amended Proviso shall govern the determination of ALP in the present case, inasmuch as the amended provisions were on statute when the proceedings were carried on by the Transfer Pricing Officer (TPO). As per the Revenue, the amended Proviso would have a retrospective operation and in any case, would be applicable to the proceedings which are pending before the TPO on insertion of the amended Proviso, which has been inserted by the Finance (No. 2) Act, 2009 with effect from 1.10.2009 and, in this case, the TPO has passed his order on 30.10.2009. The learned Departmental Representative has also referred to the CBDT Circular No 5/2010 (supra) read with Corrigendum dated 30.9.2010 issued by the CBDT in this regard. Per contra, the stand of the assessee is that the amended Proviso would be applicable prospectively and would not apply in respect of the stated assessment year, which is prior to the insertion of the amended Proviso with effect from 1.10.2009.
22. We have carefully examined the rival stands on this aspect. The amended Proviso has been brought on the statute by the Finance (No. 2) Act, 2009 with effect from 1.10.2009. The Explanatory Notes to the provisions of Finance (No 2) Act, 2009 contained in circular No 5 of 2010 (supra) provides the objective behind the amendment of the Proviso. The Legislature noticed the conflicting interpretation of the erstwhile proviso by the assessee and the income-tax Department. The assessee's view was that the arithmetical mean should be adjusted by 5% to arrive at ALP, whereas the departmental view was that no such adjustment is required to be made if the variation between the 15 transfer price and the arithmetical mean is more than 5% of the arithmetical mean. With a view to resolving this controversy, the Legislature sought to amend the proviso to section 92C(2), which has been reproduced by us in the earlier part of this order. In the said Circular, it has also been elaborated that the above amendment has been made applicable with effect from 1.4.2009 and will accordingly apply in respect of assessment year 2009-10 and subsequent years. In any case, the Proviso contains a prescription to determine the ALP and quite clearly it is a substantive provision encompassing the eventual determination of an assessee's tax liability. Thus, it can be said that the Proviso is not a procedural piece of legislation and therefore, unless it is so clearly intended, the newly amended proviso cannot be understood to be retrospective in nature. In fact, it is a well-settled proposition that the statutory provisions as they stand on the first day of April of the assessment year must apply to the assessment of the year and the modification of the provisions during the pendency of assessment would not generally prejudice the rights of the assessee. Furthermore, we are fortified by the intention of the Legislature as found from circular No 5 of 2010 (supra) whereby in para 37.5, the applicability of the above amendment has been stated to be with effect from 1.4.2009 so as to apply in respect of assessment year 2009-10 and subsequent years. In this regard, we also find that the Delhi Bench of the Tribunal in the case of ACIT v UE Trade Corporation India (P) Ltd. vide ITA No 4405(Del)/2009 dt 24.12.2010 has observed that the proviso inserted by the Finance (No 2) Act, 2009 would not apply to an assessment year prior to its insertion. In this view of the matter, we therefore find no justification to deny the benefit of +/-5% to the assessee in terms of the erstwhile Proviso for the purposes of computing the ALP.
23. However, before parting we may also refer to a Corrigendum dated 30.9.2010 by the CBDT by way of which para 37.5 of the circular No 5/2010 (supra) has been sought to be modified. The Corrigendum reads as under: 16
" CORRIGENDUM In partial modification of Circular No. 5/2010 dated 03.6.2010,
(i) In para 37.5 of the said Circular, for the lines st "the above amendment has been made applicable with effect from 1 April, 2009 and will accordingly apply in respect of assessment year 2009-10 and subsequent years."
the following lines shall be read;
st "the above amendment has been made applicable with effect from 1 October, 2009 and shall accordingly apply in relation to all cases in which proceedings re pending before the Transfer Pricing Officer (TPO) on or after such date."
st
(ii) In para 38.3, for the date "1 October, 2009, the following date shall be st read: "1 April, 2009".
In terms thereof, it is canvassed that the amended proviso has been made applicable with effect from 1.10.2009 and shall apply even to cases where proceedings were pending before the TPO on or after such date, irrespective of the assessment year involved and, therefore, in the instant case the benefit of the erstwhile proviso cannot be extended to the assessee. We have carefully pondered over the assertion made by the appellant that the Corrigendum is untenable in the eyes of law. Firstly, the said corrigendum does not bring out any preamble so as to throw light on the circumstances and the background in which the same has been issued. Secondly, it is well understood that the Explanatory Notes to the provisions of a Finance Act passed by the Parliament seeks to explain the substance of the provisions of the Act as intended by the Legislature. In fact, the Hon'ble Supreme Court in the case of K.P Varghese v ITO 131 ITR 597 (Ker) emphasized the sanctity of the statements contained in the Explanatory Notes of the provisions and stated that the interpretation placed in such documents is binding interpretation of law. The contents of the Corrigendum are quite inexplicable. Notwithstanding the aforesaid and without going into the validity of the Corrigendum dated 30.9.2010 (supra), we are of the view that the same would not operate to the detriment of the assessee since at the relevant point of time the contents of the Circular No 5/2010 (supra) were in operation. In other words, the withdrawal of the interpretation placed in circular 17 No 5 /2010 (supra) on the applicability of the amended proviso is sought to be done away by the Corrigendum dated 30.9.2010 and, therefore, such withdrawal shall be effective only after 30.9.2010, even if such Corrigendum is accepted as valid. We may note here that the appellant has assailed the validity of the Corrigendum itself on which we have not made any determination. Therefore, the Corrigendum dated 30.9.2010, in our considered opinion, has no bearing so as to dis-entitle the assessee from its claim of the benefit of +/-5% in terms of the erstwhile proviso to section 92C(2) of the Act. In coming to the aforesaid, we have been guided by the parity of reasoning laid down in the judgments of the Hon'ble Bombay High Court in the cases of BASF (India) Ltd. v CIT 280 ITR 136 (Bom); Shakti Raj Films Distributors v CIT 213 ITR 20 (Bom); and, Unit Trust of India & Anrs. v ITO 249 ITR 612 (Bom). The Hon'ble High Court has opined in the case of BASF (India) Ltd. (supra) that the circulars which are in force during the relevant period are to be applied and the subsequent circulars either withdrawing or modifying the earlier circulars have no application. Moreover, the circulars in the nature of concession can be withdrawn prospectively only as held by the Hon'ble Supreme Court in the case of State Bank of Travancore v CIT 50 CTR 102 (SC). Considering all these aspects, we therefore find no justification in the action of the lower authorities in disentitling the assessee from its claim for the benefit of +/-5% to compute ALP in terms of the erstwhile proviso to section 92C(2) of the Act. We order accordingly.
