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TMI Blog2012 (8) TMI 83X X X X Extracts X X X X X X X X Extracts X X X X ..... re outside India should be reduced from export turnover while computing the deduction u/s 10A of the Act; (2) On the facts and in the circumstances of the case and in law, the learned AO has erred in law by not considering that, if the communication expenses (i.e. lease line charges) attributable to the delivery of computer software outside India are reduced from export turnover, an equal amount should also be reduced from total turnover for computing the deduction u/s 10A of the Act. The lower authorities (the AO, TPO and DRP) have erred in - (3) making an addition of Rs. 2.82 crores to the total income on account of adjustment in Arm's Length Price (ALP) of the software development services transaction entered with its Associate Enterprise (AE); (4) conducting afresh economic analysis for determination of ALP with regard to international transaction disowning the analysis under taken by the assessee; (5) ignoring the fact that the assessee has been availing tax holiday u/s 10A of the Act and there was no intention to shift the profit base out of India w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nalysis; (13) computing the ALP without giving benefit of +/- 5% under the proviso to s. 92C of the Act; (14) charging of interest 234B and 234D of the Act; & (15) initiation of penal proceedings u/s 271(1)(c) of the Act. Brief facts of the case are as follows: 3. The assessee is engaged in the business of providing software development service of its AE in USA. The return of income for concerned asst. year was filed on 15/11/2006 declaring an income of Rs. 8,45,107/-. During the course of hearing, the AO observed that for the period of relevant financial year, the assessee had international transaction to the extent of Rs. 27 crores. With the approval of the jurisdictional CIT, a reference was made to the TPO to determine the ALP as per the provisions of s. 92CA of the Act. For the reasons recoded, the ALP of the international transaction pertaining to providing software development was determined by the TPO at Rs. 29.91 crores instead of Rs. 27.07crores, resulting in an adjustment to the extent of Rs. 2.83 crores and the excess claim of deduction u/s 10A of the Act at Rs. 3.1 lakhs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... atabase and Capitoline database up-dated till 25.8.2006 to select comparable companies; - that given the nature of the international transaction under review, economic conditions, differences in business or product life cycles and other similar factors and also the fact that financial date for the FY 2005-06 was not available in all cases, financial data of FY 2003-04 was also considered along with date for FY 2004-05 wherever available; (3) however, the TPO had not accepted the economic analysis undertaken by the assessee and conducted a fresh economic analysis; that the TPO failed to appreciate that such data was not available in the public domain at the time of complying with the mandatory TP documentation rules by the prescribed due data; that the TPO applied certain filters and did not undertake an objective comparative analysis for selection of comparable companies; that while arriving at the ALP, the TPO rejected certain comparables identified by the assessee on the following filters: - in the case of companies where consolidated results has been used for analysis; - companies with turnover less than R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p; (6) Corporate tax: Disputing the AO's stand by holding that the communication expenses attributable to the delivery of computer software outside India should be reduced from export turnover while computing the deduction u/s 10A of the Act, it was claimed, among others, that for the purpose of adjustment specified u/s 10A of the Act, only the expenditure incurred in foreign currency in providing technical services outside India alone needs to be excluded from export turnover. In this context, it was pertinent to note that the assessee was engaged in the business of development and export of software and, thus, as the assessee was not engaged in rendering any 'technical services' outside India, the question of excluding expenditure incurred in foreign currency did not arise; Relies on case laws: (i) Infosys Technologies Ltd v. Jt. CIT [2008] 19 SOT 7 (Bang.) (ii) Patni Telecom (P) Ltd v. ITO [2008] 22 SOT 26 (Hyd.) (iii) Mphasis Ltd - (2008 (7) Communication expenses: That even if communication expenses were reduced from 'e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ALP was reliable and correct; & (d) the TP documentation, detailed workings of the economic analysis and all the other documents requested by the TPO have been provided during the course of assessment; - that the assessee had under taken the comparability analysis based on well accepted TP principles and in the