TMI Blog2011 (5) TMI 107X X X X Extracts X X X X X X X X Extracts X X X X ..... ectness and relevance of the same is not objected. Regarding considering the single year/current year data instead of three years - Held that: - When the assessee has not made out a case that taking the data for only current financial year does not present the correct and fair financial result of the comparables then there is no mistake in considering the data for the financial year in which the international transaction has been entered into. Regarding turnover filtering as well as difference in functions and risk profile of comparables – the assessee raised these objections only because some of the comparables are having high profit and also high difference in the turnover and not because of the high or low turnover has influenced the operating margin of the comparables. – Held that: - unless and until it is brought on record that the turnover of such comparables has undue influence on the margins, it is not the general rule to exclude the same that too when the comparables are selected by the assessee itself. - when the assessee is having benefit of choice/option as per the said provision as existed at the relevant point of time, no separate adjustment is required on accou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... did not warrant any transfer pricing adjustment. 3. Use of contemporaneous data Erred in computing the arm's length price using the financial information of the comparable companies available at the time of assessment, although such information was not available at the time when the Appellant complied with these regulations. 4. Use of multiple year data Erred in considering the operating margins earned by comparable companies based on the financial data pertaining to the year ended 31st March, 2006 only and rejecting the financial data of comparable companies for prior two years. 5. Application of turnover filter for identification of comparable companies Erred in rejecting application of turnover filter for identification of comparable companies thereby accepting comparable companies of all sizes irrespective of their scale of operations. 6. Adjustment for difference in functional and risk profile of comparable companies vis- -vis of the Appellant Erred in not making any adjustments for differences in functional and risk profile of comparable companies vis- -vis the Appellant thereby comparing the operating margins of the comparable companies assuming higher busin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ucts in India. The assessee filed its return of income on 29-11-2006 declaring total income of Rs. 75,88,386. Since the assessee had international transaction the reference was made under section 92CA(1) of the Act to the transfer pricing officer for computation of Arms Length Price in relation to international transactions vide order dated 18-8-2008. The transfer pricing officer made transfer pricing adjustment of Rs. 2,54,27,043 vide order dated 15-10-2009. The Assessing Officer prepared the draft order under section 143(3)(ii) r.w.s.144C of the I.T. Act dated 27-11-2009 whereby proposed disallowance/addition including transfer pricing adjustment of Rs. 2,54,27,043. The assessee filed its objections along with Form No.35A in respect of various additions and disallowance made by the Assessing Officer in the draft order before the Dispute Resolution Panel (DRP). The DRP after considering the contention of the assessee passed the direction dated 27-7-2010. Pursuant to the direction of the DRP, the Assessing Officer passed the consequential order dated 30-9-2010. 4. Before us the learned AR of the assessee has submitted that during the relevant year the assessee has provided two ty ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... td. and Rata Glitter Industries Ltd. during FY 2005-06, due to which these companies cannot be considered to be comparable for FY 2005-06. (e) Turnover filter should be applied for selection of comparable companies in light of the judicial guidance available subsequent to the date of transfer pricing study. (f) Adjustment for differences in functional and risk profile should be granted in view of the fact that the assessee is a captive risk mitigated entity whereas comparables are full fledged risk bearing entities. (g) During the relevant year the assessee had reduced proportionate expenses for upgrading the Oracle software, which is used for accounting purposes. These expenses were incurred in earlier year. This amount was fully debited to Profit Loss account in the earlier year and as such, in earlier year, the TPO had reduced full amount of expense debited to Profit and loss account while calculating the margins earned by the assessee without accepting the assessee's argument that benefit is expected over the next few years. Thus, the assessee has requested to consider revised margins from its business activities for the year under consideration after eliminating ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee merely for the reasons that data for same year as the international transactions has not been used, without realizing the practical difficulties that could arise by such interpretation of law. (b) The provisions of section 92CA(3) read with section 92C(3), in terms of which the Transfer pricing officer is authorized to determine the arm's length price on the basis of information or document available with him. The various conditions