TMI Blog2013 (5) TMI 834X X X X Extracts X X X X X X X X Extracts X X X X ..... ing of the assessee, the assessee claimed to have earned a profit level of 34.17% of the cost in respect of AE transactions. Before us also, the ld. CIT/DR could not point out any specific defect in this working of the assessee. There is no legal requirement that the segmentwise working submitted before the TPO should be audited by the assessee’s CA. Moreover, it is not open to the Revenue to reject the working prepared by the assessee without pointing out any error therein. In absence of any error being pointed out in the working shown by the assessee wherein it has claimed that it has achieved a profit level of 34.17% of the cost in respect of transactions with AE, we have no option but to accept the same. the rate of profit achieved in other comparable cases are to be compared with profit level declared by the assessee in respect of its AE transactions after excluding domestic transactions. Therefore, on comparing the same, we find that the profit level declared by the assessee in respect of its AE transactions is more than the profit level in respect of comparable cases found by the TPO. In the above circumstances, in our considered view, the lower authorities were not jus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es of the case and in law in not appreciating that foreign travel expenditure and telecommunication charges were not included as part of the export turnover and as such the same cannot be excluded from export turnover, while computing the deduction under section 10A of the Act. 2.6 Without prejudice to the above, the entire quantum of foreign travel expenditure and telecommunication expenses should not be reduced from the export turnover while computing the deduction under section 10A of the Act. 2.7 Without prejudice to the above, if the quantum of foreign travel expenditure and telecommunication expense is reduced from the export turnover the same should also be reduced from the total turnover of the undertaking while computing the deduction under section 10A of the Act. 4. At the time of hearing, the ld. A.R did not make any submission on ground Nos. 2.1 to 2.6 raised herein above in this appeal, hence, they are dismissed for want of prosecution. 5. The only Ground No.2.7 of the appeal which is to the effect that if quantum of foreign travel expenditure and telecommunication expenses was reduced from the export turnover, the same should also be reduced from the total ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act shows that the amendment made to the section is not in any way relevant for our purpose. The section was again amended by the Finance Act, 1994. Some amendments took effect from the assessment year 1994-95 and some of them took effect from the assessment year 1995-96. These amendments are also not relevant for our purpose. Thereafter amendments were made to the section by the Income-tax (Second Amendment) Act, 1998. These amendments are also not relevant for our purpose. The section was then substituted by the Finance Act, 2000 with substantial changes with effect from 1-4-2001, i.e., from the assessment year 2001-02. The Finance Act, 2000 is reported in (2000) 243 ITR (St) p.65. Section 10B was substantially changed by substitution. It is by this amendment that a definition of the term export turnover was inserted in clause (iii) of Explanation 2 below the section. The Circular No. 794, dated 9-8-2000 issued by the CBDT containing Explanatory Notes on the provisions relating to Finance Act, 2000 is reproduced in (2000) 245 ITR (St.) 21. It is to be noted that the provisions of section 10A which made special provisions in respect of newly established undertakings in free-tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act, 1991 with retrospective effect from 1-4-1987 defined the term total turnover and stated that it shall not include freight or insurance attributable to the transport of the goods or merchandise beyond the customs station as defined in the Customs Act. The proviso to this clause, which took effect from 1-4-1991 clarified that total turnover would also exclude the incentives referred to in the various clauses of section 28. In Circular No. 621, dated 19-12- 1991 (supra) the CBDT explained the rationale behind the insertion of the definition of total turnover with retrospective effect. This is contained in paras 32.18, 32.19 and 32.20 of the circular. It would be better to reproduce these paragraphs: 32.18 Whereas the definition of the term export turnover excludes freight and insurance attributable to transport, no such exclusion has been specified in respect of the term total turnover . As a result, in CIF transactions, while the export turnover is taken at FOB value, the total turnover includes the sale proceeds of exports at CIF value. 32.19 With a view to removing this anomaly, it has now been clarified that total turnover will also not include such freight or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be excluded from total turnover. The order of the Special Bench in IFB Agro Industries Ltd. s case (supra). The question before the Special Bench was whether the excise duty and salestax should be excluded from the total turnover for the purpose of bringing parity between the numerator, viz., export, turnover and the denominator total turnover in the said formula, inasmuch as export turnover does not include excise duty and the sales-tax which are not leviable on exportable goods . The contention of the revenue before the Special Bench, which is alluded to in para 8 of the order was that when particular items alone are excluded, the general meaning excluding only those specified enumerated receipts should be given to the term . The Special Bench proceeded to examine the