TMI Blog2016 (11) TMI 1304X X X X Extracts X X X X X X X X Extracts X X X X ..... pment services i.e. off-site services independently from on-site services provided by way of consultancy services provided by the assessee. The Assessing Officer is also directed to adopt the segmental details of comparables, if available for benchmarking the international transactions of assessee. Accordingly, this aspect of transfer pricing adjustment, if any, is remitted back to the file of Assessing Officer, who is directed to adopt only the margins of software consultancy services i.e. off-site services in order to compute the addition, if any, on account of transfer pricing adjustment. Reopening of assessment - reference made to the TPO for determining the arm's length price of international transactions - Held that:- When no assessment proceedings were pending in relation to the relevant assessment year, the Assessing Officer was precluded from making a reference to the TPO under section 92CA(1) of the Act for the purposes of computing the arm's length price in relation to the international transaction. Consequently, order passed by the TPO under section 92CA(3) proposing an adjustment of ₹ 2,60,00,882/- to the arm's length price of the international transaction wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... correlation between turnover and profitability of companies in I.T. Sector. 3. On the facts and in the circumstances of the case and in law, the Commissioner of Income-tax (Appeals) erred in directing the AO to consider the aggregate margin of the assessee from onsite as well as offshore services for computing the ALP despite the fact that the mark up for onsite and offshore services were different form each other. 4. The Commissioner of Income-tax (Appeals) erred on facts and in law in not appreciating the fact that different markups for onsite and offshore services indicate towards functional and risk profile being different for onsite offshore segments. 5. For this and such other reasons as may be urged at the time of hearing the order of the Commissioner of Income-tax (Appeals) may be vacated and that of the AO be restored. 5. The ground of appeal No.1 raised by the Revenue is general in nature and hence, the same is dismissed. 6. The issue in grounds of appeal No.2 to 4 is against the order of CIT(A) in adjudicating the issue of transfer pricing adjustment. 7. Briefly, in the facts of the case, the assessee was engaged in providing software deve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which is not accepted by the TPO. The TPO noted that it was not that loss making companies had been removed from the list of comparables. However, only those companies which had reported huge losses in 2004 or which had very good profits in 2003 and had become loss making companies in 2004, had been rejected since they were not demonstrating consistent results. The TPO also pointed out that all the abnormalities whether on profit or loss side had been eliminated by even excluding the companies which were showing very high profit margins. The contention of assessee to reject the companies having margin of 40% was also brushed aside holding that where two companies out of set of companies had shown 40% of mark-up, it cannot be said to be abnormal. The next contention of assessee was that the software development services and the software consultancy services should be clubbed and then the margins of comparables would fall +/- 5% of arm s length range. The TPO noted that both these services were shown as separate segments in TP study report of the year and were benchmarked separately. The assessee s contention of aggregating the software development and software consultancy was not ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stment. Further, the CIT(A) also confirmed the order of TPO in excluding the loss making companies from list of comparables on the ground that the assessee was a captive service provider and operated in cost protective environment and the business module followed by the assessee did not envisage incurring of losses. With regard to turnover filter, the CIT(A) noted that before the TPO the assessee had requested for applying filter of ₹ 1 to 50 crores. However, the CIT(A) noted that the TPO had not applied any turnover filter. The CIT(A) took note of the decision of Bangalore Bench of Tribunal in Genisys Integrating System (India) Pvt. Ltd. Vs. DCIT (2012) 64 DTR 225 (Bang) (Trib), wherein the Tribunal had approved and applied the turnover filter of ₹ 1 to 200 crores where Genisys s turnover was ₹ 8.15 crores. The CIT(A) noted that the assessee s turnover was ₹ 10.08 crores and he directed the Assessing Officer to apply turnover filter of ₹ 1 to 200 crores and to exclude the comparables which had turnover of more than ₹ 200 crores from the list of comparables. The Assessing Officer was thus, directed to exclude iGate Global Solution Ltd., Infosys T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e were different mark-ups for on-site and off-shore services, which indicate towards functional and risk profile being different for on-site and off-shore segments. 