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TMI Blog2012 (5) TMI 165X X X X Extracts X X X X X X X X Extracts X X X X ..... reasonable opportunity of being heard to the assessee. - Matter remanded back. Adjustment where price variation falls within +/- 5% range of arithmetical mean of the comparables. - held that:- it appears that the benefit of +/- 5% adjustment has not been given to the assessee for the reason (as mentioned by the TPO) that sales made by the assessee to third parties were higher in comparison to the rates of sale by AEs to the assessee. But nothing is brought on record to substantiate the aforesaid observations of the TPO. - Since the facts of the present case are similar to the facts involved in the aforesaid referred to case of Tatra Vectra Motors Ltd. [2012 (4) TMI 359 - ITAT BANGALORE], so respectfully following the said order, we direct the AO to allow the benefit of +/- 5% to the assessee while computing the ALP. - IT APPEAL NO. 1343 (BANG.) OF 2010 - - - Dated:- 30-3-2012 - N.K. SAINI, GEORGE GEORGE K., JJ. For the Appellant: Shri Mahaveer Jain For the Respondent: Shri Etwa Munda ORDER N.K. Saini, Accountant Member This appeal by the assessee is against the order dated 06.10.2010 of the Assessing Officer passed u/s. 143(3) r.w. sec. 144C of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 'ble DRP has erred in upholding the same. f. The learned TPO has erred on law and facts by arbitrary adoption of the additional filters in the search process carried out by him, particularly the 'employee cost filter' and Hon'ble DRP has erred in upholding the same. g. The Hon'ble DRP has grossly erred on facts and law by implicitly accepting the comparables having abnormal / super profits selected by the learned TPO. h. The learned TPO has erred on facts and law by exercising his powers under section 133(6) to obtain selective information which was not available in the public domain and by relying on the same for comparability purposes, this being against the principals of natural justice and contrary to the OCED guidelines that advocate against the use of secret comparables and Hon'ble DRP has erred in upholding the same. i. The learned TPO has erred on law by using single year data for computation of margin of comparable companies by rejecting the multiple year data used by the Appellant and Hon'ble DRP has erred in upholding the same. j. The learned TPO has erred on facts by wrong computation of NCP, related pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so these are dismissed as not pressed. 4. Vide ground No. 1, the assessee contended that the communication expenses are to be reduced from total turnover as well as from the export turnover. 5. The facts relating to this issue in brief are that the assessee filed return of income on 30.11.2006 declaring an income of ₹ 40,911after claiming deduction u/s. 10A of the Income-tax Act, 1961 [hereinafter referred to as the Act in short ] amounting to ₹ 1,04,22,814. The said return was processed u/s. 143(1) of the Act. Later on, the case was selected for scrutiny. The Assessing Officer during the course of assessment proceedings noticed that the assessee has deducted a sum of ₹ 37,57,530 to the profit loss account towards communication expenses. The AO also noticed that the assessee had reduced an amount of ₹ 19,60,808 for lease line charges from export turnover as well as from total turnover for the purpose of computing deduction u/s. 10A of the Act. The AO held that the lease line charges of ₹ 19,60,808 attributable to the delivery of software outside India was to be reduced from export turnover only. He accordingly reworked the deduction u/s. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... present consideration for the export of the computer software or articles or things. Thus the expression total turnover which is not defined in section 10B should also be 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. It has further been held that - The common thread running through sections 80HHC, 80HHE and 80HHF is that they are all provisions granting relief to the assessees in respect of profits derived from export. The difference between Chapter III in which section 10B falls, and Chapter VI-A in which these sections fall, is that while t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... siness of the undertaking in computing the profits derived from export. In other words, the profits of the business of the undertaking are multiplied by the export turnover in respect of the articles, things or, as the case may be, computer software and derived by the total turnover of the business carried on by the undertaking. The expression total turnover has not been defined at all by Parliament for the purposes of section 10A. However, the expression export turnover has been defined. The definition of export turnover excludes freight and insurance. Since export turnover has been defined by Parliament and there is a specific exclusion of freight and insurance, the expression export turnover cannot have a different meaning when it forms a constituent part of the total turnover for the purposes of the application of the formula. A construction of a statutory provision which would lead to an absurdity must be avoided. Moreover, a receipt such as freight and insurance which does not have any element of profit cannot be included in the total turnover. Freight and insurance charges do not have any element of turnover. For this reason in addition, these two items would have to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s a matter of correct statutory interpretation. Any other interpretation would lead to an absurdity. If the contention of the Revenue were to be accepted, the same expression viz. 