absence of any information to the contrary, that it was inappropriate on the part of the Revenue to reject the comparability analysis which was undertaken in accordance with the provisions of the Act read with rules; - taking cue from the Board's Circulars 12 of 23.8.2001 and 14 of 2001 and also placing reliance on the judicial views in the cases of (i) Mentor Graphics (Noida) (P.) Ltd. v. CIT [2007] 109 ITD 101 (Delhi); (ii) Sony India (P) Ltd v. CBDT [2007] 288 ITR 52/[2006] 157 Taxman 125 (Delhi); (iii) Dy. CIT v. Indo American Jewellery Ltd. [2010] 41 SOT 1 (Mum) and (iv) Sony India (P.) Ltd (supra), it was argued that the TPO was required to accept the assessee's analysis on account of the reasons that (i) analysis undertaken in accordance with law; (ii) analysis undertaken by an external agency; & (iii) the AO/TPO had no reasons to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith Rule 10B and also s. 92B read with rule 10D, it was submitted that- In compliance with the regulations the assessee maintained the documentation as per Rule 10D based on the data that was available on the public databases before the prescribed date. Further, rule 10D(4) provides that transfer pricing documentation should, as far as possible, be contemporaneous and should exist latest by the due date for filing of income-tax return i.e., 31.10.2006 for the FY 2005-06; that all the companies do not publish the financial results by the due date and, hence, use of financial data only for the FY 2005-06 was practically not possible and that even the press note dated 22.8.2001 had clarified that multiple year data pertaining to comparable transactions can be considered for determining the arm's length price. Relies on case laws: (i) Philips Software Centre (P.) Ltd (supra) (ii) Spud of Taxes, Dhubri (1975 CTR (SC) 172 4.1.1 In conclusion it was claimed that the use of multiple year and contemporaneous data available by the prescribed date be allowed to the assessee. 4.2 On the other hand, the Ld. D R also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the transfer pricing in relation to the transactions being compared. It was, further, argued that the assessee had not made out a case that taking data for only the current FY will not present the concept and fair financial result of the comparables, the claim for multi-year data has been rejected. Relies on the case laws: (i) Symantec Software Solution (P.) Ltd. v. Asstt. CIT [2011] 46 SOT 48/11 taxmann.com 264 (Mum.) (ii) Avaya India (P) Ltd v. ACIT ITA No. 5150 (Delhi) 2010; (iii) TNT India (P) Ltd v. Asstt. CIT [2011] 45 SOT 411/10 taxmann.com 161 (Bang.) (iv) Exxon Mobile Co. India (P.) Ltd v. Dy. CIT [2011] 46 SOT 294/12 taxmann.com 84 (Mum.) (URO) It was the case of the Ld. D R that, as the TPO and the DRP have rightly held, the contemporaneous data of relevant FY was to be used for making the comparable analysis for arriving at the ALP as the assessee unable to prove that the pricing pattern of the assessee for the relevant FY has been influenced by the market conditions, business cycle/product life cycle of the earlier years Rejection of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the high or low turnover had influenced the operating margin of the comparables; that all the objections and contentions raised by the assessee in respect of those issues were general in nature and no specific fact had been brought on record to show that due to the difference in turn over the comparables become non-comparables. It was, further, argued that the assessee had not demonstrated as to how the difference in the turnover had influenced the result of comparables; that it was accepted economic principles and commercial practice that in highly competitive market condition, one can survive and sustain only by keeping low margin but high turnover. Thus, high turnover and low margin were necessary of the highly competitive market to survive. It was submitted that the arithmetic mean of operating profits of the companies selected as comparable by the TPO was 19.45% while the operating profits earned by the following super normal profit making companies selected by the TPO which were significantly more than the arithmetic mean seven companies were out-liners and cannot be considered as comparable to a risk mitigated service provider. Obtaining information not available in pub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and document in respect thereof, as was being prescribed under rule 10D(1) of IT. Rules. This rule requires to maintenance of a record of the analysis performed to evaluate comparable as well as a record of the actual working carried out for determining the ALP. It was, further, explained that rule 10D(4) requires that the information and documentation to be maintained; and that under rule 10D(1) should be contemporaneous as far as possible and should exist latest by the due date of filing of the return. It was the case of the Ld D R that the assessee admitted