have been specified in section 92C(3), which need to be satisfied in case the Transfer Pricing officer has to determine the information available with him for determining the arm's length price. Thus, even if the Transfer Pricing Officer has to deviate from the analysis conducted by the assessee the same can only be to the extent the assessee has not complied with the transfer pricing regulations for determining the arm's length price and not in any other respect where the assessee has complied with the transfer pricing regulations. In case the contention of the learned Transfer Pricing Officer for use of latest available data is to be accepted then the underlying consideration would be that the assessee has not compiled with the applicable regul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for difference in functional and risk profile. The learned AR has submitted that it was clear from the functional analysis submitted to the learned TPO that the assessee is a risk mitigated entity since risks such as market risk, warranty risk, credit and collection risk, etc are not borne by the assessee vis-a-vis the comparable companies which transact with independent entities and are not protected from these risks. Although it is evident from the functional analysis document submitted that the assessee is risk mitigated entity, the same has not been taken into consideration by the learned TPO. (g) The next contention of the learned AR is regarding turnover filtration. The ld. AR of the assessee has submitted that the assessee has taken an objection before the transfer pricing officer for application of the turnover filter while selecting comparables and requested the transfer pricing officer to exclude the comparable having less than 5 crores and more than 50 crores of the turnover while computing the ALP. He has pointed out that the TPO has not considered and discussed the arguments of the assessee regarding application of the turnover filter on merit but merely brushed t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he dispute involved in grounds of appeal 1 to 3 and therefore, the same may be admitted. 6.1 On the other hand, the ld. DR has vehemently objected to the prayer of the assessee for admission of the additional evidence at this stage. He has submitted that Rule 29 does not confer any right on the parties to produce additional evidence. The assessee has filed additional evidence first time before the Tribunal in the form of paper book No.2 without explaining the reasonable cause as to why the said evidence has not been produced before the lower authorities. He has further submitted that the additional evidence filed by the assessee is required to be verified and examined and therefore, facts are required to be investigated, which is not possible at this stage while considering the additional evidence. He relied on the decision of the jurisdictional High Court in the case of Gammon India Ltd. v. CIT [1995] 214 ITR 50/80 Taxman 591 (Bom.). 7. On merits as regards to grounds of appeal nos. 1 to 7, the ld. DR has submitted that the assessee is a capital risk free entity but still incurring loss which is beyond the comprehension. The ld. DR further contended that it is beyond imaginati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he ld. DR has then referred the asseessee's contention that the assessee is getting cost +2% net revenue of the AE for marketing support services and that would be more than 50% of the sale revenue of the AE and no further adjustment is required. He has emphasized that it is the margin of the assessee on the international transactions, which is relevant and not the percentage of the AE's revenue out of the transactions. 7.2 The ld. DR has further pointed out that while determining the ALP, TPO has the power and authority to consider the data which are available at the time of such calculation. The department has not imposed its choice of comparable; but all the comparables were chosen by the assessee. He has referred to the Rule 10B of the I.T. Rules and submitted that as per sub-rule 4 of rule 10B, the data used in analysing comparability of the uncontrolled transactions with the international transactions, shall be the data of the financial year in which the international transaction has been entered into. 7.3 As regards to the proviso to sub-rule 4 of Rule 10B, the ld. DR has submitted that it gives only a liberty to take into account the data relating to the period other th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... parables. He has pointed out that no such abnormal profit has been pointed by the assessee in case of comparables selected by the assessee and objected before the TPO. Therefore, the objection of the assessee is only to exclude the comparables which are having higher profit margin. 7.7 The ld. DR then pointed out that in case of Abode Systems India (P.) Ltd. (supra), the Delhi Bench of the Tribunal has observed that some of the cases of the comparables taken into consideration by the TPO are supernormal profit making companies and should be excluded from the comparables set. Whereas in the case in hand, it was not the case of the comparables are having supernormal. He has further pointed out that comparables having higher profit have already excluded by the TPO though on some other criteria. The object of the TP method and procedure as provided in the provisions would be defeated if such criteria is accepted for exclusion of comparables. 