'export turnover' would have a different connotation in the application of the same formula. The submission of the Revenue would lead to a situation where freight and insurance, though these have been specifically excluded from 'export turnover' for the purposes of the numerator would be brought in as part of the 'export turnover' when it forms an element of the total turnover as a denominator in the formula. A construction of a statutory provision which would lead to an absurdity must be avoided. Moreover, a receipt such as freight and insurance which does not have any element of profit cannot be included in the total turnover. Freight and insurance charges do not have any element of turnover. For this reason in addition, these two items would have to be excluded from the total turnover particularly in the absence of a legislative prescription to the contrary - CIT v. Sudarshan Chemicals Industries Ltd. (2000) 163 CTR (Bom.) 596 : (2000) 245 ITR 769 (Bom.) applied; CIT v. Lakshmi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee filed its objections before the Dispute Resolution Panel (DRP) on 15.01.2010 and the DRP directed the AO to complete the assessment after taking into consideration the detailed discussion on various issues vide its directions dated 27.09.2010 issued under sub-sec. (5) of section 144C r.w. sub-sec. (8) of section 144C of the Act. The DRP directed the AO to modify the assessment order after reworking the Profit Level Indicator (PLI) at 51.73% as against 52.74% adopted in the draft assessment order. The AO thereafter requested the ADIT (TP)-IV to rework the PLI as per the directions of the DRP. Thereafter the DCIT(TP)-IV vide letter dated 04.10.2004 indicated the correct amount of adjustment to be adopted as ₹ 98,20,024 as against the earlier adjustment amount of ₹ 98,83,653. The AO accordingly completed the assessment and worked out the adjustment u/s. 92CA of the Act as under: Cost incurred for software development activity ₹ 11,19,03,664/- Arms length mark up on cost (arithmetic mean PLI) 18.80% of the Operating Cost Arms Length Income @ 118.80% of cost ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that the TPO rejected all the assessee's comparables except 3 comparables and selected fresh 17 comparable companies and based on the NCP of the above 20 comparable companies arrived at an adjusted arithmetic mean of 18.86% and consequently proposed to adjustment of ₹ 98,83,653 to the arms' length price. It was contended that the TPO while computing the NCP made arithmetical errors and when the assessee brought to his notice, it was not considered while passing the transfer pricing order. The following instances were quoted:- Sl. No. Company Name NCP as per TPO Revised NCP Remarks 1. Sasken Communication Technologies Ltd (Seg.) 13.90% 13.44% Amortisation of expenses in the segmental P L is not allocated 2. Tata Elxsi Ltd. (Seg.) 27.65% 22.75% 'Unallocated expenditure' in the segmental P L is not allocated 17. It was further submitted that the TPO while selecting the comparable viz., Meg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould come down from 17.28% to 14.13% before giving effect of working capital adjustment. 20. It was explained that the TPO had given adjustment for working capital to the extent of 1.89% of NCP, however if the 8 companies are rejected, then the working capital adjustment would work out to 2.18% and consequently the final NCP after considering the effect of working capital adjustment would be computed as per the following details:- Sl Company Name Final NCP 1. Bodhtree Consulting Ltd. 15.99% 2. Geometric Ltd. 6.70% 3. R S Software (India) Ltd. 15.69% 4. Kals Information Systems Ltd. 39.75% 5. R Systems International Ltd. 22.20% 6. Aztecsoft Ltd. 18.09% 7. Mediasoft Solutions Pvt. Ltd. 6.29% 8. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d necessary to refer the matter to the TPO for computation of the ALP. It was further contended that the TPO considered the fresh search for comparability analysis as on 03.12.2008 which was beyond the date of compliance i.e., 31.10.2006 resulting in impossibility of performance and against the premise of maintenance of contemporaneous documentation and also exercised his power u/s. 133(6) of the Act to obtain selective information which was not available in the public domain. Furthermore, the TPO used single year data for computation of margin of comparable companies and rejected the multiple year data used by the assessee. 