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TMI Blog2013 (6) TMI 209X X X X Extracts X X X X X X X X Extracts X X X X ..... st the Business income claimed by the assessee – Held that:- Tribunal in the assessee's own case for the immediately preceding assessment year has decided this issue in favour of the Revenue. Respectfully following the precedent, the interest income should be considered as falling under the head 'Income from other sources'. Claim of deduction u/s 10A - This ground has two parts. First part deals with the inclusion of Finder fees and Marketing fees in the total turnover. Revenue admitted that the Tribunal in its afore-noted order for the preceding year has decided this issue against the assessee. Respectfully following the precedent, we uphold the action of the AO in this regard. Second component is against the inclusion of expenditure incurred in foreign currency from the total turnover. Revenue submitted that the Tribunal has decided this issue in assessee's favour in the afore-quoted order. The learned Departmental Representative admitted the position stated on behalf of the assessee in this regard. Respectfully following the precedent this issue is held in favour of the assessee. Transfer Pricing adjustment to the value of international transactions- Deter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... date of filing of return u/s 139(1) of the Act. As the amount in question was deposited by the assessee before the due date of filing the return of income, we hold that no disallowance is called for. This ground is allowed. 3. The second ground is against the treatment of interest income of Rs. 11,11,771 as 'Income from other sources' against the Business income claimed by the assessee. At the very outset, the learned Counsel for the assessee was fair enough to concede that the Tribunal in the assessee's own case for the immediately preceding assessment year has decided this issue in favour of the Revenue vide its order dated 11.04.2012 in ITA No.5235/Mum/2010. Respectfully following the precedent, we hold that the interest income of Rs. 11.11 lakh should be considered as falling under the head 'Income from other sources'. This ground is not allowed. 4. Third ground of the appeal is against the claim of deduction u/s 10A. This ground has two parties. First part deals with the inclusion of Finder fees of Rs. 1.19 crore and Marketing fees of Rs. 29.12 lakh in the total turnover. The learned AR candidly admitted that the Tribunal in its afore-noted order for the preceding year h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8. Reimbursement of expenses (Received) 0.43 Actual 0.47 9. Reimbursement of expenses (Paid) 0.26 Actual 0 TOTAL 0.93 0.76 GRAND TOTAL 26.37 19.33 6. Before proceeding further, we want to make it clear that there is no dispute on the international transactions under the II and III segments, viz., Distribution and Others (Reimbursements) inasmuch as the Transfer Pricing Officer (TPO) accepted these transactions at Arm's Length Price (ALP). The entire controversy revolves around the determination of ALP in respect of international transactions under the first segment, being, IT Enabled Services. The TPO noted on page 2 of his order that the Operating income of the assessee was Rs. 66.25 crore with the operating profit of Rs. 0.24 crore. He further observed that the assessee earned revenue of Rs. 31.58 crore with operating income of Rs. 3.89 crore giving percentage of Operating income to Total cost at 14.05%. The total of the IT Enabled Services segment transactions amounted to Rs. 22.13 crore comprising of Rs. 1.88 crore towards paymen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s arm's length profit as against the assessee's operating profit of 14.05%, the assessee made submissions against the TPO's action which have been incorporated on pages 4 and 5 of the his order. Here it is pertinent to mention that the assessee raised following objections against the twenty comparable cases chosen by the TPO : - (i) None of the companies have back to back arrangement of Software Services Offshore (which in the assessee's case constitute more than 70% of the transaction with its AE), wherein the entire revenue from sales of the AE are received by the Indian Companies. The AE's for the marketing services rendered are given cost + 5% margin. In absence of the said data and facts the comparables cannot be applied to the assessee's case. Thus only companies with like nature of transactions can be compared. (ii) Most of the companies referred by you like Aztec Software Ltd, Infosys Ltd. Tata Elxsi Ltd., Accel Transmatics Ltd., Mindtree Consulting Ltd., Flextronics Software Systems Ltd., Sasken Communications Ltd. etc. are large companies having high turnover and volume of business whereby having economics of scale cannot be compared. Thus the financials of the said c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee and the AEs should be considered at ALP. This refers to the foreign AE as a tested party. Second is that the authorities cannot go beyond the overall profit of the group of AEs. In our considered opinion, both these contentions are unsustainable as per law. 11.2.1. We take up the first contention by which the assessee has compared the profit earned by its foreign AE with outside comparables to prove that the price charged by it from the transactions with the AEs is at ALP. As can be noticed from internal page no. 34 of the TP Study that the assessee is harping on the selection of its AE as tested party on the basis of the US and UK Regulations. We have to decide as to whether the selection of the foreign AE as tested party is correct in the Indian context. For that purpose, we need to visit the provisions of the Chapter X of the Act with the caption "Special Provisions Relating to Avoidance of Tax" dealing with the computation of income from international transactions having regard to ALP. Section 92(1) of the Act provides that : 'Any income arising from an international transaction shall be computed having regard to the arm's length price.' The term "international transact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market ; (iv) the net profit margin realised by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii) ; (v) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction.' 11.2.2. A conjoint reading of the above provisions indicates that firstly, a transaction between two or more associated enterprises is called an international transaction; secondly, any income from such international transaction is required to be determined at ALP; thirdly, the ALP in respect of such international transaction should be determined by one of the prescribed methods, which also include the TNMM. Under this method, the net profit margin realized by the enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the purposes of comparison with profit of comparables, being 'profit B', to determine the ALP of transaction between the assessee and its foreign AE, misses the wood from the tree by making the substantive section 92 otiose and the definition of 'internal transaction' u/s 92B and rule 10B redundant. This is patently an unacceptable position having no sanction of the Indian transfer pricing law. Borrowing a contrary mandate of the TP provisions of other countries and reading it into our provisions is not permissible. The requirement under our law is to compute the income from an international transaction between two AEs having regard to its ALP and the same is required to be strictly adhered to as prescribed. This contention, is therefore, repelled. 