TMI Blog2017 (8) TMI 1483X X X X Extracts X X X X X X X X Extracts X X X X ..... his consolidated order for the sake of convenience. 3. The Revenue has raised the following grounds of appeal:- 1. On the facts and in the circumstances of the case and in law, the Ld, CIT(A) has erred in allowing pre-operative expenses as Non-operating expenses without appreciating that the appellant itself in its computation of income / financial statement has shown these expenses as Operating Expenses. 1.1 On the facts and in the circumstances of the case and in law, the Ld. CIT (A) has failed to appreciate that Safe Harbour Rules cannot be applied to the Assessment Year prior to its introduction. 1.2 Without prejudice, if such pre-operative expenses are treated as non-operating expenses, then it ought not to be allowed as deduction in computation of incomer 2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in directing to include M/s. Microgenetic Systems Ltd., as fresh comparable without appreciating that assessee is not permitted to make fresh search during the TP proceedings. 2.1 On the facts and in the circumstances of the case and in law, the Ld. CIT (A) failed to appreciate that assessee is supposed to maintain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spect of international transaction pertaining to provision of IT enabled design engineering services. 8. Selection of companies having exceptional year of operations as comparable Erred in selecting certain companies having exceptional year of operations as comparable to the Respondent. 9. Accepting additional company as identified by the learned Transfer pricing officer ('TPO') as comparable Erred in accepting additional company, as inappropriately selected by the learned TPO, as comparable to the Respondent. 10. Adjustment for differences on account of functional and risk profile of comparable companies vis-a-vis the Respondent Erred in comparing the full-fledged risk bearing entities with the Respondent's captive operations without making any risk adjustment for differences between the functional and risk profile of comparables vis-a-vis the Respondent. 11. Non applicability of transfer pricing provisions to unit of the Respondent which is enjoying tax holiday under section 10A of the Act Erred in ignoring the fact that since Respondent is availing tax holiday under section 10A of the Act, there is no intention to shift the profit base out of Ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cation under section 92CA(5) r.w.s. 154 of the Act against the order passed by the TPO under section 92CA(3) of the Act. The TPO re-computed the arm s length adjustment at ₹ 3,54,62,256/-. The Assessing Officer made an addition on this count, against which the appeal was filed before the CIT(A). Vide para 2.9.5 at pages 18 and 19 of the appellate order, the CIT(A) noted that M/s. Microgenetic Systems Ltd. was not part of assessee s transfer pricing study report as the adequate financial data was not available. However, the CIT(A) held that since the data was now available, then the same could be considered if the said company satisfies all the filters used by the TPO in its transfer pricing assessment order. The plea of assessee was in respect of two concerns i.e. M/s. Microgenetic Systems Ltd. and Cepha Imaging Pvt. Ltd. The CIT(A) held that Cepha Imaging Pvt. Ltd. was not comparable company because of it being functionally different. As far as M/s. Microgenetic Systems Ltd. was concerned, the Assessing Officer was directed to examine its comparability with the assessee and if the said concern met all the filters used by the TPO in its transfer pricing report, then the compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issue raised vide ground of appeal No.1.2 does not arise in the present appeal. 12. The learned Authorized Representative for the assessee further pointed out that in case the appeal of Revenue is dismissed, then no TP adjustment is required to be made in the hands of assessee and consequently, the grounds of objections raised in Cross Objections become academic in nature. 13. We have heard the rival contentions and perused the record. The assessee had provided design engineering services to M/s. Dar Holding during the year under consideration. In order to benchmark the said international transaction, the assessee had applied TNNM method and on selection of certain concerns, held its transactions with its associated enterprises to be at arm's length price. However, in the first instance, the TPO applied single year data in order to work out the average of margins of comparables. Further, the TPO applied certain filters as mentioned above as against the filters applied by the assessee. There is no issue against application of filters applied by the TPO. The assessee is aggrieved on two counts i.e. first is the consideration of pre-operative expenses as part of operating ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ses which have been incurred by the assessee are for establishment of its business and not for rendering services of Software Development Services. The said business of providing Software Development Services to the Associate Enterprise starts only after the assessee gets registration under the STPI scheme. The clear cut terms of the agreement agreed upon between the parties effectively determine the understanding agreed upon, under which the Associate Enterprise is to reimburse the assessee, only, in respect of such costs which are incurred for providing services to it after the assessee receives the recognition under the STPI scheme. The date of registration in the present case is 17-06-2005 and the Associated Enterprise has compensated the assessee for the services provided on cost plus markup basis w.e.f. 01-07-2005. The earlier costs incurred by the assessee for setting up of the business, i.e. for rent, employee cost and administrative expenses cannot form part of the operating cost of the assessee, as the understanding between the parties decide the date from which the assessee would be reimbursed the cost with markup. Accordingly, we hold that the cost of ₹ 39,14,814/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT(A) on the other hand, admitted that plea of assessee and directed the TPO to consider the same in the final set of comparables in case it is functionally comparable and satisfies all the other filters applied by the TPO. The plea of Revenue is that no new concern can be included in the final set of comparables which was not included in the TP study report. 17. We find that the Tribunal while deciding the issue of powers of TPO to select and include any functionally comparable concern in the final set of comparables, data of which was available during the TP proceedings and not during TP study report, held that the same is permissible. The Tribunal in the case of M/s. Vishay Components India Pvt. Ltd. Vs. DCIT (supra) held as under:- 13. Now, coming to the stand of assessee with regard to fresh search undertaken at the time of assessment proceedings. 