8. As regards the 5 % from arithmetic means as provided under the second proviso to section 92C(2). The ld. DR has submitted that the proviso as exist at that point of time has been substituted by the Finance Act, 2009. Therefore, this is not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the I T Rules prescribed the manner in which ALP in relation to international transaction has to be determined by applying most appropriate method as prescribed under section 92C. Rule 10B(1)(e) specifically mentioned the method/manner for determining all the ALPs by applying net Transactional Net Margin Method (TNMM). "(i) the net profit margin realized by the enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or ales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base. (ii) the net profit margin realized by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base; (iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of operating margins of the assessee with the margins of the comparables except the specific issue raised before us. 11. The main objection raised by the assessee before us is against use of financial information of the comparables at the time of assessment but such information was not available at the time of TP study done by the assessee as well as use of financial data of the comparables for the FY 2005-06 instead of three years taken by the assessee. It is to be noted that the updated financial information and data were provided by the assessee during the assessment proceedings and particularly during the proceedings before the TPO. It is not the case where the TPO has gathered some information, which was not relevant for the assessment year 2005-06 of the comparables. The information very much existed, though, the assessee might have no access to the said information at the time of TP study but the information, which was very much related to the comparables for the FY 2005-06 which was asked by the TPO and provided by the assessee. Therefore, considering the said information by the TPO while determining the ALP, does not amount to violation of any provisions of law. 11.1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... considering the data relating to the period other than the financial year in which the international transaction has been entered into; but not being more than two years prior to such financial year. As per proviso to Rule 10B, the data of earlier years reveal facts which could have influence on the current year/single year data of the comparables then the date of other two prior years may also be taken into consideration to determine the TP. 11.5 The proviso to sub-Rule 4 of Rule 10B does not mandate to always consider two more years' data of comparables in such analysis; but has a limited role only when the data of earlier years reveal facts which could have influenced on determination of the TP in relation to the transaction being compared. 11.6 When the assessee has not made out a case that taking the data for only current financial year does not present the correct and fair financial result of the comparables then there is no mistake in considering the data for the financial year in which the international transaction has been entered into. There is a rationale for using the data of the comparables pertaining to the same period during which the international transactions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omparables are having high profit and also high difference in the turnover and not because of the high or low turnover has influenced the operating margin of the comparables. All the objections and contentions raised by the assessee in respect of this issue are general in nature and no specific fact has been brought on record to show that due to the difference in turnover the comparables become non-comparables. The assessee has not demonstrated as to how the difference in the turnover has influenced the result of the comparables. It is accepted economic principles and commercial practice that in highly competitive market condition, one can survive and sustain only by keeping low margin but high turnover. Thus, high turnover and low margin are necessity of the highly competitive market to survive. 15.1 Similarly, low turnover does not necessarily mean high margin in competitive market condition. Therefore, unless and until it is brought on record that the turnover of such comparables has undue influence on the margins, it is not the general rule to exclude the same that too when the comparables are selected by the assessee itself. 16. As regards the difference in function and ri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rnational transaction and comparison of the same with the uncontrolled transactions. 18. Next issue relates to applicability of 5% variation from the arithmetic mean of the ALP. 19. The lower authorities denied the claim of the assessee on the ground that the amendment made in the said provision w.e.f. 1-10-2009 is clarificatory and procedural in nature. 