TMI Blog2019 (8) TMI 799X X X X Extracts X X X X X X X X Extracts X X X X ..... e Ld. CIT (A) that it is the duty of appellate authority to remove the errors in the order of authorities below and remit the issue with or without direction for reconsideration unless prohibited by law. Accordingly, since the Ld. CIT (A) has not passed a speaking order on this issue, we are of the considered opinion that the interest of justice will be served if this issue is remitted to the file of the Ld. CIT (A) with a direction to pass a speaking order after duly examining and considering all the contentions raised by the assessee. Accordingly, the appeal is restored to the file of the Ld. First Appellate Authority with directions. - the appeal of the assessee stands allowed for statistical purposes - ITA NO. 140/DEL/2019 - - - Dated:- 9-8-2019 - Shri R.K. Panda, Accountant Member And Shri Sudhanshu Srivastava, Judicial Member For the Assessee : S/Shri Nageswar Rao, Purushottam Anand, Advocates For the Department : Shri Sanjay I. Bara, C.I.T. DR ORDER PER SUDHANSHU SRIVASTAVA, JM: This appeal has been preferred by the assessee against the order of the Ld. Commissioner of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ese credit notes of ₹ 39 crores to its associated enterprises which was duly reflected in the books of accounts of the assessee in the service income Ledger and in the Ledger accounts of the four associated enterprises to which these credit notes were issued. It was also submitted that service charges received from the associated enterprises from time to time or any credit note returned out of such receipts related to the international transaction of provision of software consulting and support services which were shown on that basis in Form 3CEB. It was also submitted that even after giving these credit notes of ₹ 39 crores to the associated enterprises, the assessee had still earned a profit margin of 20.64% on its costs which was more than the margin earned by the comparable companies i.e. 11.31% as shown in the Transfer Pricing (TP) documentation. It was also the assessee s claim that the safe harbour margin prescribed under Rule 10TD of the Income Tax Rules, 1962 (hereinafter called the Rules ) for software development companies was 20% on cost and, therefore, the margin earned by the assessee was more than the margin prescribed under the safe harbour rules and, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to each other. That on the facts and circumstances of the case and in law, 1. Ld. AO Ld. CIT(A) has erred in making an adjustment of INR 390,000,000 to the total income of the Appellant by erroneously considering the credit notes issued to its Associated Enterprises ( AE ) as income of the Appellant as per provisions of section 5(1 )(b) of the Act and thereby making an adjustment on account of undisclosed income under section 28 of the Act. 2. Ld. AO Ld. CIT(A) grossly erred in not appreciating that adjustment of consideration relating to international transaction of provision of service is fully in consonance with agreement between parties as also the provisions of law and further erred in presuming that contractual adjustment of tentative consideration for services as an adjustment to arm s length price. 3. Ld. AO Ld. CIT(A) failed to appreciate facts of the case in correct perspective and further misinterpreted the provisions of Chapter X leading to unlawful and incorrect adjustment to returned income. 4. Ld. Assessing Officer Ld. CIT(A) proceeded on incorrect presumptions to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the facts and circumstances of the case. 3.0 The Ld. Authorised Representative (AR) submitted that the lower authorities had erred in not appreciating that even after the issuance of the said credit notes to the associated enterprises the assessee had still earned a profit margin of 20.64% on its costs which was more than the margin earned by the comparable companies which was 11.08% as shown in the transfer pricing documentation. Our attention was drawn to the transfer pricing documentation place in the paper book to buttress this point. It was further submitted that the safe harbour margin prescribed under Rule 10TD of the Rules for software development companies was 20% on costs and, therefore, the margin earned by the assessee was more even than the margin prescribed under the safe harbour rules and thus there was no evasion of tax in India because of issuance of these credit notes. 3.1 It was further submitted that the lower authorities had failed to appreciate the fact that the only objective behind the issuance of the said credit notes to the associated enterprises was that the associated enterprises were charged in accordance with the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amounted to correction of the arms length price. 3.4 The Ld. authorised representative submitted that the Ld. CIT (Appeals) had upheld the conclusions reached by the assessing officer without even referring to the contractual agreement and, therefore, the decision-making process in the impugned order was arbitrarily. 3.5 The Ld. authorised representative further submitted that the lower authorities had erred in not appreciating that the credit notes were required to be issued to ensure that the associated enterprises were charged in accordance with the contracts and not charged excessively only by reference to the budgeted expenditure. Referring to the GTM, it was submitted that credit notes were issued and accounted for in the context of billing for the services rendered and this approach was not contrary to any provisions of the Act including section 92 of the Act. It was submitted that correct charges for services and issuance of credit notes was required to arrive at contractual consideration of the international transaction which was the first step before testing the same for the point of view of arms length ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Ld. CIT Departmental Representative (DR) placed extensive reliance on the observations and findings of the assessing officer. The Ld. CIT DR submitted that reference was not required to be made to the transfer pricing officer because in this case the issue was not any dispute about the arms length price but it was shifting of profits or avoidance of tax to other group entities. The Ld. CIT DR submitted that the main issue was whether the profit, as determined from the books of accounts maintained in the normal course of business, could be artificially reduced to a level just above the net profit margin acceptable to the local tax authority by way of issuance of credit notes to the associated enterprises. It was further submitted that the other issue which needed consideration was whether or not the profit of ₹ 39 crores had accrued to the assessee and was, thereafter, diverted as an application of income. The Ld. CIT DR submitted that it has been the contention of the assessee that the credit notes were issued in accordance with the guidelines provided under the Fujitsu Global Transfer Pricing Policy and, thus, it was apparent that the assessee s justification for the tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax authorities. 4.5 The Ld. CIT DR submitted that it was beyond conclusion that the impugned transactions were pure transfer of taxable profits out of India with the view to evade taxes. It was submitted that these adjustments certainly did not qualify as tax planning because the same was done as an arrangement by the group in Tokyo with a view to divert the accrued profit of 39 crores to other associated enterprises by leaving a minimum level of taxable profit in India. 4.6 The Ld. CIT DR submitted that in view of the observations of the assessing officer and further in view of the findings of the Ld. CIT (Appeals), the appeal of the assessee deserved to be dismissed. 5.0 We have heard the rival submissions and have also perused the material on record. We have also perused the order of the assessing officer as well as that of the Ld. first appellate authority. A perusal of the order of the Ld. CIT (Appeals) shows that the Ld. first appellate authority has summarily rejected the contentions of the assessee. The findings of the Ld. CIT (Appeals) are contained in Para 6.5 to 6.13 and while adjudicating all the groun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er ground No. 7 pertaining to the assessee s contention that the assessing officer had erred in concluding that the credit notes were part of software development services transactions and not international transactions and ground No. 8 pertaining to the contention of the assessee that the assessing officer had erred in not considering that even after the issuance of credit notes the profit margin earned by the assessee was more than the arms length margin of the comparable companies were also dismissed by making only one observation that these grounds required to be dismissed because the assessing officer had held that the adjustment of funds by way of credit notes did not fall under the meaning of international transactions according to the provisions of section 90(2)(b) of the Act. While dismissing the grounds raised by the assessee, the impugned order is woefully silent on the reasons as to why the Ld. CIT (A) agrees to the observations of the assessing officer. Thus, it is very much evident that there has been a failure on the part of the Ld. first appellate authority to properly adjudicate the grounds before her. There is no independent application of mind by ..... X X X X Extracts X X X X X X X X Extracts X X X X
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