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2015 (6) TMI 418 - ITAT DELHI

2015 (6) TMI 418 - ITAT DELHI - TMI - Transfer pricing adjustment - whether the transactions between the head office in India and branch office in Canada can be considered as international transactions, even though the assessee inadvertently reported the same so as a matter of abundant caution? - Held that:- It is not permissible to make transfer pricing adjustment by applying the average operating profit margin of the comparables on the assessee’s universal transactions entered into with both t .....

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with non- AEs, we vacate the impugned order on this issue and restore the matter to the file of AO/TPO for recalculating the amount of addition of transfer pricing adjustment by taking into consideration the international transactions only under this segment to the exclusion of transactions with Canada Office and non-AEs. - Decided in favour of assessee for statistical purposes.

Depreciation on building let out to some third party - whether should be excluded from the total operating .....

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on liable for exclusion. The DRP has also simply directed the TPO to verify this aspect, and, then, exclude the excess amount of depreciation in determining the ALP of the international transaction. As such, the Officer is not only entitled but also duty bound to verify the correctness of the claim lodged by the assessee before excluding the excess amount of depreciation.

Treatment of hypothetical interest on security deposits as income u/s 28(iv) - Held that:- It is amply clear that .....

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loan given by the assessee to its AE - Held that:- Respectfully following the precedent for the AY 2002-03, we set aside the impugned order and remit this matter to the file of AO/TPO for a fresh determination of the transfer pricing adjustment, on the basis of the directions given by the Tribunal for such earlier years. - ITA No. 5846/Del/2011 - Dated:- 12-6-2015 - Shri R. S. Syal, AM And Shri A. T. Varkey, JM,JJ. For the Petitioner : Shri Akhilesh Gupta, Partner For the Respondent : Shri Vivek .....

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cts of the case are that the assessee, an Indian company, was incorporated on 3.11.2000 and has a branch office in Canada. The assessee is a wholly owned subsidiary of Aithent Inc., USA. The assessee is engaged in development of computer software. Seven international transactions were reported in Form No.3CEB, which have been enlisted by the Transfer Pricing Officer (TPO) in his order dated 26.10.2010. The assessee benchmarked these international transactions and demonstrated them to be at arm s .....

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also paid for certain consulting services rendered by its AE to its Canada branch. For the time being, we are not considering the international transaction of unsecured interest free loan for which an adjustment of ₹ 87,90,467 was recommended by the TPO. In so far as the above transactions of rendering software development services and receiving consulting services, to the exclusion of interest free loan are concerned, the assessee used certain comparables and showed that these transactio .....

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The TPO altered some of the comparables chosen by the assessee and computed the arm s length margin of his final set of comparables at 23.56% of the operating cost. This arm s length margin was applied on total revenues earned by the assessee at ₹ 36.63 crore (inclusive of revenues from non-AEs). That is how, he proposed transfer pricing adjustment of ₹ 8,61,31,210/- on this score. The assessee remained unsuccessful before the DRP on various issues including the selection of comparab .....

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assessee s international transactions under this segment, the TPO applied arm s length margin on the total transactions undertaken by the assessee inclusive of the revenue received from non- AEs. 5. We have noticed above that the assessee has a branch office in Canada and there are some transactions between the head office in India and the branch office in Canada. These transactions have also been taken into sweep for the purposes of making the transfer pricing adjustment. There is no dispute o .....

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and the transfer pricing analysis. 6. The first question for our consideration is whether the transactions between the head office in India and branch office in Canada can be considered as international transactions, even though the assessee inadvertently reported the same so as a matter of abundant caution. The answer is obviously in negative because section 92B(1) categorically provides that: For the purposes of this section and sections 92, 92C, 92D and 92E, an international transaction means .....

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national transaction , there must be two or more separate entities. 7. It is simple and plain that no person can transact with self in common parlance. As such, one cannot earn any profit or suffer loss from self. The same is true in the context of business as well. Neither any person can earn income nor suffer loss from self. It is called the principle of mutuality. When expanded commercially, the proposition which follows is that there can be no profit from trade with self. This has been fairl .....

