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TMI Blog2012 (5) TMI 153X X X X Extracts X X X X X X X X Extracts X X X X ..... mean. With a view to resolving this controversy, the Legislature sought to amend the proviso to section 92C(2) - Proviso is not a procedural piece of legislation and therefore, unless it is so clearly intended, the newly amended proviso cannot be understood to be retrospective in nature. In fact, it is a well-settled proposition that the statutory provisions as they stand on the first day of April of the assessment year must apply to the assessment of the year and the modification of the provisions during the pendency of assessment would not generally prejudice the rights of the assessee. - the proviso inserted by the Finance (No 2) Act, 2009 would not apply to an assessment year prior to its insertion. - no justification to deny the benefit of +/-5% to the assessee in terms of the erstwhile Proviso for the purposes of computing the ALP. - Decided in favor of assessee. - IT APPEAL NO. 1399 (BANG.) OF 2010 - - - Dated:- 29-2-2012 - N.K. SAINI, SMT. P. MADHAVI DEVI, JJ. Padamchand Khincha for the Appellant. Etwa Munda for the Respondent. ORDER N.K. Saini, Accountant Member This appeal by the assessee is directed against the order dated 06.10.2010 pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 16. not appreciating that deduction under section 10A should be allowed in respect of current year profits of the eligible undertaking uninfluenced by the results of other units/brought forward business loss/unabsorbed depreciation allowance. 17. levying interest under section 234B and section 234D. The appellant submits that each of the above grounds/sub-grounds are independent and without prejudice to one another. The appellant craves leave to add, alter, vary, omit, substitute or amend the above grounds of appeal, at any time before or at, the time of hearing, of the appeal, so as to enable the Income-tax Appellate Tribunal to decide the appeal according to law. 3. Ground Nos. 1 to 5 are general in nature, so do not require any comments on our part, while grievance of the assessee vide ground No.6 to 13 is that a flawed process had been adopted in computing the operating margin of comparables by considering the data which was not available to the assessee at the time of complying with the TP documentation requirements and by selecting inappropriate comparables and rejecting the appropriate comparables without providing complete information and oppo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee selected 9 companies as comparables. The arithmetic mean of these comparables was 10.59% and the assessee's operating margin on cost was 11.55%, which was above the arithmetic mean of comparable companies. Therefore, the international transactions were at arms' length. 7. It was contended that the TPO issued a show cause notice dated 30.04.09 and proposed to redetermine the ALP for software development services. The said notice contained remarks on assessee's study, new search methodology, comparables proposed (20) and copies of replies received u/s. 133(6) of the Act from other companies. In response to that, the assessee filed a detailed reply on 26.06.09 in which it raised various objections to the proposed action of the TPO. A reference was made to pages 129 to 301 of the assessee's PB. It was further stated that the TPO subsequently issued another notice on 20.07.09 which contained remarks on replies to the notices u/s. 133(6) of the Act yet to be received and objections of the assessee with respect to comparables considered by the TPO in the first show cause notice. In the said notice, the TPO proposed to adopt 14 companies as comparables and the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt difference in size of companies remaining unadjusted would impact comparability because size is an important facet of an enterprise level difference. It was also explained that comparable means something that is similar or equivalent and the companies operating on a large scale are having benefit from economies of scale, higher risk taking capabilities robust global delivery and business models as opposed to the smaller or medium sized companies. Therefore two companies of dissimilar size could not be assumed to earn comparable margins. However, impact of difference in size could be removed by a quantitative adjustment to the margin or price being compared, if it was possible to do so reasonably accurately, otherwise uncontrolled transactions may have to be rejected from comparability exercise. Reliance was placed on the following case laws: (i) Dy. CIT v. Quark Systems (P.) Ltd. [2010] 38 SOT 307 (Chd.) (SB) (ii) Egain Communication (P.) Ltd. v. ITO [2009] 118 ITD 243 (Pune) (iii) Sony India (P.) Ltd. v. Dy. CIT [2008] 114 ITD 448 (Delhi) (iv) Dy. CIT v. Indo American Jewellery Ltd. [2010] 41 SOT 1 (Mum.) (v) Agnity India Technologies (P.) Ltd. IT A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act by the TPO, the ld. counsel for the assessee submitted that the assessee was provided notices and replies received in a CD and that the TPO proposed to accept/reject those companies as comparables based on the responses received from those companies to