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TMI Blog2015 (6) TMI 418X X X X Extracts X X X X X X X X Extracts X X X X ..... ing Officer (TPO) in his order dated 26.10.2010. The assessee benchmarked these international transactions and demonstrated them to be at arm's length price (ALP) by following the Transactional Net Margin Method (TNMM). The last two transactions, namely, Reimbursement of expenses and Apportionment of administrative expenses, etc., are not in dispute. The first five transactions are of rendering software development services by the assessee to its associated enterprises (AEs). The assessee, apart from having head office in India has also a branch office in Canada providing software development services to its AE in the USA. The assessee also paid for certain consulting services rendered by its AE to its Canada branch. For the time being, we are not considering the international transaction of unsecured interest free loan for which an adjustment of Rs. 87,90,467 was recommended by the TPO. In so far as the above transactions of rendering software development services and receiving consulting services, to the exclusion of interest free loan are concerned, the assessee used certain comparables and showed that these transactions were at arm's length price. The assessee's total revenue f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... total income and the transfer pricing analysis. 6. The first question for our consideration is whether the transactions between the head office in India and branch office in Canada can be considered as international transactions, even though the assessee inadvertently reported the same so as a matter of abundant caution. The answer is obviously in negative because section 92B(1) categorically provides that: 'For the purposes of this section and sections 92, 92C, 92D and 92E, an "international transaction" means a transaction between two or more associated enterprises ........'. A bare perusal of the definition of 'international transaction' brings to light that for treating any transaction as an international transaction, it is sine qua non that there should be two or more separate AEs. When we consider the definition of 'International transaction' given in section 92B along with the meaning of the AE given in section 92A, it clearly transpires that in order to describe a transaction as an 'international transaction', there must be two or more separate entities. 7. It is simple and plain that no person can transact with self in common parlance. As such, one cannot earn any profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therefore, hold that the TPO was not justified in determining the ALP of the international transaction of 'Software Product Development/Software Consultancy Services' by applying the average operating profit margin of the comparables to the cost base of transactions with its AE, which also included the transactions with the branch office in Canada. Such cost base is directed to be considered as exclusive of transactions with the Canada branch. We, therefore, set aside the impugned order to this extent. 10. It is uncontroverted, as is also apparent from the TPO's order, that the transfer pricing adjustment has been made by considering the total costs incurred by the assessee in respect of both the controlled and uncontrolled transactions with the associated enterprises (AE) and non- AEs. An addition towards transfer pricing adjustment can be made by comparing the assessee's profit rate from the international transaction with that of comparable uncontrolled transactions. Under the TNMM, the process is simple in initially finding out the operating profit margin of the assessee and then the average adjusted operating profit margin of comparable cases. Such adjusted profit margin of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as well as the AO failed to give effect to the direction given by the DRP which is binding on them. 13. In such circumstances, the question arises as to whether the direction given by the DRP is mandatory or directory on the TPO/AO. In order to find an answer to this question, we need to have a look at the mandate of section 144C(13), which is as under:- "(13) Upon receipt of the directions issued under sub-section (5), the Assessing Officer shall, in conformity with the directions, complete, notwithstanding anything to the contrary contained in section 153 or section 153B, the assessment without providing any further opportunity of being heard to the assessee, within one month from the end of the month in which such direction is received." 14. A bare perusal of this provision indicates that upon receipt of the directions issued by the DRP under sub-section (5) of section 144C, the AO has to complete the assessment in conformity with the directions so given. In other words, the assessing authority is bound by the directions given by the DRP and these directions are mandatory and not directory in nature. Reverting to the facts, once the DRP directed the TPO to exclude the excess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d are that the assessee was found to have let out its property on receiving an interest-free security deposit of Rs. 77,25,480/-. The AO determined interest rate of 15% which, in his opinion, should have otherwise led to increase in the annual letting value of the property. Initially he discussed the inclusion of this amount in the annual letting value of the property, but, later on, he switched over to section 28(iv) and, finally, included a sum of Rs. 11,58,822/- in the assessee's total income towards notional interest on interest free deposit. The assessee challenged the view taken by the AO in the draft order before the DRP, who, vide para 3.3 of its direction, directed the AO to delete this addition. It was held that neither the ALV of the property can be increased u/s 23 with the notional interest nor section 28(iv) can be applied. However, we find from the final assessment order passed by the AO that the addition of Rs. 11.58 lac has still been made. 17. Again, it is amply clear that the direction given by the DRP for deletion of this addition has not been taken into consideration by the AO while finalizing the assessment. We have noticed above that the direction given by t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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