that it did not undertake any risk adjustment in the TP document report and in the absence of that comparability; it was difficult to make adjustment. Relies on the case laws: (i) Marubeni India (P.) Ltd v. Addl CIT [ITA NO. 945 (Del.) of 2009] (ii) Symantec Software Solution (P.) Ltd (supra) (iii) Exxon Mobil Co. India (P.) Ltd (supra) (iv) ADP (P.) Ltd v. Dy. CIT [2011] 45 SOT 172/10 taxmann.com 160 (Hyd.) (v) Vedaris Technology (P) Ltd v. Asstt. CIT [2011] 44 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Act as comparables in addition to those proposed in the notice without giving an opportunity to the appellant to present its objection(s)/comments; (ii) Even under TNMM, considering turnover range of Rs. 1 crore to Rs. 200 crores and Rs. 1 crore to Rs. 500 crores and rejecting certain comparables selected by TPO, the appellant's transactions were at arm's length; (iii) Six companies which did not even appear in the initial search list of the TPO were issued notice u/s 133(6) of the Act to collate information. The process adopted in issuing notice u/s 133 (6) of the Act was not detailed. The information obtained in response thereto had not been fully shared; (iv) That the AO/TPO erred in determining the arm's length margin/price using only FY 2005-06 data which was not available to the assessee at the time of complying with the transfer pricing documentation requirements; (v) The assessee had made detailed submissions for rejection of KALS as comparable, however, the appellants submissions have not been commented either by the TPO or the DRP; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the course of any proceeding under the Act, require any person who has entered into an international transaction to furnish any information or document in respect thereof. Thus, it subscribes that the requirement is only to maintain and keep the information and documents relating to international transactions so that they are available as and when required during any proceeding under the Act. The section does not provide that the information and documents are to be kept and maintained for a period of eight years. Rule 10-D of sub-sec. 1 specifies the documents and information which are to be kept and maintained by the assessee and sub-rule (2) thereof provides that nothing contained in sub-rule 1 shall apply in a case where the aggregate value as recorded in the books of accounts, the international transactions entered into by the assessee does not exceed Rs. 1 crore. Sub-rule 3 provides the supporting authentic documents which are to be kept and maintained and sub-rule 4 thereof provides that the information and documents specified under sub-rules (1) & (2) should as far as possible be contemporaneous and should exists latest by the 'specified date' referred to in clause-4 of sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a relevant comparable, he can issue notices to the parties whom he considers as relevant to gather requisite information and on being satisfied with regard to relevancy of the material which can be used against the assessee only then the assessee has to be given an opportunity of presenting its objections, if any. Thus, the TPO need not inform the assessee about the process used by him for issuing the notices u/s 133(6) of the Act nor is he under any obligation to furnish the entire information to the assessee. 5.4 However, we are of the firm view that the principles of natural justice requires that when any information is sought to be used against the appellant, the appellant has to be given a reasonable opportunity of hearing on that material. In the present case, the TPO had furnished all the information to the appellant in the form of CD and the appellant, after perusing the same, had submitted a detailed submission along with its objections for taking various companies as comparables. It was another matter, if the TPO had not considered the objections of the appellant judiciously. In such a case, it would be an error of judgment, but, not violation of principles of natural j ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... geo India (P.) Ltd v. Dy. CIT [2011] 47 SOT 252/13 taxmann.com 62 (Mum.) (7) Exxon Mobil Co. India (P.) Ltd (supra) (8) Emerson Process Management India (P.) Ltd v. Addl. CIT [2011] 47 SOT 107/13 taxmann.com 149 (Mum.) (9) Haworth (India) (P.) Ltd v. Dy. CIT [2011] 131 ITD 215/11 taxmann.com 76 (Delhi) (10) UE Trade Corpn. (India) (P.) Ltd v. Asstt. CIT [2011] 44 SOT 457/9 taxmann.com 75 (Delhi) (11) Cummins India Ltd v. Dy. CIT [2011] 45 SOT 78 (Pune) (URO) (12) CIT v. Kerala Electric Lamp Works [2003] 261 ITR 721/129 Taxman 549 (Ker.); (13) CIT v. Rajasthan Mercantile Co. Ltd [1995] 211 ITR 400 (Delhi); (14) K.P. Varghese v. ITO [1981] 131 ITR 597/7 Taxman 13 (SC) (15) CIT v. Alom Extrusions Ltd [2009] 319 ITR 306/185 Taxman 416 (SC) On the other hand, the Ld. D R, placing strong reliance on the stand of the authorities below, submitted that 5% was not the standard, but, it was the range within w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case, the turnover of the company is in the range of 30 crores, therefore, the companies, which have turnover of Rs. 1.00 crore to 200 crores alone should be taken into consideration for the purpose of making TP study. 