TMI Blog2012 (8) TMI 83X X X X Extracts X X X X X X X X Extracts X X X X ..... on being satisfied with regard to relevancy of material which can be used against assessee, assessee has to be given an opportunity of presenting its objections, if any. TPO Directed to recompute with following directions:- i) the operating revenue and the operating cost of the transactions relating to associated enterprises only shall be considered; (ii) the comparables having the turnover of more than Rs. 1 crore, but, less than Rs. 200 crores only shall be taken into consideration; (iii) all the information relating to comparables which were sought to be used against the appellant shall be furnished to the appellant; (iv) to consider the objections of the appellant that relate to additional comparables sought to be adopted by the TPO and to pass a detailed order; and (v) to give the standard deduction of 5% under the proviso to s.92C(2) of the Act. Free trade zone – Held that:- while computing deduction under section 10A communication expenses should be reduced not only from export turnover but also from total turnover - IT APPEAL NO. 1354 (BANG.) OF 2010 - - - Dated:- 29-2-2012 - N. BARATHVAJA SANKAR, GEORGE GEORGE K., JJ. R. Vijaya Raghavan for the Appellant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by rejecting certain comparable companies identified by the assessee: - where consolidated results have been used for analysis; that the assessee had considered the consolidated results in only those cases where the software services related income of the Indian operations constituted more than 75% of the consolidated company-wide/segmental revenue; - using turnover Rs. 1 crore as a comparability criterion; - as having economic performance contrary to the industry behaviour (e.g. companies showed diminishing revenue trends); - in the comparability analysis as the comparables were having different accounting year (other than 31st March or companies whose financial statements were for a period other than 12 months); - in the comparability analysis using 'onsite revenues greater than 75 per cent of the export revenues as a comparability criteria; - in the comparability analysis using 'employee cost greater than 25 per cent of the total revenues' as a comparability criteria; (8) by accepting certain companies using unreasonable comparability criteria; (9) obtaining information which was not available in public domain by exercising po ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... educed also from the total turnover while computing deduction under section 10A of the Act; and ( iii ) charging of interest u/s 234B and 234D of the Act and also initiation of penal proceedings u/s 271(1)(c) of the Act. 4.1 During the course of hearing the Ld. A R had submitted his submission in an exhaustive manner narrating various contentions put forth before the TPO as well as before the DRP. The submissions of the Ld. A R are summarized as under: (1) the international transactions of the assessee with its AEs during the relevant AY for the provision of software development services at Rs. 27.07 crores; that for the purpose of establishing the ALP of its international transaction with its AE, the assessee had undertaken a transfer pricing study in accordance with the provisions of the Act. Based on a detailed analysis with regard to the functions performed, risks assumed and assets utilized by the assessee and its AEs in respect of international transactions between them and, accordingly, concluded that the price received by the assessee in respect of its transactions with AEs was at arm's length; (2) that the key features of the TP study undertaken ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... make suitable adjustments to account for differences in the risk profile of the assessee vis- -vis the comparable companies; ( d ) that the TPO did not consider that the adjustment to the ALP, if any, should be limited to the lower end of 5% range as the assessee had the right to exercise this potion under the proviso to s.92C(2) of the Act; and ( e ) the TPO initiated penalty proceedings under Explanation 7 to s. 271(1)(c) of the Act. (4) that the AO had issued draft assessment order proposing to make an addition of Rs. 2.83 crores on account of TP adjustment and recomputed the deduction u/s 10A of the Act by reducing the communication charges (i.e.; lease line charges of Rs. 25.31 lakhs from the export turnover without simultaneously reducing the same from the total turnover) hence, reducing the deduction u/s 10A of the Act to the extent of Rs. 3.1 lakhs; (5) Even the DRP agreed with the stand of the AO/TPO and rejected the assessee's reasonable contentions with a marginal relief of Rs. 1.5 lakhs on account of re-computation of operating margin of Megasoft Limited whereby re-determining the ALP at Rs. 2.82 crores. (6) Corporate ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act, the AO could determine the price only under