Income Tax Appellate Tribunal - Bangalore
Mercedes-Benz Research And ... vs Assessee on 8 March, 2012
IN THE INCOME TAX APPELLATE TRIBUNAL
"B" BENCH : BANGALORE
BEFORE SHRI N.K. SAINI, ACCOUNTANT MEMBER
AND SHRI GEORGE GEORGE K., JUDICIAL MEMBER
ITA No.1369/Bang/2010
Assessment year : 2006-07
M/s. Mercedes-Benz Research & Vs. The Income Tax Officer,
Development India Pvt. Ltd., Ward 12(1),
rd
Pine Valley, 3 Floor, Bangalore.
Embassy Golf Links
Business Parks,
Off Intermediate Ring Road,
Bangalore - 560 071.
PAN : AAACD 6261B
APPELLANT RESPONDENT
Appellant by : Shri Rajan S. Vora, C.A.
Respondent by : Shri Etwa Munda, CIT-III(DR)
Date of hearing : 08.03.2012
Date of Pronouncement : 30.04.2012
ORDER
Per N.K. Saini, Accountant Member
This is an appeal by the assessee against the order dated 18.10.2010 passed by the Assessing Officer u/s. 143(3) r.w.sec. 144C(1) of the Income-tax Act, 1961 [hereinafter referred to as "the Act" in short"].
2. Following grounds have been raised in this appeal:- ITA No.1369/Bang/10 Page 2 of 50
"Based on the facts and circumstances of the case and in law, Mercedes-Benz Research and Development India Private Limited (hereinafter referred to as 'Appellant') respectfully craves leave to prefer an appeal against the order passed by Income Tax Officer -- Ward 12(1) ('AO') in pursuance of the directions issued by Dispute Resolution Panel ('DRP'), Bangalore dated 08 September 2010 under section 253 of the Income-tax Act, 1961 ('Act') on the following grounds:
That on the facts and circumstances of the case and in law,
1. the order of the learned AO, based on directions of the Hon'ble DRP, erred in assessing the total income at Rs. 5,55,64,766 as against returned income of Rs. 2,07,682/- computed by the Appellant;
Grounds of appeal relating to corporate tax matters
2. on the facts and in the circumstances of the case and in law, based on directions of DRP, the learned AO has erred in law and in fact by holding that the foreign currency expenses are towards technical services rendered outside India and should be reduced from "export turnover" while computing the profits eligible for deduction under section 10A of the Act;
3. on the facts and in the circumstances of the case and in law, based on directions of DRP, the learned AO has erred in law by not considering that, if foreign currency travel expenses are reduced from export turnover, an equal amount should also be reduced from total turnover for computing the deduction under section l0A of the Act.
Grounds of appeal relating to transfer pricing matters On the facts and in the circumstances of the case and in law:
4. the learned AO/Transfer Pricing Officer ('TPO') erred in making an addition of Rs. 4,24,78,340 to the total income of the Appellant on account of adjustment in the arm's length price of the contract software research and development services transaction entered by the Appellant with its associated enterprise;
5. the learned AO/TPO have erred in ignoring the fact that since that Appellant is availing tax holiday u/s 10A of the Act, there is no intention to shift the profit base out of India, which is one of the basic intention of the introduction of transfer pricing provisions;
ITA No.1369/Bang/10Page 3 of 50 Grounds of objections relating to Cost Plus Method ("CPM")/Comparable Uncontrolled Price Method ('CUP').
6. the learned AO/TPO erred in rejecting the methodology as adopted by the Appellant and using Transactional Net Margin Method ("TNMM") as the most appropriate method for determining arms length price.
Grounds of objections relating to TNMM:
7. the learned AO/TPO erred in disregarding the economic analysis undertaken by the Appellant and conducting a fresh economic analysis for the determination of the arm's length price in connection with the impugned international transaction;
8. the learned AO/TPO erred in determining the arm's length margin price using only financial year 2005-06 data, which was not available to the Appellant at the time of complying with the transfer pricing documentation requirements;
9. the learned AO/TPO erred in rejecting certain comparables considered by the Appellant in the comparability analysis by applying different quantitative and qualitative filters;
a) the learned AO/TPO has erred by rejecting certain comparable companies using turnover < Rs. 1 Crore as a comparability criterion;
b) the learned AO/TPO erred in rejecting certain comparables on the ground that the comparables were having different accounting year (other than March 31 or companies whose financial statements were for a period other than 12 months);
c) the learned AO/TPO erred in rejecting certain comparables considered by the Appellant in the comparability analysis using 'onsite revenues greater than 75% of the export revenues' as a comparability criterion; and
d) the learned AO/TPO erred in rejecting certain comparables in the comparability analysis using 'employee cost greater than 25% of the total revenues' as a comparability criterion.
10. the learned AO/TPO erred in accepting certain companies as comparables using unreasonable comparability criteria;
11. the learned TPO erred in obtaining information which was not available in public domain by exercising powers u/s 133(6) of the Act and relying on the information for comparability analysis; ITA No.1369/Bang/10 Page 4 of 50
12. the learned AO/TPO erred in not considering the foreign exchange fluctuation gain (loss) as part of the operating income while computing the operating margin;
13. the learned AO/TPO erred in not considering the provisions written back as part of the operating income while computing the operating margin;
14. the learned AO/TPO erred in wrongly computing the operating margins of some of the comparable companies identified in the TP order;
15. the learned AO/TPO erred in not making suitable adjustments on account of differences in the risk profile of the Appellant vis- â-vis the comparables, while conducting comparability analysis;
16. the learned AO/TPO erred in computing the arms length price without giving benefit of +/- 5 percent under the proviso to section 92C of the Act;
17. the learned AO erred in levying interest of Rs.1,02,55,066 and Rs.626 u/s 234B and 234C of the Act respectively;
18. the learned AO erred, in law, and in facts, in initiating penalty proceedings u/s 271(l)(c) of the Act.
The Appellant submits that each of the above grounds is independent and without prejudice to one another. The Appellant craves leave to add, alter, amend, vary, omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of the appeal, so as to enable the Hon'ble Tribunal to decide on the appeal in accordance with the law."
3. Ground No.1 is general in nature and ground No.18 is not arising out of the impugned order, so no finding is given for these grounds.
4. Vide ground Nos. 2 & 3, the grievance of the assessee relates to the action of the Assessing Officer in excluding foreign currency expenses from export turnover and not from the total turnover while computing deduction u/s. 10A of the Act.
ITA No.1369/Bang/10Page 5 of 50
5. The facts related to this issue in brief are that the assessee filed its return of income on 27.11.2006 declaring an income of Q 2,07,682, which was processed u/s. 143(1) of the Income-tax Act, 1961 [hereinafter referred to as "the Act", in short"]. Later on, the case was selected for scrutiny. During the course of assessment proceedings, the Assessing Officer noticed that the assessee had not computed the export turnover as stipulated in section 10A of the Act. He also observed that the assessee had included in its export turnover the expenses incurred on tele/internet charges in regard to delivery of software abroad, travelling expenses which includes payment made in foreign currency on visit of its employees to render technical assistance to its clients abroad and other onsite expenses. According to the AO, those expenses are to be excluded from the export turnover and he accordingly recomputed the export turnover at Q 23,72,54,821 by excluding the aforesaid expenses amounting to Q 11,45,37,299. The AO recomputed eligible exemption u/s. 10A of the Act at Q 2,66,29,480 instead of Q 3,94,35,146 claimed by the assessee. Now the assessee is in appeal.
6. The ld. counsel for the assessee reiterated the submissions made before the authorities below and further submitted that disallowance u/s. 40(a)(ia) would impact the profitability of the undertaking and as the assessee company is providing 100% export services to its AE and claiming tax holiday, hence this adjustment would be inconsequential as far as taxable income is concerned, because the exemption u/s. 10A would go up if the figure of undertaking goes up. It was further stated that if the foreign currency, travelling expenses were to be reduced from the export ITA No.1369/Bang/10 Page 6 of 50 turnover, an equal amount should also have been reduced from the total turnover for computing deduction u/s. 10A of the Act. It was further submitted that the adjustment made by the AO with respect to section 10A deduction was contrary to the various Tribunal rulings including the ruling of the Chennai Special Bench in the case of ITO Vs. M/s.Sak Soft Ltd. (2009) 313 ITR (AT) 353 (Chn)(SB). Reliance was also placed on the following case laws:
- CIT v. Gem Plus Jewellery India Ltd. (2010) 330 ITR 175 (Bom).
- CIT v. Tata Elxi Ltd. 2011-TIOL-684-KARN.