10. The ground of appeal No.1 raised by the Revenue is general in nature and hence, the same is dismissed. The learned Departmental Representative for the Revenue referred to the TP study report filed by the assessee and pointed out that the assessee itself has reported provision of software development services to its associate enterprises at ₹ 10.08 crores and the provision of on-site services to its associate enterprises at ₹ 1.70 crores separately in the said report. He further pointed out that the assessee in TP study report had separately benchmarked two transactions and had prepared its report. In respect of provision of software development services, the assessee had selected 24 companies whose arithmetic mean of margin worked out to 2.20% as against the PLI of assessee at 7.5%, which was found to be at arm s length by the assessee. However, the TPO rejected the companies where the data was not available or where the companies were having losses or the companies were having abnormal losses. The TP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xmann.com 91 (Pune-Trib.), relating to assessment year 2008-09 and TIBCO Software (India) (P.) Ltd. Vs. DCIT (2015) 58 taxmann.com 215 (Pune -Trib.), relating to assessment year 2009-10. Just because the comparables picked up by the assessee were same and results of two i.e. provision of off-shore and onsite services should be clubbed, as per the learned Departmental Representative for the Revenue was wrong and submissions of the assessee before the CIT(A) in this regard, especially in the case of assessee where separate working was available, was incorrect. 11. The learned Authorized Representative for the assessee in reply, pointed out that the CIT(A) in the first instance had excluded the big turnover companies by applying the turnover filter and in this regard four companies were excluded. Our attention as drawn to the computation at page 152 of the Paper Book, wherein before the CIT(A) the assessee had provided operating revenue of several companies. Coming to the second aspect of the issue decided by the CIT(A), the learned Authorized Representative for the assessee pointed out that Goldstone Technologies Ltd. had made segmental reporting of its earnings. However, in respe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee had applied TNMM method using OP/OC as PLI in its TP study report while benchmarking the international transaction. Admittedly, the assessee had benchmarked the two services i.e. provision of software development services to the SAS and provision of on-site services to overseas SAS group companies separately by using OP/OC as PLI, in its TP study report. In respect of provision of software development services, the assessee was being reimbursed at cost plus 7.5%, whereas in respect of on-site services provided to overseas groups, the assessee was being reimbursed at cost plus 15.04%. However, in the TP study report, the assessee picked up same set of comparables whose arithmetic mean worked out to 11.75% and the same was held to be arm s length price in respect of both the transactions separately. The TPO re-worked the arithmetic mean of margins of comparable companies by applying the financial data for the financial year 2003-04 and in this regard, because of abnormal results shown by certain companies, the list of companies to be compared with the results shown by the assessee were revised and for the provision of software development services, the arithmetic mean of said comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... crores. The turnover of HCL Comnet Systems Services Ltd. was ₹ 260.18 crores, of Infosys BPO Ltd., was ₹ 649.56 crores and of Wipro Ltd. was ₹ 939.78 crores. The said companies were excluded by the Tribunal on the basis of turnover filter, which was approved by the Hon ble High Court. The Hon ble High Court held that the said companies are no doubt large and distinct companies where the area of development of subject services are different and as such the profit earned therefrom cannot be benchmarked or equated with the Respondent-Company. Applying the said ratio to the facts before us, we uphold the order of CIT(A) in excluding the companies whose turnover was more than ₹ 200 crores. Thus, ground of appeal No.2 raised by the Revenue is dismissed. 