the circumstances enumerated in clauses (a) to (d), for which, it was submitted that - ( a ) the ALP in the case of the international transaction has been determined by applying the prescribed method in accordance with sub-sec. (1) and (2) of s. 92C; ( b ) all the relevant information and documents relating to the international transaction has been maintained as prescribed and provided to the TPO; ( c ) the data used in computation of ALP was taken from the two databases for obtaining publicly available financial information in India, namely, prowess (a database compiled and managed by The Centre for Monitoring Indian Economy) and Capitoline (a corporate database compiled and managed by Capital Market Publishers); that the assessee had used the contemporaneous data for computation of ALP as on the date of filing of return of income in accordance with rule 10D(4), as such, the data used for computation of the ALP was reliable and correct; ( d ) the TP documentation, detailed workings of the economic analysis and all the other documents requested by the TPO have been provided during the course of assessment; - t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the net level over the years from 2005 to 2010; that in spite of the parent company incurring operating losses, the assessee had earned income on cost plus margin consistently over the said period; and that the assessee earned a consistent margin irrespective of the losses incurred by the parent company reiterates that the assessee is a limited risk service provider and, thus, it was argued, an adjustment to the ALP proposed by the TPO was not warranted; (11) that the comparable data for the FY 2005-06 was not available in most cases at the time of complying with the TP documentation requirements under the provisions of the Act; that the rejection of the comparability data used by the assessee on the above ground would be contrary to what was prescribed under the Act and the relevant rules; - that extensively quoting the provisions of s. 92(1) of the Act read with Rule 10B and also s. 92B read with rule 10D, it was submitted that- In compliance with the regulations the assessee maintained the documentation as per Rule 10D based on the data that was available on the public databases before the prescribed date. Further, rule 10D(4) provides that transfer pricing documentat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee's ground is not sustainable. Determination of the arm's length margin/price: Contesting the assessee's arguments, the Ld. D R, by illustrating the provisions of rule 10B (4), s. 92B read with rule 10D, 10D (3) and also 10D (4), maintained that the aspect raised by the assessee has been discussed by the TPO in his impugned order; that the DRP was also in agreement with the TPO's view and held that ordinarily only the data pertaining to the FY of the transaction can be considered. It was, further, explained that the proviso to rule 10B (4) which permits the use of data relating to other than financial year in which the international transactions have been entered into being not more than two years prior to such FY data but it has a limited role only when the data of earlier years reveals facts which could have influenced on determination on the transfer pricing in relation to the transactions being compared. It was, further, argued that the assessee had not made out a case that taking data for only the current FY will not present the concept and fair financial result of the comparables, the claim for multi-year data has been rejected. Relies on the case laws: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ely, (i) Mega Soft Limited; (ii) Infosys Technologies Limited; (iii) KALS Information System Limited; (iv) Tata Elxi Limited; (v) Accel Transmatic Limited; and (vi) Flectronics Software System Limited, the Ld. D R submitted that for the detailed reasons recorded in his impugned order, the TPO was justified in considering as comparables. Further, it was argued that in the margin computation sheet as per Annexure 'B', the TPO had correctly adopted segmental data for the calculation of margins and, thus, there was no merit in the assessee's argument. It was, further, submitted that the assessee had raised those objections only because out of 20 comparables, 6 of the comparables were having high profit and high difference in the turn over and not because of the high or low turnover had influenced the operating margin of the comparables; that all the objections and contentions raised by the assessee in respect of those issues were general in nature and no specific fact had been brought on record to show that due to the difference in turn over the comparables become non-comparables. It was, further, argued that the assessee had not demonstrated as to how the difference in the turnover ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see's contentions. It was the case of the Revenue that even loss claimed seems to be meagre