7. In his rival submissions, the ld. CIT(DR) strongly supported the order of the AO that the issue of qualifying deduction of sub-section (4) of section 10A developed its mechanism of computing the same i.e., in respect of the profit derived from the qualifying export of articles, things or computer software, sale proceeds of which were received or were brought as required by the Act and which was to be determined by applying the same ratio as the export turnover bears to the total turnover, in short by apportionment. Reliance was placed on the ITAT Chennai Bench decision in the case of California Software Co. ltd. v. ACIT (2008) 118 TTJ (Chn)
842.
8. We have considered the submissions of both the parties and carefully gone through the material available on record. In the present case, it is not in dispute that the assessee claimed deduction under section 10A of the Act, however, the Assessing Officer while framing the assessment under section 143(3) of the Act computed the deduction under ITA No.1369/Bang/10 Page 7 of 50 section 10A of the Act by reducing lease line charges from export turnover, but not from the total turnover.
9. This issue now has been settled by the Special Bench of ITAT, Chennai in the case of ITO Vs. M/s.Sak Soft Ltd. (2009) 313 ITR (AT) 353 (Chennai (SB) by holding as under :
" To say that in the absence of any definition of "total turnover"
for the purpose of section 10B, there is no authority to exclude anything from the expression as understood in general parlance would be wrong, as there has to be an element of turnover in the receipt if it has to be included in the total turnover. That element is missing in the case of freight, telecom charges or insurance attributable to the delivery of the goods outside India and expenses incurred in foreign exchange in connection with the provision of technical services outside India. These receipts can only be received by the assessee as reimbursement of such expenses incurred by him. Mere reimbursement of expenses cannot have an element of turnover. It is only in recognition of this position that in the definition of "export turnover" in section 10B the aforesaid two items have been directed to be excluded. Secondly, the definition of export turnover contemplates that the amount received by the assessee in convertible foreign exchange should represent "consideration" in respect of the export. Any reimbursement of the two items of expenses mentioned in the definition can under no circumstances be considered to represent "consideration" for the export of the computer software or articles or things. Thus the expression "total turnover" which is not defined in section 10B should also be interpreted in the same manner. Thus the two items of expenses referred to in the definition of "export turnover" cannot form part of the total turnover since the receipts by way of recovery of such expenses cannot be said to represent consideration for the goods exported since total turnover is nothing but the aggregate of the domestic turnover and the export turnover. In the formula prescribed by section 10B(4) the figure of export turnover has to be the same both in the numerator and in the denominator of the formula. It follows that the total turnover cannot include the two items of expenses recovered by the assessee and referred to in the definition of "export turnover."
It has further been held that -
ITA No.1369/Bang/10Page 8 of 50
" The common thread running through sections 80HHC, 80HHE and 80HHF is that they are all provisions granting relief to the assessees in respect of profits derived from export. The difference between Chapter III in which section 10B falls, and Chapter VI-A in which these sections fall, is that while the former excludes the income in question totally from the purview of total income and gives total exemption from tax, the latter gives deduction of a part of the profits and gains of the concerned business from the gross total income. Both, however, are chapters which give relief to assessees from taxation subject to the conditions bring fulfilled and in that sense they are of the same genre. The object of these sections is to encourage the earning of foreign exchange and provide incentive to promote exports. If some of the sections such as sections 80HHE and 80HHF provide for a formula for calculating the deduction which is identical with the formula prescribed by section 10B, it would be incongruous to interpret section 10B in a manner different from those two sections merely because there is no definition of "total turnover" in that section. "Export turnover"
as defined in these sections excludes freight, telecom charges or insurance attributable to the delivery of the computer software outside India or expenses, if any, incurred in foreign exchange in providing technical services outside India. Thus statutory parity is maintained between export turnover and total turnover in these sections. There is no reason why such parity cannot be maintained between export turnover and total turnover in section 10B just because "total turnover" has not been defined in that section."'
10. Similar view has been taken by the Hon'ble High Court of Bombay in the case of CIT Vs. Gem Plus Jewellery India Ltd. (2010) 330 ITR 175 (supra) wherein it has been held as under :
" Under sub-section 10A of the Income Tax Act, 1961, a deduction is allowed from the total income of the assessee of such profits and gains as are derived by an undertaking from the export of articles or things or computer software for a period of ten consecutive assessment years commencing from the assessment year relevant to the previous year in which the undertaking begins manufacture or production. Sub-section (4) of section 10A provides the manner in which the profits derived from the export of articles or things or computer software shall be computed. Under sub-section (4) the proportion between the ITA No.1369/Bang/10 Page 9 of 50 export turnover in respect of the articles or things, or, as the case may be, computer software exported, to the total turnover of the business carried over by the undertaking is applied to the profits of the business of the undertaking in computing the profits derived from export. In other words, the profits of the business of the undertaking are multiplied by the export turnover in respect of the articles, things or, as the case may be, computer software and derived by the total turnover of the business carried on by the undertaking. The expression "total turnover" has not been defined at all by Parliament for the purposes of section 10A. However, the expression "export turnover" has been defined. The definition of "export turnover" excludes freight and insurance. Since export turnover has been defined by Parliament and there is a specific exclusion of freight and insurance, the expression "export turnover" cannot have a different meaning when it forms a constituent part of the total turnover for the purposes of the application of the formula. A construction of a statutory provision which would lead to an absurdity must be avoided. Moreover, a receipt such as freight and insurance which does not have any element of profit cannot be included in the total turnover. Freight and insurance charges do not have any element of turnover. For this reason in addition, these two items would have to be excluded from the total turnover particularly in the absence of a legislative prescription to the contrary."
11. A similar view has been taken by the Hon'ble jurisdictional High Court in the case of CIT Vs. Tata Elexi (2011) TIOL - 684 (Karn.) and the relevant finding given therein reads as under :
"The total turnover of the business carried on by the undertaking would consist of the turnover from export and the turnover from local sales. The export turnover constitutes the numerator in the formula prescribed by sub-section (4). Export turnover also forms a constituent element of the denominator in as much as the export turnover is a part of the total turnover. The export turnover, in the numerator must have the same meaning as the export turnover which is constituent element of the total turnover in the denominator. The legislature has provided a definition of the expression "export turnover" in Expln.2 to s.10A which the expression is defined to mean the consideration in respect of export by the undertaking of articles, things or computer software received in or brought into India by the assessee in convertible foreign exchange but so as not to include inter alia freight, ITA No.1369/Bang/10 Page 10 of 50 telecommunication charges or insurance attributable to the delivery of the articles, things or software outside India. Therefore in computing the export turnover the legislature has made a specific exclusion of freight and insurance charges. The submission which has been urged on behalf of the revenue is that while freight and insurance charges are liable to be excluded in computing export turnover, a similar exclusion has not been provided in regard to total turnover. The submission of the revenue, however, misses the point that the expression "total turnover" has not been defined at all by Parliament for the purposes of s.10A. However, the expression "export turnover"
has been defined. The definition of "export turnover" excludes freight and insurance. Since export turnover has been defined by Parliament and there is a specific exclusion of freight and insurance, the expression "export turnover" cannot have a different meaning when it forms a constituent part of the total turnover for the purposes of the application of the formula. Undoubtedly, it was open to Parliament to make a provision which has been enunciated earlier must prevail as a matter of correct statutory interpretation. Any other interpretation would lead to an absurdity. If the contention of the Revenue were to be accepted, the same expression viz. 'export turnover' would have a different connotation in the application of the same formula. The submission of the Revenue would lead to a situation where freight and insurance, though these have been specifically excluded from 'export turnover' for the purposes of the numerator would be brought in as part of the 'export turnover' when it forms an element of the total turnover as a denominator in the formula. A construction of a statutory provision which would lead to an absurdity must be avoided. Moreover, a receipt such as freight and insurance which does not have any element of profit cannot be included in the total turnover. Freight and insurance charges do not have any element of turnover. For this reason in addition, these two items would have to be excluded from the total turnover particularly in the absence of a legislative prescription to the contrary - CIT v Sudarshan Chemicals Industries Ltd. (2000) 163 CTR (Bom) 596: (2000) 245 ITR 769 (Bom) applied; CIT v Lakshmi Machine Works (2007) 210 CTR (SC) 1: (2007) 290 ITR 667 (SC) and CIT v Catapharma (India) (P) Ltd. (2007) 211 CTR (SC) 83: (2007) 292 ITR 641 (SC) relied on".
