TMI Blog2016 (6) TMI 583X X X X Extracts X X X X X X X X Extracts X X X X ..... sfer pricing. Instead of following the proper procedure stipulated under Chapter X of the I.T. Act as well as Rule 10 of I.T. Rules, the CIT (Appeals) has proceeded to take the AEs of the assessee as tested party and further recomputed their profit margin by excluding certain expenses which we find is not permitted under the provisions of transfer pricing. Not only changing the tested party from the assessee to its AE, the CIT (Appeals) has also selected a domestic company as a comparable to the AE of the assessee. Therefore the entire exercise of determining the ALP by the CIT (Appeals) is contrary to the provisions of transfer pricing under the I.T. Act. Hence in view of the facts and circumstances of the case, we set aside the impugned order of the authorities below and remit the issue to the record of the Assessing Officer / TPO for deciding the matter afresh by considering the segment-wise data of the assessee and then compare the same with the comparable companies in the light of various decisions relied upon by the assessee. We find that in the series of decisions, this Tribunal has come to a conclusion that the threshold limit of the RPT should not be more than 15% in n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in law. 2. The learned Assessing Officer has erred in making a reference to Transfer Pricing Officer for determining arm's length price without appreciating that under section 92CA( I), a reference could be made to the Transfer Pricing Officer only in circumstances where the assessing officer considers it necessary or expedient so to do and also without specifying the relevant- clause under section 92C(3) which necessitated the reference. The learned Commissioner of Income Tax (Appeals) - IV ['CIT(A) - IV'] has further erred in confirming the action of the Assessing officer. 3. The learned Assessing Officer, learned Transfer Pricing Officer and Commissioner of Income Tax (Appeals) IV have erred in a. passing the order without demonstrating that appellant had the motive of shifting profits outside India by manipulating prices charged in its international transactions: and, b. not appreciating that the charging or computation provision relating to income under the head Profits Gains of Business or Profession do not refer to or include the amounts computed under Chapter X and therefore the addition made under Chapter X is bad in law. GROUNDS ON COMPAR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plained and submitted the workings during the appellate proceeding; and, f. Combining the marketing expenses incurred by appellant and commission paid to AE to arrive at the ratio of 10.59 of such expenses on sales and accordingly concluding that it is very high without appreciating that marketing expenses of INR 64,76,000 were incurred for non-AE business only. iii. TP Analysis of Onsite Services Rendered by AE 8. The learned Commissioner of Income Tax (Appeals) - IV has erred in a. adopting CPM as the most appropriate method for evaluating the software development services received by the appellant without justifying how the same was most appropriate method; b. adopting inappropriate methodology and process in arriving at the arm's length price; c. selecting Indian companies having onsite revenues as comparable after selecting AE (a company based in USA) as the tested party. Without prejudice, CIT(A) has erred in rejecting similarly placed Indian companies as comparable on unjustifiable reasons; and. d. adopting net margin of the comparable in computing the arm's length price without appreciating that under CPM gross margin are to be considered. G ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cted at source without considering the Circular issued by the Central Board of Direct Taxes. 15. FOREIGN TAX CREDIT NOT GRANTED a. The learned CIT(A) has erred in concluding that the appellant has failed to substantiate its claim for foreign tax credit without considering the submission tiled by the appellant. b. The learned CIT(A) has erred in not directing the AO to grant appropriate credit for foreign taxes. 16. INTEREST UNDER SECTION 234B OF THE ACT The learned C IT(A) has erred in confirming the levy of interest under section 234B of the Act amounting to ₹ 10,928,569. 17. INTEREST UNDER SECTION 234D OF THE ACT The learned CIT(A) has erred in confirming the levy of interest under section 234D of the Act amounting to ₹ 128.352. 18. PENALTY UNDER SECTION 271(1)(C) The learned CIT(A) has erred in directing the AO to re-compute the penalty in view of the enhanced total income of the Company. 19. RELIEF a) The Appellant prays that directions be given to grant all such relief arising from the above grounds and also all relief consequential thereto. b) The Appellant craves leave to add to or alter, by deletion, substitution, mo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The assessee is basically having international transactions in two segments i.e. software development services provided to AEs and payment of selling commission to AEs. In fact the assessee is providing software development services to overseas third party through its AE and some part of the services were also sub-contracted to the AE. Accordingly, the assessee is making payment on selling commission to its AE on cost plus 12%. Similarly, the assessee is also receiving sub- contracts work of software development services from AE which was ultimately meant for the third party as per the contract between the AE and the third party. However, since the work is sub-contracted by the AE to the assessee therefore there is no privity of contract between the assessee and the ultimate recipient of the service. The assessee is undertaking software development from its AE under the sub-contract. The assessee bench marked its international transactions by applying Transactional Net Margin Method ( TNMM ) as Most Appropriate Method ( MAM ) at entity level. The assessee's margin at entity level is 12.61%. The assessee selected 15 comparables for bench marking its transactions, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7. Thirdware Solutions Ltd. 39.79 39.77 8. R S Software (India) Ltd. 7.47 7.56 9. Geometric Solutions Ltd. Software 16.90 16.15 10. Tata Elxsi Ltd. (Seg.) 19.58 19.59 11. Visualsoft Technologies Ltd. (Seg.) 19.04 17.70 12. Sasken Communication Ltd. (Seg.) 12.60 12.83 13. iGate Global Solutions Ltd. (Seg.) 4.14 3.13 14. Flextronics Systems Ltd. Software 24.35 23.81 15. L T Infotech Ltd. 9.37 9.07 16. Satyam Computer