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2013 (11) TMI 925 - AT - Income TaxTransfer pricing adjustment - Determination of arm s length price - Violation of principle of natural justice - Held that - show cause notices were issued to the assessee by the TPO at least on two occasions; viz., on 20.4.2009 and 20.7.2009 in the course of T.P. Audit. As far as issue of notice to the assessee before passing of the final order by the Assessing Officer under section 143(3) r.w.s. 144(13) of the Act. Section 144C(13) mandates that upon receipt of the DRP s directions under section 144C(5) of the Act, the Assessing Officer s mandate is to complete the assessment in conformity with the directions of the DRP without providing any further opportunity of being heard to the assessee - Decided against assessee. Reference to TPO - Held that - it is mandatory for the Assessing Officer to refer all the cases whenever the aggregate value of international transactions is more than ₹ 5 Crores. These instructions are binding on all Assessing Officers. In these cases, there is no need for the Assessing Officer to make a prima facie opinion, except that he/she needs to examine the 3CEB Report to see the aggregate value of international transactions. In the instant case, as the aggregate value of international transactions based on 3CEB Report filed by the taxpayer before the Assessing Officer, exceeded ₹ 5 Crores, he referred the case to the TPO. Therefore, we see no infirmity in referring the matter to the TPO without forming a considered opinion . In the light of the above reasoning, the first legal point raised by the assessee, namely, the reference to the TPO by the Assessing Officer without forming a considered opinion does not stand the test of law and cannot be sustained, therefore this plea of the assessee is rejected - Following decision of Tally solutions Pvt Ltd. v. DCIT 2011 (9) TMI 196 - ITAT BANGALORE - Decided against assessee. Selection of comparables TPO conducted fresh search for comparables - Held that - The income arising from international transactions is to be computed having regard to arm s length price as per the guidelines laid down in section 92C of the Act by adopting one of the laid down methods, at the discretion of the competent authority - No ambiguity or absurd consequence of application of Chapter X to persons who are subject to the jurisdiction of taxing authorities in India nor do we find any statutory requirement of establishing that there is a transfer of profits outside India or that there is evasion of tax. Only condition precedent for invoking provisions of Chapter X is that there should be income arising from international transaction and such income has to be computed having regard to arm s length price - Chapter X cannot be made applicable to parties which are subject to the jurisdiction of the tax authorities in India, without there being any material to show transfer of profits outside India or evasion of tax between the two parties - Following decision of Coca Cola India Inc v. ACIT 2008 (12) TMI 67 - PUNJAB AND HARYANA HIGH COURT - Decided against assessee. From the assessee s T.P. Study and the MSA, it is clear that the assessee group deals with both product development and professional services and the assessee renders services to both the divisions, including product development. The MSA between Yodlee, USA and the assessee envisages product development by the assessee and this aspect does not appear to have been examined by the TPO. Adjustments under Rule 10B - Held that - Inspite this the TPO has given a detailed disposition on each of the risk involved in the risk profile and his detailed reasons as to why no adjustment is tenable in the case of the assessee - No evidence has been brought on record by the assessee before us, to controvert or to demonstrate that the findings of the TPO were incorrect and that the assessee had a case either for risk adjustment, or for that matter for adjustments for accounting practices, research and development expenditure or marketing expenditure. No case has been made out by the assessee by virtue raising this ground that any of the adjustments sought for are warranted. It cannot be anybody s case that an adjustment has to be necessarily granted whenever or wherever there is difference between the tested party and the comparables. An adjustment for risks etc is a valid principle for comparability, but whether this case entails such an adjustment would depend on the facts of the case. However, in the instant case mere claim for adjustments for risks, research and development expenditure, market expenditure etc serves no purpose as it is not backed by any cogent or clinching evidence. The onus is on the assessee to establish the need for adjustments on specific issues and how these issues affect comparability. In the instant case, the assessee has not discharged the onus and we are, therefore, constrained to dismiss this ground raised by the assessee - Decided against assessee.