and not much effect in determination of ALP. Not making suitable adjustments on account of diff. in the risk profile: It was contended by the Ld. D R that as the assessee failed to bring any evidence on record to show that their exist any difference in the risk profile of the comparable companies vis- -vis of the assessee, the TPO/DRP had rejected the assessee's claim, that to avail benefit of such adjustment, information should be submitted along with details maintained by the assessee under rule 10D. It was, further, argued that s. 92D(1) provides that every person entering into an international transaction was required to keep and maintain such information and document in respect thereof, as was being prescribed under rule 10D(1) of IT. Rules. This rule requires to maintenance of a record of the analysis performed to evaluate comparable as well as a record of the actual working carried out for determining the ALP. It was, further, explained that rule 10D(4) requires that the information and documentation to be maintained; and that under rule 10D(1) should be contemporaneous as far as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ully perused the relevant case records and also voluminous Paper Books furnished by the Ld. A.R. With due respects, we have also perused various case laws on which either party had placed their confidence. The prime thrust and grievances of the appellant being: ( i ) that the AO had erred by holding that the communication expenses attributable to the delivery of computer software outside India should be reduced from export turnover while computing the deduction u/s 10A of the Act; ( ii ) that the TPO had selected six companies in the order passed u/s 92CA of the Act as comparables in addition to those proposed in the notice without giving an opportunity to the appellant to present its objection(s)/comments; ( ii ) Even under TNMM, considering turnover range of Rs. 1 crore to Rs. 200 crores and Rs. 1 crore to Rs. 500 crores and rejecting certain comparables selected by TPO, the appellant's transactions were at arm's length; ( iii ) Six companies which did not even appear in the initial search list of the TPO were issued notice u/s 133(6) of the Act to collate information. The process adopted in issuing notice u/s 133 (6) of the Act was not detailed. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ethod as may be prescribed by the Board. Section 92D provides that (i) every person who has entered into an international transaction shall maintain and keep such information and documents in respect thereof; (ii) the Board may also prescribe the period for which the information and documents shall be kept and maintained; and (iii) the AO or the CIT(A) may, in the course of any proceeding under the Act, require any person who has entered into an international transaction to furnish any information or document in respect thereof. Thus, it subscribes that the requirement is only to maintain and keep the information and documents relating to international transactions so that they are available as and when required during any proceeding under the Act. The section does not provide that the information and documents are to be kept and maintained for a period of eight years. Rule 10-D of sub-sec. 1 specifies the documents and information which are to be kept and maintained by the assessee and sub-rule (2) thereof provides that nothing contained in sub-rule 1 shall apply in a case where the aggregate value as recorded in the books of accounts, the international transactions entered into b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is own enquiries and call for information from various entities keeping the assessee in the dark. Under sub-sec. (3) (7) of s. 92CA, the TPO is entrusted with all the powers under clauses (a) to (d) of sub-section (1) of section 131 or sub-section (6) of section 133 to call for and gather any information as may be required. When the TPO is making the search for a relevant comparable, he can issue notices to the parties whom he considers as relevant to gather requisite information and on being satisfied with regard to relevancy of the material which can be used against the assessee only then the assessee has to be given an opportunity of presenting its objections, if any. Thus, the TPO need not inform the assessee about the process used by him for issuing the notices u/s 133(6) of the Act nor is he under any obligation to furnish the entire information to the assessee. 