general meaning of the expression total turnover and apart from several authorities, reference was also made to Circular No. 621 (supra). On an examination of the relevant authorities, including Supreme Court judgments, the Special Bench held that excise duty and sales-tax constitute part of the turnover and trading receipts of the business and, therefore, the term total turnover should be taken as inclusive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have also held that parity should be maintained between the export turnover and the total turnover which are the numerator and denominator respectively in the formula. This would be clear from the following observations of the court (at page 773 of the report) : Further, the meaning of export turnover in clause (b) of the Explanation to section 80HHC, therefore, clearly shows that export turnover did not include excise duty and sales tax. The export turnover is the numerator in the above formula whereas the total turnover is the denominator. The above formula has been prescribed to arrive at the profits from exports. In the circumstances, the above two items, namely, sales tax and excise duty, cannot form part of the total turnover. In fact, if the denominator was to include the above two items and if the numerator excluded the above two items, then the formula would become unworkable. In the circumstances, we are of the view that in order to ascertain the export profits, the above two items cannot be introduced to inflate the total turnover artificially in order to reduce the benefit which an assessee is entitled to. [Emphasis supplied] 22. We may now look at the judgment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed export turnover as the sale proceeds received or brought into India in convertible foreign exchange, of any goods or merchandise exported out of India, but excluding freight or insurance attributable to the transport of the goods beyond the customs station. Clause (ba) defined total turnover as not including freight or insurance attributable to the transport of the goods beyond the customs station. In this case the following propositions were laid down by the Supreme Court : (i) While interpreting the words total turnover in the formula, a schematic or purposeful interpretation to the words has to be given since the section is entirely based on the formula. (ii) The formula has to be read in entirety. (iii) The legislative changes made to the section indicate that the Legislature intended to exclude certain items of receipts (like commission and interest) from the deduction as they did not possess any element of turnover, though they may have emanated from the exports. (iv) The words total turnover in the formula cannot be interpreted with reference to the definition of the word turnover in other laws like the Central Sales Tax Act or as defined in accounti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were acquired by 3i Infotech. The assessee provides software development services to J B Software Inc., USA and also to unrelated entities. The assessee is remunerated on hourly rate and fixed price basis depending on the project contract, and so the assessee had, as per its claim, had a very limited risk bearing software development service provider with respect to the transactions with AE's. During the year, the assessee had international transactions for ` 26,02,80,790/-. The assessee used TNMM and reported 34.17% as the profit on operating cost (PLI) for its transaction with the AEs. As per the TP study conducted by the assessee, the PLI was found to be 11.06%. Based on that, the assessee declared its transactions with the AE to be at arm's length. 11. The TPO accepted that the assessee is a low risk service provider, but undertook a fresh search. Reasons for the TPO to undertake a fresh search of comparables were that: One of the comparables selected by the assessee, M/s VJIL Consulting Ltd, had incurred losses for 2 years including the relevant financial year; There was no foreign exchange earnings of M/s Shree Tulsi Online.com during the relevant financi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es. In this context, the assessee also referred to the Central Board of Direct Taxes ( CBDT ) Circular 14 issued in 2001, which read with Section 92C(3), which puts the primary onus on the assessee to determine the ALP in accordance with the rules and substantiate the same with the prescribed documentation. Where such onus is discharged by the assessee and the data used for determining the ALP is reliable and correct then there cannot be any intervention by the Assessing Officer/TPO), the assessee asserted. On the use of single year data for analysis, the assessee submitted that the Software services industry in India has witnessed robust growth over the last few years and continues to be the fastest growing segments within the Indian IT Industry. Given the nature of the industry and economic conditions, the use of multiple year data (i.e. two/three year average) reduces the variability/distortions to the financial results arising from the use of single year data. Use of single year data of the comparable companies may not adequately capture the market and business cycle reflected in the Industry. The use of multiple year data generally captures market cycles and reduces the lik ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... matrix because M/s VJIL Consulting Ltd had incurred losses for 2 years including the relevant financial year, and there was no foreign exchange earnings of M/s Shree Tulsi Online.com during the relevant financial year. The other reason was that the assessee had used 3 years' data, instead of one year data, the assessee informed. But the assessee contended that retention of loss making comparable companies alongside