24. Apart from the aforesaid, the appellant has assailed the addition on other aspects also. One of the issue raised is regarding the inclusion of Compucom Software Ltd. as a comparable by the TPO. Such inclusion is assailed on the ground that the related party transactions of this Company exceeded 25% of the total revenues for financial year 2005-06. As per the workings placed at pages 244-245 of the Paper Book-II, it is reflected that the related party transactions of this Company are 28.78%, which is in excess of 25%. It has been pointed out 18 that there is an apparent contradiction in the approach of the TPO inasmuch as he has rejected certain companies considered comparable by the assessee, which as per the TPO had substantial related party transactions. Considering the case set-up by the assessee, in our view, the filter set-up by the assessee to exclude companies having related party transactions in excess of 25% cannot be considered as unreasonable. Moreover, we do not find any reason for the Assessing Officer to do away with the filter of related party transactions exceeding 25% adopted by the assessee, on a selective basis. Ostensibly, the aforesaid filter has been accepted by the TPO in principle, but has been ignored while reviewing the case of Compucom Software Ltd. Clearly, the said filter has escaped its application at the hands of the TPO while including Compucom Software Ltd. as a comparable. Therefore, in the instant case, we direct the TPO to exclude Compucom Software Ltd. from the final set of comparables. The assessee succeeds on this aspect.
25. It has been stated before us that if Compucom Software Ltd. is excluded from the set of comparable companies and considering the +/-5% safe harbor provided under section 92C(2) of the Act, whose benefit we have allowed to the assessee in para 24 above, the margin of 11.62% of the appellant would be at ARM's Length from the Indian Transfer pricing perspective. In this view of the matter, we do not adjudicate on the other aspects raised by the assessee, as the necessary relief has already been allowed to the assessee. Thus, on this Ground assessee succeeds.
26. The only other Ground raised is with regard to the disallowance on account of a delay in payment of employees' contribution towards provident fund amounting to Rs 71,694/-. It has been explained by the learned Counsel that the delay was just six days in two instances and nine days in one instance as per the details contained at page 213 of the Paper Book. In any case, the amount had 19 been deposited before the due date of filing of the return of income and therefore no disallowance is called for, in view of the following decisions:
(i) CIT v Aimil Ltd 321 ITR 508 (Del); and,
(ii) CIT v. Alom Extrusions Ltd. 319 ITR 306 (SC)
Though the learned Departmental Representative has contested the
disallowance, yet no decision to the contrary has been brought to our notice. Therefore, following the aforesaid precedents, we hereby set aside the order of the Commissioner of Income-tax (Appeals) and direct the Assessing Officer to delete the disallowance.
27. In the result, appeal of the assessee is allowed.
Order pronounced in the open Court on this 3rd Day of October, 2011.
Sd/- Sd/-
(SHAILENDRA KUMAR YADAV) (G.S. PANNU)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Pune, Dated: 3rd October, 2011
B
Copy to:-
1) Assessee
2) Department
3) The CIT (A) concerned
4) CIT concerned
5) DR, "A" Bench, ITAT, Pune.
6) Guard File
By Order
true copy
Asst. Registrar, I.T.A.T., Pune
20
N THE INCOME TAX APPELLATE TRIBUNAL
PUNE BENCH " A", PUNE
BEFORE SHRI SHAILENDRA KUMAR YADAV, JUDICIAL MEMBER
AND SHRI G.S. PANNU, ACCOUNTANT MEMBER
I.T.A. No. 1350/PN/2010
(Asstt. Year : 2006-07)
Starent Networks (India) P. Ltd. .. Appellant
P-17, Rajiv Gandhi Infotech Park,
Hinjewadi, Pune
Vs.
Dy. Commissioner of Income-tax, .. Respondent
Pune
PER G.S. PANNU, AM
CORRIGENDUM
It is observed that a typographical error has crept in our order dated 24.10.2011 in the captioned appeal, inasmuch as in para 23 of the order it has been wrongly stated that, " In fact, the Hon'ble Supreme Court in the case of K.P Varghese v ITO 131 ITR 597 (Ker)............." We hereby direct that the following sentence may be substituted in place of the above:
"In fact, the Hon'ble Supreme Court in the case of K.P Varghese v ITO 131 ITR 597 (SC) ........."
Sd/- Sd/-
(SHAILENDRA KUMAR YADAV) (G.S. PANNU)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Pune, Dated: 3 rd November, 2011
B
Copy to:-
1) Assessee
2) Department
3) The CIT (A) concerned
4) CIT concerned
5) DR, "A" Bench, ITAT, Pune.
6) Guard File
By Order
true copy
Asst. Registrar, I.T.A.T., Pune
21