Services Ltd. 22.74 22.22 17. Infosys Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was an acquisition of the assessee by the Mphasis BFL Limited therefore, due to this event of acquisition a proper representation could not be made before the authorities below. No notice was given to the assessee by the CIT (Appeals) to adopt a different method and AE as a tested party. Even otherwise, the profit margin of the AE has not been properly computed by the CIT (Appeals) as it has excluded certain expenses while computing the profit margin. Thus the learned Authorised Representative has submitted that the impugned order of the CIT (Appeals) is not sustainable as the same suffers from illegality being contrary to the provisions of transfer pricing. Even otherwise, the learned Authorised Representative of the assessee has submitted that the comparable companies selected by the TPO cannot be considered for the purpose of determining the ALP as the same are functionally different from the assessee. The assessee has raised the objections against various companies selected by the TPO and one company namely Geometric Software Solutions Ltd. which was though selected by the assessee also however, as it is found to be not comparable with the assessee, therefore the assessee is s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) : The functional comparability of this company is examined by the Tribunal in the case of Kodiak Network India Ltd. (supra) and it was found that this company is functionally dis-similar to the software development services provider. 9. Flextronic Software System Ltd. : The learned Authorised Representative has submitted that the comparability of this company has been examined by the co-ordinate bench of this company in the case of ITO Vs. Sunquest Information Systems (India) Pvt. Ltd. in ITA No.1302/Bang/2011 vide order dt.11.6.2015. This company is functionally not comparable with the assessee. 10.1 Geometric Software Solutions Ltd. : The learned Authorised Representative has submitted that though the company was selected by the assessee, however, in view of the RPT of this company at 22.52%, this company cannot be considered as a good comparable. 10.2 On the other hand, the learned Departmental Representative has submitted that despite sufficient opportunities were given by the TPO as well as the CIT (Appeals) the assessee did not file the relevant details and therefore the assessee's conduct was completely non-co-operative during the proceedings before the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... material on record. We find that the assessee took its operating margin at entity level and then compared the same with the mean margins of the selected comparables. The TPO has not objected to its methodology of the assessee but rejected certain comparables selected by the assessee and included the some more comparables in the set of comparables for determining the ALP. It is pertinent to note that as per the provisions of Transfer Pricing, the entity level margin of the assessee cannot be considered for the purpose of bench marking the international transactions when the assessee is having both international as well as third party transactions. Though there is a strength in the contention of the learned Authorised Representative that in view of the complexity of the transactions between the assessee and its AEs as well as the third party transactions in which the assessee has to pay the selling commission to the AE, the assessee adopted entity level operating margin for the purpose of bench marking its international transactions. However, this method is not permitted as per the provisions and rules of the transfer pricing under Income Tax Act and I.T. Rules and therefore to that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons and considered the relevant material on record. An identical issue has been considered and decided by the Hon'ble jurisdictional High Court in assessee's own case for the Assessment Year 2004-05 vide decision dt.8.1.2016 in ITA No.703 of 2009 in paras 11 to 13 as under : 11. We have considered the rival submissions made by the parties and perused the material on record. 12. On substantial question No.1, the assessing authority has extensively considered whether the activity carried on by the assessee is software development or technical service. It is an admitted fact, as per the assessment order, the role of the assessee is of developer of software and not a consultant to any project. It is also categorically held by the assessing authority that the purpose of business of the assessee is to develop the software and in such process, expenditure is incurred in foreign currency to provide technical services outside India. Having held so, the assessing authority proceeded to conclude that the nature of expenditure and the nature of business are two different and distinct concepts and as per the statute, what is to be excluded is the expenses in foreign exchange ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ficer/TPO not to reduce the expenses from the export turnover for computation of deduction under Section 10A of the Act. 13.1 Ground No.15 is regarding foreign tax credit. 13.2 We have heard the rival submissions and considered the relevant material on record. In the outcome of the remand proceedings if any tax liability is determined by the Assessing Officer, then the tax credit in respect of the foreign tax paid by the assessee is also required to be considered. We accordingly direct the Assessing Officer to consider the appropriate credit for foreign tax paid. 14. Ground Nos.16 17, interest under Sections 234B 234D is consequential in nature. 15. Ground No.18 is regarding penalty under Section 271(1)(c) of the Act is premature to deal with the issue. Revenue s Appeal 16. The Revenue has raised the following grounds : 1. The order of the learned CIT (Appeals) is opposed to law and facts of the case. 2. On the facts and in the circumstances of the case the learned CIT (Appeals) erred in holding the telecommunication expenses amounting to ₹ 38,63,601 and foreign currency expenses incurred for providing software development outside India amo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 10A 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 assxcessee, 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 busines ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the export turnover is a part 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 purpos ..... 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