Issues Involved:
1. Deduction under section 10B of the Income Tax Act. 2. Assessment and reference to Transfer Pricing Officer (TPO). 3. Fresh comparable search undertaken by the TPO. 4. Comparability analysis adopted by the TPO for determining arm's length price (ALP). 5. Erroneous data used by the AO/TPO. 6. Non-allowance of appropriate adjustments to the comparable companies. 7. Variation of 5% from the arithmetic mean. 8. Interest under section 234B of the Act. 9. Penalty under section 271(1)(c) of the Act. 10. Directions issued by the Dispute Resolution Panel (DRP). Issue-wise Detailed Analysis: 1. Deduction under section 10B of the Act: The assessee contended that telecommunication expenses and expenditure incurred in foreign currency should not be excluded from export turnover while computing the deduction under section 10B. The Tribunal found the issue covered in favor of the assessee by the Karnataka High Court's decision in Tata Elxsi Ltd., which held that if certain expenses are excluded from export turnover, they should also be excluded from total turnover. The Tribunal directed the AO not to exclude the expenses from export turnover, thus partly allowing the assessee's ground. 2. Assessment and reference to Transfer Pricing Officer (TPO): The assessee argued that the reference to the TPO was bad in law as the AO did not issue a show cause notice under section 92C(3) and did not record an opinion that the conditions of section 92C(3) were satisfied. The Tribunal found no merit in the claim of violation of natural justice and held that the AO's reference to the TPO was in accordance with CBDT Circular No.3 of 2003, which mandates reference for transactions exceeding Rs. 5 Crores. The Tribunal dismissed this ground. 3. Fresh comparable search undertaken by the TPO: The assessee objected to the TPO conducting a fresh benchmarking analysis and substituting the assessee's analysis. The Tribunal found no merit in the claim that the TPO needed to demonstrate tax avoidance for making adjustments. It upheld the TPO's right to conduct fresh analysis and dismissed this ground. 4. Comparability analysis adopted by the TPO for determining ALP: The assessee challenged the rejection of its TP Study and the comparables selected by the TPO. The Tribunal examined the comparability of specific companies: - Infosys Technologies Ltd.: Excluded due to significant differences in turnover and brand-related profits. - Accel Transmatic Ltd.: Remanded to the AO/TPO to determine if it meets the software development filter and is functionally comparable. - Tata Elxsi Ltd.: Excluded as it was engaged in niche product development services. - KALS Info Systems Ltd.: Remanded to the AO/TPO for fresh consideration of its functional comparability. - Megasoft Ltd.: Remanded to the AO/TPO to examine functional comparability and segmental margins. - Flextronics Software Systems Ltd.: Remanded to the AO/TPO to examine if the segment includes revenue from products and to compute segmental results. 5. Erroneous data used by the AO/TPO: The assessee contended that the TPO used non-contemporaneous data. The Tribunal held that the TPO is required to use contemporaneous data as per Rule 10B(4) and dismissed this ground. 6. Non-allowance of appropriate adjustments to the comparable companies: The assessee argued for adjustments for differences in accounting practices, marketing expenditure, R&D expenditure, and risk profile. The Tribunal found no evidence to support these claims and dismissed this ground. 7. Variation of 5% from the arithmetic mean: The assessee contended that the TPO erred in not granting the benefit of the 5% variation. The Tribunal noted the retrospective amendment to section 92C(2A) and held that the 5% benefit is not allowable, dismissing this ground. 8. Interest under section 234B of the Act: The Tribunal held that the charging of interest under section 234B is mandatory and consequential, directing the AO to recompute the interest while giving effect to the order. 9. Penalty under section 271(1)(c) of the Act: The Tribunal found the ground premature as the initiation of penalty proceedings does not cause grievance to the assessee and dismissed it as infructuous. 10. Directions issued by the Dispute Resolution Panel (DRP): The Tribunal did not specifically address this issue separately as it was covered under the other grounds discussed. Conclusion: The appeal was partly allowed, with directions to the AO/TPO for fresh consideration on specific issues and exclusion or inclusion of certain comparables based on detailed examination.
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