2007 (11) TMI 339 - AT - Income Tax

Transfer Pricing - Computation of Arm's length price of International Transactions - comparable selection - software services provided to its Associated Enterprises (AE) - deduction claimed u/s 10A - appropriate method u/s 92C - Transactional Net Margin Method (TNMM) - HELD THAT:- Assessing Officer did not apply Indian regulation or guidelines issued by OECD on transfer pricing. The taxpayer, on the other hand, carried out proper screening of approximately 8,000 companies carrying business of software in India and exporting services and goods abroad. It took into account characteristics of its company in question for the relevant assessment year and thereafter made selection of company after applying functional test with reference to assets employed and risk taken by those companies.

Though identical transaction could not be located even by the assessee, an attempt was made to find comparable transactions as close as possible to the controlled transaction. Besides the assessee has rightly relied upon the transaction in the case of Integrated Hitech Ltd. with operating profit ratio of 3.16%. This transaction has been accepted as comparable by the TPO and, therefore, there is nothing further for the taxpayer to establish that controlled transaction with AE was an arm's length transaction.

We are not taking into account high profit or high loss making companies as comparables. All the above, independent comparables have shown profit margin of less than the assessee and, therefore, in the light of above evidence, there is no reason to hold that taxpayer's international transaction with AE is not at arm's length. It has no tangible assets worked in no risk environment are very strong points of the taxpayer, not refuted on record.

While holding so, we have not adopted mean profit of several comparable found by respective parties because in spite of our repeated requests, the parties before us, were unable to show us any rule or decision under which average or mean margin (OP/TC) of different companies is to be taken. Tax administration and parties can work different Arm's length price i.e. a range by the application of different methods. In such a situation, mean of Arm's Length Price as provided in proviso to section 92C(2) of the Act can be taken. But above Arm's length range is not the same thing as average operating profits of different entities with different FAR worked by the TPO through the same method as done in this case by adopting TNMM.

The assessee has satisfied not one but several points of arms' length range worked out on record. In our considered view, it is not necessary for the taxpayer to satisfy all points in the range. Even if one point is satisfied, the assessee can be taken to have established its case and in that situation, the onus is shifted to the department to show why taxpayer's case be not accepted. Arm's length price does not mean maximum price or maximum profit in the range. A willing buyer in an open market shall pay minimum and not maximum price for goods or services. Of course, quality and brand name are important but considered not so by TPO as TNMM method was applied by him. Project profile and other factors were, therefore, not erroneously considered. As noted earlier, the case of Integrated Hitech has been specifically accepted as comparable by both the parties. On other four cases noted above, the TPO or other revenue authorities have not made any adverse comment at any stage of proceeding. It was open to them in proceedings before the ld. CIT(A) or the Appellate Tribunal to show that PIL figure of Integrated Hitech or other four companies were wrong or on account of their FAR analysis, these entities could not be taken as "reliable" comparables for computation of the Arm's Length Price. But no material was brought on record, no arguments advanced to reject the above transaction. Therefore, we accept them as comparable and accept the price disclosed by the taxpayer as Arm's Length Price. Consequently, the addition is directed to be deleted.

Before close, we would like to draw attention to the following . observation of the Supreme Court in the case of Parashuram Pottery Works Co. Ltd v. ITO [1976 (11) TMI 1 - SUPREME COURT] wherein it was observed as under:- "It has been said that the taxes are the price that we pay for civilization. If so, it is essential that those who are entrusted with the task of calculating and realizing that price should familiarize themselves with the relevant provisions and become well-versed with the law on the subject. Any remissness on their part can only be at the cost of the national exchequer and must necessarily result in loss of revenue. At the same time, we have to bear in mind that the policy of law is that there must be a point of finality in all legal proceedings, that stale issues should not be reactivated beyond a particular stage and that lapse of time must induce repose in and set at rest judicial and quasi-judicial controversies as it must in other spheres of human activity."

That in the other ground, the taxpayer has raised objection on denial of deduction under section 10A of the IT Act. The question of allowability of claim to the appellant u/s 10A has already been considered and decided in the assessment year 2001 in the case of this very assessee. The Bench, after following the decision of the Tribunal in the case of Legato Systems India (P.) Ltd. v. ITO [2004 (11) TMI 294 - ITAT DELHI-E], restored the matter to the file of the Assessing Officer to make further inquiry and allow deduction to the assessee.

The aforesaid decision is directed to be applied in the year under consideration as facts and circumstances as also objection of the revenue are similar as raised in that year. Besides, it may be pointed out that decision of the Tribunal in the case of Legato Systems India (P.) Ltd.[2004 (11) TMI 294 - ITAT DELHI-E] has been approved by the Hon'ble Delhi High Court.

Thus, the appeal of the assessee is allowed.