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TMI Blog2013 (9) TMI 304X X X X Extracts X X X X X X X X Extracts X X X X ..... of M/s. Qpro Infotech Ltd. by the TPO with a direction to compare its transactions with that company. The appellant vide its letter dated 19-05-2006 demonstrated that its profit percentage is better than that of M/s. Qpro Infotech Ltd. as of March, 2004. The TPO however, did not accept the same and handed over the financial statements of another company, viz., M/s. New Gen Imaging Systems Pvt. Ltd. and directed the appellant company for comparison. The assessee company, vide its letter dated 06-11-2006 addressed to the TPO, explained that the line of activity of M/s. New Gen. Imaging Systems Pvt. Ltd. was different from them. Therefore, the assessee explained that it was a futile exercise to compare the uncomparables. The TPO however, disregarded these facts and proceeded to hold that the appellant's pricing is lower than the average rate of M/s. New Gen Imaging Systems Pvt. Ltd. and held that the appellant company has lowered its profit margin and has diverted its profit to the parent company. From the material placed on record and on a careful examination of the same, it is found that the learned TPO has erred in attempting to compare the financial statements of the assessee comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Infotech Ltd. It is submitted that the Transfer pricing Officer has clearly observed that comparison of profits between the assessee and its associated enterprise cannot be accepted as cost plus method. Further the Transfer Pricing Officer has pointed out that M/s Kolam Information Services (P.) Ltd. and M/s Qpro infotech Ltd. cannot be treated as comparable companies in view of the related party transactions. 2.5 The learned CIT(A) erred in holding that purchases by Alden Group Ltd., UK from the assessee as well as from unrelated parties are on bulk basis and have to be held as comparable if products are similar. The learned CIT(A) failed to note that the assessee itself in its TP document has stated under the head Analysis & Selection of Method has stated that CUP is not applicable as the assessee company deals only with its Holding Company at UK and the parent company is not having any services rendered by third parties other than the assessee. 2.6 The learned CIT(A) erred in observing that the Transfer pricing officer nowhere questioned the similarity of products and that the assessee and M/s NewGen are not comparable companies. The learned CIT(A) failed to consider that un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the ALP determined by the TPO observed as under: "Determination of Arms Length Price u/s. 92CB by the TPO: As the aggregate value of the international transactions entered into by the assessee-company with the associated enterprises (A/den Group Ltd., UK exceeded Rs. 5 crores during the F. Y. 03-04, this case was referred to the Transfer Pricing Officer u/s, 92CA of the IT Act with the approval of the CIT, Cbennai-1 for determining the Arms Length Price in respect of the transactions reported in form 3CB filed by the assessee. The order of the TPO 1 in CR No. NO/TPO1I/AY 04-05 dated 21-12-2006 determining the Arms Length Price to the tune of Rs. 10,79,32,446/- was received resting in an increased income of Rs. 1,58,59,366/-. Accordingly, an opportunity was given to the assessee's representative on 22-12-2006. Thereafter, the assessment is completed determining the total income taking into account the adjustment to the arms length price determined by the TPO. Penalty proceedings read with Explanation (7) to Section 271(1)(c) is initiated on account of addition made in computing total income under sub-section (4) of Section 92C amounting to Rs. 1,58,59,366/- treating the amount ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been rejected by the AO without assigning any reason. Hence the prices charged by the Appellant is reasonable and compares with other assessees in the same business environ. Hence no addition is called for under this head." 6. The Ld. CIT(A) deleted the addition made by way of adjustment to the ALP, by observing as under: "6.2 I have carefully gone through the above submissions and all the details and evidences furnished by the assessee company and applied my mind to the facts of the case and examined the assessment records of appellant. Before discussing the ground raised by the appellant and the submissions thereon of the appellant company, it would be useful to discuss the basic objectives behind the insertion of Transfer Pricing Regulation in India. 