12. From the ratio laid down in the aforesaid judicial pronouncements by the Hon'ble jurisdictional High Court and Hon'ble High Court of Bombay, it ITA No.1369/Bang/10 Page 11 of 50 is crystal clear that if an item is excluded from the export turnover, the same should also be excluded from the total turnover to maintain parity between the numerator and denominator while calculating the deduction under section 10A of the Act. In view of the above, we set aside the order of the lower authorities on this issue and direct the Assessing Officer to reduce the expenses incurred on tele/internet charges in regard to delivery of software abroad, travelling expenses which includes payment made in foreign currency on visit of its employees to render technical assistance to its clients abroad and other onsite expenses amounting to Q 11,45,37,299 both from export turnover as well as total turnover.
13. Vide grounds 4 to 15, the grievance of the assessee relates to determination of arms' length margin/price (ALP).
14. The facts related to this issue in brief are that since the assessee entered into international transaction as specified in section 92(B) of the Act, therefore the AO referred the case to the Transfer Pricing Officer (TPO), who determined the ALP in respect of software services at Q39,44,35,674 as against Q 35,17,92,120 shown by the assessee, the difference of Q 4,26,43,555 was determined as an adjustment u/s. 92CA of the Act. The AO asked the assessee to file its objections, if any, for the proposed adjustment in ALP. According to the AO, the submissions of the assessee were already considered by the Transfer Pricing authority while passing the order u/s. 92CA of the Act, the AO therefore passed an order dated 21.12.09 u/s. 92CA of the Act adopting the ALP in respect of international transactions dealt with by the assessee with its Associated Enterprises (AEs) to the tune of Q 4,26,43,555 as suggested by the TPO. ITA No.1369/Bang/10 Page 12 of 50 Thereafter the assessee filed its objections before the Dispute Resolution Panel (DRP), who gave directions under sub-sec. (5) r.w. sub-sec.(8) of section 144C of the Act and worked out adjustment of Q 4,24,78,340 as against Q 4,26,43,555 suggested by the TPO. Now the assessee is in appeal.
15. The ld. counsel for the assessee submitted that the assessee was engaged in providing specialized contract software research and development service in the automobile field (software services) to Dailmer A G the parent company (Associated Enterprise or AE) on cost plus 5% mark up basis. It was further submitted that the assessee set up a offshore software research and development service centre fully dedicated to its parent company and that the services provided by the assessee were for internal captive consumption. It was contended that for the purpose of establishing the ALP of its international transaction with its AE, the assessee had undertaken a transfer pricing (TP) study carried out by an independent external consultant and an analysis was undertaken to determine the functions performed, risks assumed and assets utilized by the assessee and its AE in respect of international transactions between them and based on the TP study, the external consultant concluded that the price adopted by the assessee in respect of its international transactions with its AE was at arms' length. It was contended that the Comparable Uncontrolled Price (CUP) method and Cost Plus Method (CPM) were determined as the most appropriate method to determine the ALP. While doing so, the Man Hour Rate charged by the assessee was compared with the hourly rates charged by leading software companies ITA No.1369/Bang/10 Page 13 of 50 whose financial informations were available in the public domain. It was emphasized that no adjustment was made to take into consideration unproductive and idle hours and the differences in risks assumed since the upper range of transfer price at USD 26.24 had been established by the assessee in comparison to the rate of comparable companies in the range of USD 4.00 to USD 31.16, therefore, the total price arrived at under CUP/CPM was established at arms' length. It was argued that the TPO had not accepted the economic analysis undertaken by the assessee and conducted a fresh economic analysis by rejecting the CUP/CPM analysis carried out by the assessee and applied Transactional Net Margin Method (TNMM) as most appropriate method. It was further argued that the TPO had obtained information u/s. 133(6) of the Act, which were not available in the public domain and used the same for judging comparability with the assessee. It was stated that the TPO applied certain filters and rejected certain companies selected by the assessee by using the following criteria:
- Companies having a turnover less than 1 crore;
- Companies having economic performance contrary to the industry behaviour (e.g. companies which showed a diminishing revenue trend);
- Comparables on the ground that the comparables were having different accounting year (other than March 31 or companies whose financial statements were for a period other than 12 months);
- Companies onsite revenues greater than 75% of the export revenues' as a comparability criterion; and
- Companies having 'employee cost greater than 25% of the total revenues' as a comparability criterion.ITA No.1369/Bang/10 Page 14 of 50
16. The ld. counsel for the assessee submitted that the TPO provided an adjustment towards working capital at 1.31% and adjusted net margin of comparable companies after providing working capital adjustment which was determined at 19.37% on operating cost and computed operating margin of comparable companies by considering foreign exchange gain/losses as non-operating in nature. It was submitted that the TPO did not make suitable adjustment to account for differences in the risk profile of the assessee vis-à-vis the comparable companies. It was contended that the assessee operated in a risk mitigated environment and was remunerated on cost plus 5% mark-up basis, even though the parent company was in the automobile sector (car manufacturer) and earned only a profit margin of less than 3%. Therefore the assessee company had no motive to shift the profits out of India because the parent company had compensated the assessee adequately.
17. It was contended that the assessee justified its ALP for the international transactions by adopting CPM/CUP method for the financial year 2001-02 and the same was accepted by the TPO for financial year 2002-03. It was explained that the assessee was a captive service provider rendering its entire software services to its parent company for improving software being used in automobiles/aircraft engines manufactured by the holding company and thus the services were being provided under long term contract. It was pointed out that the assessee was not allowed to carry out similar business for any other customer due to the specialized nature of the work and the fact that the same was for internal consumption of the parent company, so it was difficult to find exact ITA No.1369/Bang/10 Page 15 of 50 comparables which provided similar services due to lack of external informations. It was also pointed out that OECD guidelines called for adoption of CPM method in cases where long term buy and supply arrangements in the case of provision of services especially for contracted research and development was involved. It was stated that since the company was dedicated captive service provider under long term service arrangement and the final output being unfinished i.e., not marketable, the Cost Plus Method was the most appropriate method and even the TPO agreed the difference between the two methods i.e., CUP and TNMM in the assessee's case was only of academic interest. A reference was made to page 9 of TPO's order. It was accordingly submitted that the CPM method adopted by the assessee was the right method and should not have been rejected.
18. It was submitted that additional supplementary analysis was undertaken using the hourly rate for the rates charged by the assessee to the parent company and the computation of man hour rates had been arrived at as per the information available from the public domain, such as annual reports published, those were selected on the basis of those companies which were major industry players and no filters had been applied while selecting those companies. It was reiterated that the hourly rate of comparable companies was in the range of USD 4 to USD 31.16 while the rate charged by the assessee i.e., USD 26.24 was at the higher end of this range, hence hourly rate charged was to be concluded at arms' length because average rate per hour of those comparables worked out to USD 14.46. It was stated that there was no comparable undertaking ITA No.1369/Bang/10 Page 16 of 50 software activity in the automotive space, therefore the comparison was undertaken with major Indian software companies to establish the man hour rates charged by the assessee which was closer to the upper end of the rates charged by industry majors who were in a position to command premium price. It was stated that the assessee satisfied all the conditions to apply CPM method and also provided an additional analysis in terms of return on capital investment to indicate the profitability of the assessee as it was an important criterion considered by the businessmen to determine the viability of the business. It was stated that the TP regulations were introduced in India with the intent to curb tax avoidance by abuse of TP and to avoid undue hardship to the assessee and the CBDT had issued Circular No.14 of 2001 which when read with section 92C(3) of the Act clearly provides that primary onus is on the tax payer to determine the arms' length price in accordance with the rules and to 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, there can be no intervention by the Assessing Officer. It was stated that a plain reading of section 92C(3) of the Act reveals that the AO can determine the price only under the circumstances enumerated in clauses
(a) to (d) of sub-section (3) of section 92C of the Act and since the comparability analysis undertaken by the assessee was based on wholly accepted transfer pricing principles, therefore in the absence of any information to the contrary, it was inappropriate to reject the comparability analysis of the assessee. Reliance was placed on the following case laws:-
- Indo American Jewellery Ltd. v. DCIT 41 SOT 1 (Mum) ITA No.1369/Bang/10 Page 17 of 50
- Sony India (P) Ltd. v. CIT [2007] 288 ITR 52 (Del)
- Mentor Graphics (Noida) (Pvt) Ltd. 112 TTJ (Del) 408 It was accordingly submitted that the TPO was bound to accept assessee's analysis on account of following reasons:-
- Analysis undertaken in accordance with the law.
- Analysis undertaken by an external agency.
- AO/TPO had no reasons to believe that the transactions
were not at arms' length.