the notices u/s. 133(6) of the Act and in case of variance between reply u/s. 133(6) of the Act in preference to the Annual Report of the companies which is audited by professional qualified Chartered Accountant and approved by Board of Directors, reply u/s. 133(6) of the Act was given preference, as such the process adopted for issuance of notice and use of such information was inappropriate because the TPO issued notices to 165 companies but it was not clear how those companies were selected since the basis of selection for issuing notices u/s. 133(6) of the Act was not provided to the assessee, therefore the entire process lacked transparency and fairness, as such the arbitrary approach of the TPO was clear when one looks at the selection of M/s. Megasoft Ltd. as comparable because the said company was rejected on the ground that it fails RPT filter and employee cost filter. It was pointed out that the TPO had stated that not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the specified date, which clearly established that power u/s. 133(6) of the Act was not properly exercised by the TPO who used the power to gather information which came into public domain after the specified date. It was contended that the power u/s. 133(6) of the Act could not have been used to obtain information to enable selection of comparables because the data has to be in existence by the specified date i.e., 30th Nov. as recognized by the amendment made to definition of specified date by the Finance Act, 2011 wherein it has been clarified that the date was extended as sufficient data was not available under the existing specified date to make the comparison meaningful. Therefore, extension of specified date was a recognition as also acceptance by the Legislature that the comparability analysis as also the determination of ALP has to be on the basis of data that was available in public domain by the specified date and if subsequent information was permitted to be used, then the ALP would remain fluid which could lead to ever changing ALP. It was also contended that the law does not expect a person to do an impossible thing as per the maxim lex non cogit ad impossibilia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egment level were higher. Therefore the approach of the TPO was arbitrary, as such the said company, M/s. Megasoft Ltd., was to be rejected as a comparable. Reliance was placed on the following case laws:- (i) Egain Communication (P.) Ltd. (supra). (ii) Quark Systems (P.) Ltd. (supra) (iii) Sap Labs India (P.) Ltd. v. Asstt. CIT [2011] 44 SOT 156/[2010] 8 taxmann.com 207 (Bang.) (iv) ITO v. Saunay Jewels (P.) Ltd. [2010] 42 SOT 4 (Mum.) (URO) (v) Mentor Graphics (Noida) (P.) Ltd. v. Dy. CIT [2007] 109 ITD 101 (Delhi) 14. It was pointed out that another comparable considered by the TPO and the DRP was KALS which was considered as a comparable by adopting the figures supplied in the information u/s. 133(6) of the Act where the said company contended that it was a purely software development company, contrary to the factual information as available in the annual report of the said company which mentions under the head 'inventories' that computer spares were charged to consumption in the year of purchase and the company was engaged in providing training. In the said segment i.e., training, consistent losses were reported and in the year under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hnologies (P.) Ltd. ( supra ) . It was also contended that the TPO rejected certain comparables selected by the assessee and had the analysis been modified incorporating the comparables selected by the assessee, the resulted arms' length price would increasingly skew in favour of the assessee. 17. In his rival submissions, the ld. CIT(DR) strongly supported the order passed by the AO and reiterated the observations made in the assessment order. He further submitted that the DRP only after considering the objections of the assessee worked out the arms' length price, therefore the addition made by the AO was justified. 18. We have considered the submissions of both the parties and carefully gone through the material available on record. In the present case, it is noticed that the assessee selected 10 comparables out of which 2 viz., Visual Soft Technologies Ltd. and VJIL Consultancy Ltd. were rejected by the TPO. However, the TPO included another company M/s. Infosys Technologies Ltd. which was claimed to be 906 times bigger than the assessee. In our opinion the said company being significantly dissimilar in size should not have been considered as comparable. In t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 133(6) of the Act and were sought to be used against the assessee, if the assessee so desires. 