15. Now, coming to the next direction of the CIT(A) in holding that the margins of provision of software development services and provision of on-site services by the assessee to its associate enterprises have to be computed cumulatively. The first aspect to be noted in the case is that while the assessee is providing several services to its associate enterprises and it has recognized that it is providing t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he company rendering on-site services to its clients, then even in a case where one company itself providing both the said services, the same have to be considered separately while benchmarking the international transactions. The basis on which the assessee before us is being reimbursed on account of its off-site services is cost plus 7.5% and for on-site services, it is being reimbursed at cost plus 15.04%, which itself establish that the two services provided by the assessee are different and the same cannot be clubbed for the purpose of benchmarking the international transactions. We reverse the order of CIT(A) in this regard and direct the Assessing Officer to re-compute the same. Where the mark-up earned by the assessee is different from two activities carried on by it that established that the activities undertaken were different on account of functional and risk perspective. Since the assessee in the present case was being remunerated at separate mark-up for each of the activity, then both the activities have to be considered separately while benchmarking arm's length price of transactions perse. Merely because the same set of comparables have been utilized does not ju ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , err e d in upholdin g th a t th e r e w as no n ee d t o mak e fre s h ref e r e nc e t o th e T PO f o r d e t e rmin a ti o n o f a rm ' s l e n g th pri ce of int e rnati o nal tr a n sact i o n s , a fter initia t in g p ro ce e din gs under sec ti o n 1 4 7 of th e Ac t . Deprivation of opportunity of appeal before the DRP 3. Without prejudic e t o th e a bov e gr o unds r e gardin g v alidit y o f re ass e ss m e nt p r oc ee dings und e r secti o n 14 7 of th e Ac t , e rr e d in uph o ldin g the i ss uanc e of th e o rd e r und e r se ction 1 43( 3) read w ith se ction 14 7 of th e Act along with th e notic e o f d e mand in s t ea d of i ss uin g ord e r und e r s e ction 144 C o f th e Act , obje c ti o n aga in s t whi c h w ould h ave b ee n fil e d befor e DRP . 20. The assessee has challenged the re-assessment proceedings conducted by the Assessing Officer under section 147 of the Act and has fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons reflects that the reference is made to the international transactions entered into by the assessee with its associate enterprises and the adjustments sought to be made by the TPO at ₹ 2.60 crores and in view thereof, the Assessing Officer was of the view that the income of assessee to the tune of ₹ 2.60 crores had escaped assessment on account of arm's length price of international transactions and notice under section 148 of the Act was issued. Consequent thereto, the assessee filed latter stating that the original return of income filed by it should be treated as filed under section 148 of the Act. The letter is dated 02.02.2011, which is placed at pages 266 to 269 of the Paper Book. The assessee thereafter, sought the reasons for reopening the assessment and also challenged the validity of assessment proceedings initiated under section 147 of the Act vide letter dated 02.02.2011 placed at page 267 of the Paper Book. The Assessing Officer in return, furnished reasons on 07.02.2011, copy of which is placed at pages 270 and 271 of the Paper Book. The assessee challenged the validity of proceedings initiated under section 147 of the Act and also objected to the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esentative for the assessee pointed out that the issue arising in the present appeal filed by the assessee is squarely covered by the order of Co-ordinate Bench of Pune Tribunal in the case of Maximize Learning (P.) Ltd. Vs. ACIT in ITA No.2234/PN/2012, relating to assessment year 2007-08, order dated 02.02.2015 and the facts and issue were pointed out to be identical. The assessee in this regard has filed a comparative chart between the facts and issue arising in the case of Maximize Learning Pvt. Ltd. (supra) and in the present case and has stressed that since the re-assessment proceedings have been quashed in the case of Maximize Learning Pvt. Ltd. (supra), the same needs to be quashed in the facts of the assessee also. He pointed out that the assessee has challenged the reopening perse where the original assessment proceedings were dropped even though the report was received from the TPO under section 92CA(3) of the Act since no notice under section 143(2) of the Act was served upon the assessee in time. As no assessment order was passed after reference to the TPO, then the same order of TPO could not be the basis for reopening the assessment under section 147/148 of the Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessment proceedings under section 143(3) of the Act were dropped by the Assessing Officer in the case of assessee on 