19. Ld. counsel for the assessee contended that the TPO had rejected the companies with less than Q 1 crore turnover on the ground that the margin earned by those companies fluctuate to extremes because of narrow base and that the reliability of the data in respect of the small companies was not always high and lack of competitive strength, operational efficiencies and reliability of financial data was significantly reduced because the same persons were often major shareholders as well as key employees with diminishing the economic destruction between profit and balance. It was further stated that while applying TNMM method for determination of ALP, differences on account of turnover were neutralized by use of comparables having both high and low turnover than that of the tested party and a turnover filter had been employed for the tested party was a risk bearing entrepreneur assuming risks and rewards of scale.
Therefore a turnover criteria should not have been applicable in case of a entity which charged cost plus pricing model because the margins of a risk mitigated contract service provider were not dependent on scale or size of its operations. It was stated that in assessee's case the TPO failed to ITA No.1369/Bang/10 Page 18 of 50 acknowledge the fact that accounts were prepared by the assessee in accordance with the generally accepted accounting standard, hence the stand of TPO that the financial data of companies with less than Q 1 crore were not reliable, was not tenable. Therefore the turnover filter of less than Q 1 crore turnover should not have been applied for comparability analysis. It was pointed out that the TPO rejected the companies which were having different accounting standards, but did not consider this fact that those companies even though having different financial year ending were operating during the same period of time similar to the assessee and were also facing similar business cycles, market and economic conditions, therefore in the absence of any evidence available to the contrary that there had been significant impact on the margins due to change in different reporting/accounting period, it would have been incorrect to disregard those companies using this filter, particularly when the TPO could have exercised his power u/s. 133(6) of the Act to obtain the 12 month financial statements for all such cases.
20. It was further stated that the TPO adopted onsite revenue filter and rejected certain companies with onsite revenues greater than 75% of the export revenues, but did not consider this fact that software development activity comprises of both onsite and offshore developmental activities and the nature of activity remains the same irrespective of whether the company was engaged in providing onsite or offshore services. Since the activity remains software development, therefore it was not appropriate on the part of the TPO to reject the companies providing onsite services on the ground of functional dissimilarity. It was emphasized that as per ITA No.1369/Bang/10 Page 19 of 50 "NASSCOM Strategic Review 2007 - IT Industry in India", the Indian IT industry comprises of both onsite and offshore services and as per the industry report, onsite revenues/services constitutes approximately 30% of the total IT revenues in the financial year 2004-05. It was also stated that the informations on onsite revenue and offshore revenue was not available or disclosed in the financial statements of most of the companies, but those were gathered by the TPO by exercising power conferred u/s. 133(6) of the Act, therefore it was not appropriate to reject the companies providing onsite services on the ground of functional dissimilarity, when the nature of activity they performed still remained "software development".
21. It was also submitted that the TPO adopted employee cost filter where companies with employee cost less than 25% of the total revenues were rejected as a comparable by stating that on an average salary cost comprises of 24% to 42% of the revenue in the case of a software service provider. It was stated that the TPO did not consider that there was no mandatory norm to govern the disclosure relating to employee costs, particularly when companies followed different model in disclosing the expenses and might have shown employee cost as a separate item in their financial statements and some other companies might have aggregated it under "other expenses" heads such as 'administrative expenses', 'sales and marketing expenses', etc., therefore it was not appropriate to use employee cost filter. It was pointed out that the TPO accepted certain companies using unreasonable comparable criteria, one instance was quoted of M/s. Megasoft Ltd., which was stated to be a software product and service company, rather than a pure software service provider like the ITA No.1369/Bang/10 Page 20 of 50 assessee and made extra-ordinary or super normal profits at 52.74% which was higher than even Indian IT industry leaders.
22. Another instance quoted was of KALS Information Systems Ltd. (KALS), and it was stated that a review of the annual report of the said company indicated that the company was into provision of software development services as well as sale of software products since its inception and consisted of STPI unit engaged in development of software & software products and a training centre engaged in training of software professionals on online projects. It was pointed out that the turnover of KALS was Q 2.15 crores and the inventories were at Q 1.27 crores, which was approximately 60% of the turnover. It was stated that normally the software development services provider would not carry such large inventories, therefore it was clearly evident that the said company was majorly into development of software products. It was also stated that the profit margin of KALS was at 39.75% which was abnormally high, so the said company could not have been considered as comparable with the assessee.
23. It was pointed out that the TPO considered M/s. Accel Transmatic Ltd. (Accel) as comparable, the said company was engaged in 2D/3D animation, special effects creation and game asset development, therefore the activities/services were in the nature of IT enabled services and not software development. The said company had rendered the services to the related parties to the extent of 31% of the total services revenues, therefore, this company should have been rejected as it did not satisfy related party transaction filter proposed by the TPO at the services income ITA No.1369/Bang/10 Page 21 of 50 level. It was stated that the information provided by the TPO pursuant to notice u/s. 133(6) of the Act was contradictory to the related party transactions disclosure provided in the audited financial statements. It was also pointed out that the related profit margin of KALS was 44.07% which was on the higher side, therefore the said company could not have been considered as comparable with the assessee.
24. It was further stated that the TPO considered Infosys Technologies Ltd. (Infosys) as comparable, but the said company was having software services revenue at Q 9000 crores as compared to the assessee's Q 35 crores and the profit margin of the said company was at 40.38%, therefore the said company was also not comparable with the assessee.
25. Another related instance quoted of comparable was of M/s. Tata Elxsi Ltd. and it was stated that the said company was having two segments; one was system integration services and another software development and services. It was stated that the TPO considered the software development services segment as comparable which comprises of hardware, software and IT enabled services/activities, but the assessee had not rendered any hardware related or IT enabled services, therefore the said company could not have been considered as comparable as it was functionally different.
26. One another instance quoted was of Flextronics Software Systems Ltd. wherein the informations were obtained u/s. 133(6) of the Act, but those were not available in public domain.
ITA No.1369/Bang/10Page 22 of 50
27. It was contended that if the aforesaid 6 companies were not to be selected as comparables, the arithmetic mean of 14 companies was at 12.98% and margin of post working capital adjustment was at 11.79%.
28. The ld. counsel for the assessee further submitted that the TPO obtained information by exercising powers u/s. 133(6) of the Act and relied upon those informations for comparability analysis inspite of the fact that those informations were not available in public domain. It was stated that the TPO issued notices to approximately 165 companies and sought certain information, but the basis of selection of those companies was not provided to the assessee, so it was unfair if notices were not issued to all the companies and were issued to only a few of the companies selected by the TPO. It was stated that rule 10D(3) of the I.T. Rules, 1962 provides that information specified in sub-rule (1) shall be supported by authentic documents. Reliance was placed on the decision of Aztec Software and Technology Ltd. v. ACIT (2007) 107 ITD 141.
29. The ld. counsel for the assessee further stated that the informations provided by the company selected by the AO might not have been as per Accounting Standard 17 issued by the Institute of Chartered Accountants of India, hence they did not represent the true and fair position as the bifurcation of income and expenses was based on individual judgment of the persons handling the accounts. It was also stated that the informations obtained by the TPO existed between the tax payers and the tax administration, but were not available to the assessee, therefore such informations qualified as secret comparables, as such the information was confidential in nature and usage of such secret comparables/information ITA No.1369/Bang/10 Page 23 of 50 raised a number of concerns especially with respect to fairness and transparency of the process. It was accordingly submitted that the TPO used the powers u/s. 133(6) of the Act in a discretionary manner, so it was against the principles of natural justice. Reliance was placed on the following case laws:-
- Philips Software Centre Pvt Ltd. v. ACIT 119 TTJ (Bang) 721
- Honeywell Automation India Ltd. v. DCIT [2009-TIOL-104- ITAT-Pune]
- Glbal Vantedge Pvt. Ltd. v. DCUT 37 SOT 1 (Del)
30. It was further submitted that the TPO did not consider the foreign exchange fluctuation gain (loss) as well as provision written back as part of the operating income while computing operating margin. It was pointed out that the TPO has considered extra-ordinary items for computing the operating margins while dealing with the comparable iGate Global Solutions Ltd., that company was introduced as a comparable after conducting a fresh economic analysis and obtaining relevant segmental information u/s. 133(6) of the Act. By including the said company as comparable, the TPO determined the operating margin as 15.61% on cost instead of correct margin of 2.81%. Therefore the TPO was not justified in computing the operating margin.
