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TMI Blog2013 (6) TMI 113X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, 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. Selection of Comparable - Compucon Software Ltd - Held that:- As company has a high percentage of Related Party Transactions (RPT) exceeding 25% therefore,even on the basis of the threshold adopted by TPO the said company merits exclusion from the list of comparable companies. Secondly, even adopting the threshold of RPT at 25%, the said company is liable to be excluded. In favour of assessee. Inclusion of ICSA (India) Ltd. as comparable - Held that:- No reasons have been advanced by the TPO to do away with the filter adopted by the assessee wherein assessee has excluded comparables wherein the sales are less than Rs One crore and also where the sale are in excess of Rs 50 crores on the basis of the turnover of the comparables TPO is no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l data of comparable companies for prior two years or use of multiple year data; 4) erred by cherry picking new comparables with high profit margins. The ld AO also erred in including new comparables, without providing a sound/logical search strategy; 5) erred in adding new comparables which differ in functions undertaken, assets employed and risk assumed as compared to appellant, also whose data was not available to the appellant at the time of preparing the TP documentation; 6) erred in rejecting comparables selected in TP study report, for FY 05-06 without sound and logical reasons; 7) erred in rejecting comparable selected in TP study report, on account of losses incurred by concerned comparables in a single year i.e. for FY 05-06; 8) erred in applying the Related Party (RPT ) criteria considering the value of RPT as a percentage of total sales and expenses and not considering the base to be sales alone; 9) erred in rejecting BIPL s criteria, of applying a filter, to select companies with RPT/sales 10% and unjustly adopting a criteria to accept companies with RPT/Total transactions 25%; 10) erred in rejecting application of turnover filter for identification of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by referring to the relevant discussion in the orders of the authorities below. The rival submissions have been heard and the relevant record perused. 4. In order to appreciate the controversy and the rival stands, it would be appropriate to briefly note the background and the relevant facts. The appellant before us is a Company incorporated under the provisions of the Companies Act, 1956 and is inter-alia, engaged in the business of export of network security and administrative software solutions, broadly speaking software development activities. The appellant has its software development facility at Pune, which is a 100% Export Oriented Unit (EOU) approved under the Software Technology Park scheme (STPI) of the Government of India. The assessee is undertaking software development activities exclusively for its parent company, Bindview Development Corporation, US (hereinafter referred to as AE ). During the year under consideration, it was noticed that assessee company had entered into the following international transactions with AE/related parties: S.No Description of transaction Amount in Rs. 1. Provision of software development services ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed out that the appellant-company had carried out the benchmarking of its international transaction on the basis of Transactional Net Margin Method (hereinafter referred to as TNMM method ) with the identified comparables on the basis of FAR analysis, i.e. Functions performed, risk assumed and assets utilized. The assessee had relied upon prowess and capitaline plus data base to identify comparable companies in the transfer pricing study (hereinafter referred to as T P study ) and by applying appropriate filters, eleven companies were identified as comparables for benchmarking the international transaction, details of which has been noted by the TPO in para 4 of his order. In this connection, it is pointed out that the arithmetical mean of the fully loaded cost price (FLCP) of the comparables was 4.96% whereas the FLCP mark up of the assessee was 13.33% and therefore, the declared consideration of Rs 24,48,47,439/- for the international transaction with AE was consistent with ALP standard from the Indian Transfer Pricing perspective. It is pointed out that in carrying out such TP study the assessee used the average of prior two years data of comparable companies as on 31.1.2006. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... adopting comparables on a random basis without any search strategy/process, is untenable and is to be seen as a faulty selection of comparables. In this connection, reliance was placed on the observations of the Tribunal on the following decisions: i) Mentor Graphics (Noida) P Ltd. V DCIT 112 TTJ 408 (Del); ii) Skoda Auto India (P) Ltd. V. ACIT 122 TTJ 699 (Pune); and, iii) Philips Software Centre P Ltd. V. ACIT 119 TTJ 721 (Bang) Apart from the aforesaid, the learned Counsel also referred to detailed written submissions on each of the comparables to establish as to how the same are not liable to be included for the purposes of benchmarking the international transaction in question. Thirdly, the plea of the assessee is that the TPO unjustly rejected 9 comparables out of the 11 comparables selected by the assessee. In this connection, it was pointed out that the assessee had selected the comparable companies based on a methodological search strategy and reference was invited to pages 79 to 80 of the Paper Book in this regard. Apart therefrom, reference was also invited to the detailed factual submissions placed in the Paper Book to justify that the comparables have been reje ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... proviso to section 92C(2) of the Act and has failed to grant the relief for the downward adjustment of 5 percent from the arithmetic mean, which is permitted to and which has also been opted for by the appellant. It was submitted that the TPO has applied the amended proviso to section 92C(2) in the instant case. However, according to the assessee, the amendment in proviso to section 92C(2) is substantive amendment and not a procedural amendment and, therefore, the same should apply prospectively. Reliance has been placed on the judgment of the Hon ble Supreme court in the case of Kehavan Madhava Menon v State of Bombay (AIR 1951 SC 128). According to the appellant, if the amendment is considered prospective in nature, the old law would apply and in such a case, the assessee should be able to claim benefit of +/-5%. Reliance was placed on the decision of the Delhi Bench of the Tribunal in the case of Sony India (P) Ltd 114 ITD 448. Further reliance has been placed on the following decisions: i) Karimtaruvi Tea Estate Ltd. V. State of Kerala 60 ITR 262 (SC); ii) ACIT v. UE Trade Corporation India, ITA No 4405/Del/09 dated 24.10.2010; and, iv) UCO Bank v. CIT 237 ITR 889 (SC). ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earned Departmental Representative, appearing for the Revenue, has defended the addition made by the Assessing Officer. With regard to the assessee s contention that only the data available at the time of analysis when the international transaction had been entered into should be used, the learned Departmental Representative submitted that such argument is not acceptable in view of the prescription of rule 10B(4) of the Income-tax Rules. It was submitted that Rule 10B(4) provides use of the data relating to the financial year in which the international transaction has been entered into and does not say specifically that contemporaneous data or only such data which is available at the time of transaction or at the time of conducting of analysis by the assessee, is alone to be used. Even with regard to the assessee s plea with reference to the OECD guidelines in this regard, it has been pointed out that the approach of the TPO in using the information which is currently in public domain at the time of carrying out the analysis, cannot be faulted. Moreover, it is also pointed out that if the assessee intended to use the data for the prior two years as per the proviso to Rule 10B(4), t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... djustment allowed by the TPO on account of difference in working capital requirements was adequate and reasonable on the facts of the instant case. In this manner, the learned Departmental Representative has justified the order of the TPO. 11. We have carefully considered the rival submissions. As noted earlier, the pith and substance of the dispute raised by the assessee is against the action of the Revenue in determining ALP of the appellant s international transaction of provision of software development services to its AE at R 26,93,99,396/- as against Rs 24,48,47,439/- declared by the assessee. In this connection, the first area of dispute is with regard to the claim of the assessee seeking benefit of the option available under the erstwhile proviso to section 92C(2) of the Act for adjustment of +/-5% variation for the purposes of computing the ALP. The Revenue, on the other hand, has contended that since the impugned assessment was made after 1.10.2009, the provisions of Proviso to section 92C(2) of the Act as amended with effect from 1.10.2009 shall apply. Similar dispute was a subject-matter of consideration by the Pune Bench of the Tribunal in the case of Starent Network ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... up by the Revenue and which has been more potently argued is to the effect that the benefit of such Proviso is not available 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not generally prejudice the rights of the assessee. Furthermore, we are fortified by the intention of the Legislature as 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m itself on which we have not made any determination. Therefore, the Corrigendum dated 30.9.2010, in our considered opinion, has no bearing so as to disentitle 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ost 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 data of the financial year 2005-06 of the comparable companies in order to benchmark the international transaction of the assessee, which has been carried out during the instant year. The assessee, on the other hand, seeks support from the following Proviso to Rule 10B(4) which reads as under: 10B(4) The 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: Provided that data relating to a period not being more than two years prior to such fina ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 14. Apart from the aforesaid, the appellant has assailed the addition on other aspects also. One of the aspect relates to the selection of comparables by the TPO. On this, the first issue raised is regarding the inclusion of Compucon Software Ltd. as a comparable by the TPO. The assessee objected to the inclusion of this company on the plea that it has a high percentage of Related Party Transactions (RPT) and, therefore, the same was liable to be excluded. In support, the assessee has also referred to a summary of search strategy at pages 79 to 80 of the Paper Book to point out that it had set up a filter in terms of which companies having RPT in excess of 10% were excluded. The TPO, however, has considered exclusion of a company on the basis of RPT beyond a threshold of 25% as against 10% considered by the assessee and, according to him in this case the RPT was less than 25%. In this connection, the assessee has drawn our attention to pages 180 to 182 of the Paper Bo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tional transaction in question which falls outside the search matrix. Even with regard to the filter applied by the assessee on the basis of the level of R D expenses the situation remains the same. Therefore, once the TPO has accepted such filters in principle, clearly its application is unjustly ignored by him while including ICSA (India) Ltd. as a comparable company. We, therefore, direct the TPO to exclude ICSA (India) Ltd. from the final set of comparables. 16. Another issue relating to selection of comparables by the TPO is regarding inclusion of Kals Information System Ltd. The assessee has objected to its inclusion on the basis that functionally the company is not comparable. With reference to pages 185-186 of the Paper Book, it is explained that the said company is engaged in development of software products and services and is not comparable to software development services provided by the assessee. The appellant has submitted an extract on pages 185-186 of the Paper Book from the website of the company to establish that it is engaged in providing of I T enabled services and that the said company is into development of software products, etc. All these aspects have no ..... X X X X Extracts X X X X X X X X Extracts X X X X
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