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TMI Blog2012 (5) TMI 165X X X X Extracts X X X X X X X X Extracts X X X X ..... erred in confirming the same. Ground No. 2: Re-computation of Arm's Length Price which has resulted in an addition of Rs. 98,20,024/-. Under this ground of appeal we have the following specific grounds of appeals: a. The learned AC has erred in making a reference without recording any reasons based on which he reached the conclusion that it was 'expedient and necessary' to refer the matter to the Transfer Pricing Officer ("TPO") for computation of the arm's length price, as is required under section 92CA(1) and Hon'ble DRP has erred in upholding the same. b. The learned TPO has erred on facts and law by rejecting the transfer pricing (TP) documentation maintained by the Appellant as per Rules and Hon'ble DRP has erred in upholding the same. c. The learned TPO has erred on law by undertaking the fresh search for comparability analysis (FY 2005-06) as on December 03, 2008, which is beyond the date of compliance i.e. October 31, 2006 resulting in 'impossibility of performance' and against the premise of maintenance of 'contemporaneous documentation'. The same is also violates the law, Rule 10B(4) read with Read 10D(4) and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of differential risk borne by the comparables. However, the learned TPO has allowed working capital adjustment of 2% considering the nature of risk free business of the Appellant in the assessment year 2007-08. m. The learned TPO has erred on law by not granting the Appellant the option to chose a price that falls within +/- 5% range of the arithmetic mean of the comparables, as contemplated under the proviso to section 92C(2) as it stood at the time of preparing the TP documentation. Accordingly, this has resulted in hardship for Appellant, having regard to the principle of natural justice and Hon'ble DRP has erred in upholding the same. n. The learned TPO erred on facts by adding the amount of Rs. 1,77,221/- to the operating cost, which was received as reimbursement on cost to cost basis from the associated enterprise towards cost directly incurred on behalf of the associated enterprise. Also the learned TPO has not given an opportunity of being heard to the Appellant on this matter, as the same was correctly treated by not including in the operating cost in the show-cause notice issued to the Appellant. The learned AO has grossly error by not following the dire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n under section 10A of the Act, however, the Assessing Officer while framing the assessment under section 143(3) of the Act computed the deduction under section 10A of the Act by reducing lease line charges from export turnover, but not from the total turnover. 8. This issue now has been settled by the Special Bench of ITAT, Chennai in the case of Sak Soft Ltd. (supra) by holding as under : "To say that in the absence of any definition of "total turnover" for the purpose of section 10B, there is no authority to exclude anything from the expression as understood in general parlance would be wrong, as there has to be an element of turnover in the receipt if it has to be included in the total turnover. That element is missing in the case of freight, telecom charges or insurance attributable to the delivery of the goods outside India and expenses incurred in foreign exchange in connection with the provision of technical services outside India. These receipts can only be received by the assessee as reimbursement of such expenses incurred by him. Mere reimbursement of expenses cannot have an element of turnover. It is only in recognition of this position that in the definition of "expo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... definition of "total turnover" in that section. "Export turnover" as defined in these sections excludes freight, telecom charges or insurance attributable to the delivery of the computer software outside India or expenses, if any, incurred in foreign exchange in providing technical services outside India. Thus statutory parity is maintained between export turnover and total turnover in these sections. There is no reason why such parity cannot be maintained between export turnover and total turnover in section 10B just because "total turnover" has not been defined in that section."' 9. Similar view has been taken by the Hon'ble High Court of Bombay in the case of Gem Plus Jewellery India Ltd. (supra) wherein it has been held as under : "Under sub-section 10A of the Income Tax Act, 1961, a deduction is allowed from the total income of the assessee of such profits and gains as are derived by an undertaking from the export of articles or things or computer software for a period of ten consecutive assessment years commencing from the assessment year relevant to the previous year in which the undertaking begins manufacture or production. Sub-section (4) of section 10A provides ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of the total turnover in the denominator. The legislature has provided a definition of the expression "export turnover" in Expln. 