24. It was further contended that the TPO while deciding upon the sales turnover as a quantitative filter had only considered minimum turnover as being valid and had not kept any limit on the turnover for comparability which had led to a situation where the comparable set as identified by the TPO consisted of companies which had a turnover range from ₹ 1.02 crores (Lucid Software Ltd.) to ₹ 9028 crores (Infosys Technologies Ltd.) as against the turnover of the assessee at ₹ 12.29 crores, which indicated that the TPO had overlooked one of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the assessee had to incur a lot of traveling expenses on training its staff in USA and also incurred heavy expenditure on training and recruitment, which were peculiar only to a start-up company and not to be found in any established company, if the start-up expenses were excluded, then the NCP of the assessee would have been 19.80%, but the TPO ignored the start-up cost. It was pointed out that the TPO rejected certain comparables selected by the assessee, had the analysis been modified incorporating the comparables selected by the assessee, the result ALP would increasingly skew in favour of the assessee. 25. Reliance was placed on the following case laws: (a) Dy. CIT v. Quark Systems (P.) Ltd. [2010] 38 SOT 307 (Chd.) (SB) (b) DHL Express (India) (P.) Ltd. v. Asstt. CIT [2011] 46 SOT 379/11 taxmann.com 40 (Mum.) (c) Dy. CIT v. Deloitte Consulting India (P.) Ltd. [2011] 12 taxmann.com 500 (Hyd.) (d) Agnity India Technologies (P.) Ltd. [IT Appeal No. 3856 (Delhi) of 2010] (e) CIT v. Rakhra Technologies (P.) Ltd. [2011] 203 Taxman 154/15 taxmann.com 266 (Punj. Har.) (f) South Eastern Coalfields Ltd. v. Jt. CIT [2003] 85 ITD 608 (Nag.) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d subsequently issued another notice on 20.07.09 and proposed to adopt 14 companies as comparables, but in the final order the TPO selected 22 companies as comparables. In other words, 8 additional companies were considered as comparables apart from those which were proposed in the notice dated 20.07.09, copy of which is placed at pages 305 to 355 of the assessee's compilation. It therefore appears that new companies were adopted by the TPO as comparables without affording opportunity to the assessee to present its objections to their adoption. It is well settled that nobody should be condemned unheard as per the maxim audi alteram partem, but in the present case nothing is brought on record to substantiate that the TPO/AO while adopting additional comparables had provided opportunity of being heard to the assessee. Therefore this issue deserves to be set aside to be decided afresh at the level of the Assessing Officer. For the aforesaid view, we are fortified by the order dated 31.01.2012 of the ITAT 'A' Bench Bangalore in the case of Genesis Microchip (I) Pvt. Ltd., Bangalore v. DCIT, Circle 11(3), Bangalore in ITA No. 1254/Bang/2010 for the A.Y. 2006-07. 19. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ustment at ₹ 98,20,024 as against the earlier adjustment of ₹ 98,83,653. Now the assessee is in appeal. 31. The ld. counsel for the assessee submitted that the assessee should have been given a standard deduction of 5% as provided under proviso to section 92C(2) of the Act before making adjustment for the transfer price. Reliance was placed on the following case laws: 1. Genisys Integrating Systems (India) (P.) Ltd. (supra) 2. Tatra Vectra Motors Ltd. [IT Appeal No. 1284/Bang/2010, dated 31-1-2012]. 32. The ld. counsel for the assessee contended that the contention of the assessee was rejected by the DRP on the ground that amendment to proviso to section 92C was clarificatory in nature and therefore retrospective in effect. It was contended that the amendment to proviso to section 92C was not retrospective as clarified by the CBDT by way of letter No.F.142/13/2010-SO(TPL) dated 30.09.2010. It was further contended that a deeming provision has been created to adopt an arms' length price if the price actually undertaken by the assessee does not exceed 5% of the amount at which international transaction has actually been undertaken instead of reck ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the case of Sony India Pvt. Ltd. v. DCIT (2009) 315 ITR (AT) 150 has held as under: The proviso to section 92C(2) of the Act consists mainly of two parts: (a) where more than one price is determined by the most appropriate method, then the arm's length price shall be taken to be the arithmetical mean of such price; or (b) at the option of the assessee, a price which may vary from the arithmetical mean by an amount not exceeding 5 per cent of such arithmetical mean. The first limb of the proviso has general application. There is no option with nor any sort of concession allowed to the assessee. The arm's length price so determined may be accepted or contested by the assessee or by any aggrieved person in accordance with the statutory provisions. It is a statutory levy without any option. The second limb of the proviso gives an option to the assessee to take the arm's length price which may