profitable companies tends to even out the risk profile of comparable companies, and so a company with losses cannot be rejected outright as a comparable on that ground alone, if it is still a going concern or its losses do not exceed its net worth. Appropriate analysis for reasons for losses has to be undertaken before selection or rejection of a comparable company. The assessee felt that loss filter applied by the TPO was erroneous and should be rejected. Reference was drawn to the decision of the Income Tax Appellate Tribunal (ITAT), Delhi in Sony India Private Limited (reference: ITA No. 1189/Del/2005, 819 820/DeI!2oo7). In the said case, the Tribunal had observed that the facts and circumstances surrounding the company should determine its status as a comparabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 15.79 6 SIP Technologies Exports Ltd -33.44 7 Helios Matheson It(Bangalore) Ltd 24.47 8 Tutis Technologies Ltd 10.98 Arithmetic Mean 8.20 Thus, undertaking a new search and using the FY 2007-08 information of the comparable companies is not appropriate as the Rule 10D(4) requires that information and documentation are to be maintained by the assessee. The assessee also stated that it is not appropriate to undertake new search/update the margins based on the data available at the time of assessment. This would lead to anomaly since if this approach is adopted then the arm's length margins earned by the comparable companies will not be as per the provisions of the Act but 'will depend upon the date of performing the search/updating of margin, which is not the intention of the legislature. On segmental approach, the assessee informed that during the previous financial year, the assessee was in the process of setting u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as under: With a view to allow a degree of flexibility in adopting an arm s length price, the Finance Act, 2002 has amended the proviso to subsection (2) of section 92C to provide that where the most appropriate method results in more than one price, a price which differs from the arithmetical mean by an amount not exceeding five per cent of such mean may be taken to be the arm's length price, at the option of the assessee. The proviso of Section 92C(2) was amended by the Finance (No. 2) Act, 2009 and was replaced by two provisos wherein the first proviso provides that on availability of more than one ALP, the ALP may be determined by taking arithmetical mean of such prices. The second proviso provides that if the price at which the international transaction has been undertaken does not exceed 5% of the ALP determined as per first proviso the same is deemed to be at arm's length price. In respect of the same, the CBDT issued a Circular No. 5/2010 dated 3 June 2010 giving explanatory notes to the provisions of the Finance (No.2) Act, 2009. Para 37 to 37.5 in the aforesaid circular talks about the amendment made in the proviso to Section 92C(2). Para 37.5 contains ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the assessee company. 3K Technologies Ltd is engaged in designing, developing, manufacturing and assembly of computers, components parts and accessories. The company obtains technical know-how for the development of computer systems by entering into foreign collaborations. It mainly provides the following services Strategy studies Package implementation Custom development Testing services BPO / IT Enabled services For KALS Information Systems Limited and Magnasoft Consulting, the assessee submitted that they are predominantly a product company, and hence should be rejected. The assessee also stated that in many instances the margins computed are not correct. The assessee submitted that the margins of the said comparable companies need to be rectified as per the computation performed by the assessee from the annual reports of the respective comparable companies. The detailed computation of the margins from the annual reports of the respective comparable companies provided by the assessee is given below: Name of the company Margin computed by the TPO Correct Margin Nettlinx Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and arm's length price is intended to capture that so that the related parties are not able to hide their related party transactions in inefficiency, and that has been the basis of comparability method, adopted largely world-wide for TP analysis. Thus, this ground needs to be rejected. 25. On related party transactions, the assessee submitted that fixing RPT at 25% is not correct. Sure, the purist view should be that we have comparables only which do not have any RPT at all, and that would be the best scenario. But as it has been stated by some court, we may not find any comparable in the market. That would defeat the comparability method. So, as a compromise 25% of RPT has been taken to be a benchmark for undertaking TP analysis. It can be kept at 10-15% as has been stated in some courts, but that is also as arbitrary as 25%. No scientific study has been done to establish RPT level. Till something happens, I guess we would have to live with an arbitrary level, and most of the TP analysis, this panel has seen benchmarked at 25%. So, we would stick to that. But if Trigyn Technologies Ltd had 100% RPT, it is a mistake and needs to be rectified. The TPO would undertake to find ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eeds the permissible limit and falls outside the arm's length. The proviso provides a relief to the taxpayer at the time of determining the ALP. Therefore, the option is available to the assessee only when assessee is computing the ALP and not when the AO/TPO is computing the ALP . Thus, this objection of the assessee is not valid. 