5.7 In these circumstances, we are of the considered view that this issue requires to be remitted back to the file of the TPO for fresh consideration with the following directions: (i) the operating revenue and the operating cost of the transactions relating to associated enterprises only shall be considered; (ii) the comparables having the turnover of more than Rs. 1 crore, but, less than Rs. 200 crores only shall be taken into consideration; (iii) all the information relating to comparables which were sought to be used against the appellant shall be furnished to the appellant; (iv) to consider the objections of the appellant that relate to additional comparables sought to be adopted by the TPO and to pass a detailed order; and (v) to give the standard deduction of 5% under the proviso to s.92C(2) of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r' is not defined, there is no clue regarding what is to be excluded while arriving at the total turnover. However, while interpreting the provisions of section 80HHC, the Courts have laid down various principles which are independent of the statutory provisions. There should be uniformity in the ingredients of both the numerator and the denominator of the formula, since otherwise it would produce anomalies or absurd results. Section 20A is a beneficial section which intends to provide incentives to promote exports. In the case of combined business of an assessee, having export business and domestic business, the legislature intended to have a formula to ascertain the profits from export business by apportioning the total profits of the business on the basis of turnovers. Apportionment of profits on the basis of turnover was accepted as a method of arriving at export profits. In the case of section 80HHC, the export profit is to be derived from the total business income of the assessee, whereas in section 10-A, the export profit is to be derived from the total business of the undertaking. Even in the case of business of an undertaking it may include export business and domestic bus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r is apart of the total turnover. The export turnover, in the numerator must have the same meaning as the export turnover which is constituent element of the total turnover in the denominator. The Legislature has provided a definition of the expression 'export turnover' in Expln. 2 to s. 10A which the expression is defined to mean the consideration in respect of export by the undertaking of articles, things or computer software received in or brought into India by the assessee in convertible foreign exchange but so as not to include inter alia freight, telecommunication charges or insurance attributable to the delivery of the articles, things, or software outside India. Therefore, in computing the export turnover the Legislature has made a specific exclusion of freight and insurance charges. The submission which has been urged on behalf of the revenue is that while freight and insurance charges are liable to be excluded in computing export turnover, a similar exclusion has not been provided in regard to total turnover. The submission of the revenue, however, misses the point that the expression 'total turnover' has not been defined at all by Parliament for the purposes of s. 10A. H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he above reasons, we hold that for the purpose of applying the formula under sub-section (4) of section 10B, the freight, telecom charges or insurance attributable to the delivery of articles or things or computer software outside India or the expenses, if any, incurred in foreign exchange in providing the technical services outside India are to be excluded both from the export turnover and from the total turnover, which are the numerator and the denominator respectively in the formula. The appeals filed by the department are thus dismissed." Although the order of Special Bench is in the context of s. 10B of the Act, the ratio laid down in the above decision applies to s. 10A of the Act as well, as the provisions of s. 10A and 10B are identical on all material aspects. More particularly, both the sections define only 'export turnover' but not 'total turn over' and sub-section (4) of both the sections prescribe an identical formula for computing the export profits. 7.6 We, therefore, direct that when the communications expenses should be reduced not only from the export turnover but also from the total turnover while computing deduction u/s 10A of the Act. It is ordered accordingl ..... X X X X Extracts X X X X X X X X Extracts X X X X
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