TMI Blog2011 (10) TMI 633X X X X Extracts X X X X X X X X Extracts X X X X ..... ised multiple Grounds on this issue, the pertinent grievance is against the determination of the ALP at a higher figure by the Revenue authorities than the value declared by the assessee. 3. In brief the relevant factual backdrop leading up to the present dispute can be summarized as follows. The appellant is a company incorporated under the provisions of the Companies Act, 1956 and is a 100% owned subsidiary of M/s Starent Networks Corporation, USA (hereinafter referred to as SNC ). The appellant is engaged in carrying out research, development and testing activities in the field of software development and export thereof exclusively to its parent holding company, i.e. SNC. The appellant company has three undertakings in India located at Pune and Bangalore, which are stated to be approved under the Software Technology Park scheme of the Government of India entitled to the benefits provided under section 10A of the Act. 4. During the year under consideration, assessee entered into an international transaction with its Associated Enterprise(AE), i.e. SNC on account of software development services for a stated consideration of ₹ 17,47,15,470/-. In the course of assessme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es/services not comparable to the Appellant; and, (vi) Related party transactions more than 25%. Upon consideration of the above filters, the net operating profit/operating cost was used as the relevant PLI and average PLI was ascertained at 8.72%. For the year under consideration, the appellant had earned a margin of 11.62% and since the margin earned by the appellant was higher than the average of margin earned by the comparable companies, the instant international transaction with the AE for the provision of software development services was canvassed by the assessee as having been concluded at an arm s length. 6. The aforesaid determination of ALP by the appellant was not found acceptable by the TPO. Firstly, the TPO rejected one of the filters applied by the appellant, i.e. the filter on account of abnormal PLI (i.e. negative PLI or PLI greater than 50%) for the reason that the functional comparability, assets employed and risks undertaken should ultimately alone matter in identifying the comparable companies. Further, the TPO cited two more filters for rejection of comparable companies, namely, Companies with negative net worth; and, Companies having ratio of personn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t appropriate method for benchmarking the appellant s international transaction; - that out of the set of comparables finally adopted by the TPO, two companies, one having the highest profit margin at 84.94% (i.e. Omnitech Infosolutions Ltd) and the other having the lowest margin at 0.98% (i.e. Goldstone Technologies Ltd) should be excluded to arrive at the PLI for benchmarking the said international transaction of the appellant; - that since the PLI of the remaining four companies on aggregation basis came to 20%, the Assessing Officer was directed to compute the value of the international transaction adopting TNM Method and PLI of 20% on the cost; and, - that as regards the contention of the appellant regarding the allowability of benefit of +/-5% as per proviso to section 92C of the Act, the DRP was of the view that the safe harbour of +/-5% is not available to the appellant; As a result of the above directions, the final set of comparable companies adopted are as under: S.No Name of the company Margin (OP/TC)(%) 1 NUC Soft Ltd 3.69% 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d a filter to remove abnormal PLI (i.e. negative PLI or PLI greater than 50%) while identifying the comparable companies and after the application of such filter, the Goldstone Technologies Ltd. cannot be considered as a company having abnormal PLI or a negative PLI and therefore the same cannot be excluded on account of the reason advanced by the DRP especially when the said company has been accepted as functionally comparable by the TPO in the subsequent year. It was accordingly contended that Goldstone Technologies Ltd be considered as a comparable for the purposes of testing the international transaction in question. 9. Secondly, it is submitted that Compucom Software Ltd. has been wrongly considered by the TPO as a comparable company and deserves to be excluded because of significant related party transactions. In this regard, it has been pointed out that while adopting the said company as a comparable, the TPO did not consider that it has related party transactions which comprised more than 25% of the total revenue for the financial year 2005-06. It has been submitted that the appellant applied a filter of rejecting companies having related party transactions in excess of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rned counsel that the above conclusion of the DRP is in contrast to the following decisions: a. Skoda Auto India (P) Ltd v ACIT 122 TTJ 699 (Pune); and b. Electrobug Technologies Ltd v ACIT 37 SOT 270 (Delhi) 12. In this regard, the appellant has submitted a detailed written submission which is on the following lines: 4.3 As per the erstwhile proviso to section 92C(2) of the Act, an assessee has the option of charging a price to its AE, which may vary from the ALP by +/-5%. The appellant further states that section 92CA(3) of the Act provides that the GTPO has to determine the arm s length price in accordance with sub-section (3) of section 92C. Section 92C(3) further states that the arm s length price shall be determined by the AO in accordance with sub-section (1) and (2) of section 92C. Therefore, it should be appreciated that it is mandatorily required to calculate the arm s length price in accordance with section 92C(1) and 92C(2) of the Act. The Explanatory memorandum to Finance Bill 2002 and Notes on Clauses - income Tax (Finance Bill, 2002) also clarifies that in case the application of the most appropriate method results in two or more prices, the Appellant is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly so as to lead to a presumption of willfully wrong return furnished by the taxpayer. In terms