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2022 (3) TMI 1495 - AT - Income TaxTP Adjustment - referring the transaction to the TPO for determining the ALP - mandatory conditions have not being satisfied or complied with by the AO while making a reference to the TPO - HELD THAT - Once an assessee enters into an international transaction, the AO has to make a reference to the TPO and the fact that he made a reference in the present case can only go to show that the AO is satisfied that it was necessary or expedient to make a reference to the TPO for determination of ALP of international transaction entered into by an assessee. The order passed in section 92CA of the Act clearly spells out that prior approval of the CIT, Karnataka Central Bengaluru, dated 10.09.2008 has been obtained by the AO before making a reference under section 92CA of the Act to the TPO. In these circumstances, we are of the view that there is no merit in ground No.3.1 raised by the assessee. Consequently, grounds 3.1 is held to be without any merit and is dismissed. Section 92CA(1) requires an Assessing officer to refer an International Transaction for determination to the TPO if he considers it necessary or expedient to refer the mater to the TPO - The exercise of finding out whether any income arises and/or is affected or potentially arises and/or is affected by the International Transaction would certainly be a factor to determine whether or not it is necessary or expedient to refer the matter to the TPO. Since no objection was raised by the assessee to the applicability of Chapter X then the prima facie view of the Assessing officer would be sufficient before referring the transaction to the TPO for determining the ALP. Consequently, there is no merit in Grd.No.3.2 raised by the Assessee. Validity of search action - We do not find any merit in ground Nos.10 as without calling for the reason to believe recorded u/s.132 of the Act before issuing an authorization to search a person and property, one cannot come to a conclusion whether the condition precedent for issue of warrant of authorization to search u/s.132 of the Act are satisfied or not. No attempt by appellant company to shift profits outside of India - Special Bench of the ITAT, Bengaluru, in the case of Azetec Softech Technology 2007 (7) TMI 50 - ITAT BANGALORE has laid down proposition that there is no requirement of establishing that there has been an attempt to shift profits out of India before making a reference to the TPO and that before making a reference to the TPO, there is no requirement of affording assessee opportunity of being heard. Powers of AO to examine the issue without regard to ALP in the proceedings under section 153A - Ground raised by the assessee are without any merit because the assessee did not file a transfer pricing analysis alongwith the returns filed under section 139(1) of the Act and therefore the AO was well within his powers to examine the issue without regard to ALP in the proceedings under section 153A of the Act. These grounds are accordingly dismissed. Determination of ALP in respect of the international transaction of rendering software development services by the assessee to its AE - Comparable selection - HELD THAT - Four comparable companies whose turnover is above Rs.100 crores should be excluded from the list of comparable companies. Remaining six companies be excluded on the ground that these companies are not functionally comparable. Computation of deduction u/s10A - AO reduced delivery charges from the export turnover without excluding the same from the total turnover - HELD THAT - This issue is no longer res integra and has been settled by the Hon ble Karnataka High Court in the case of Tata Elxsi 2011 (8) TMI 782 - KARNATAKA HIGH COURT wherein it was held that whatever is excluded from the Export turnover should also be excluded from the total turnover. Moreover, the order of the Hon ble Karnataka High Court has been upheld by the Hon ble Supreme Court in the case of CIT v. HCL Technologies Ltd. 2018 (5) TMI 357 - SUPREME COURT
Issues Involved:
1. Validity of the reference to Transfer Pricing Officer (TPO). 2. Determination of Arm's Length Price (ALP) for international transactions. 3. Application of turnover filter in selecting comparable companies. 4. Exclusion of delivery charges from export turnover under Section 10A. 5. Levy of interest under Sections 234(A), (B), and (C). 6. Admissibility of additional grounds raised by the assessee. 7. Legal grounds challenging the search proceedings and transfer pricing proceedings. Issue-wise Detailed Analysis: 1. Validity of the Reference to TPO: - The assessee contended that the reference to the TPO was made without satisfying mandatory conditions and without providing an opportunity to be heard, violating principles of natural justice. - The tribunal found no merit in these grounds, stating that once an international transaction is involved, the AO is mandated to refer the matter to the TPO. The AO had obtained prior approval from the CIT before making the reference, fulfilling the necessary conditions. 2. Determination of ALP for International Transactions: - The TPO rejected the assessee's Transfer Pricing (TP) analysis and selected 17 comparable companies with an average profit margin of 29.30%. - The tribunal addressed various grounds raised by the assessee regarding the selection of comparables and the methodologies used. - The tribunal directed the exclusion of companies with turnovers exceeding Rs.100 crores, aligning with the consistent stand taken in previous cases. - The tribunal also remanded the issue of functional comparability for certain companies back to the TPO/AO for fresh consideration. 3. Application of Turnover Filter in Selecting Comparable Companies: - The tribunal reiterated the importance of applying the turnover filter, stating that companies with significantly higher turnovers should not be compared with those having much lower turnovers. - The tribunal excluded companies like Infosys Ltd., L&T Infotech Ltd., and Satyam Computer Services Ltd., among others, from the list of comparables due to their high turnovers. 4. Exclusion of Delivery Charges from Export Turnover under Section 10A: - The tribunal directed that delivery charges should be excluded from both the export turnover and the total turnover while computing the deduction under Section 10A. - This decision was based on the precedent set by the Karnataka High Court in the case of Tata Elxsi, which was upheld by the Supreme Court in CIT v. HCL Technologies Ltd. 5. Levy of Interest under Sections 234(A), (B), and (C): - The tribunal did not find merit in the assessee's challenge to the levy of interest under Sections 234(A), (B), and (C). 6. Admissibility of Additional Grounds Raised by the Assessee: - The tribunal admitted the additional grounds raised by the assessee, which were purely legal and could be adjudicated based on the existing record. - These grounds included challenges to the validity of the search proceedings and the transfer pricing proceedings. 7. Legal Grounds Challenging the Search Proceedings and Transfer Pricing Proceedings: - The tribunal dismissed the grounds challenging the validity of the search proceedings, citing the statutory amendment to the law that precludes the tribunal from examining the validity of search actions. - The tribunal also dismissed the ground that there was no requirement to establish an attempt to shift profits out of India before making a reference to the TPO. Separate Judgments Delivered by Judges: - The order was delivered by Shri N. V. Vasudevan, Vice President, and Shri B. R. Baskaran, Accountant Member, without separate judgments. Conclusion: - The appeals were partly allowed, with directions to the AO to recompute the ALP and deductions under Section 10A in accordance with the tribunal's findings and after providing the assessee an opportunity to be heard.
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