31. It was further stated that the TPO had not made suitable adjustment on account of difference in the risk profile of the assessee vis-à-vis comparables like conducting comparability analysis. It was further stated that rule 10B(1)(e)(iii) of the I.T. Rules, 1962 provides that adjustment ITA No.1369/Bang/10 Page 24 of 50 should be made to the profit margin of independent comparable companies to take into account the difference in functions and risks and that the international commentary on TP also recognizes that the adjustment must be made to account for its differences between controlled and uncontrolled situations that would significantly affect the price charged or return required by independent enquiries. It was pointed out that one of the principal elements for TP purposes is the analysis of risk assumption by the respective parties and in the open market theory, the assumption of increased risk is normally compensated by an increase in the accepted return, therefore the controlled and uncontrolled transactions are comparable only when the adjustments with respect to significant differences between them in the risks assumed is made. However, in the present case, the TPO did not make any risk adjustment of the margins of the assessee on the ground that the assessee do not have material impact on the profitability and accordingly denied any risk adjustments. It was explained that he assessee functions in a limited risk environment with most of the risk being assumed by its AEs, while the comparables selected for the analysis includes companies which have fairly diversified areas of specialization, perform additional functions viz., marketing etc. and bear more risks akin to any third party independent service provider. It was further stated that in view of the limited functions performed and limited risk borne by the assessee, it could be characterized as a contract service provider operating in a risk mitigated environment vis-à-vis comparable companies who perform entrepreneurial risk taking functions and therefore bear entrepreneurial risks. It was also stated that the assessee bears ITA No.1369/Bang/10 Page 25 of 50 lesser business risk than independent comparable companies due to the nature of its revenue model because it guaranteed profits by way of mark- up on costs incurred regardless of its success or failure and it has been providing services to its AEs over the year which is growing year on year and making profits irrespective of the performance of the IT industry in India and that the assessee does not bear any risk of incurring loss due to under-utilisation of capacity or insufficient business from its AEs as it is compensatory on cost plus basis, while the independent companies have to bear the vagaries of economic and business factors that are prevailing in the industry and thus could either incur losses or earn profits based on market conditions. Therefore the benefit of risk adjustment should have been accorded to the assessee. Reliance was placed on the following case laws:-
- Sony India (P) Ltd. v. DCIT 114 ITD 448 (Del)
- Philips Software Centre Pvt. Ltd. v. ACIT 119 TTJ (Bang) 721
32. It was further stated that the assessee computed risk adjustment in its case vis-à-vis comparable companies and provided the same to the TPO/AO, however the same had not been accepted by the TPO/AO. It was also stated that the assessee had filed detailed submissions with the DRP on Capital Assets Pricing Model (CAPM) to make appropriate adjustment to margins on account of risk differentials in the case of comparable companies, however the DRP without considering the submissions made by the assessee on CAPM had passed the directions. Accordingly it was stated that the directions may be given to the Assessing Officer to allow risk adjustment to the assessee.
ITA No.1369/Bang/10Page 26 of 50
33. In his rival submissions, the ld. CIT(DR) strongly supported the orders of the authorities below and further submitted that the assessee is a captive service provider rendering its entire software services to its parent company for improving software for the use in automobile/aircraft engines manufactured by the holding company, these services were being provided under long term contract and the assessee was not allowed to carry out similar business for any other customer, therefore the assessee's profile clearly distinguishes it from full fledged entrepreneurial companies and it was difficult to find exact comparables which provide similar services, due to lack of external informations. It was stated that the admitted that it was not possible to find out companies providing exactly similar services, therefore the assessee adopted cost plus method as most appropriate method and picked up 5 software companies for comparing the man hour rate. However, the assessee did not select the comparable companies and did not compare its gross or net margins with the margins of other comparable companies. It was further stated that section 92C(1) of the Act prescribes certain method for computation of ALP, out of those one of which is most appropriate method having regard to the nature of transaction and class of transaction of associated person or function performed by such person shall be adopted. Reliance was placed on the decision of the ITAT Mumbai "L" Bench in the case of Serdia Pharmaceuticals (India) (P) Ltd. v. ACIT (2011) 37(II) ITCI 410. It was stated that the provisions u/s. 92C(1) are subject to the condition that the AO has the power to determine the arms' length price (ALP) when the ALP computed by the tax payer is not on the basis of correctly applying the ITA No.1369/Bang/10 Page 27 of 50 method of computing the arms' length price in terms of section 92C(2) of the Act, however, subject to the condition that the AO has to give an opportunity of hearing to the assessee by serving a show cause notice as to why he should not do so. Therefore the selection of method for determining the ALP is not unfettered discretion of the tax payer, rather duty of the tax payer is to select such method for determining the ALP as is most appropriate having regard to all the relevant factors such as - nature of transaction, class of transaction, class of associated persons, functions performed by such persons or such other relevant factors as the Board may prescribe.
34. The ld. CIT(DR) stated that the TPO rejected the TP document maintained by the assessee because the assessee had not given either computation of gross mark-up or used mark-up in computing ALP by considering any other uncontrolled transaction or enterprises. It was stated that CUP method is one of the additional method for determining the ALP and this method is to be applied in the manner provided in Rule 10B(1)(a) of I.T. Rules, 1962. It was further stated that in CUP method, the price charged or paid, property transferred or services provided in a comparable uncontrolled transaction or number of such transactions are identified, thereafter some adjustments are made in that price on account of factors which could materially affect the price in the open price and the said price so adjusted would be the ALP in respect of the property transferred or services provided in the international transaction. It was further stated that the uncontrolled transaction should reflect goods of similar type and quantity as most between the AEs and relate to transactions taking place at ITA No.1369/Bang/10 Page 28 of 50 a similar time and stage in the production/distribution gain with similar condition applying. It was pointed out that in the instant case the assessee accepted that the margin charged by other companies rendering software services was not comparable to its situation in the absence of many state functions and risk that those companies carry out and assume a comparison of their margins were not appropriate. It was pointed out that the assessee while relying hourly rate charged by the comparable companies had not furnished any information relating to property purchased or services obtained by an enterprise from their AE and countries wherein AE's situated. It was further pointed out that the information submitted by the assessee in Form 3CED revealed that the assessee entered into international transaction with Diamler Chrysler AG, Germany and Diamler Chrysler Corporate (DCC) USA and substantial part of revenue derived from Diamler Chrysler AG, Germany might have been at variance with that charged from USA, therefore in such a situation no valid comparison could have been made between the price charged by the assessee from other countries with that of Germany. Reliance was placed on the decision of ITAT Mumbai in the case of Ghardia Chemicals Ltd. v. DCIT 35 SOT 406 Mum. It was emphasized that sub-rule (4) of rule 10B of the I.T. Rules, 1962 clearly states that data to be used in analyzing comparability of uncontrolled transaction with international transaction shall be the data relating to the financial year in which the international transaction has been entered into, but the proviso to the said rule carves out an exception that data relating to a period not being more than two years prior to such financial year may also be considered if such data ITA No.1369/Bang/10 Page 29 of 50 reveals facts which could have an influence on the determination of transfer price relating to relevant transactions being compared. It was further stated that the contemporaneous data and proviso is applicable only in some specified conditions, but no material has been brought on record by the assessee to suggest that there were circumstances prevailing for application of the proviso. Therefore the TPO/DRP was justified in considering current financial year data. Reliance was placed on the following case laws:-
- M/s. Aztech Software & Technology Service Ltd. v. ACIT 294 ITR (AT) 32
- Mentor Graphics Pvt. Ltd. v. DCIT 109 ITD 101
- Customer Service India Pvt. Ltd. v. ACIT 30 SOT 486
- M/s. Symantec Software Solution v. ACIT, ITA No.7814/ MUM/2010
- Avaya India Pvt. Ltd. v. ACIT - ITA 5150/Del/2010
- M/s. TNT India Pvt Ltd. v. ACIT - ITA No.1442/Bang/08
- Honey Well Automation India Ltd. v. DCIT - ITA No.4/PN/08
- Haworth (India) Pvt Ltd. v. DCIT - ITA No.5341/Del/2010
- DCIT v. M/s. BP India Service Pvt Ltd. - ITA No.4425/Mum/2010.
35. It was stated that the ld. counsel for the assessee raised several objections on six comparable companies viz., M/s. Megasoft Ltd., M/s. KALS Information System Ltd., M/s. Accel Transmatic Ltd., M/s. Tata Elxi Ltd., M/s. Infosys Technologies Ltd. and Floctronics Software System Ltd. and asked for exclusion of these from comparables. In this regard, it was submitted that M/s. Megasoft Ltd. has furnished segmental information in pursuance to notice issued u/s. 133(6) of the Act and clarified that Blue Ally Division is an offshore and on limit consulting division and does jobs based on customers requirements and billing done on hourly basis, while XIUS- ITA No.1369/Bang/10 Page 30 of 50 BCCIL was a product which caters the need of mobile software industries and the said product was to be customized to the requirement of each customer which indicated that the products of the said company i.e., M/s. Megasoft Ltd. were in the form of licence from third parties and customized as per requirement of its customers, therefore the said company was a service provider akin to software development services. It was further stated that the revenues of software development services of M/s. Megasoft Ltd. constituted 76% of overall revenue for the financial year 2005-06, thus it satisfied the TPO's filter and hence could not be rejected merely because extra-ordinary or super normal profits, hence may be retained as comparable.