2 to s. 10A which the expression is defined to mean the consideration in respect of export by the undertaking of articles, things or computer software received in or brought into India by the assessee in convertible foreign exchange but so as not to include inter alia freight, telecommunication charges or insurance attributable to the delivery of the articles, things or software outside India. Therefore in computing the export turnover the legislature has made a specific exclusion of freight and insurance charges. The submission which has been urged on behalf of the revenue is that while freight and insurance charges are liable to be excluded in computing export turnover, a similar exclusion has not been provided in regard to total turnover. The submission of the revenue, however, misses the point that the expression "total turnover" has not been defined at all by Parliament for the purposes of s.10A. However, the expression "export turnover" has been defined. The definition of "export turnover" excludes freight and insurance. Since export turnover has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (a) to (k) relates to addition on account of recomputation of arms' length price (ALP). The facts relating to this issue in brief are that the AO during the course of assessment proceedings noticed that the assessee had international transactions during the financial year relevant to assessment year under consideration. He therefore referred the case to the Transfer Pricing Officer (TPO) to determine the ALP after obtaining necessary approval from the ld. CIT, Bangalore-I, Bangalore u/s. 92CA of the Act and the TPO vide order dated 30.10.2009 informed the AO that an adjustment of Rs. 98,83,653 is required to be made to the income of the assessee consequent to the determination of ALP as under: Operating cost (Rs.11,17,26,443 + Rs. 1,77,221) Rs. 11,19,03,664/- Arms length Margin 18.86% of the Operating Cost Arms Length Price (ALP) @ 118.86% of operating cost Rs. 13,30,08,695/- Price shown in the international transactions (Rs. 12,29,47,821 + Rs. 1,77,221) Rs. 12,31,25,042/- Shortfall being adjustment u/s. 92CA Rs. 98,83,653/- 13. The Assessing Officer pointed out that the TPO had taken into consideration the facts of the case and the objections of the assessee before ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (b) Companies having Nil sales or sales less than Rs. 1 crore are rejected. (c) Companies having sales more than Rs. 200 crore are rejected. (d) Companies operating in different industry/products/services are rejected. (e) Companies having insufficient information about products or functions or financials, are rejected. (f) Restructuring, sick and loss making companies are rejected. 16. After application of all the above filters, the assessee selected 32 companies as broadly comparable companies. The weighted average Net Operating Profit on Cost (NCP) margins of those broadly comparable companies ranged from 11.83% to 30.36% with arithmetic mean of 8.54% translating the arms' length range of 3.54% to 13.54%. It was explained that the assessee earned NCP margin of 19.80% (after excluding start-up cost from the total cost)/10.04% (before excluding the start-up cost from the total cost) which exceeds/was within the arms' length range of 3.54% to 13.54%. Therefore the international transaction with the AEs were at arms' length. It was contended that the TPO rejected all the assessee's comparables except 3 comparables and selected fres ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s with turnover less than Rs. 200 crores as smaller firms. The average NCP of 20 comparable companies selected by the TPO when indexed on the basis of the said study clearly depicted that the scale of operations had clear nexus with the operating margin as under:- - Large firms (One) 40.38% - Medium firms (Five) 19.13% - Small firms (Fourteen) 17.06% But the assessee's case was of a categorically small sized company since the turnover of the assessee was Rs. 12.29 crores. Therefore 7 companies having turnover of more than Rs. 200 crores should have been excluded in which case the average NCP would come down from 17.28% to 14.13% before giving effect of working capital adjustment. 20. It was explained that the TPO had given adjustment for working capital to the extent of 1.89% of NCP, however if the 8 companies are rejected, then the working capital adjustment would work out to 2.18% and consequently the final NCP after considering the effect of working capital adjustment would be computed as per the following details:- Sl Company Name Final NCP 1. Bodhtree Consulting Ltd. 15.99% 2. Geometric Ltd. 6.70% 3. R S Software (India) Ltd. 15.69% 4. Kals Inform ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bility of performance and against the premise of maintenance of contemporaneous documentation and also exercised his power u/s. 133(6) of the Act to obtain selective information which was not available in the public domain. Furthermore, the TPO used single year data for computation of margin of comparable companies and rejected the multiple year data used by the assessee. 