28.09.2010 and similarly in the case of Maximize Learning Pvt. Ltd. (supra). Thereafter, in both the cases notice under section 148 of the Act was issued by the Assessing Officer and the issue which arises before us is against the validity of such re-assessment proceedings. In both the cases, the reasons for reopening the assessment was the TPO s order passed under section 92CA(3) of the Act during the pendency of original assessment proceedings, which were held to be invalid. The question which arises is the validity of re24 assessment proceedings on the surmise that an adjustment has to be made on account of arm's length price of international transactions in the hands of assessee on the basis of such reference, during the course of assessment proceedings, which were held to be invalid. After going through the factual and legal aspects of the case, the Tribunal vide order dated 02.02.2015 (supra) had firstly held that the Assessing Officer was precluded for making a reference to the TPO under section 92CA(1) of the Act for the purpose of computing arm's le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssment year 2002-03. Section 92(1) of the Act provides that any income arising from an international transaction between associated enterprises shall be computed having regard to the arm s length price. Sections 92A and 92B of the Act contain provisions relating to the meaning of the expressions associated enterprise and international transaction respectively. Section 92C of the Act contains the powers of the Assessing Officer and the manner of determination of arm's length price in relation to an international transaction. Section 92CA of the Act provides that where the Assessing Officer considers it necessary or expedient to do so, he may refer to the Transfer Pricing Officer the determination of the arm s length price. Section 92CB of the Act relates to the power of the Board to make safe harbour rules. Section 92D of the Act relates to Maintenance and keeping of information and document by persons entering into an international transaction. Section 92E of the Act prescribes that the person entering into international transaction shall furnish a report from a chartered accountant in Form No.3CEB. Section 92F of the Act contains definitions of certain terms which are rele ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act postulates that arm's length price in relation to an international transaction is determined either by the Assessing Officer as provided in sub-section (3) of section 92C or by the TPO u/s 92CA(3) of the Act where a reference is made to him by the Assessing Officer. In both situations, the Assessing Officer is required to compute the total income of the assessee having regard to the arm's length price of the international transaction so determined, either in terms of sub-section (4) of section 92C or sub-section (4) of section 92CA. Notably, sub-section (4) of section 92C comes into play where an arm's length price in relation to the international transaction is determined by the Assessing Officer and sub-section (4) of section 92CA comes into play where the arm's length price in relation to an international transaction is determined by the TPO, on a reference by the Assessing Officer. In the case before us, the total income of the assessee has been computed having regard to the arm's length price determined by the TPO under section 92CA(3) of the Act and therefore the Assessing Officer has taken recourse to section 92CA(4) of the Act. 15. It is quite ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or as contemplated under the Act. Under the provisions of section 92CA reference is in relation to the international transaction. Hence all transactions have to be explicitly mentioned in the letter of reference. Since the case will be selected for scrutiny before making reference to the TPO, the Assessing Officer may proceed to examine other aspects of the case during pendency of assessment proceedings but await the report of the TPO on the value of international transaction before making final assessment. [underlined for emphasis by us] 17. It is emphasized on the basis of the CBDT Instruction (supra) that even as per the understanding of the CBDT, a case is to be selected for scrutiny assessment before the Assessing Officer may refer the computation of arm's length price in relation to an international transaction to the TPO u/s 92CA of the Act. Therefore, we are inclined to uphold the position sought to be canvassed by the assessee that an Assessing Officer can make reference to the TPO u/s 92CA of the Act only after selecting the case for scrutiny assessment. In-fact, the aforesaid underlined observations of the CBDT Instruction (supra) is a pointer to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t it is open to the Department to make a reference to the TPO without issuing notice u/s 143(2) of the