36. Regarding the case of KALS Info System Ltd., the ld. CIT(DR) submitted that the revenues from software development services in the said company constituted almost 99% of the total operating revenues and it qualifies 75% revenues filter from software development, accordingly considered as comparable. It was further submitted that KALS itself had confirmed being a software development service provider, as such there was no question of major revenue from software products and the TPO rightly considered that company as a comparable.
37. As regards to the submission of the ld. counsel for the assessee that M/s. ACCEL Transmatic Ltd. should have been rejected on account of significant related party transactions, the ld. CIT(DR) submitted that the services rendered by the said company to the related parties were alleged to be approximately 31% of the total services revenue, however no information appears towards software development services, even though ITA No.1369/Bang/10 Page 31 of 50 the said company has given segmental information, therefore M/s. Accel Transmatic Ltd. has rightly been retained as a comparable.
38. As regards to M/s .Tata Elxsi Ltd., it was stated that the said company had furnished segmental revenues and instances and merely because expenses from cash of the sub-activities were not available, did not tantamount for rejection. It was further stated that financial statements furnished by the said company were segmental information and TPO computed operating profit on the basis of the said data, therefore M/s. Tata Elexsi Ltd. was rightly retained as comparable.
39. As regards to M/s. Infosys Technologies Ltd., the ld. CIT(DR) stated that the products revenue of the said company was only 3.95% to the total operating revenues, thus more than 96% of its revenues were from software development services and accordingly it qualifies filter of 75% from software development services. Therefore getting higher turnover did not necessarily mean that it would generate higher margin. It was further stated that the assessee had not demonstrated as to how the difference in turnover has influenced the result of the comparables. The ld. CIT(DR) contended that it is accepted economic principle and commercial practice that in highly competitive market conditions one can survive and sustain only by keeping low margin but high turnover. Reliance was placed on the decision of ITAT Mumbai "E" Bench in the case of M/s. Symantec Software Solution Pvt. Ltd. v. ACIT, ITA No.7814/MUM/2010. It was further submitted that a mere higher profit margin cannot be a reason for elimination as a comparable.
ITA No.1369/Bang/10Page 32 of 50
40. Similarly for M/s. Flextronics Software System Ltd., the ld. CIT(DR) stated that its products revenue constitutes only 16.6% of the segmental revenue, therefore the software development services revenue in segment 'products and services' was 83.4% which was more than 75% and thus qualifies the TPO's filter for revenues from software development services, accordingly rightly considered as comparable.
41. The ld. CIT(DR) vehemently argued and stated that sub-section (7) of section 92CA of the Act has empowered the TPO to exercise all or any of the powers mentioned in section 131 or sub-section (6) of section 133 of the I.T. Act for determination of the ALP, therefore the object was clearly to enable the TPO to seek clarification where there was ambiguity or insufficiency or obfuscation of data or information in public domain so that the ALP can be arrived at in a logical manner, therefore the TPO issued notices u/s. 133(6) of the Act to ascertain filter criteria, as such it cannot be a valid ground for exclusion of the comparables because those were based on the replies received against the notice u/s. 133(6) of the Act. Reliance was placed on the decision of the Hon'ble Delhi High court in the case of M/s. MESSE Dusseldorf v. DCIT (2010) 320 ITR 565 (Del).
42. As regards to the exclusion of foreign exchange loss and loss on sale of assets, the ld. CIT(DR) submitted that the TPO has rightly excluded the same from operating costs because those expenses had nothing to do with the main operatives of the assessee. Reliance was placed on the decision of the ITAT Mumbai Bench in the case of M/s. DHL Express (India) Pvt. Ltd. v. ACIT, ITA No.7360/MUM/2010. As regards to the objection of the assessee relating to the exclusion of provisions written ITA No.1369/Bang/10 Page 33 of 50 back, it was stated that no such income had been credited in the P&L account, hence there was no question of adjustment of operating income.
43. As regards to the objection of the ld. counsel for the assessee that the TPO has introduced iGate Global Solutions Ltd. as a comparable company after conducting a fresh economic analysis and obtaining relevant segmental information u/s. 133(6) of the Act, the ld. CIT(DR) submitted that segmental information/data furnished by M/s. iGate Global Solutions Ltd. revealed that the operating costs consisted of salaries & wages, selling, marketing, depreciation etc., but the TPO worked out extraordinary items after examining the financial statement for the F.Y. 2005-06 and rightly determined margin at 15.61% instead of 2.81% wrongly worked out by the assessee. It was also stated that similar objections had been raised before the DRP who held that margin in respect of iGate had been correctly worked out by the TPO, therefore there was no merit in the objection raised by the assessee.
44. As regards to the claim of the assessee for risk adjustment, the ld. CIT(DR) submitted that the TPO and DRP had rejected the assessee's claim on the ground that the assessee failed to bring any evidence on record to show that there existed any difference in the risk profile of comparable companies vis-à-vis of the assessee. It was pointed out that in order to take benefit of this adjustment, information should have been submitted along with the details under rule 10D of the Income-tax Rules, 1962 by the assessee. It was also pointed out that as per the provisions u/s. 92D(I) of the Act, every person entering into an international transaction is required to keep and maintain such information and ITA No.1369/Bang/10 Page 34 of 50 documents in respect thereof, as is being prescribed under rule 10D(1) of the Income-tax Rules, 1962. The said rule requires maintenance of a record of the analysis performed to evaluate comparable as well as a record of the actual working carried out for determining the ALP. It was further stated that the assessee admitted that they did not undertake any risk adjustment in TP document report, therefore in the absence of that comparability, it was difficult to make adjustment. Reliance was placed on the following case laws:-
i) M/s. Marubeni India Private Ltd. v. Addl. CIT - ITA No.945/Del/2009.
ii) Symantec Software Solution Private ltd. v. ACIT - ITA No.7894/Mum/2010
iii) Exxon Mobil Company India Pvt. Ltd. v. DCIT - ITA No.8311/Mum/2010
iv) ADP(P) Ltd. v. DCIT, ITAT No.106/Hyd/2009
v) Vedaris Technology (P) Ltd. v. ACIT (2010) 131 TTJ (Del) 309
vi) M/s. Deloitte Consulting India Pvt. Ltd. v. DCIT
vii) ST Micro Electronics Pvt. Ltd. v. CIT(A), ITA No.1806, 1807/Del/2008.
45. In his rejoinder, the ld. counsel for the assessee submitted that in order to determine the arms' length price (ALP) nature of the international transactions, the man hour rate charged by the assessee was compared with hourly rates charged by leading software companies whose financial informations were available in public domain and the hourly rate of the comparable companies was in the range of USD 4 to USD 31.16 i.e, the average rate per hour works out to USD 14.46, while the rate charged by the assessee i.e. USD 26.24 was at the higher end of this range and higher average of the above said rates, hence hourly rate charged was to be ITA No.1369/Bang/10 Page 35 of 50 concluded at arms' length. Therefore the approach adopted by the TPO in rejecting the economic analysis carried out by the assessee and undertaking fresh economic analysis using TNMM to determine the ALP of the international transaction was not appropriate. Reliance was placed on the decision of the ITAT Delhi Bench in the case of Mentor Graphics (Noida) (P.) Ltd. v. DCIT 112 TTJ (Del) 408.
46. It was further submitted that the company which owns intellectual property rights generally has premium pricing power which is ultimately reflected in higher net profitability like in the case of M/s. Megasoft Ltd., therefore the argument of the ld. DR that revenues in the form of licence from third parties are akin to software development services was merely generic without any sound basis because the company M/s. Megasoft Ltd. was engaged in business of software development services on a company wise basis and had the said company provided segmental accounts for XIUS-BCIG and Blue Ally Division, it should not have been considered as a comparable and only the Blue Ally Division of the said company should have been considered as comparable. Similarly the company KALS has products of its own and hence should have been rejected as comparable because a break-up of product and services revenue was not available. It was further stated that the TPO had selected companies for issuing notices u/.s 133(6) of the Act on an arbitrary basis, particularly the responses of M/s. Sankhya Infotech and M/s. Megasoft Ltd. obtained u/s. 133(6) of the Act could not have been relied upon as those companies had provided contradictory information in their responses to the notices issued u/s. 133(6) of the Act. It was further stated that the TPO had wrongly ITA No.1369/Bang/10 Page 36 of 50 considered foreign exchange fluctuation and provisions written back as non-operating in nature, which are to be considered as operating in nature. Reliance was placed on the following case laws:
(i) M/s. SAP Labs India Pvt. Ltd. v. ACIT 44 SOT 156 (Bang)
(ii) Gem Plus Jewellery India Ltd. v. CIT 330 ITR 175 (Bom)
(iii) Sony India (P) Ltd. v. DCIT 114 ITD 448 (Del)
47. The ld. counsel for the assessee further submitted that the assessee provided the working for the adjustment only on the basis of the decision of the ITAT Delhi Bench in the case of Sony India (P.) Ltd. v. DCIT 114 ITD 448 and also provided Capital Assets Pricing Model (CAPM) based on the analysis before the DRP for the risk adjustment, but the same had not been considered by the DRP. Therefore in the absence of any other quantification mechanism, CAPM based analysis should have been considered and deduction is to be allowed to the assessee on account of difference in the risk profile of the assessee vis-à-vis comparable companies.