24. It was further contended that the TPO while deciding upon the sales turnover as a quantitative filter had only considered minimum turnover as being valid and had not kept any limit on the turnover for comparability which had led to a situation where the comparable set as identified by the TPO consisted of companies which had a turnover range from Rs. 1.02 crores (Lucid Software Ltd.) to Rs. 9028 crores (Infosys Technologies Ltd.) as against the turnover of the assessee at Rs. 12.29 crores, which indicated that the TPO had overlooked one of the most important criteria of comparability - scale of operations. It was contended that the ITAT, Bangalore Bench in the case of Genesis Integrating Systems (P.) Ltd. [IT Appeal No. 1231/Bang/2010] remanded back the matter to the TPO with a clear direction to recompute th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en the NCP of the assessee would have been 19.80%, but the TPO ignored the start-up cost. It was pointed out that the TPO rejected certain comparables selected by the assessee, had the analysis been modified incorporating the comparables selected by the assessee, the result ALP would increasingly skew in favour of the assessee. 25. Reliance was placed on the following case laws: (a) Dy. CIT v. Quark Systems (P.) Ltd. [2010] 38 SOT 307 (Chd.) (SB) (b) DHL Express (India) (P.) Ltd. v. Asstt. CIT [2011] 46 SOT 379/11 taxmann.com 40 (Mum.) (c) Dy. CIT v. Deloitte Consulting India (P.) Ltd. [2011] 12 taxmann.com 500 (Hyd.) (d) Agnity India Technologies (P.) Ltd. [IT Appeal No. 3856 (Delhi) of 2010] (e) CIT v. Rakhra Technologies (P.) Ltd. [2011] 203 Taxman 154/15 taxmann.com 266 (Punj. & Har.) (f) South Eastern Coalfields Ltd. v. Jt. CIT [2003] 85 ITD 608 (Nag.) (g) ITO v. LIC of India [2001] 79 ITD 278 (Cal.) (h) Asstt. CIT v. Jindal Irrigation Systems Ltd. [1996] 56 ITD 164 (Hyd.) (i) Quark System (P.) Ltd. (supra) (j) Adobe System India (P.) Ltd. v. Addl. CIT [2011] 44 SOT 49 (Delhi) (URO) (k) Mentor Graphi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 20.07.09, copy of which is placed at pages 305 to 355 of the assessee's compilation. It therefore appears that new companies were adopted by the TPO as comparables without affording opportunity to the assessee to present its objections to their adoption. It is well settled that nobody should be condemned unheard as per the maxim audi alteram partem, but in the present case nothing is brought on record to substantiate that the TPO/AO while adopting additional comparables had provided opportunity of being heard to the assessee. Therefore this issue deserves to be set aside to be decided afresh at the level of the Assessing Officer. For the aforesaid view, we are fortified by the order dated 31.01.2012 of the ITAT 'A' Bench Bangalore in the case of Genesis Microchip (I) Pvt. Ltd., Bangalore v. DCIT, Circle 11(3), Bangalore in ITA No. 1254/Bang/2010 for the A.Y. 2006-07. 19. In the present case, the AO adopted M/s. Infosys Technologies Ltd., KALS Information System Ltd., Accel Transmatic Ltd. and Tata Elxsi Ltd. as comparables on the basis of data which was obtained by him in response of the notices issued u/s. 133(6) of the Act, however no opportunity of being heard wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er price. Reliance was placed on the following case laws: 1. Genisys Integrating Systems (India) (P.) Ltd. (supra) 2. Tatra Vectra Motors Ltd. [IT Appeal No. 1284/Bang/2010, dated 31-1-2012]. 32. The ld. counsel for the assessee contended that the contention of the assessee was rejected by the DRP on the ground that amendment to proviso to section 92C was clarificatory in nature and therefore retrospective in effect. It was contended that the amendment to proviso to section 92C was not retrospective as clarified by the CBDT by way of letter No.F.142/13/2010-SO(TPL) dated 30.09.2010. It was further contended that a deeming provision has been created to adopt an arms' length price if the price actually undertaken by the assessee does not exceed 5% of the amount at which international transaction has actually been undertaken instead of reckoning the price which is determined by the TPO which was the position under unamended proviso to section 92C(2) of the Act. It was accordingly submitted that the benefit of standard deduction of 5% should have been given to the assessee. 33. In his rival submissions, the ld. CIT(DR) submitted that no benefit of 5% be given to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee, a price which may vary from the arithmetical mean by an amount not exceeding 5 per cent of such arithmetical mean. The first limb of the proviso has general application. There is no option with nor any sort of concession allowed to the assessee. The arm's length price so determined may be accepted or contested by the assessee or by any aggrieved person in accordance with the statutory provisions. It is a statutory levy without any option. The second limb of the proviso gives "an option" to the assessee to take the arm's length price which may vary from the arithmetic mean by an amount not exceeding 5 per cent of such arithmetic mean. The word "option" is synonymous with "choice" or "preference". Therefore, it is the choice of the assessee to take the arm's length price with a marginal benefit and not the arithmetical mean determined as the most appropriate method. There is nothing in the language to restrict the application of the provision only to marginal cases where