Act, but in our view, it is not supported by a schematic reading of the relevant Provisions relating to the transfer pricing assessment contained in sections 92 to 92F. The entire purpose of computation of arm's length price in relation to an international transaction is found in sub-section (1) of section 92 of the Act. Section 92(1) mandates that any income arising from an international transaction shall be computed having regard to the arm's length price. Therefore, the sole aim of computing the arm's length price in relation to any international transaction is to compute the income arising therefrom. Thus, the computation of income and the determination of arm's length price in relation to the international transaction have to go hand-in-hand and without there being an occasion to compute income arising from an international transaction, it is difficult to comprehend the process for computation of arm's length price in relation to the relevant international transaction. Therefore, it would not be open for the Department to say that the process of computing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntire scheme envisaged for the transfer pricing assessment in sections 92 to 92F of the Act. The provisions of sections 92 to 92F of the relate to computation of income from the international transaction having regard to the arm's length price, meaning of associated enterprises, meaning of international transaction, determination of arm's length price, keeping and maintaining of information and documents by persons entering into international transactions, furnishing of a report from an accountant by persons entering into such transaction and the definition of certain expressions occurring in such sections. The aforesaid provisions do not operate in individual spheres but the same operate with a singular purpose of computing income arising from an international transaction. The process of computation of income is necessarily a part and parcel of the assessment proceedings envisaged under the Act. Section 92CA of the Act is not an independent provision, but it is triggered only when the occasion arises for application of section 92(1) of the Act, whereby income from an international transaction is to be computed having regard to its arm's length price; and, the occasion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the relevant assessment year i.e. upto 30.09.2008. There is no dispute that no such notice has been issued within the above stipulated period. A consequence of the aforesaid situation is that the return of income filed by the assessee on 05.11.2007 became final as no scrutiny proceedings were started within the period stipulated in law. The aforesaid position is also reinforced by the CBDT Circular No.549 dated 31.10.1989. As per the CBDT, if, after furnishing return of income, an assessee does not receive a notice u/s 143(2) of the Act from the Department within period stipulated in the proviso to section 143(2) of the Act, it follows that the return filed by the assessee has become final and no scrutiny proceedings should be started in respect of that return. In other words, in the present case, assessment proceedings u/s 143 of the Act came to end and the matter became final on 30.09.2008 i.e. the date within which a notice u/s 143(2) of the Act was required to be issued, which was not done. The judgement of the Hon ble Punjab Haryana High Court in the case of Vipan Khanna vs. CIT and Others, 255 ITR 220 (P H) is also to the same effect. In-fact, as per the Hon ble Punjab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubsequent assessment order passed under section 143(3) r.w.s. 147 and 144C(3) of the Act was liable to be quashed. The relevant observations of the Tribunal (supra) are in paras 28 to 35, which are as under :- 28. The next aspect is as to whether, in the above circumstances, the order of the TPO dated 29.10.2010 (supra) can be a valid material for the Assessing Officer to entertain a belief that certain income chargeable to tax has escaped assessment within the meaning of section 147 of the Act. 29. In this context, the Ld. CID-DR has vehemently pointed out that the return of income filed by the assessee included international transactions entered with the associated enterprise and such return of income was required to be taken-up for compulsory scrutiny, as per the norms of the CBDT relating to assessment year 2007-08. Therefore, when such a return of income was not picked up for a scrutiny assessment within the stipulated period, the only course for the Revenue was to issue notice u/s 148 of the Act on the ground that certain income chargeable to tax has escaped assessment. Secondly, it is pointed out that the return of income was filed by the assessee on 05.11.2007 wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sons recorded by the Assessing Officer for re-assessment. The reasons recorded by