20. The next issue vide ground No.14 relates to the benefit of +/- 5% range mentioned in the proviso to section 92C(2) of the Act. 21. The facts related to this issue in brief are that the assessee had international transactions during the financial year 2005-06 and the case was referred to the TPO to determine the ALP. The TPO vide order dated 26.10.2009 stated that an adjustment of ₹ 1,19,16,091 was required to be made to the income of the assessee company, consequent to determination of the ALP. The AO forwarded the draft order dated 17.12.09 to the assessee to file its objections before the DRP. The DRP directed the AO to complete the assessment after taking into consideration the detailed discussion on various issues vide directions under sub- sections (5) (8) of section 144C of the Act dated 17.09.10. The DRP directed to modify the assessment order after reworking the correct margin at 51.73% as against 52.74% adopted in the draft assessment order. The AO adopted the adjustment at ₹ 1,18,78,437 as against earlier adjustment of ₹ 1,19,16,091. Now the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... material on record, it is noticed that a similar issue has been adjudicated by the ITAT 'A' Bench Bangalore having the same constitution in the case of Tatra Vectra Motors Ltd. ( supra ) wherein the relevant finding has been given in paras 12 to 17 of the order dated 31.01.2012, which read as under: 12. We have considered the submissions of both the parties and carefully gone through the material available on record. In the present case, the assessee has not disputed the adjustments u/s. 92CA of the Act, but challenging the working of ALP without giving benefit of the option available under the erstwhile proviso to section 92C(2) of the Act, so it becomes relevant to discuss the provisions contained in the erstwhile proviso to section 92C(2) of the Act, which was inserted by Finance Act, 2002 w.e.f. 1-4-2002 and reads as under: Provided , that where more than one price is determined by the most appropriate method, the arm's length price shall be taken to be the arithmetical mean of such prices, or, at the option of the assessee, a price which may vary from the arithmetical mean by an amount not exceeding five per cent of such arithmetical mean. 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch benefit. In the case of an assessee who exercises the option and accepts the arm's length price even exceeding 5 per cent of the arithmetic mean determined by the tax authority as correct and is ready to pay tax on the difference between the price disclosed by him and the arm's length price the application of the proviso is not excluded. The legal position cannot be different in a case where minor variation of 5 per cent is not accepted and the arm's length price is further challenged in appeal. The mere fact of acceptance or non-acceptance of the arithmetic mean cannot be taken to be the determining factor relating to the right to contest the arm's length price in appeal. Such inference is not supported by the language of the provision. Both in the first as also in the second limb, the implications of the determined the arm's length price are the same except for the marginal benefit allowed to the assessee under the second limb. Hence, the second limb of the proviso is applicable even to cases where the assessee intends to challenge the arm's length price taken as arithmetic mean and determined through the most appropriate method. Therefore, the benefit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of the assessee, a price which may vary from the arithmetical mean by an amount not exceeding five percent of such arithmetical mean. As per the said Proviso, an option is available to the assessee for adjustment of +/-5% variation for the purposes of computing ALP. As per the Proviso, where more than one price is determined by the most appropriate method, the arm's length price shall be taken to be the arithmetical mean of such prices or at the option of the assessee, a price which may vary from the arithmetical mean by an amount not exceeding 5% of such arithmetical mean. The point made out by the assessee is based on the latter part of the Proviso whereby an option is given to the assessee to take an ALP which may vary from the arithmetical mean by an amount not exceeding 5% of such arithmetical mean. Firstly, the claim of the Revenue is that such benefit is not available to the present assessee, because the price of international transaction disclosed by the assessee exceeds the margin provided in the Proviso. This aspect of the controversy, in our view, is no longer germane in view of the plethora of decisions of our co-ordinate Benches, namely, Sony India (P) Lt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (No. 2) Act, 2009 with effect from 1.10.2009. The Explanatory Notes to the provisions of Finance (No 2) Act, 2009 contained in circular No 5 of 2010 (supra) provides the objective behind the amendment of the Proviso. The Legislature noticed the conflicting interpretation of the erstwhile proviso by the assessee and the income-tax Department. The assessee's view was that the arithmetical mean should be adjusted by 5% to arrive at ALP, whereas the departmental view was that no such adjustment is required to be made if the variation between the transfer price and the arithmetical mean is more than 5% of the arithmetical mean. With a view to resolving this controversy, the Legislature sought to amend the proviso to section 92C(2), which has been reproduced by us in the earlier part of this order. In the said Circular, it has also been elaborated that the above amendment has been made applicable with effect from 1.4.2009 and will accordingly apply in respect of