14. Under section 92D of the Act, it is provided that every person who has entered into an international transaction is to keep and maintain such information and documents in respect thereof as may be prescribed. Rule 10D of the Rules prescribes the information and documents to be kept and maintained under section 92D o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... regard to the international transaction or class of transactions or class of associated persons or functioned performed by such persons or such other relevant entities as the Board may prescribe. Sub-section (2) therein provides that the most appropriate method shall be applied for determination of arm's length price in the manner as may be prescribed. Section 92C(3) of the Act reads as under:- 92C. (1)..... (2)..... (3) Where during the course of any proceeding for the assessment of income, the Assessing Officer is, on the basis of material or information or document in his possession, of the opinion that- (a) the price charged or paid in an international transaction [or specified domestic transaction] has not been determined in accordance with sub-sections (1) and (2); or (b) any information and document relating to an international transaction [or specified domestic transaction] have not been kept and maintained by the assessee in accordance with the provisions contained in sub-section (1) of section 92D and the rules made in this behalf; or (c) the information or data used in computation of the arm s length price is not reliable or correct; or (d) the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss an order in writing. Hence, under the provisions of the Act, the machinery to pass an order for determination of arm's length price of an international transaction entered into by any person is so provided. It is not only the evidences which are relied upon by the assessee in support of its computation of arm's length price of its international transaction but also any other evidence which the TPO may require on some specified points or the information which may be gathered by the TPO can be used by the TPO to determine the arm's length price of international transaction. Undoubtedly, the assessee is the first person who is to collect the information and documents in respect of its international transaction which are enlisted under Rule 10D of the Rules. But mere collections of documents and compilation of data is not the only responsibility of the assessee, who can be asked to produce such other evidence as the TPO may require on any points. Further, the TPO is also empowered to take into account such material which he has gathered i.e. the data. However, there is a restriction in the section itself that such data should be available in public domain. Such material ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... absence of which, there could not be curtailment of powers to be exercised by the TPO for determining arm's length price of international transaction. Merely because, the financial results of a concern which were functionally similar to the assessee came into public domain on a later date, but relate to the year in which the international transaction had been undertaken, cannot be rejected on the surmise that they were not available on the date of compilation of documentation and / or came in the public domain later. The argument of learned Authorized Representative for the assessee before us is that if the TP proceedings of a particular case had been taken up on an earlier date when no such data was available, would put such a person on an advantageous position as compared to person whose TP proceedings were taken up on a later date when information in respect of such comparables were recently published. The search process is to be carried out by the TPO who in turn, has to determine the arm's length price of international transaction on the basis of information available with him and once such information is made available to him, then the same can be applied by the TPO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the part of the taxpayer to comply with the statutory provisions, the tax authorities would have to determine the ALP. In such a situation, burden of proof on tax authorities is much reduced. 21. Thereafter, the conclusion of the Tribunal was that the taxpayer had to cooperate with the tax authorities by furnishing relevant information. Further, where the authorities were of the view that arm's length price was not correctly determined by taxpayer, then the same could be substituted by arm's length price on the basis of material or information furnished by the assessee or collected by the Revenue authorities. It was further held that such arm's length price had to be determined by keeping in mind the provisions of the Act and also the principles of natural justice and be fair and reasonable to the taxpayer and any material collected to be used against the taxpayer was to be put to the taxpayer to explain. It was further held that the adjustments made on account of arm's length price by tax authorities could be deleted in appeal only if appellate authorities are satisfied and records a finding that arm's length price submitted by the assessee was fair a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nterpreting the transfer pricing provisions and the principle laid down by the Special Bench of Tribunal is applicable to the issue before us. The learned Authorized Representative for the assessee before us has placed reliance on the ratio laid down by Hon ble Bombay High Court in Scindia Steam Navigation Co. Ltd. Vs. CIT (supra), wherein the issue was the applicability of amended provisions of the Act. The question arising before the Hon ble Bombay High Court was that in case any provision has been amended later, were such amended provisions to be applied while completing assessment of the year which was pending as on the date, on which the amendment was brought in or as per the provisions which were applicable to the relevant year. The Hon ble Bombay High Court did not accept the contention of the learned Departmental Representative for the Revenue in this regard as it would cause startling results. The said proposition laid down by the Hon ble Bombay High Court is not applicable to the facts of the present case before us, where under the provisions of the Act itself, the TPO is empowered to substitute the arm's length price on the basis of material or information furnished ..... X X X X Extracts X X X X X X X X Extracts X X X X
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