5.4 However, we are of the firm view that the principles of natural justice requires that when any information is sought to be used against the appellant, the appellant has to be given a reasonable opportunity of hearing on that material. In the present case, the TPO had furnished all the information to the appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Asstt. CIT [2011] 44 SOT 156/[2010] 8 taxmann.com 207 (Bang.) (4) TNT India (P.) Ltd ( supra ) (5) Genisys Integrating Systems (India) (P.) Ltd v. Dy. CIT [IT Appeal No. 1231 (Bang) of 2010, dated 5-8-2011] (6) Diageo India (P.) Ltd v. Dy. CIT [2011] 47 SOT 252/13 taxmann.com 62 (Mum.) (7) Exxon Mobil Co. India (P.) Ltd ( supra ) (8) Emerson Process Management India (P.) Ltd v. Addl. CIT [2011] 47 SOT 107/13 taxmann.com 149 (Mum.) (9) Haworth (India) (P.) Ltd v. Dy. CIT [2011] 131 ITD 215/11 taxmann.com 76 (Delhi) (10) UE Trade Corpn. (India) (P.) Ltd v. Asstt. CIT [2011] 44 SOT 457/9 taxmann.com 75 (Delhi) (11) Cummins India Ltd v. Dy. CIT [2011] 45 SOT 78 (Pune) (URO) (12) CIT v. Kerala Electric Lamp Works [2003] 261 ITR 721/129 Taxman 549 (Ker.); (13) CIT v. Rajasthan Mercantile Co. Ltd [1995] 211 ITR 400 (Delhi); (14) K.P. Varghese v. ITO [1981] 131 ITR 597/7 Taxman 13 (SC) (15) CIT v. Alom Extrusions Ltd [2009] 319 ITR 306/185 Taxman 416 (SC) On the other hand, the Ld. D R, placing strong reliance on the stand of the authorities below ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taken into consideration for the purpose of making TP study. In the instant case, the turnover of the company is in the range of 30 crores, therefore, the companies, which have turnover of Rs. 1.00 crore to 200 crores alone should be taken into consideration for the purpose of making TP study. 5.7 In these circumstances, we are of the considered view that this issue requires to be remitted back to the file of the TPO for fresh consideration with the following directions: ( i ) the operating revenue and the operating cost of the transactions relating to associated enterprises only shall be considered; ( ii ) the comparables having the turnover of more than Rs. 1 crore, but, less than Rs. 200 crores only shall be taken into consideration; ( iii ) all the information relating to comparables which were sought to be used against the appellant shall be furnished to the appellant; ( iv ) to consider the objections of the appellant that relate to additional comparables sought to be adopted by the TPO and to pass a detailed order; and ( v ) to give the standard deduction of 5% under the proviso to s.92C(2) of the Act. 6. Before parting wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er' is not defined, there is no clue regarding what is to be excluded while arriving at the total turnover. However, while interpreting the provisions of section 80HHC, the Courts have laid down various principles which are independent of the statutory provisions. There should be uniformity in the ingredients of both the numerator and the denominator of the formula, since otherwise it would produce anomalies or absurd results. Section 20A is a beneficial section which intends to provide incentives to promote exports. In the case of combined business of an assessee, having export business and domestic business, the legislature intended to have a formula to ascertain the profits from export business by apportioning the total profits of the business on the basis of turnovers. Apportionment of profits on the basis of turnover was accepted as a method of arriving at export profits. In the case of section 80HHC, the export profit is to be derived from the total business income of the assessee, whereas in section 10-A, the export profit is to be derived from the total business of the undertaking. Even in the case of business of an undertaking it may include export business and domestic bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rnover is apart of the total turnover. The export turnover, in the numerator must have the same meaning as the export turnover which is constituent element 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. 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ench held as under: "For the above reasons, we hold that for the purpose of applying the formula under sub-section (4) of section 10B, the freight, telecom charges or insurance attributable to the delivery of articles or things or computer software outside India or the expenses, if any, incurred in foreign exchange in providing the technical services outside India are to be excluded both from the export turnover and from the total turnover, which are the numerator and the denominator respectively in the formula. The appeals filed by the department are thus dismissed." Although the order of Special Bench is in the context of s. 10B of the Act, the ratio laid down in the above decision applies to s. 10A of the Act as well, as the provisions of s. 10A and 10B are identical on all material aspects. More particularly, both the sections define only 'export turnover' but not 'total turn over' and sub-section (4) of both the sections prescribe an identical formula for computing the export profits. 7.6 We, therefore, direct that when the communications expenses should be reduced not only from the export turnover but also from the total turnover while computing deduction u/s 10A of t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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