TMI Blog2013 (5) TMI 49X X X X Extracts X X X X X X X X Extracts X X X X ..... nce to the respondent/assessee’s case inasmuch as even if the arithmetical mean of the comparables as accepted by the Tribunal are taken into account, the profit level indicator would, whether the seven companies are taken into consideration or all eight companies are taken into consideration, be less than 6.99 % which is the profit level indicator of the respondent/assessee for the relevant year, that is, financial year ending 31.03.2002. Also the reference to the OECD guidelines by the Tribunal in the impugned order are in the context of the reliance placed by the Transfer Pricing Officer on the very same guidelines. In the present case, there are specific provisions of sub-rules (2) and (3) of Rule 10B of the said Rules as also of the first proviso to section 92C(2) of the said Act which apply. Therefore, the question of applying OECD guidelines does not arise at all. Thus it is clear that the Tribunal was wrong in holding that if one profit level indicator of a comparable, out of a set of comparables, is lower than the profit level indicator taxpayer, then the transaction reported by the taxpayer is at an arm’s length price. The proviso to section 92C(2) is explicit that whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 through the same method as done in this case by adopting TNMM. The assessee has satisfied not one but several points of arms s 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 T.P.O. 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 speci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt/assessee is an Indian company which was incorporated in 1998. It is a wholly owned subsidiary of IKOS System Inc., a company incorporated in USA and engaged in the business of software development and also in rendering marketing systems services to the parent company. The present case, as pointed out above relates to the assessment year 2002-03 pertaining to the financial year 2001-02 in respect of which the respondent/assessee filed its return of income on 31.10.2002. 5. The respondent/assessee develops software but does so only upon the instructions of its parent associated enterprise, that is, IKOS Systems Inc. It does not create/develop/sell separate software products or packages and the entire software developed by the respondent/assessee is used by the parent associated enterprise captively for integrating the same with other software components developed by IKOS Systems Inc. The integrated software in turn supports the hardware manufactured by IKOS Systems Inc. and is sold as a separate package in the open market by the latter company. It is, therefore, clear that the respondent/assessee s business is limited to providing services of software development support entirel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee in accordance with the provisions contained in sub-section (1) of section 92D and the rules made in this behalf; or (c) the information or data used in computation of the arm's length price is not reliable or correct; or (d) the assessee has failed to furnish, within the specified time, any information or document which he was required to furnish by a notice issued under sub-section (3) of section 92D, the Assessing Officer may proceed to determine the arm's length price in relation to the said international transaction [or specified domestic transaction] in accordance with sub-sections (1) and (2), on the basis of such material or information or document available with him:- Provided that an opportunity shall be given by the Assessing Officer by serving a notice calling upon the assessee to show cause, on a date and time to be specified in the notice, why the arm's length price should not be so determined on the basis of material or information or document in the possession of the Assessing Officer. In view of the above provisions, it is apparent that the arm s length price in relation to an international transaction has to be determined by following one of the me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ength price in relation to the international transaction in accordance with the provisions of sub-section (1) and sub-section (2) of section 92C on the basis of such material or information or documents available with him. Provided, of course, that an opportunity is given by the assessing officer to the assessee to show cause as to why the arm s length price should not be so determined on the basis of material or information or document in the possession of the assessing officer. In other words, in the aforesaid circumstances the assessing officer may himself embark upon the determination of the arm s length price. However, where the assessing officer considers it necessary to do so, he may with the previous approval of the commissioner, refer the computation of the arm s length price to the Transfer Pricing Officer. This is provided in section 92CA of the said Act which, to the extent relevant, reads as under:- 92CA. (1) Where any person, being the assessee, has entered into an international transaction [or specified domestic transaction] in any previous year, and the Assessing Officer considers it necessary or expedient so to do, he may, with the previous approval of the Commi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hereof, the Transfer Pricing Officer adopted a profit level indicator of 24.53% and determined the arm s length price of the international transactions at Rs. 10,34,40,177/- as against Rs. 8,88,66,320/- returned by the respondent/assessee. This resulted in an adjustment of Rs. 1,45,73,857/- in the income of the assessee being the difference between the arm s length price and the price charged by the assessee from its associated enterprise (IKOS System Inc.) for rendering services to them. Thereafter, the assessing officer passed the assessment order on 28.03.2005, inter alia, after making the aforesaid addition. We are not concerned with the other aspects of the assessment order. 