6.3 The Transfer Pricing Regulations were introduced by Finance Act, 2001 w.e.f. Financial Year 2001-02. This concept is new to Indian taxation, although tax authorities in United States and other developed countries have applied it for the last three decades. In about 1991, India gave up its restrictive approach in matters of foreign import and foreign exchange and adopted liberalized economic and fiscal policies. This change ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the new transfer pricing regulations is to prevent shifting out of profits by manipulating prices charges or paid in international transactions, thereby eroding the country's tax base. The new section 92 is, therefore, not intended to be applied in cases where the adoption of the arm's length price determined under the regulations would result in a decrease in the overall tax incidence in India in respect of the parties involved in the international transaction." 6.5 Relevant extracts of Circular No.12 of 2001 dated 23rd August, 2001, are reproduced herein below: "The aforesaid provisions have been enacted with a view to provide a statutory framework which can lead to computation of reasonable, fair and equitable profit and tax in India so that the profits chargeable to tax in India do not get diverted elsewhere by altering the prices charged and paid in intra-group transactions leading to erosion of our tax revenues. However, this is a new legislation. In the initial years of its implementation, there may be room for different interpretations leading to uncertainties with regard to determination of arm's length price of an international transaction. While it would be necessa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otice issued under sub-section (3) of section 92D. 6.9 In the instant case, none of the above was pointed out by the Transfer Pricing Officer in his order and hence only if anyone of the above criteria is not met then that Transfer Pricing Officer could have proceeded to determine the arm's length price in accordance with sub-sections (1) and (2) of section 92C. Under these circumstances, the Transfer Pricing Officer and the Assessing Officer had no power to enter the issue relating to determination of the arm's length price and hence the same could not have been re-determined and varied by the Transfer Pricing Officer or the Assessing Officer. 6.10 The assessee company has elaborately stated the procedure followed by it for its purchases. The price quoted by the parent company always corresponds to the ruling global market price and if the assessee company can afford to supply at the quoted price, then only the order is placed on the assessee company. The material placed before the TPO by the assessee goes to show that the price quoted by the assessee company always correspond to the global price. The learned Transfer Pricing Officer has opined that the price charged for the e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s are vital factors. Purchases by the Alden Group Ltd., U.K. from the assessee company as well as from unrelated suppliers are on bulk basis and have to be held as comparable if products are similar. The learned Transfer Pricing Officer has nowhere questioned similarity of products. In view of the above facts, it is held that the invoices of the Alden Group Ltd., U.K. of purchases from unrelated parties as well as quotations will have to be considered as Comparable Uncontrolled Transactions and the learned Transfer Pricing Officer has clearly erred in ignoring such important data. It can be seen from the details submitted by the assessee company that there is a Comparable Uncontrolled Price available for all the products (where the learned Transfer Pricing Officer has recomputed the ALP) in the form of purchase invoice or quotation from unrelated party and the price charged by the assessee-company is within ± 5% variation from the Comparable Uncontrolled Price. 6.10 The Delhi Bench of the Tribunal in Mentor Graphics (Noida) (P) Ltd. v. Dy. CIT [2007] 109 ITD 101 has laid down the principles for determination of the arm's length price which are summarized as follows: 1. W ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ibunal, the same cannot be varied by the Transfer Pricing Officer or the Assessing Officer unless it can be shown that these aspects were not properly examined in the report submitted. Therefore, in the light of above decision of the Delhi Bench of the Tribunal, it is held that the Transfer Pricing Officer or the Assessing Officer should not have rejected the arm's length price determined by the appellant without showing how the pricing worked out by the appellant was incorrect or perverse. In the present case, the appellant was given the financial statements of M/s. Qpro Infotech Ltd. by the TPO with a direction to compare its transactions with that company. The appellant vide its letter dated 19-05-2006 demonstrated that its profit percentage is better than that of M/s. Qpro Infotech Ltd. as of March, 2004. The TPO however, did not accept the same and handed over the financial statements of another company, viz., M/s. New Gen Imaging Systems Pvt. Ltd. and directed the appellant company for comparison. The assessee company, vide its letter dated 06-11-2006 addressed to the TPO, explained that the line of activity of M/s. New Gen. Imaging Systems Pvt. Ltd. was different from them. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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