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) 14 ITR 1 (All). Even if for a moment, we accept the contention of the Revenue as correct that the head office earned profit from its branch office, then such profit earned would constitute additional cost of the Branch office. On the aggregation of the accounts of the Head office and branch office, such income of the HO would be set off with the equal amount of expense of the BO, leaving thereby no separately identifiable income on account of this transaction. 8. Reverting to the extant contex .....

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considered as international transaction. 9. There is hardly any need to accentuate that there can be no estoppel against law. Merely because the assessee took an inadvertent appreciation of the transactions with self as international transactions, that cannot prevent it from claiming before the authorities that the correct legal position should prevail. In view of the fact that the assessee s office in Canada is its branch office, the transactions between the head office and the branch office, u .....

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nsactions with the Canada branch. We, therefore, set aside the impugned order to this extent. 10. It is uncontroverted, as is also apparent from the TPO s order, that the transfer pricing adjustment has been made by considering the total costs incurred by the assessee in respect of both the controlled and uncontrolled transactions with the associated enterprises (AE) and non- AEs. An addition towards transfer pricing adjustment can be made by comparing the assessee s profit rate from the interna .....

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nt by applying the average operating profit margin of the comparables on the assessee s universal transactions entered into with both the AE and non- AEs. As the entire exercise under Chapter-X is confined to computing total income of the assessee from international transactions having regard to the arm s length price, there is no scope for computing the income even from non-international transactions having regard to the ALP. As the TPO has computed the transfer pricing adjustment qua all the t .....

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n of some companies in the list of comparables. The TPO is directed to consider the arguments of the assessee and then decide as per law as to whether such companies are comparable or not. Needless to say, the assessee will be allowed a reasonable opportunity of hearing by the TPO/AO. 12. The second issue raised in this appeal is against considering depreciation on building as operating cost, which building was let out and some rental income was also earned therefrom. We do not find any discussi .....

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is no discussion in the final assessment order passed by the AO on 31.10.2011 giving effect to the TPO s order on this aspect of the matter. The ld. AR contended that both the TPO as well as the AO failed to give effect to the direction given by the DRP which is binding on them. 13. In such circumstances, the question arises as to whether the direction given by the DRP is mandatory or directory on the TPO/AO. In order to find an answer to this question, we need to have a look at the mandate of .....

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e directions issued by the DRP under sub-section (5) of section 144C, the AO has to complete the assessment in conformity with the directions so given. In other words, the assessing authority is bound by the directions given by the DRP and these directions are mandatory and not directory in nature. Reverting to the facts, once the DRP directed the TPO to exclude the excess amount of depreciation, it was incumbent upon him to give effect to such direction notwithstanding his contrary view on the .....

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s passed an order completing the assessment. The insertion of this provision reaffirms that the direction given by the DRP u/s 144C(5) is binding on the AO who, under sub-section (13) of section 144C, is bound to complete the assessment in conformity with the direction given by the DRP. It is only in the secondary stage after the completion of assessment, as per which the Revenue, if aggrieved against direction given by the DRP, can appeal before the tribunal against the order passed by the AO g .....

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of the AO/TPO for passing an order in conformity with the direction given by the DRP. We want to make it explicit that we have not undertaken the exercise of examining any aspect of the actual amount of the excess depreciation liable for exclusion. The DRP has also simply directed the TPO to verify this aspect, and, then, exclude the excess amount of depreciation in determining the ALP of the international transaction. As such, the Officer is not only entitled but also duty bound to verify the .....

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crease in the annual letting value of the property. Initially he discussed the inclusion of this amount in the annual letting value of the property, but, later on, he switched over to section 28(iv) and, finally, included a sum of ₹ 11,58,822/- in the assessee s total income towards notional interest on interest free deposit. The assessee challenged the view taken by the AO in the draft order before the DRP, who, vide para 3.3 of its direction, directed the AO to delete this addition. It w .....

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g on the AO in terms of section 144C(13). Adopting the discussion made above, we hold that the addition of ₹ 11.58 lac is not warranted because of the direction given by the DRP for the deletion of the addition. This ground is allowed. 18. The last issue in this appeal is against the addition on account of transfer pricing adjustment towards interest on interest free loan given by the assessee to its AE. The TPO observed that the assessee advanced some interest free loan to its AE. He appl .....

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