48. We have considered the submissions of both the parties and carefully gone through the material available on record. It is noticed that a similar issue having identical facts has been adjudicated by this Bench of the Tribunal in the case of M/s. Insilica Semiconductors India Pvt. Ltd. v. ITO, Ward 11(2) in ITA No.1399/Bang/2010 for the A.Y. 2006-07 order dated 29.02.2012, wherein the relevant findings has been given in paras 18 & 19 of the said order, which read as under:-
ITA No.1369/Bang/10Page 37 of 50
"18. We have considered the submissions of both the parties and carefully gone through the material available on record. In the present case, it is noticed that the assessee selected 10 comparables out of which 2 viz., Visual Soft Technologies Ltd. and VJIL Consultancy Ltd. were rejected by the TPO. However, the TPO included another company M/s. Infosys Technologies Ltd. which was claimed to be 906 times bigger than the assessee. In our opinion the said company being significantly dissimilar in size should not have been considered as comparable. In the present case, the TPO included certain companies as comparable on the basis of information obtained by way of notice u/s. 133(6) of the Act, but without providing an opportunity of being heard to the assessee, the TPO issued a show cause notice dated 30.04.09 copy of which is placed on pages 95 to 125 of the assessee's PB and proposed to redetermine the ALP on the basis of 20 comparables and subsequently issued another notice on 20.07.09 and proposed to adopt 14 companies as comparables, but in the final order the TPO selected 22 companies as comparables. In other words, 8 additional companies were considered as comparables apart from those which were proposed in the notice dated 20.07.09, copy of which is placed at pages 305 to 355 of the assessee's compilation. It therefore appears that new companies were adopted by the TPO as comparables without affording opportunity to the assessee to present its objections to their adoption. It is well settled that nobody should be condemned unheard as per the maxim audi alteram partem, but in the present case nothing is brought on record to substantiate that the TPO/AO while adopting additional comparables had provided opportunity of being heard to the assessee. Therefore this issue deserves to be set aside to be decided afresh at the level of the Assessing Officer. For the aforesaid view, we are fortified by the order dated 31.01.2012 of the ITAT 'A' Bench Bangalore in the case of Genesis Microchip (I) Pvt. Ltd., Bangalore v. DCIT, Circle 11(3), Bangalore in ITA No.1254/Bang/2010 for the A.Y. 2006-07.
19. In the present case, the AO adopted M/s. Infosys Technologies Ltd., KALS Information System Ltd., Accel Transmatic Ltd. and Tata Elxsi Ltd. as comparables on the basis of data which was obtained by him in response of the notices issued u/s. 133(6) of the Act, however no opportunity of being heard was provided to the assessee for rebuttal, therefore the Assessing Officer was not justified in considering those comparables while working out the ALP in assessee's case. In that view of the matter, we deem it appropriate to set aside this issue back to the file of the Assessing Officer, to be adjudicated ITA No.1369/Bang/10 Page 38 of 50 afresh in accordance with law, after providing due and reasonable opportunity of being heard to the assessee. The AO/TPO is also directed to allow the opportunity to cross-examine the comparables whose replies were obtained u/s. 133(6) of the Act and were sought to be used against the assessee, if the assessee so desires."
49. Since the facts of the present case are similar to the facts involved in the aforesaid referred to order dated 29.02.2012 of the Tribunal in the case of M/s. Insilica Semiconductors India Pvt. Ltd. v. ITO, so respectfully following the said order, we remand this issue back to the file of the AO/TPO to be decided afresh in accordance with law, after providing due and reasonable opportunity of being heard to the assessee.
50. It is also relevant to point out that in the aforesaid referred to case, the issue relating to adjustment on account of risk profile was not there, therefore we direct the TPO to consider the arguments and submissions of the assessee which has been mentioned in the former part of this order, while adjudicating the issue afresh.
51. The next issue vide ground No.16 relates to the benefit of +/- 5% adjustment as mentioned in the proviso to section 92C(2) of the Act.
52. The facts related to this issue in brief are that the assessee had international transactions during the financial year 2005-06 and the case was referred to the TPO to determine the ALP. The TPO vide order dated 29.10.2009 stated that an adjustment of Rs.4,26,43,555 was required to be made to the income of the assessee company, consequent to determination of the ALP. The AO forwarded the draft assessment order dated 21.12.09 to the assessee to file its objections before the DRP. The ITA No.1369/Bang/10 Page 39 of 50 DRP directed the AO to complete the assessment after taking into consideration the detailed discussion on various issues vide directions under sub-sections (5) & (8) of section 144C of the Act dated 08.09.10. The DRP directed to modify the assessment order after reworking the correct margin in the draft assessment order. In compliance to the above direction, the AO adopted the adjustment at Rs.4,24,78,340 as against earlier adjustment of Rs.4,26,43,555. Now the assessee is in appeal.
53. The ld. counsel for the assessee submitted that the assessee should have been given a standard deduction of 5% as provided under proviso to section 92C(2) of the Act before making adjustment for the transfer price. Reliance was placed on the following case laws:
1. M/s. Genisys Integrating Systems (India) Pvt. Ltd. v.
DCIT ITA No.1231/Bang/2010
2. M/s. Tatra Vectra Motors Ltd. v. DCIT ITA No.1284/Bang/2010 dtd. 31.01.2012.
54. The ld. counsel for the assessee further submitted that the contention of the assessee was rejected by the DRP on the ground that amendment to proviso to section 92C was clarificatory in nature and therefore retrospective in effect. It was contended that the amendment to proviso to section 92C was not retrospective as clarified by the CBDT by way of letter No.F.142/13/2010-SO(TPL) dated 30.09.2010. The ld. counsel for the assessee contended that a deeming provision has been created to adopt an arms' length price if the price actually undertaken by the assessee does not exceed 5% of the amount at which international transaction has actually been undertaken instead of reckoning the price which is determined by the TPO which was the position under unamended ITA No.1369/Bang/10 Page 40 of 50 proviso to section 92C(2) of the Act. Reliance was placed on the following case laws:
- M/s iPolicy Network Private Limited Vs. ITO, New Delhi [ITA No.5504/Del/2010]
- M/s. Symantec Software Solutions Private Limited Vs. ACIT [ITA No.7894/MUM/2010]
- M/s. SAP Labs India Private Limited Vs. ACIT, [44 SOT 156 (Bang)]
- TNT India Private Limited Vs. ACIT [ITA No. 1442 (Bng)/08]
- Haworth (India) Private Limited Vs. DCIT, [ITA No.5341/DeI/2010]
- UE Trade Corporation (India) (P) Limited Vs. ACIT [44 SOT 457 (Del)]
- Cummins India Limited Vs. DCIT, [ITA No. 277 & 1412 /PN/071
- Starnet Networks (India) P. Ltd. Vs. DCIT(ITA No. 1350/PN/2010) ITAT, Pune.
- Genisys Integrating Systems (India) Private Limited vs DCIT (ITA. No. 1231 (Bang.)/2010)
- CISCO Systems (India) Pvt. Ltd. Vs. DCIT (ITA No. 1410 (Bang.)/2010)
- Emerson Process Management India Pvt Ltd Vs ACIT (ITA No. 8118/Mum/2010)
- Diageo India Private Limited vs DCIT ([TA. No. 8602 (Mum.)/2010)
55. In view of the above, the ld. counsel for the assessee contended that the Proviso to Section 92C(2) of the Act as amended by Finance (No: 2) Act of 2009 is prospective in operation and will be applicable only after 01 October 2009 (i.e., from AY 2009-10 and onwards). Therefore he submitted ITA No.1369/Bang/10 Page 41 of 50 that the benefit of 5% is to be provided from the ALP as per the erstwhile proviso of Section 92C(2) of the Act.
