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TMI Blog2012 (12) TMI 482X X X X Extracts X X X X X X X X Extracts X X X X ..... gher depreciation as compare to the rates prescribed under the Companies Act – Assessee claims that such excess depreciation was liable to the excluded while benchmarking the financial results of the assessee with those of comparable cases – Held that:- It was opined that the object and purpose of the transfer pricing is to compare like with the like and to eliminate differences, if any, by suitable adjustments. Therefore, it found justification on the part of the assessee in pleading that the profits be taken without deduction of depreciation. Allow adjustment after verification. Issue remand back to AO Adjustment of start-up cost in calculation of ALP – Assessee is in 1st year of operation and due to start-up cost profit margins are abnormally affected - Capacity utilization was not satisfactory – Held that:- Following the decision in case of Skoda Auto India P. Ltd.(2009 (3) TMI 249 - ITAT PUNE-A) as the plea set-up by the assessee for economic adjustments on account of under capacity utilization and being in start-up phase, is not something which is unreasonable and neither it is otiose to the mechanism of transfer pricing assessments. The matter requiring factual appreciati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lant company filed a return of income declaring a loss of Rs 5,68,84,028/-. The Assessing Officer noticed that the assessee had undertaken International Transactions with its Associated Enterprises, namely, ADL firstly by way of providing business services and IT enabled services for which consideration was Rs 13,90,31,479/- and secondly, external commercial borrowings of Rs 22,36,395/-. The Assessing Officer made a reference to the Transfer Pricing Officer (in short TPO ) to determine the ALP with reference to the International Transactons relating to business process services provided to AE in terms of section 92CA(1) f the Act. The assessee contended before the TPO that being the first full year of operations, it had incurred a loss on account of lower volumes of business. It was also explained that transfer pricing study was carried out by the assessee by adopting the Transactional Net Margin Method (TNMM) and in terms thereof, it was sought to be demonstrated that the consideration received by the assessee for the services rendered to its AE was at arm s length. The TPO examined the transfer pricing study report of the assessee dealing with the economic function analysis of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the TPO has adopted 11 comparables as detailed in para 10 of his order and found the mean of operating profit/operating costs at 15.57%. The PLI in the case of the assessee was computed -30.5% and on comparison with the mean PLI of comparables of 15.57%, a difference of 46.07% was found. Accordingly, an adjustment of Rs 9,22,02,777/- was made to the international transaction relating to the business process services provided to the AE. The assessee raised objections before the Dispute Resolution Panel (i.e. DRP ) against the adjustments proposed by the TPO, so however, the DRP vide its order dated 2.8.2011 has directed the Assessing Officer to finalize the assessment on the basis of the determination of ALP done by the TPO. Accordingly, based on the order of the TPO, the assessment has been finalized by the Assessing Officer. In this background of the matter, the assessee is in appeal before us. 4. Before us, the learned Counsel for the assessee has submitted that the authorities below have erred in rejecting the approach adopted by the assessee for transfer pricing analysis/contemporaneous documentation maintained by the assessee and, therefore, the transfer pricing adjustment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) M/s Fiat India P Ltd, vide ITA No 1848/Mum/09; and, (v) ITO v. CRM Services India (P) Ltd vide ITA No 4069/Del/09. The learned Counsel has also taken us through an analysis of capacity utilization, placed on record in order to justify his assertion that there was under utilization of capacity considering the initial year of business. Apart from 6 the aforesaid, the learned Counsel for the assessee submitted that the benefit of +/-5% as envisaged in the proviso to section 92C(2) of the Act has not been granted to the assessee and in support, reliance has been placed on various Tribunal decisions as under: i) Bindview India P. Ltd. v. DCIT vide ITA No 1386/PN/10 (Pune) ii) Skoda Auto India P. Ltd. v ACIT 122 TTJ 699; iii) Policy Network P. Ltd, ITA No 5504/Del/10; iv) M/s SAP Labs India P. Ltd v ACIT, ITA No 398/Bang/08; v) Development Consultants (P) Ltd v. DCIT 115 TTJ 577; vi) Sony India (P) Ltd v. CBST 288 ITR 52; vii) Electrobug Technologies Ltd. v. ACIT 37 SOT 270; viii) Abode Systems India (P) Ltd v. ACIT, ITA No 5043/Del/10; and, ix) Haworth (I) P.Ltd v. DCIT, ITA No 5341/Del/10 Lastly, the appellant also canvassed that the authorities below have err ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DRP in para 5.4 to the effect that the amended proviso to section 92C(2) of the Act is applicable with effect from 1.10.2009 and shall accordingly apply in relation to all cases in which proceedings are pending on or after such date. Therefore, as per the learned Departmental Representative, the benefit of +/-5% intended by the erstwhile proviso to section 92C(2) of the Act was not available to the assessee for the year under consideration. For all the above reasons the learned Departmental Representative has defended the action of the Assessing Officer after making adjustment towards ALP of the international transaction by an amount of Rs.9,22,02,777/-. 