the price disclosed by the assessee does not exceed 5 per cent of the arithmetic mean. The arm's length price determined on application of the most appropriate method is only an approxima ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e proceedings were pending before the TPO on or after such date. Therefore, the benefit of +/- 5% intended by the erstwhile proviso to section 92C(2) of the Act was not available to the assessee. Accordingly the ld. CIT(DR) had strongly defended the assessment framed by the AO and his method of determining the ALP. 16. As regards to the applicability of the amended provisions in proviso to section 92C(2) of the Act which is applicable w.e.f. 1.10.2009 is concerned, it is noticed that this issue has been adjudicated by the ITAT Pune Bench "A", Pune in ITA No.1350/PN/2010 in the case of Starnet Networks (India) P. Ltd. v. DCIT (supra), wherein the relevant findings has been given in paras 20 to 23 of the order dated 03.10.2011 and read as under: "20. We have carefully considered the rival submissions. In this case, a pertinent issue which has been vehemently agitated by the appellant is with regard to its claim of seeking benefit of the option available under the erstwhile proviso to section 92C(2) of the Act. The erstwhile proviso which was inserted by Finance Act, 2002 with effect from 1.4.2002 read as under: "Provided that where more than one price is determined by the most app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cent of the latter, the price at which the international transaction has actually been undertaken shall be deemed to be the arm's length price." The case set up by the Revenue is that the amended Proviso shall govern the determination of ALP in the present case, inasmuch as the amended provisions were on statute when the proceedings were carried on by the Transfer Pricing Officer (TPO). As per the Revenue, the amended Proviso would have a retrospective operation and in any case, would be applicable to the proceedings which are pending before the TPO on insertion of the amended Proviso, which has been inserted by the Finance (No. 2) Act, 2009 with effect from 1.10.2009 and, in this case, the TPO has passed his order on 30.10.2009. The learned Departmental Representative has also referred to the CBDT Circular No 5/2010 (supra) read with Corrigendum dated 30.9.2010 issued by the CBDT in this regard. Per contra, the stand of the assessee is that the amended Proviso would be applicable prospectively and would not apply in respect of the stated assessment year, which is prior to the insertion of the amended Proviso with effect from 1.10.2009. 22. We have carefully examined the riv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its insertion. In this view of the matter, we therefore find no justification to deny the benefit of +/-5% to the assessee in terms of the erstwhile Proviso for the purposes of computing the ALP. 23. However, before parting we may also refer to a Corrigendum dated 30.9.2010 by the CBDT by way of which para 37.5 of the circular No 5/2010 (supra) has been sought to be modified. The Corrigendum reads as under: "Corrigendum In partial modification of Circular No. 5/2010 dated 03.6.2010, (i) In para 37.5 of the said Circular, for the lines "the above amendment has been made applicable with effect from 1st April, 2009 and will accordingly apply in respect of assessment year 2009-10 and subsequent years." the following lines shall be read; "the above amendment has been made applicable with effect from 1st October, 2009 and shall accordingly apply in relation to all cases in which proceedings are pending before the Transfer Pricing Officer (TPO)on or after such date. " (ii) In para 38.3, for the date "1st October, 2009, the following date shall be read: "1st April, 2009". In terms thereof, it is canvassed that the amended proviso has been made applicable with effect from 1.10.200 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in the case of BASF (India) Ltd. (supra) that the circulars which are in force during the relevant period are to be applied and the subsequent circulars either withdrawing or modifying the earlier circulars have no application. Moreover, the circulars in the nature of concession can be withdrawn prospectively only as held by the Hon'ble Supreme Court in the case of State Bank of Travancore v. CIT 50 CTR 102 (SC). Considering all these aspects, we therefore find no justification in the action of the lower authorities in disentitling the assessee from its claim for the benefit of +/-5% to compute ALP in terms of the erstwhile proviso to section 92C(2) of the Act. We order accordingly." 17. We therefore considering the totality of the facts and respectfully following the aforesaid referred to orders of the co-ordinate benches of the ITAT at Delhi & Pune, direct the Assessing Officer to allow the benefit of +/-5% to the assessee while computing the ALP in terms of the erstwhile proviso to section 92C(2) of the Act." 35. Since the facts of the present case are similar to the facts involved in the aforesaid referred to case of Tatra Vectra Motors Ltd. (supra), so respectfully fol ..... X X X X Extracts X X X X X X X X Extracts X X X X
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