28. Rule 10B(4) of Income-tax Rules, 1962 is very clear that single year data is required and there cannot be any argument on that. The only place three years data could be employed where the market situations so demand and these are exceptional cases as per the proviso to Rule 10B(4) of the IT Rules. Here no such extra-ordinary situation was there which required for invoking of the proviso. The proviso allows the use of earlier year data, if (and only if) such data reveals facts which could have all influence on the determination of transfer prices in relation to the transactions being compared. In all other circumstances only the data relating the Financial Year of the international transaction should be used for comparability analysis. In any case, onus is on the assessee to demonstrate and establish existence of factors necessitating the use o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fficer ( TPO ) erred in not considering the segmental results provided by the assessee, without appreciating the fact that the expenditure has been identified and apportioned towards rendering services to Associated Enterprises (AE) and unrelated parties by adopting appropriate allocation key. (viii) The learned TPO erred in rejecting the segmental results on the ground that the segmental results were unaudited. (ix) The benefit of using +/- 5% range to determine the ALP should be provided to the assessee even if the arithmetic mean is determined by the TPO. (x) The learned Transfer Pricing Officer ('TPO ) erred in selecting comparable companies which are functionally dissimilar when compared to the assessee. (xi) The learned Transfer Pricing Officer ( TPO'') should have rejected companies with abnormal profit margins, which squarely fall within the ambit of the term outliers vis-a-vis the average industry. (xii) The learned Transfer Pricing Officer (hereinafter referred to as 'TPO ) erred in considering 25 percent as the threshold limit for the Related Party Transactions filter as this number is an arbitrary number that has been adopted without any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... services. (xxiii) Trigyn Technologies Ltd [ Trigyn or the Company''] is not functionally comparable to the tested party. (xxiv) Trigyn has significant Related Parts) Transactions [100% on operating sales], hence has to be rejected. 16. It was submitted that it agreed with the TPO s stand in disregarding the use of multiple year data in determining the price of the international transaction with AEs, but the TPO did not appreciate that the software service industry in India had witnessed robust growth over the last few years and continued to be the fastest growing segment within Indian IT industry. Given the nature of industrial and economic conditions, the use of multiple year data i.e to which three year average reduced the variability/distortions to the financial results arising from the use of single user data. It was further submitted that the DRP erred in confirming the TPO s stand in rejecting VJIL Consulting Ltd without appreciating that losses are part of business and hence company cannot be removed just because it incurs losses. 17. It was submitted that the DRP erred in confirming the TPO s stand in rejecting Shree Tulsi Online.com Ltd as a compara ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was submitted that the assessee was in the business of software development services to J B Software Inc. USA and also to unrelated entities and was remunerated on hourly rate and fixed price basis depending on the project contract and that the assessee had a very limited risk bearing software development service provider with respect to the transaction with AEs. The comparables adopted by the TPO were of companies either designing, developing and manufacturing and assembly of computers or software product sale/licensing and training activities apart from software service or were providing sales and services of their own software product. It was submitted that the segmental PLI worked out by the assessee for its international transaction with the AEs was supported by the certificate of the CA in Form 3CEB and therefore, the TPO as well as the DRP were not justified in rejecting the PLI of 34.17% worked out by the assessee for its ALP with AEs. 22. On the other hand, the ld.CIT/DR supported the orders of the lower authorities. 23. We have heard the rival submissions and perused the orders of the lower authorities and materials available on record. The assessee is engaged in so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsactions which is neither factually correct nor legally permissible. For the submission the assessee placed reliance on the decision of the Delhi Bench of the Tribunal in the case of DCIT vs Stratex Net Works (India) Pvt. Ltd, [2010] 133 TTJ 365 wherein it was held as under: 7. The TPO on p. 12 in the order extracted by the AO in the assessment order himself accepted that adjustment is required to be made to the value of international transaction related to commission on sales and warranty service. He has made the adjustment on these two items only. The grievance of the assessee is that if the TPO wants to determine the ALP of international transaction with associated concern then he should work out the profit disclosed the assessee on those receipts and compare that result with the comparables of independent cases, who have carried out similar international transactions with independent parties. In that exercise the domestic receipts which have nothing to do with the AEs are required to be excluded for working out the profit level indicator shown by the assessee in respect of international transaction. We find force in this contention of the learned counsel for the assessee. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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