vary from the arithmetic mean by an amount not exceeding 5 per cent of such arithmetic mean. The word option is synonymous with choice or preference . Therefore, it is the choice of the assessee to take the arm's length price with a marginal benefit and not t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not allow the benefit of the adjustment as provided in the proviso to section 92C(2) of the Act and the contention of the ld. CIT(DR) was that since the impugned assessment was made after 1.10.2009, the amended proviso to section 92C(2) of the Act shall apply in this case, which are applicable from w.e.f. 1.10.2009 and shall accordingly apply to the cases in which the proceedings were pending before the TPO on or after such date. Therefore, the benefit of +/- 5% intended by the erstwhile proviso to section 92C(2) of the Act was not available to the assessee. Accordingly the ld. CIT(DR) had strongly defended the assessment framed by the AO and his method of determining the ALP. 16. As regards to the applicability of the amended provisions in proviso to section 92C(2) of the Act which is applicable w.e.f. 1.10.2009 is concerned, it is noticed that this issue has been adjudicated by the ITAT Pune Bench A , Pune in ITA No.1350/PN/2010 in the case of Starnet Networks (India) P. Ltd. v. DCIT (supra), wherein the relevant findings has been given in paras 20 to 23 of the order dated 03.10.2011 and read as under: 20. We have carefully considered the rival submissions. In this c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 09 which 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: Provided further that if the variation between the arm's length price so determined and price at which the international transaction has actually been undertaken does not exceed five per cent of the latter, the price at which the international transaction has actually been undertaken shall be deemed to be the arm's length price. The case set up by the Revenue is that the amended Proviso shall govern the determination of ALP in the present case, inasmuch as the amended provisions were on statute when the proceedings were carried on by the Transfer Pricing Officer (TPO). As per the Revenue, the amended Proviso would have a retrospective operation and in any case, would be applicable to the proceedings which are pending before the TPO on insertion of the amended Proviso, which has been inserted by the Finance (No. 2) Act, 2009 with effect from 1.10.2009 and, in this case, the TPO has passed his order on 30.10.2009. The learned Departmental Representative has also ref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has been stated to be with effect from 1.4.2009 so as to apply in respect of assessment year 2009-10 and subsequent years. In this regard, we also find that the Delhi Bench of the Tribunal in the case of ACIT v. UE Trade Corporation India (P) Ltd. vide ITA No 4405(Del)/2009 dt 24.12.2010 has observed that the proviso inserted by the Finance (No 2) Act, 2009 would not apply to an assessment year prior to its insertion. In this view of the matter, we therefore find no justification to deny the benefit of +/-5% to the assessee in terms of the erstwhile Proviso for the purposes of computing the ALP. 23. However, before parting we may also refer to a Corrigendum dated 30.9.2010 by the CBDT by way of which para 37.5 of the circular No 5/2010 (supra) has been sought to be modified. The Corrigendum reads as under: Corrigendum In partial modification of Circular No. 5/2010 dated 03.6.2010, (i) In para 37.5 of the said Circular, for the lines the above amendment has been made applicable with effect from 1st April, 2009 and will accordingly apply in respect of assessment year 2009-10 and subsequent years. the following lines shall be read; the above amen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laim of the benefit of +/-5% in terms of the erstwhile proviso to section 92C(2) of the Act. In coming to the aforesaid, we have been guided by the parity of reasoning laid down in the judgments of the Hon'ble Bombay High Court in the cases of BASF (India) Ltd. v. CIT 280 ITR 136 (Bom); Shakti Raj Films Distributors v. CIT 213 ITR 20 (Bom); and, Unit Trust of India Anrs. v. ITO 249 ITR 612 (Bom). The Hon'ble High Court has opined in the case of BASF (India) Ltd. (supra) that the circulars which are in force during the relevant period are to be applied and the subsequent circulars either withdrawing or modifying the earlier circulars have no application. Moreover, the circulars in the nature of concession can be withdrawn prospectively only as held by the Hon'ble Supreme Court in the case of State Bank of Travancore v. CIT 50 CTR 102 (SC). Considering all these aspects, we therefore find no justification in the action of the lower authorities in disentitling the assessee from its claim for the benefit of +/-5% to compute ALP in terms of the erstwhile proviso to section 92C(2) of the Act. We order accordingly. 17. We therefore considering the totality of the facts ..... X X X X Extracts X X X X X X X X Extracts X X X X
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