56. In his rival submissions, the ld. CIT(DR) submitted that no benefit of adjustment of +/- 5% be given to the assessee particularly when the proviso to section 92C(2) of the Act has been amended w.e.f. 1.10.2009 by introducing a clarificatory amendment. It was further stated that the transfer pricing adjustment would be made only from arithmetical mean price, therefore by virtue of amendment the adjustment of +/- 5% variance is allowable only in the case of price charged in the international transaction and not for the adjustment. Reliance was placed on the following case laws:-
- Marubani India Pvt. Ltd. v. Addl. CIT (ITA No.935/Del/2009) - DCIT v. Global Vantadge Pvt. Ltd. (2010-TIOL-24-ITAT- DEL) - DCIT v. Bast India Ltd. (41 SOT 10) - M/s. Deloitte Consultancy India Pvt. Ltd. v. DCIT (ITA No.1084/Hyd/2010) - Exxon Mobil Company India Pvt. Ltd. v. DCIT (ITA No.8311/Mum/2010) - ST Micro Electronics Pvt. Ltd. v. CIT(A) (ITA No.1806, 1807/Del/2008) - ADP (p) Ltd. v. DCIT (ITA NO.106/Hyd/2009)
57. After considering the submissions of both the parties and material on record, it is noticed that a similar issue has been adjudicated by the ITAT 'A' Bench Bangalore having the same constitution in the case of M/s. Tatra ITA No.1369/Bang/10 Page 42 of 50 Vectra Motors Ltd. v. DCIT, ITA No.1284/Bang/2010 for the A.Y. 2006-07 wherein the relevant finding has been given in paras 12 to 17 of the order dated 31.01.2012, which read as under:
"12. We have considered the submissions of both the parties and carefully gone through the material available on record. In the present case, the assessee has not disputed the adjustments u/s. 92CA of the Act, but challenging the working of ALP without giving benefit of the option available under the erstwhile proviso to section 92C(2) of the Act, so it becomes relevant to discuss the provisions contained in the erstwhile proviso to section 92C(2) of the Act, which was inserted by Finance Act, 2002 w.e.f. 1-4-2002 and 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, or, at the option of the assessee, a price which may vary from the arithmetical mean by an amount not exceeding five per cent of such arithmetical mean."
13. From the plain reading of the above proviso, it is clear that the option is available to the assessee for adjustment of +/- 5% variation for the purposes of computing ALP. As per the said proviso, where more than one price is determined by the most appropriate method, the ALP 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 per cent of such arithmetical mean. In our opinion, the benefit of option i.e., adjustment of +/- 5% variation, as provided in proviso to section 92C(2) of the Act is available to the assessee.
14. On a similar issue, the ITAT Delhi Bench in the case of Sony India Pvt. Ltd. v. DCIT (2009) 315 ITR (AT) 150 has held as under:
" The proviso to section 92C(2) of the Act consists mainly of two parts:
(a) where more than one price is determined by the most appropriate method, then the arm's length price shall be taken to be the arithmetical mean of such price; or (b) at the option of the assessee, a price which may vary from the arithmetical mean by an amount not exceeding 5 per ITA No.1369/Bang/10 Page 43 of 50 cent of such arithmetical mean. The first limb of the proviso has general application. There is no option with nor any sort of concession allowed to the assessee. The arm's length price so determined may be accepted or contested by the assessee or by any aggrieved person in accordance with the statutory provisions. It is a statutory levy without any option. The second limb of the proviso gives "an option" to the assessee to take the arm's length price which may vary from the arithmetic mean by an amount not exceeding 5 per cent of such arithmetic mean.
The word "option" is synonymous with "choice" or "preference". Therefore, it is the choice of the assessee to take the arm's length price with a marginal benefit and not the arithmetical mean determined as the most appropriate method. There is nothing in the language to restrict the application of the provision only to marginal cases where the price disclosed by the assessee does not exceed 5 per cent of the arithmetic mean. The arm's length price determined on application of the most appropriate method is only an approximation and is not a scientific evaluation. Therefore, the Legislature thought it proper to allow marginal benefit to assessees who opt for such benefit. In the case of an assessee who exercises the option and accepts the arm's length price even exceeding 5 per cent of the arithmetic mean determined by the tax authority as correct and is ready to pay tax on the difference between the price disclosed by him and the arm's length price the application of the proviso is not excluded. The legal position cannot be different in a case where minor variation of 5 per cent is not accepted and the arm's length price is further challenged in appeal. The mere fact of acceptance or non-acceptance of the arithmetic mean cannot be taken to be the determining factor relating to the right to contest the arm's length price in appeal. Such inference is not supported by the language of the provision. Both in the first as also in the second limb, the implications of the determined the arm's length price are the same except for the marginal benefit allowed to the assessee under the second limb. Hence, the second limb of the proviso is applicable even to cases where the assessee intends to challenge the arm's length price taken as arithmetic mean and determined through the most appropriate method. Therefore, the benefit of second limb is available to all assessees irrespective of the fact that the price of international transaction disclosed by them exceeds the margin provided in the provision." ITA No.1369/Bang/10 Page 44 of 50
15. In the present case, it appears that the benefit of +/- 5% adjustment has not been given to the assessee for the reason (as mentioned by the TPO) that sales made by the assessee to third parties were higher in comparison to the rates of sale by AEs to the assessee. But nothing is brought on record to substantiate the aforesaid observations of the TPO. The AO had accepted the recommendation of the TPO in his report dated 30.8.2000 and made the addition of Rs.1,76,56,164, however, while doing so, he did not allow the benefit of the adjustment as provided in the proviso to section 92C(2) of the Act and the contention of the ld. CIT(DR) was 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, which are applicable from w.e.f. 1.10.2009. and shall accordingly apply to the cases in which the proceedings were pending before the TPO on or after such date. Therefore, the benefit of +/- 5% intended by the erstwhile proviso to section 92C(2) of the Act was not available to the assessee. Accordingly the ld. CIT(DR) had strongly defended the assessment framed by the AO and his method of determining the ALP.
16. As regards to the applicability of the amended provisions in proviso to section 92C(2) of the Act which is applicable w.e.f. 1.10.2009 is concerned, it is noticed that this issue has been adjudicated by the ITAT Pune Bench "A", Pune in ITA No.1350/PN/2010 in the case of Starnet Networks (India) P. Ltd. v. DCIT (supra), wherein the relevant findings has been given in paras 20 to 23 of the order dated 03.10.2011 and read as under:
"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 ITA No.1369/Bang/10 Page 45 of 50 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 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 ITA No.1369/Bang/10 Page 46 of 50 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 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 ITA No.1369/Bang/10 Page 47 of 50 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:
" 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 "the above amendment has been made applicable with effect from 1st April, 2009 and will accordingly apply in respect of assessment year 2009-10 and subsequent years."
the following lines shall be read;
"the above amendment has been made 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 (TPO)on or after such date."
(ii) In para 38.3, for the date "1st October, 2009, the following date shall be read: "1st 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 ITA No.1369/Bang/10 Page 48 of 50 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 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 ITA No.1369/Bang/10 Page 49 of 50 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."
17. We therefore considering the totality of the facts and respectfully following the aforesaid referred to orders of the co- ordinate benches of the ITAT at Delhi & Pune, direct the Assessing Officer to allow the benefit of +/-5% to the assessee while computing the ALP in terms of the erstwhile proviso to section 92C(2) of the Act."
58. Since the facts of the present case are similar to the facts involved in the aforesaid referred to case of M/s. Tatra Vectra Motors Ltd. v. DCIT in ITA No.1284/Bang/2010 order dated 31.01.2012, so respectfully following the said order, we direct the AO to allow the benefit of +/- 5% to the assessee while computing the ALP.
59. Vide ground No.17, the grievance of the assessee relates to charging of interest u/s. 234B and 234C of the Act. Regarding this issue, it was the common contention of both the parties that it is consequential in nature, we order accordingly.
60. The last issue agitated by the assessee vide ground No.18 regarding the initiation of penalty proceedings u/s. 271(1)(c) of the Act has been raised prematurely, hence the same is dismissed. ITA No.1369/Bang/10 Page 50 of 50
61. In the result, the appeal of the assessee is partly allowed for statistical purposes.
Pronounced in the open court on this 30th day of April, 2012.
Sd/- Sd/-
( GEORGE GEORGE K. ) ( N.K. SAINI )
Judicial Member Accountant Member
Bangalore,
Dated, the 30th April, 2012.
Ds/-
Copy to:
1. Appellant
2. Respondent
3. CIT
4. CIT(A)
5. DR, ITAT, Bangalore.
6. Guard file
By order
Assistant Registrar
ITAT, Bangalore.