11.3. Now we espouse the second contention of the ld. AR that the authorities cannot go beyond the overall profit of the group of AEs in determining the ALP of the international transaction. It has been noticed supra that the object of Chapter-X of the Act is to prevent the avoidance of tax from transactions between two or more AEs. Because of such internal relation, the affairs between the AEs are capable of being arranged in such a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he AEs taken as one unit, has no statutory mandate and is not stipulated under any of the prescribed methods. As such, the same is liable to be jettisoned as sans merit. We order accordingly. 12. (B) Case specific submissions 12.1. We will now evaluate and examine the case specific submission advanced on behalf of the assessee. It was put forth that the assessee chose six foreign comparable cases to demonstrate that the price charged by it from its AEs was at ALP under the TNMM. Such point of view was sought to be canvassed before the TPO vide its letter dated November, 2009, a copy of which is available at page 367 (relevant page 374) of the paper book. In that letter it was stated by the assessee that its subsidiaries in USA and Germany were responsible for carrying out primarily sales and marketing activity along with sales and site support to clients in the respective countries. It remunerated the subsidiaries at cost plus 5% mark up. The assessee selected six comparables which were stated to be engaged in marketing functions in USA. The arithmetic mean of the cost plus mark up earned by those comparables was demonstrated at 4.07%. That is how the transactions betwe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o strictly go by the procedure enshrined in the method itself. Under no circumstance can the course of action prescribed under a method be dispensed with or substituted with a new one on the pretext of rationality or otherwise. This legal position has been abundantly laid down by the special bench of the tribunal in a recent case of L.G. Electronics India (P) Ltd. VS. ACIT 140 ITD 31 (Del- Trib)(SB). As such, we are not inclined to approve the way in which the assessee has determined the ALP by mixing up the TNMM and the Cost plus method. 12.3. There is another vital reason for rejecting the assessee's method of determining the ALP. It has been greatly emphasized that the foreign AE incurred expenses on marketing and for carrying out the sales and marketing activity along with sales and site support to clients in the respective countries, for which it remunerated at cost plus 5% mark up. Since cost plus 5% mark up was higher than 4.07% of the comparables, the assessee claimed its international transactions of rendering offshore software and technical support services at arm's length. It is significant to note that the international transaction under consideration is that of rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... These wrong recordings in the TPO's order have no bearing on the question of determination of ALP of the international transactions under dispute. As such, these are hereby ignored. 14.2. There are certain infirmities in the order of the TPO, which have bearing on the determination of the ALP. The TPO has proceeded on the premise that the assessee provided IT Enabled services to its two AEs worth Rs. 22.13 crore. This has been mentioned in para 8 and elsewhere also in his order. It is in contrast to the correct factual position recorded on page 2 of the TPO's order by which it is obvious that the amount of Rs. 1.88 crore represents the amount 'Paid' by the assessee towards Marketing fees and the other three figures totaling Rs. 20.25 crore are the amounts 'Received' by the assessee towards rendering of software services and technical support services. 14.3. Another glaring infirmity in the TPO's order which has bearing on the TP adjustment is that he determined 14.05% as Operating income / Total cost, which was later applied on the international transactions under the IT Enabled Services segment for working out the TP adjustment of Rs. 1.46 crore. In determining the Operating i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... functionally different from the assessee. In the like manner, there are certain other companies in this list of twenty comparable cases which are prima facie engaged in different functions when compared with that of the assessee. It can be noticed from page 5 of the TPO's order that the assessee raised objections as to the comparability of these twenty cases, albeit in a general manner, which came to be rejected without any cogent reasons. Rather there is no discussion worth the name in the TPO's order as to how the objections taken by the assessee as to the comparability of these companies, were not correct. Without going into the factual position qua each of these twenty cases as to whether they are comparable or not, in our considered opinion, the ends of justice would meet adequately if the impugned order on this issue is set aside and the matter is restored to the file of AO / TPO so that the comparability or otherwise of such cases may be discussed and decided in the light of the objections of the assessee on this issue. We sum up our conclusion that the AO / TPO would determine the ALP of ITES segment afresh by primarily considering the correct figures of operating profit t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ms. This rule has been cited with approval by several courts including the Hon'ble Supreme Court in CIT vs. V.MR.P. Firm (1965) 56 ITR 67 (SC). Where the facts of a case prima facie show that the authorities took a clearly incorrect view on the provisions of the Act in an earlier year, whether favoring the assessee or the Revenue, it cannot be argued in the subsequent year that the same incorrect approach should be repeated. The Hon'ble Delhi High Court in CWT vs. Meattles (P) Ltd. (1984) 156 ITR 569 (Del) has held that the Revenue authorities cannot be stopped from taking a correct view of statutory provisions in a later year. 16.3. We have elaborately discussed above that how the method employed by the assessee for determining the ALP in respect of international transactions for the year under consideration is contrary to the statutory provisions having no approval from any judicial forum. If such a wrong method has been inadvertently accepted by the TPO in an earlier year, we cannot grant a license to the assessee to continue calculating the ALP in such a grossly erroneous manner in perpetuity. It needs to be discontinued forthwith. We, therefore, reject this contention advanc ..... X X X X Extracts X X X X X X X X Extracts X X X X
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