of the above, the assessee submitted that the amendment to the proviso made with effect from 1.10.2009 was not retrospective and came into effect from the assessment year 2009-10 and subsequent years. In this regard, reference was made to a decision of the Delhi Bench of the Tribunal in the case of ACIT v UE Trade Corporation India (ITA no 4405/Del/09 dated 24.10.2010), a copy of which has been placed before us. For the above reasons, it is contended that the computation mechanism as per the erstwhile proviso be applied and assessee be allowed the benefit of 5% range as provided by the erstwhile proviso to section 92C(2) of the Act. 13. Apart from the aforesaid arguments, the learned Counsel has made detailed submissions that out of the comparable companies identified by the appellant, the rejection of certain comparables by the TPO was not appropriate in the case of the following companies, namely, i) VMF Softech Ltd.; ii) RS Software (I) Ltd.; iii) Quintegra Solutions Ltd.; iv) VJIL Consulting Ltd.; and v) LGS Global Ltd. 14. Further, the learned Counsel pointed out that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany has lower profits in comparison with the appellant company, it is inappropriate to conclude that any profit has been shifted outside India so as to attract the transfer pricing regulations of the Act. 15. On the other hand, the learned Departmental Representative, appearing for the Revenue, has primarily relied upon the orders of the authorities below in support of the case of the Revenue. The learned Departmental Representative pointed out that the final set of comparables considered on the basis of the directions of the DRP was fair and proper. It is pointed out that the risks assumed by the assessee company are quite high which would suggest high returns/margins. It was submitted that the assessee was fully dependent on a single customer, i.e. its parent company and this factor by itself suggests a high risk situation. It was also pointed out that certain assets have been transferred by the parent company to the appellant at fair value of the transaction which showed that there was no intention on the part of the parent company to assume the risks associated with the operations of the appellant company. It is also pointed out that it was wrong to suggest on the part of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e by the Finance Act, 2001 w.e.f. 1.4.2002. It is with a view to avoid hardship to the tax payers in the initial years of implementation of these provisions, government of India, through a press note issue by the Ministry of Finance (department of Revenue) on 22.8.2001, expressed its intention of not making any adjustment if the price adopted by the assessee was upto 5% less or upto 5% more than the arm s length price determined by the AO. Immediatey thereafter, the Central Board of Direct Taxes (CBDT) issued the Circular No 12 dtd. 23.8.2001) specifying that the AO shall not make any adjustment to the price shown by the assessee if such price was up to 5% less or upto 5% more than the arm s length price determined by the AO and in such cases, the price declared by the assessee may be accepted. In the present case, it is seen that the ALP of the international transaction undertaken by the assessee falls beyond the 5% margin of the price of international transaction computed by the assessee. Therefore in view of the provisions of the law, details and intentions as are evident from the press note of Govt. of India as well as circular of the CBDT, as aforementioned the benefit of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... part of this order. In the said Circular, it has also been elaborated that the above amendment has been made applicable with effect from 1.4.2009 and will accordingly apply in respect of assessment year 2009-10 and subsequent years. In any case, the Proviso contains a prescription to determine the ALP and quite clearly it is a substantive provision encompassing the eventual determination of an assessee s tax liability. Thus, it can be said that the Proviso is not a procedural piece of legislation and therefore, unless it is so clearly intended, the newly amended proviso cannot be understood to be retrospective in nature. In fact, it is a well-settled proposition that the statutory provisions as they stand on the first day of April of the assessment year must apply to the assessment of the year and the modification of the provisions during the pendency of assessment would not generally prejudice the rights of the assessee. Furthermore, we are fortified by the intention of the Legislature as found from circular No 5 of 2010 (supra) whereby in para 37.5, the applicability of the above amendment has been stated to be with effect from 1.4.2009 so as to apply in respect of assessment yea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ents 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 aforesa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Compucom Software Ltd. as a comparable. Therefore, in the instant case, we direct the TPO to exclude Compucom Software Ltd. from the final set of comparables. The assessee succeeds on this aspect. 25. It has been stated before us that if Compucom Software Ltd. is excluded from the set of comparable companies and considering the +/-5% safe harbor provided under section 92C(2) of the Act, whose benefit we have allowed to the assessee in para 24 above, the margin of 11.62% of the appellant would be at ARM s Length from the Indian Transfer pricing perspective. In this view of the matter, we do not adjudicate on the other aspects raised by the assessee, as the necessary relief has already been allowed to the assessee. Thus, on this Ground assessee succeeds. 26. The only other Ground raised is with regard to the disallowance on account of a delay in payment of employees contribution towards provident fund amounting to ₹ 71,694/-. It has been explained by the learned Counsel that the delay was just six days in two instances and nine days in one instance as per the details contained at page 213 of the Paper Book. In any case, the amount had been deposited before the due date ..... 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