2014 (2) TMI 36 - ITAT CHENNAI

Entitlement for benefit of proviso to section 92C(2) of the Act - 5% safe harbor range - Determination of Arm’s length nature of international transaction – Transfer pricing adjustment - Benchmarking analysis and comparables disregarded – Requirement to maintain Transfer pricing documents u/s 92D of the Act r.w. Rule 10D of the Rules – Held that:- The decision in IHG IT Services (India) (P.) Ltd. v. [2013 (5) TMI 309 - ITAT DELHI] Followed - The benefit of 5% tolerance margin as prescribed under provisio to Section 92C(2) for the purposes of determining the arm's length price of an international transaction is allowable as a standard deduction in all cases, or is allowable only if the difference is less than 5% - the second proviso to Section 92C(2) was amended by the Finance Act, 2012 with retrospective effect from 1.4.2002 - even after the retrospective amendment by the Finance Act, 2012, it was entitled to the benefit of adjustment of + 5% variation while computing the ALP - if the variation between the arm's length price and the price at which international transaction was actually undertaken does not exceed the specified percentage, then only the price at which the international transaction has actually been undertaken shall be deemed to be arm's length price - Thus, the benefit of tolerance margin would be available only if the variation is within the tolerance margin - Once the variation exceeded the tolerance margin, then there would be no benefit even up to tolerance margin - Then, the ALP as worked out under Section 92C(1) shall be taken as ALP without any benefit of tolerance margin.

Adjustments carried out by the TPO were on purchases made from its associate enterprise –It could not be point out as to which were those companies which were excluded and what were the margin levels indicated by such companies - Assessee has indeed filed before the DRP, margins of comparables adjusted for difference in working capital, but at no point of time it had given any reason why such adjustments were required - What were the debtor adjustment and creditor adjustment and how these were relevant have not been demonstrated by the assessee - the assessee has not been able to justify the adjustments that were required to be made on account of negative working capital.

Adjustment for Customs duty – Held that:- The higher import content of raw material was a factor to be considered while doing the ALP analysis - higher import content of raw material itself did not warrant an adjustment in operating margins - For getting the benefit of any such adjustment, assessee should be able to demonstrate that higher import content was necessitated by any extraordinary circumstance beyond its control - Assessee had endeavoured to make a 5% adjustment to its total cost for off-setting the leverage derived on account of negative working capital and for taking care of underutilization of capacity - there was no empirical data ever provided by the assessee to support the figure of 5% arrived by it.

Addition made inspite of invoices raised – Held that:- Irrespective of the method of treatment given in the books of accounts, unless and until the invoice is raised, a customer will not be legally bound to pay - Assessee will get a legal right to claim the sum only after raising the invoice – Relying upon E.D. Sassoon & Co. Ltd. v. CIT [1954 (5) TMI 2 - SUPREME Court] - the point of accrual of income has to be seen from the date on which a legal claim could have been legitimately made on such income – the amount could have been considered as income only for the relevant previous year ending 31st March, 2008 - The addition, made for the relevant previous year thus, deleted.

Disallowance u/s 40(a)(i) and 40(a)(ia) of the Act – Non-deduction of TDS on payment made for acquiring software – Held that:- "royalty" mentioned in Section 40(a)(i) and 40(a)(ia) has to be assigned the meaning given in Explanation 2 to clause (vi) of sub- section (1) of Section 9 of the Act - None of the authorities below have verified this issue in the proper perspective - They were also not having the benefit of the elucidation of the law in this regard by higher authorities - The A.O. had held that the tax had to be deducted by the assessee for payment made to software purchase, but, was not done - Neither he, nor the DRP had looked into the aspect whether the payments made were in respect of "Shrink-wrapped" software or towards right to use software and whether Section 40(a)(i) and 40(a)(ia) stood attracted – thus, the matter remitted back to the AO for fresh adjudication – Decided partly in favour of Assessee.