assessment year 2009-10 and subsequent years. In any case, the Proviso contains a prescription to determine the ALP and quite clearly it is a substantive provision encompassing the eventual determination of an assessee's ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pending before the TPO on or after such date, irrespective of the assessment year involved and, therefore, in the instant case the benefit of the erstwhile proviso cannot be extended to the assessee. We have carefully pondered over the assertion made by the appellant that the Corrigendum is untenable in the eyes of law. Firstly, the said corrigendum does not bring out any preamble so as to throw light on the circumstances and the background in which the same has been issued. Secondly, it is well understood that the Explanatory Notes to the provisions of a Finance Act passed by the Parliament seeks to explain the substance of the provisions of the Act as intended by the Legislature. In fact, the Hon'ble Supreme Court in the case of K.P Varghese v. ITO 131 ITR 597 (Ker) emphasized the sanctity of the statements contained in the Explanatory Notes of the provisions and stated that the interpretation placed in such documents is binding interpretation of law. The contents of the Corrigendum are quite inexplicable. Notwithstanding the aforesaid and without going into the validity of the Corrigendum dated 30.9.2010 (supra), we are of the view that the same would not operate to the detr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allow the benefit of +/- 5% to the assessee while computing the ALP. 27. Vide ground No.15, the grievance of the assessee relates to the action of the Assessing Officer in excluding the internet charges from export turnover while computing deduction u/s. 10A of the Act. 28. The facts related to this issue in brief are that the AO during the course of assessment proceedings noticed that the assessee debited a sum of ₹ 13,50,250 in the profit loss account towards communication charges and the same had not been reduced from the export turnover for the purposes of computing deduction u/s. 10A of the Act. The AO also noticed that the said communication charges included internet charges amounting to ₹ 2,67,047. The contention of the assessee before the AO was that the provisions of section 10A of the Act have been incorporated with an objective of providing incentive to software industries and the proposal of excluding telecommunication charges from the export turnover and then computing deduction u/s. 10A of the Act would accordingly frustrate the object behind the insertion of section 10A of the Act, as income of the assessee derived from export of services wou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interpreted in the same manner. Thus, the two items of expenses referred to in the definition of export turnover cannot form part of the total turnover since the receipts by way of recovery of such expenses cannot be said to represent consideration for the goods exported since total turnover is nothing but the aggregate of the domestic turnover and the export turnover. In the formula prescribed by section 10B(4) the figure of export turnover has to be the same both in the numerator and in the denominator of the formula. It follows that the total turnover cannot include the two items of expenses recovered by the assessee and referred to in the definition of export turnover . 32. The aforesaid decision had been considered and affirmed by the Hon'ble jurisdictional High Court in the case of Tata Elxsi Ltd. ( supra ) wherein it has been held that for the purpose of computation of deduction u/s. 10A of the Act, if any expenditure is excluded from the export turnover, the same has to be excluded from the total turnover also. A similar view has also been taken by the Hon'ble Bombay High Court in the case of CIT v. GEM Plus Jewellery India Ltd. [2010] 194 Taxman 19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee under the head profits and gains of business or profession has to be set off against the profits and gains if any, of any business or profession carried on by such assessee. Therefore, as the profits and gains under Section 10-A is not to be included in the income of the assessee at all, the question of setting off the loss of the assessee of any profits and gains of business against such profits and gains of the undertaking would not arise. Similarly, as per Section 72(2), unabsorbed business loss is to be first set off and thereafter unabsorbed depreciation treated as current years depreciation under Section 32(2) is to be set off. As deduction under section 10-A has to be excluded from the total income of the assessee, the question of unabsorbed business loss being set off against such profit and gains of the undertaking would not arise. In that view of the matter, the approach of the assessing authority was quite contrary to the aforesaid statutory provisions and the appellate Commissioner as well as the Tribunal were fully justified in setting aside the said assessment order and granting the benefit of Section 10-A to the assessee. Hence, the main substantial question o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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