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2008 (4) TMI 340 - AT - Income TaxAllowed expenses toward employee contribution on PF u/s 43B - Additions on transfer pricing adjustments - "international transactions" u/s 92B(1) - most appropriate method for determining the ALP - assessee is a company registered in India, inter alia having three related parties in the form of subsidiaries and further step down subsidiaries incorporated in foreign countries, all of which are admittedly "associated enterprises" (AE) - cross-border transaction with an AE - ''Quantitative screening'' - determination of ALP on a transaction-by-transaction basis - Allowed expenses toward employee contribution on PF u/s 43B - HELD THAT :- the material available on record direct the AO to verify the claim of the assessee and if the employees' contribution have been paid either before the filing of return or before the due date of filing of the return, whichever is earlier, then the claim of the assessee on account of employer's contribution should be allowed following the judgment of the Tribunal, Special Bench, Kolkata in the case of I.T.C. Ltd. We also direct the AO to verify the claim of the assessee regarding arithmetical mistake in disallowance to the extent of Rs. 4,08,181. We hold and direct accordingly and accept the ground raised by the assessee for statistical purposes. Transactions entered by the assessee with its AE, DCIL in Bahamas - HELD THAT:- We agree with the view that gross margins of DCIL need to be compared with gross margins of comparable uncontrolled transactions or unrelated enterprises entering into such transactions. We can conclude that DCIL is a company of substance and is performing full-fledged distribution activities. It is not a paper company established to evade taxes as argued by the CIT(A) in his order. Hence, we do not find any justification in the arguments, of the CIT(A) that entire profits should come to the assessee and DCIL should not retain profits. Further the benchmarking exercise and analysis conducted by the assessee has been examined by the CIT(A) and TPO but they have not been able to controvert the analysis of the assessee. Therefore, we conclude, DCIL should retain the gross margins as determined through the benchmarking exercise by the assessee discussed earlier in this order. Therefore based on such analysis, in the case of asst. yr. 2003-04, the amount of adjustment in the ALP of the international transactions entered by the assessee with DCIL should be restricted to USD 275,632 as submitted and conceded by the learned Authorised Representative. This amount converted to Indian rupees based on the average currency conversion rates for the relevant year comes to Rs. 1,33,42,185. In case of asst. yr. 2004-05, based on the analysis discussed above the assessee has conducted its international transactions with DCIL at arm's length. Hence there should not be any adjustment in the ALP for this year. International transactions by the assessee with TKC - we conclude that results of the analysis done from the Indian side by the assessee show that the international transactions entered by the assessee with TKC are at arm's length. The TPO and the CIT(A) nor the TPO (sic.-AO) remarked against or made any objections against the analysis performed by the assessee to justify the ALP of its international transactions entered with TKC. Therefore, the CIT(A) erred in sustaining the adjustments made by the TPO. Hence, there should not be any adjustment in respect of international transactions in nature of deputation of employees with DCIL and TKC in respect of international transactions in nature of deputation of employees with DCIL and TKC as the transaction has been entered at arm's length for both the assessment years. International transactions entered by the assessee with Datacore US - We agree with the submission made by the ld AR regarding testing the margins of Datacore India for the international transaction entered by the assessee with Datacore US. The results of the economic analysis show that the arm's length OP /TC of the comparable companies is 24.08 per cent after application of the +/5 per cent range whereas the results of Datacore India for the year ended 31st March, 2003 indicate that the company has earned a profitability of 26.61 per cent on its international transactions when measured by the OP/TC criteria. This clearly establishes that the international transaction of Datacore India with its associate is at arm's length. For asst. yr. 2004-05. Selection of time period. We extracted companies, which had sales 0 in at least two out of the three financial years ending during the period 1st April, 2001 and 16th Feb., 2004. This left us with 3,989 companies. As, we already had a set of companies from Prowess we extracted only the extra companies from Capitaline Plus, data for which were not available in Prowess. This gave us a set of 1,228 companies from Capitaline Plus. Various data fields in Capitaline Plus and Prowess were selected and the ones that were relevant to our analysis were extracted companies, which satisfied basis search criteria. A simple average of the raw numeric data fields was then computed, and various computations were performed thereon as well as on the raw data for individual years. Quantitative screening - Quantitative screening is a process under which comparability is assessed by comparing economically significant financial data of ratios. We conclude that the analysis undertaken by the assessee to determine the ALP of the international transaction with Datacore USA is correct and on the basis of the analysis it is seen that transaction undertaken by the taxpayer with Datacore USA is at arm's length for both the assessment years. In the result, the appeals filed by the assessee are partly allowed.
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