10. The CIT (Appeals) confirmed the said addition by virtue of an order dated 30.03.2006. Being aggrieved by the said order, the respondent/assessee preferred an appeal before the Income Tax Appellate Tribunal which has been allowed by the said Tribunal. The revenue is in appeal before us. While allowing the respondent/assessee s appeal, the Tribunal made the observations in paragraph 46.2, which we have already extracted above, to which serious exception was taken by the revenue. We have already indicat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... panies typically have high wages/salaries to total sales ratio), may not be eliminated. The list of such companies is as under :- Name of the company Reason for elimination Kushagra Software Ltd. Manufacturing concern lntergrated Hitech Ltd. Low turnover Fare C Software Ltd. Low employee cost Luminaire technologies Ltd. Low turnover Pentagon globalSolutions Ltd. Low employee cost. Engaged in manufacturing activity O C L Informatics Ltd. Low turnover 13. On an examination of paragraph 7.2 of the Transfer Pricing Officer s order, it is apparent that the general grounds for rejection of the comparables submitted by the respondent/assessee were as under:- (a) The companies suggested by the respondent/assessee were actually not comparable inasmuch as their turnovers were widely different; (b) The respondent/assessee had not used the data of the financial year ending 31.03.2002 which was the relevant year for the purposes of determination of the arm s length price; (c) The respondent/assessee did not include companies in its list of comparables which had a diff ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated because it had a different product profile. The Transfer Pricing Officer accepted the contentions of the respondent/assessee with regard to Blue Star Infotech Ltd. and NIIT Gis Ltd. and excluded those companies from the list of comparables. However, the Transfer Pricing Officer rejected the objections of the respondent/assessee with regard to the other suggested comparables. As a result, the Transfer Pricing Officer finalised his list of comparable companies as under:- 7.8 In view of the above discussions, the following list of comparable companies are finally chosen for analysis. Name of the company OP/TC (F.Y.2001-02) Ideaspace Solutions Ltd. 20.69% Integrated Hitech Ltd. 3.16% Quintegra Solutions Ltd. 37.89% Sark Systems India Ltd. 27.91% Teledata Informatics Ltd. 32.99% Average OP/TC 24.53% Hence, the arithmetic mean of operating profit over the total cost margins of the comparable companies for the financial year 2001-02 works out to 24.53%. The arm s length price of the international transactions entered into by the assessee with its AE is worked o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y to the provisions of rule 10B(2)(3) as well as rule 10B(1)(e). The Tribunal also found that the range of turnovers which was employed by the Transfer Pricing Officer for filtering in comparables was far too wide inasmuch as the Transfer Pricing Officer had considered the range of Rs.50 lakhs to Rs.100 crores whereas the turnover of the respondent/assessee was only Rs.8.8 crores. It may be pointed out that the respondent/assessee, while selecting its comparables in its Transfer Pricing Report, had taken the range of Rs.47 lakhs to Rs.25.71 crores. Thirdly, the Tribunal returned the finding that the Transfer Pricing Officer should not have rejected the comparables selected by the respondent/assessee. Apart from this, the Tribunal also held that the Transfer Pricing Officer had wrongly adopted the criteria of low employee cost as a percentage of turnover and that such a criteria ought not to have been employed in selecting comparables. It is also observed by the Tribunal that a fresh search for comparables could be done by the Transfer Pricing Officer only if comparables drawn by the respondent/assessee were insufficient or had other deficiencies. According to the learned counsel fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y rejected any of the comparables of the respondent/assessee. The Tribunal was of the view that the comparables of the respondent/assesse ought to have been accepted and, had that been the case, there would have been no need for the Transfer Pricing Officer to search for comparables. Of course, in passing the order, the Tribunal made certain general observations that unless and until the comparables drawn by the tax payer were rejected, a fresh search by the Transfer Pricing Officer could not be conducted. However, this has to be tempered with the relevant statutory provisions which are clearly set out in sub-section (3) of section 92C of the said Act which stipulates four situations whereunder the assessing officer/ Transfer Pricing Officer may proceed to determine the arm s length price in relation to an international transaction. If any one of those four conditions are satisfied, it would be open to the assessing officer/Transfer Pricing Officer to proceed to determine the arm s length price. This clarification of the observation of the Tribunal was necessary and that is why we have done so. 22. We also note that the Tribunal had gone further and reduced the list of comparable ..... X X X X Extracts X X X X X X X X Extracts X X X X
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