20. We have heard the ld. AR of the assessee and ld. DR and considered the relevant records available on record. Since the provisions has been amended and substituted by Finance Act 2009 w.e.f. 1-10-2009; therefore, the legislature has specifically given the date from which the amendment has been effected; however, the same cannot be treated as clarificatory and procedural in nature being retrospective. The Hon'ble Supreme Court in the case of CIT v. Woodward Governor India (P.) Ltd. [2009] 312 ITR 254/179 Taxman 326. "Lastly, we are of the view that the amendment of section 43A by the Finance Act, 2002, with effect from April 1, 2003, is a mendatory and not clarificatory. The amendment is in complete substitution of the section as it existed prior thereto. Under the un-amended section 43A adjustment to the actual cost to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exceeding 5 per cent of the arithmetic mean. The 'option', as is clear from the language is to take ALP which is not in excess of 5 per cent of the said mean. The word 'option' as per the Law Lexicon is synonymous with 'choice' or 'preference'. Therefore, it is the choice of the assessee to take ALP with a marginal benefit and not the arithmetical mean determined by the most appropriate method. There is nothing in the language to restrict the application of the provision only to marginal cases where price disclosed by the assessee does not exceed 5 per cent of the arithmetic mean. The ALP determined on application of most appropriate method is only an approximation and is not a scientific evaluation. Therefore, the legislature thought it proper to allow marginal benefit to cases who opt for such benefit. Both in the first as also in the second limb, implications of determination /ALP are the same except for the marginal benefit allowed to the assessee under the second limb. Hence, second limb is applicable even to cases where the taxpayer intends to challenge ALP taken as arithmetic mean and determined through the most appropriate method. Option is given to the assessee as in some ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , an assessee who is liable to pay advance tax under section 208 has failed to pay such tax or, where the advance tax paid by such assessee under the provisions of section 210 is less than ninety per cent of the assessed tax, the assessee shall be liable to pay simple interest at the rate of (one) per cent for very month or part of a month comprised in the period from the 1st day of April next following such financial year (to the date of determination of total income under sub-section (1) of section 143 and where a regular assessment is made, to the date of such regular assessment, on an amount) equal to the assessed tax or, as the case may be, on the amount by which the advance tax paid as aforesaid falls short of the assessed tax. Perusal of the above provisions shows that liability to pay interest arises on failure of the assessee to pay advance tax under section 208 or advance tax payable under section 210 is paid less than 90%. Perusal of the provisions of sections 208 and 209 shows that for the purpose of payment of advance tax the assessee has to estimate his current income and then he has to calculate income tax on that income at the rate in force in the financial year. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase of the appellant, referred to above, has held that the return filed by the appellant was in consonance with law and there was only a formal defect and the moment that defect was cured, the return related back to the original date. In our opinion, when the Supreme Court in Ghaswala's case says that charging of interest under section 234B is mandatory, what it really means is that once the assessee is found liable to pay interest, then recovery of interest is mandatory and recovery of that interest cannot be waived for any reason. But for charging interest under that section, it has to be established that the assessee as committed default in payment of advance tax. In our opinion, as in the present case it is nobody's case that the appellant has committed default in payment of advance tax when he actually paid it, the appellant cannot be held liable to pay interest under section 234B. Insofar as observations in the order of the Tribunal, that the appellant should have anticipated the events that took place in March, 1992, in our opinion, have no substance. In our opinion, it is rightly submitted that it was not possible for the appellant to anticipate the events that were to take ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion was subjected to the provisions of Chapter X and particularly section 92 for computation of income from international transaction. Therefore, whether the assessee charged the excess commission or less is not relevant and material once the income is subjected to the provisions of Chapter X being related to the international transaction. If the claim of the assessee is allowed, it will defeat the very object and purpose of the provisions of Chapter X. It is irrelevant for the purposes of ALV for international transaction whether the actual price charged by the assessee in relation to the international transaction is less or excessive. The income from international transaction is computed having regard only to the ALP and nothing else. Thus, even if the income from commission received from the AE in relation to the international transaction turnout to be excess, if the same has been computed by applying the provisions of Chapter X, subsequent claim of bad debt or business loss would be against the very purpose and object of the provisions of Chapter X of the Act. Therefore, we hold that the claim of bad debt as claimed by the assessee in respect of the commission from AE subjected ..... X X X X Extracts X X X X X X X X Extracts X X X X
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