8 6. We have carefully considered the rival submissions. One of the issues raised by the assessee in this appeal and which is manifested by Ground of appeal No. 5 in the Memo of Appeal is with regard to the benefit of the option available under the erstwhile proviso to section 92C(2) of the Act, which allows the assessee an option for adjustment of +/-5% variation for the purpose of computing ALP. Such an issue has been a subject-matter of consideration by the Pune Bench of the Tribunal in the case of Starent Networks (India) P. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le to the assessee in the instant case, because the said Proviso has been amended by the Finance (No 2) Act, 2009 with effect from 1.10.2009 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 1.10.200 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s found from circular No 5 of 2010 (supra) whereby in para 37.5, the applicability of the above amendment 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 yea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idered opinion, has no bearing so as to dis-entitle the assessee from its claim 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acker Motherson Ltd (supra) wherein the Tribunal upheld the plea of the assessee that for the purposes of making comparison profits be taken without deducting depreciation as depreciation was leading to large differences in margins. As per the Tribunal, depreciation, which can have varied basis and is allowed at different rates is not an expenditure which must be deducted in all situations. It was opined that the object and purpose of the transfer pricing is to compare like with the like and to eliminate differences, if any, by suitable adjustments. Therefore, it found justification on the part of the assessee in pleading that the profits be taken without deduction of depreciation. The Tribunal in that case found sufficient evidence to show material differences on account of depreciation and therefore, upheld the plea that adjustment was required to be made on such count. In this background, we have examined the case set-up by the assessee. As per the assessee, it has charged depreciation at rates higher than those prescribed under the Schedule XIV to the Companies Act, 1956. It is also sought to be made out with reference to the Annual report of comparable companies that in 9 out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... find that no reason has been brought out as to how the data canvassed to be considered by the assessee would have a nexus on the determination of the transfer pricing in relation to the impugned transaction. This aspect of the matter has been considered by the Pune Bench of the Tribunal in the case of Bindview India P. Ltd., Pune v. DCIT vide ITA No 1386/PN/10 dated 30.11.2011, wherein the following discussion is available: 13. We have carefully examined the rival stands on this aspect. Section 92C of the Act prescribes the determination of the ALP in relation to an international transaction on the basis of most appropriate method prescribed therein. Rule 10B lays down the manner in which the ALP in relation to an international transaction is to be determined for the purposes of section 92C(2) of the Act. Sub-rule (4) of Rule 10B prescribes that data to be used in analysing the comparability of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction has been entered into. On the strength of the aforesaid provision, Revenue has sought to justify the action of the TPO of having used the d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... als facts which could have an influence on determination of the transfer price in relation to the transactions being compared. We have carefully examined the stand of the assessee before the lower authorities as well as before us and find that no credible or cogent reasoning has been brought out to justify the use of multiple data of prior two years and the manner in which it would influence the determination of transfer pricing in relation to the impugned international transaction. Therefore, having regard to the facts and circumstances of the present case, we are unable to accept such objection of the assessee against the action of TPO having used the data of the financial year 2005- 06 of the comparable companies in order to benchmark the impugned international transaction. Thus, on this aspect, the assessee has to fail. 11. Following the aforesaid precedent, in the present case also as mandated by provisions of Rule 10B(4) of the Income-tax Rules, 1962 where the data of more than two years prior to such financial year is to be considered, it is required to be demonstrated that such data reveals facts which could have an influence on determination of the transfer price in re ..... X X X X Extracts X X X X X X X X Extracts X X X X
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