the Assessing Officer for re-assessment, have already been reproduced by us in the earlier part of this order. It s a trite law that the reasons recorded by the Assessing Officer are alone to be examined so as to test their validity. In this context, a reference can be made to the judgement of the Hon ble Delhi High Court in the case of Northern Exim (P) Ltd. vs. DCIT, (2012) 20 taxmann.com 466 (Delhi) wherein it has been held that a Court is to be guided only by the reasons recorded for re-assessment and not by the reasons or explanation given by the Revenue at a later stage in respect of the notice of re-assessment. The Hon ble Delhi High Court after making a reference to the following judgements :- (i) Jamna Lal Kobra vs. ITO (1968) 69 ITR 461 (All.); (ii) CIT vs. Agarwalla Bros. (1991) 189 ITR 786 (Pat.); (iii) G.M. Rajgharia vs. ITO, (1975) 98 ITR 486 (Pat.); (iv) Asa John Devinathan vs. Addl. CIT, (1980) 126 ITR 270 (Mad.); (v) East Coast Commercial Co. Ltd. vs. ITO, (1981) 128 ITR 326 (Cal.); (vi) Equitable Investment Co. (P.) Ltd. vs. ITO, (1988) 174 ITR 714 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4) of section 92CA of the Act having regard to the arm's length price determined by the TPO. There is no dispute on the said aspect. In the present case, the point made out by the assessee is that a nonest and void ab initio order passed by the TPO on 29.10.2010 determining the arm's length price u/s 92CA(3) of the Act cannot form a basis to formulate a belief that certain income chargeable to tax has escaped assessment within the meaning of section 147 of the Act. The controversy in the present case has to be adjudicated in the light of the parameters of section 147/148 of the Act. In a somewhat similar situation, the Hon ble Rajasthan High Court in the case of Brig B. Lal vs. WTO, 127 ITR 308 (Raj.) was dealing with a situation where the reopening of assessment was based on a report submitted by the Valuation Officer in an invalid reference. As per the Hon ble High Court, a report submitted by the Valuation Officer in an invalid reference must be treated as a nullity in the eyes of law, nonest and void ab initio. According to the Hon ble High Court, where the reopening of assessment was based on such illegal, null and void report, the entire fabric for reopening of the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... disagreed with the assessee s defense and upheld the action of the Assessing Officer in taking into account the subsequent order of the TPO for forming a belief that certain income liable to tax had escaped assessment even in relation to an assessment year prior to the insertion of 92CA of the Act with effect from 01.04.2002. As per the Hon ble High Court, the order of the TPO could certainly have nexus for reaching a conclusion that income has been incorrectly assessed or has escaped assessment within the meaning of section 147 of the Act. The proposition laid down by the Hon ble High Court is to the effect that the order of the TPO passed u/s 92CA of the Act after 01.04.2002 i.e. under the amended Provisions, can be one of the reasons for re-assessment for a period prior to the introduction of the amended Chapter X with effect from 01.04.2002. Clearly, the dispute in the case of M/s Coca Cola India Inc (supra) stood on a different footing than the dispute before us. In the case of M/s Coca Cola India Inc (supra), it was nobody s case that there was any illegality in the reference made to the TPO or that the order of the TPO was void ab initio with respect to the assessment year f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... equent order passed by the Assessing Officer under section 143(3) r.w.s. 147 an d 144C of the Act is liable to be quashed. Accordingly, we hold so. The ground of the appeal No.1 raised by the assessee is allowed. 30. As the preliminary issue raised by the assessee regarding the assumption of jurisdiction by the Assessing Officer has been decided in favour of the assessee and the impugned assessment has been quashed, the remaining grounds of appeal raised by the assessee regarding the merits of the addition become academic and hence the same are not adjudicated for the present. 31. Since the assessment completed under section 143(3) r.w.s. 147 of the Act has been held to be invalid, there is no merit in grounds of appeal raised by the Revenue, hence, the appeal of Revenue in ITA No.1927/PN/2013 is dismissed. The grounds of appeal raised by the Revenue are thus, dismissed. 32. In the result, the appeal of Revenue in ITA No.810/PN/2013 is partly allowed, appeal of assessee in ITA No.1850/PN/2013 is allowed, appeal of Revenue in ITA No.1927/PN/2013 is dismissed and Cross Objections of assessee are dismissed. Order pronounced on this 16th day of September, 2016 - - TaxTM ..... X X X X Extracts X X X X X X X X Extracts X X X X
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